Microfinance Focus, January 25, 2012: In an interview with Microfinance Focus, Mr. Aloysius P. Fernandez, Chairperson of NABARD Financial Services (NABFINS) and Member Secretary of Myrada shared his opinion about the Indian microfinance crisis, the evolution of the Self Help Group (SHG) movement and the various models in microfinance.

Mr. Fernandez shared the observations he had made from his experiences with dealing with the various challenges and issues in the industry.

Microfinance Focus: Why do you think the crisis happened in the Indian microfinance sector?

Aloysius Fernandez: Well many people feel that the crisis was caused by the impact of the Andhra Pradesh bill. That had an impact surely. But rightly there is a lot of evidence that the Andhra Pradesh bill was the result of several pressures that came on the government to take some action. The Andhra Pradesh bill did not pop out of the air. It came out of pressure.

I only opened my eyes after the Krishna crisis. After 2005, I began to take note. As Myrada Director, I had a lot of field operations from which I used to get a lot of feedback. There was a lot of field evidence to show that were a lot of problems, arising from the business models that the MFIs in Andhra Pradesh had adopted.

That business model was characterized by a few features namely rapid growth and maximization of profit. I would like to highlight that there needs to be a clear distinction between profit making and maximizing profit. They are completely different.

Where did the pressures come from? When you ask such questions it goes back to the business model. The business models were such that international players played a role. Due to the heavy influx of capital from all over the world, especially during 2008, 2009 and early 2010, there was massive input of cash and venture capital during these years. That is where international players played a role. Anyone knows that when venture capital comes into the picture, this means that you must grow fast, you must maximize profit and exit as fast as possible. All these were incorporated into the business model of these MFIs.

Now the question is: Does this business model fit into their stated objectives? Does this business model promote their stated objectives? Their stated objectives are for the poor and their livelihood. The answer is no.

These are the basis for which they got private funding on cheap rates from the bank. To me, I am happy with profit making. But profit maximization with the objectives of eradicating poverty and improving the livelihoods of people does not work.

One solution would be to separate NBFCs and MFIs. Remain NBFC and maximize profit and get venture capital but not get priority sector link. Then you have MFIs, who operate like NBFC, who will get priority lending but not maximize profit and invest in livelihood promotion. But putting the two together confuses everything.

Microfinance Focus: What is your opinion about the progress made by the Self Help Group (SHG) movement in India?

Aloysius Fernandez: In 1991 NABARD came up with three basic policy changes:

1. Allow banks to lend one loan to the group and let the group decide how to lend.

We learnt that giving one loan to a group is cheaper than lending to individuals. Also it builds up the group’s ability to discuss and take responsibility. The group was formed on affinity, which existed before we entered the picture. We indentified the poor in the village through a wealth ranking exercise. Then they formed their own groups through a self-selection exercise. Such a group had a positive strength. Myrada helped them to sit down and discuss. There were some trained modules called institutional capacity building, which we had designed.

2. Allow banks to lend to unregistered group

This is a difficult nut to crack and a lot of hard work dedicated to it. We fought for two years until it was approved. We wanted that the banks lend to unregistered groups only if they functioned like registered groups and conducted regular meetings. The only reasoned why we wanted them to be unregistered was because we conducted a survey of 500-800 groups and not one of them wanted to be registered. The moment they were registered, they experienced being harassed by government officers. But they provided Myrada field officers with the information.

3. Allow banks to lend without physical collateral

That’s the basis of the SHG linkage program launched by NABARD in 1992. The work took place from 1987-1992. NABARD then came in with the money to train them in institutional capacity building (ICB). Not about book keeping, but instead, how to meet how to talk how to arrive at a consensus etc.

NABARD’s had initially projected a target of 500 groups. In 2000 Government of India made it a national program and gave NABARD a 1 million target. Using the same amount of money for 500 groups, it started training 1 million groups. Therefore, the training of ICB declined. When it became a national program, districts were told to form self- help groups without understanding what it was. Andhra was the first to pick this up and formed groups and gave out loans overnight. The banks were not happy and seized savings of the group. It is interesting to note that there were more savings in banks than loans. The government coming into the picture was the kiss of death. Basically, due to the target approach.

