While NGOs as microfinance institutions have had some success in facilitation and social intermediation, there is little evidence of the fact that they have had much success in poverty reduction. In this article, the author recommends the development of a symbiotic relationship between NGOs and banks, with the former efficiently utilising their strengths in social engineering and the latter focusing on pure financial intermediation. Such a strategic partnership, the author feels, will help achieve the otherwise elusive targets of outreach to the poor and financial sustainability.
The role of non-governmental organisations (NGOs) in microfinance (mF) needs reviewing from an operational perspective. Based on research of selective studies and experts’ opinion, selected literature on microfinance, and the author’s own experience over the last decade, this paper seeks to establish two main points. First, it asserts that with a few notable exceptions, the record of NGOs in mainstreaming microfinance is a modest one viewed from the context of NGOs as microfinance institutions (mFIs). When judged by the two criteria of success that much of the microfinance world has adopted – outreach to the poor and financial sustainability – the results are not encouraging [Nair 2001]. NGOs as mFIs have thus far had trouble achieving both objectives simultaneously. There is also little evidence of any aggregate impact on poverty reduction as the result of mFIs’ forays. The success of NGOs has however been laudable where facilitating and social intermediation criteria are applied. It is here that the author feels that the strategic partnership between banks and NGOs is poised to change the developmental intervention map of India. Second, the essay suggests that banks, for all their laudable work, will be making a strategic error in focusing on financial intermediation while ignoring partnership with NGOs. While microfinance is never easy for other types of institutions trying to practise it (e g, NGOs or credit unions), it is not, as will be explained, a field where a banker has natural advantages.
To the extent that banks incorporate NGOs’ activities in mainstreaming their self-help group (SHG) portfolios, they stand to gain. To the extent NGOs reorient their mission, vision and personnel towards the microfinance agenda, as a large number have done in the last decade, they risk drawing themselves away from work they are uniquely suited to do. Some of this work, moreover, would play a critical role in preparing the ground for mF among poor people. In other words, NGOs have to move away from pure financial intermediation to investing in human and social capital at the grass roots and bankers have to tap this invaluable experience of NGOs in mobilising, graduating and enabling rural communities. This will prepare the ground by enhancing credit absorption capacity of SHGs and enhancing their creditworthiness. The following account
will explain how.
In 1997, the World Bank’s Sustainable Banking for the Poor (SBP) project completed an ambitious survey. Until then those interested in microfinance had an intuitive sense of the movement’s growth, but no systematic attempt had yet been made to gauge its dimensions, nor look comprehensively at its results. The findings were unambiguous: NGOs acting as mFIs did not have any significant outreach vis-а-vis other financial institutions purveying microcredit.
Interestingly, commercial banks accounted for 78 per cent of the total number of outstanding microloans, and credit unions 11 per cent. NGOs accounted for only 9 per cent, and savings banks (which are not primarily in the credit business) just 2 per cent. Also, commercial banks accounted for 68 per cent of the total outstanding loan balance, savings banks 15 per cent, credit unions 13 per cent and NGOs 4 per cent. In terms of numbers of clients, commercial banks and credit unions showed significantly greater overall outreach than NGOs. While NGOs’ outreach, on average, was deeper, it was also narrow – NGOs reach some very poor people, but they do not reach many. On the other hand, credit unions and commercial banks also serve some wealthier clients so that their average outreach to the poor is not as deep. Still, the indications are that overall, credit unions and commercial banks serve more under-served poor clients than do NGOs.
This is not to rule out the role of NBFCs, NGOs with inchoate mFI activities or pure mFIs. The demand for financial services is high and as stated by the High Level Task Force on mF: “At least 25,000 bank branches, 4,000 NGOs and 2,000 federations of SHGs involving over 1,00,000 personnel of these institutions would have to be associated for scaling up and bank linkage of one million SHGs. Many of these NGOs will transform themselves into mFIs and will not only facilitate microfinancing, but will also themselves do the necessary financial intermediation. Similarly, many federations of SHGs will take on financial intermediation and act as mFIs.”
We shift the focus to India.In the current context with over 4,60,000 SHGs credit-linked with banks, the SHG-bank linkage programme of microfinance has emerged as the biggest in the world. But besides banks, the major role played by NGOs in facilitating this transformation cannot be overemphasised. The National Bank for Agriculture and Rural Development (NABARD) which plays a role in promoting and facilitating bank linkages while networking and coordinating the activities of all players in the field has underscored the crucial role played by NGOs as facilitators in purveying bank credit to SHGs. The story of the three models of this massive programme has been brought out by NABARD in the table .
Table: Three Patterns of SHG-Bank Linkage*
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