Aloysius P. Fernandez is Executive Director of rural development NGO MYRADA and Chairman of the Board of microfinance institution Sanghamithra Rural Financial Services .
MicroCapital: How did you get started in social finance?
AF: During the 1971 Bangladesh War, running a refugee program, I discovered the poverty and suffering there. I began to understand the causes of poverty, and I said: “Well, I’ve got to intervene in some way. Should I intervene in land? That’s difficult. Should I intervene in wages? That’s difficult.” So I said, “Let’s look at capital.” Then, we started cooperative societies, and these cooperatives broke down….
Even if the government made regulations to ensure that poor people and the lower castes were on board, the chairman of the society was always more powerful. Therefore the other people we had trained just got angry one day and said, “We refuse to return the money to the society because the president and secretary are exploiting us.” But, the poorer people said, “We want to return the money.” I said, “To whom?” They said, “To you!” Then off the top we said, “Why don’t you return it to yourself?”
One woman said, “My daughter is sick and I want some money.” So we said, “Ask the others.” They said, “Yes, she’s sick; we’ll give you a loan from our group.” It started with the sickness, and then one wanted money for some food. She said, “We usually go to the president of the cooperative and borrow money, so we are not going to go now.” So the group lent her money for some food, and that broke the relationship of power between the cooperative president and her.
We started analyzing this, and then we said, “Now, how do we introduce this in some policy change?” We were a bit ambitious, I must say. So we said, “If anybody can accept this as an alternate system, it’s only NABARD (National Bank for Agriculture and Rural Development) because they can then change policy at the Reserve Bank of India (RBI) and push this because they have influence over the regional rural banks and the commercial banks.” We went to NABARD Chairman and CEO P. R. Nayak and said, “You’re having problems getting money to the poor; here is money for the poor.” He said, “Oh! That’s something new.” I must give NABARD and RBI full marks because they got these policies through when nobody was talking about them in 1990 and 1991.
In 1989, he asked me, “Now, what policy change do you want?” I said, “Allow the banks to give loans without asking for the purpose. Why are you so particular about giving based on viable loans and unit costs?” They would give loans for sheep. There would have to be 20 female sheep and one male sheep, so that was supposed to be a viable unit. But, if you give such a big unit to a single woman, she has to leave all her other work and look after this. So, in order to survive she will sell two sheep. There goes your viable unit. We found that 60 percent of the recovery didn’t come from the asset, so why are you wasting your time? Let people decide [how to use their loans].
MC: Do you feel that the current legislation from NABARD and RBI fails to leave room for the private sector?
AF: What did the government do? It tried to introduce a bill which I personally thought was a very badly drafted bill. NGOs are not built for lending money. What has happened in the last five or six years is a number of NGOs have started lending money. There is one microfinance institution starting everyday in India. I think microfinance has a big role to play in India, but let’s make a distinction. One: let us have microfinance for people who need it. It can be for-profit, fast-growing, have good substantial interest rates and have good profits; no problem. But if you want to have microfinance in the context of poverty, then there are certain limitations. One is that it has to have reasonably affordable interest rates because the investment in agricultural and rural areas doesn’t give you a very high return. Two: it has to be in the context of development or in the context of organizations lowering the risk of development. Therefore, if you are looking at it in the context of poverty, you can’t look at microfinance as a single bullet. It has to be embedded in a much broader framework, and it has to be tempered by social concern. At the same time, microfinance institutions involved in poverty can be financially sustainable, as Sanghamithra Rural Financial Services (Sanghamithra) has proved. You need to create growth first and that growth rises either by private sector, by government or by NGOs, and that creates options where then microfinance can go in.
Now, let me give you a simple example. When MYRADA discovered that self-help affinity group (SAG) members were giving loans for dry-land agriculture, which is a high-risk proposition in our Deccan plateau, MYRADA then decided that we had
to lower the risk. So, we went into watershed management, which is managing water and soil in a whole micro-watershed which then improves the productivity of the soil, water retention and water use. We say, “Bring the soil back to life,” and we have a compass, trenches, silt applications, green manure and rotation of crops. We bring all that in. That’s MYRADA’s job, not Sanghamithra’s job.
What did we do? We lessened the risk of this investment. So, you can’t just give credit. You really have to look at a variety of things and unfortunately, many of these new MFIs just want to grow, and now they’re beginning to have difficulty because money isn’t coming back. I have had enough experiences where microfinance institutions are using very rough methods to recover money. I’ve had, personally, to go and bail people out of jail because of this.
MC: That’s a very poignant image. So are you saying that there must be governmental or charitable subsidies?
AF: Sanghamithra started with a grant – because I’m now 68 and I can’t live too long, so we said, “We have to get it moving fast” – but, Sanghamithra lives on loans. It borrows from the bank and on-lends. So, you do need a little push in the beginning; I don’t see why not. Very often when they look at our SAGs lending for education, they say, “Oh, this is consumption,” and I tell them, “You guys wouldn’t be sitting here if somebody didn’t educate you.” So, I find no problem in investing some money in starting MFIs. There are a lot of generous people saying, “Okay, we’ll help you for three years.”
Now the SAG model is completely self-reliant because the groups are federated into sets of 20, and they collect information on how the money is used. The sets of 20 groups are then federated into what we call, “community managed resource centers,” which are about 120 SAGs and watershed associations. The community managed resource centers are today sustainable. We have got about 89 of them. About 30 are raising all the money they require for a building, internet, you name it. Most of the buildings are given by the local government, in fact. To them, 20 self-help groups is quite a locally strong political group. It’s power. You’ve got to change power relations. So, for the SAG model, if I had adopted a banking model where I lent to individuals, I would need about 3,000 staff, at least, to manage these 12,000 groups. We have none. The federations collect information, and we computerize it. We just help them to understand how the money is used, and we then identify trends in livelihoods and try to support them to improve in value and scale. So, the self-help group is a model that doesn’t require staff. The only money I need is to run programs: agricultural development, new watershed programs, housing, sanitation and drinking water. We are in all these areas, but we need money for that.
MC: What types of challenges have you had to overcome?
AF: We didn’t have to keep the groups together. It was something internal. This was the biggest discovery: that traditionally you build on people’s strengths and not on people’s needs. If you make analyses of needs, you develop a dependency relationship between them and you.
The biggest challenge today is the quality of self-help groups (SHGs). In India, it became a national policy in 2000, and then the quality declined because they started forming groups without giving target-oriented training. But, of course, you have 3.2 million of them in India today. Now, we have to work for quality all over here. That’s when we changed our name to “self-help affinity group.” “Because,” we said, “we have to distinguish our groups, which are based on affinity and which have all this training, from groups that are formed overnight and which are not homogenous groups.” There are no subsidies in the self-help group. The subsidy is in training the group; not in capitalizing it. So, that’s when we called it “SAG.”
MC: What do you think is your most enduring or important achievement and what was the key to this success?
AF: I made one or two decisions. One was, if I want this movement to spread in India, then I cannot project MYRADA as the beginner and the founder because everybody gets too jealous about that. So, let’s get NABARD to work on it.
The key to success is consistency because you can’t change policies within two years, which the government tries to do sometimes. We’ve got nearly 600 full-time staff, and they’re all in the field, and they were the ones that really carried it forward. Today, we have 12,000 self-help groups. It was all done by my colleagues. Without them, you couldn’t do anything. I consider the great success to be holding them all together for the last 25 years.
This is the second in our “Pioneers In Microfinance” series, recognizing early innovators in social finance, which is generously underwritten by the Deutsche Bank Microcredit Development Fund .
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