There are good experiences all over India as well. Some of the World Bank Projects and NGOs are doing a good job.

SHG movement went down after 2005. One of the reasons is that banks are short of staff. So the solution was to give money, lump sum, to NBFCs/MFIs. And NBFCs/MFIs do not form SHG, but give individual loans instead.

Microfinance Focus: Do you think that there is a conflict between the Grameen model and the SHG model?

Aloysius Fernandez: In the SHG model you give one loan to the group. In the other model, you give loans to the individual so you are taking the responsibility. In SHG the recovery in not weekly, they have no recovery pattern.

The Grameen model is good for the city. Let me give you an example. There are three maids near our area who took a loan. Two of them borrowed money for pushcarts and to maintain shops, while another took out 10,000 to buy earrings.

You need to be clear that they are working around the towns, not in rural areas. You have a regular income working in irrigated areas and not when working in dry land areas. Not one has a problem with interest rate. Their major concern is how much money they have to return every week and not interest rate. Weekly pressure is the major concern of all the clients under NBFC/MFI, not SHG. They are concerned with the amount of money they have to return every week. Major motivating factor to remain in the game is to get the next loan.

Microfinance Focus: What is the next step for the SHG movement?

Aloysius Fernandez: The solution is that the SHG movement has to go back to Self Help Affinity groups. They need to provide adequate training such as livelihood and institutional capacity training. This is paramount as they make their own decisions. SHG is for the poor. It gives the poor space to grow and gives them time.

NBFC is not for the poor. The non-poor also need money. But the solution is to divide NBFC/MFI separately. The NBFC’s business model does not allow them to target the poor. Also I have noticed that governance of the major NBFC/MFI has been poor. Sa-Dhan will be most probably issuing a show cause notice to SKS, Spandana and SHARE.

Microfinance Focus: Could NABARD take on a regulatory role in the future?

Aloysius Fernandez: That’s just a rumor floating about. NABARD will not take on regulatory role. RBI will remain the single regulator.

Microfinance Focus: As chairman of NABFINS, could you explain NABFINS’s business model?

Aloysius Fernandez: It is a low cost business model. The low cost model means that there are low salaries. And more importantly, the whole model does not maximize profit. It is customized by software that allows us to customize according to the farmers need. That is the only element that adds to costs. Therefore, we don’t need 50-60 people in a district.

NABFINS’s low cost business model has three verticals. The first level is that its target is the poor who work with SHGs, formed by NGOs providing other services to the poor as well. We lend to the SHG directly and not to the NGO. The NGO is there to help us recover the money. Also we provide money for grants to train the SHG and work with a village chief who gets commission. Three or four staff works with the village chief and SHG. The second level is to work with second level institutions. They are producer companies who are aggregating adding value such as marketing. We already have four such companies to which we provide infrastructure support to carry the production to a higher level. We work with marginalized groups, such as sex workers. The third level is we are providing funds for training and skills such as technical skills. These are what we will focus on next year.

I would like to summarize that the business model that has landed the industry in crisis is not the business model for the poor. It is a business model for others, the not so poor, who need money as well. Mistake has been made by the NBFCs/MFIs deliberately, in order to receive priority lending. I am happy with maximizing profits but you have to be clear about your objectives.

The Global Microcredit Summit is partly responsible for the whole confusion between NBFCs and MFIs. They are responsible by putting everything, even SHGs, together as microfinance. The reason for doing so was to be able to reach the target of 100 million. There was so much international hype. CGAP is also responsible. In fact, CGAP is more responsible because they learnt from their experience from Compartamos, yet they didn’t take a stand till recently. They only accepted the Grameen model. Basically they questioned if SHGs, of uneducated people, can make better decisions than the field officers of the MFIs? This just shows the information on the ground and what is in the media. Therefore, the media has a big role to play.

(This interview was first published in the Microfinance Focus special print magazine which was distributed at the Global Microcredit Summit 2011 in Spain.)