A case in SHG Bank Linkage Programme -Term Loan Vs Cash and Carry Loan
The Government of India (GOI) issued a circular on 17 Nov 2011 to all the commercial banks directing them to start issuing all loans to the Self Help Groups (SHGs) in the form of Cash Credit Facility only. It also directed them to convert all the existing loans issued as Term Loans into Cash Credit Facilities.
The rationale offered for this direction was simple. In the opinion of GOI, the present practice of giving term loans has a cost to the bank because of the high number of transactions and documentation required for it. It also takes away a lot of precious time for the staff of the branch. Similarly, it also costs time and inconvenience to the group members as they have to come repeatedly to the branch for documentation and also save to keep separate accounts for repaying each loan.
On 19 Dec 2011, it issued a clarification that SHG’s will hold one service account with the bank branch which shall be the savings-cum Overdraft account. Initially, groups will deposit their savings in this account and as and when they become creditworthy, an Overdraft will be issued to them from the same account.
Salient features of the GOI instructions are:
1. The banks will sanction the cash credit limit for the amount which the Group will be entitled to have in the ratio of 1:4 after savings of 5 years. However, the disbursement limit would be sanctioned after six months and thereafter reviewed each year in the ratio of savings as prescribed by RBI. This will help to avoid repeated documentation which involves a lot of activity for the Group as well as for the branch of the bank.
2. NABARD will ensure that this is discussed and conveyed to all bank branches in all districts of India immediately and in case of existing accounts, the same procedure will be followed.
3. Wherever internal guidelines of the bank permit to go beyond the ratio of 1:4, the same will be applied in all cases- existing and new.
4. In so far as existing SHGs are concerned, the term loans shall be converted into cash credit limit by 31 December 2011.
I believe that either humility among all the CMDs of all the commercial banks or the fear of coming under the firing line of the GOI has made all the bankers fall in line without getting confused/amused whether it is the job of RBI or the GOI to issue such directives on the type of loans to be issued to their clients. It appears that the RBI is yet to take any follow-up action by way of further instructions to the banks in this regard. Of course, NABARD in its circular on ‘SHG-Version 2’ issued in April 2012 to all the banks has covered among other things the operational guidelines on issuing loans to SHGs through Cash Credit mode.
Leaving aside the semantics, let me examine the implications of this directive on the programme implementation
NABARD in its guidelines issued in April 2012 has attempted to educate the banks by way of a couple of illustrations covering various aspects to be looked into by banks while sanctioning Cash Credit Limits to SHGs.
Though the GOI instructions stipulate sanctioning of Cash Credit Limit to SHGs for a five year period after reckoning the savings (projected based on existing savings), NABARD has advised the banks to sanction cash credit limit for a period of three to five years based on the projected savings of the SHGs up to the end of 3 to 5 years. Drawable limits for each year can, however, be fixed within this aggregate ceiling as a multiple of actual pooled savings reached.
NABARD has also observed that some banks have expressed apprehensions that such an approach could drive to financial indiscipline at the SHG level and lead to over-borrowing and potential defaults.
To prevent such an eventuality, it has proposed certain measures be adopted by banks such as sanction of credit by SHG to its individual members will be guided as per their terms and duration as decided by the groups and not by the cash credit limit sanctioned by the bank, introduction of appropriate prudent mechanisms for review and continuance of limit by ensuring that all or part of the principal drawal is repaid in an operational year.
Further, it has also recommended that the banks could insist that every drawal be repaid within twelve months from the date of drawal or insist on turnover of at least 25-30% of the principal drawn in the first half of the year while reviewing the operations of the credit limit.
In India, as at the end of March 2011, out of 74.62 SHGs having Savings Bank accounts with banks, there were 47.87 lakh SHGs having loan outstanding to the tune of Rs.31.22 billion. In addition, there are a large number of SHGs financed by the micro-finance institutions (MFIs) though some of them would have obtained loans from the banking channel also. For the same period, according to NABARD’s estimates, the savings of 74.62 lakh SHGs stood at Rs.70.16 billion giving an average savings per SHG of a little over Rs.9,400 (it ranged from Rs.4,035 per SHG in NE Region to Rs.10,600 in the Southern States). It also grew by 13.2 percent during 2010-11. The average loan outstanding per SHG was Rs.65,223 giving a ratio of 1:6.9 (say 1:7) between savings and loan outstanding. Based on the above figures, let us do some on the back envelope calculation and fix the aggregate Cash Credit Limit of all the SHGs in the country for a five year period.
|Year||No. of SHGs credit linked at the beginning||Growth of SHGs (%)||No. of SHGs at the end||Saving per SHG||Growth in savings (%)||Savings per SHG at the end||Total savings at the end(billion)||Cash Credit Limit at the end(billion)|
The banks would charge interest at monthly rests and this will be added to the outstanding. For example, on a loan outstanding of Rs.1 lakh at the end of March, the bank at 12% interest would charge Rs.1000 as interest for March which will increase the loan outstanding figure without any actual business done. The cumulative effect of this action will be a proportionate increase in the loan assets of the bank if it has a large portfolio of SHG loans.
In case of a term loan for the same amount of Rs. 1 lakh issued at the beginning of the year and the SHG concerned has repaid about Rs.50,000, then the loan outstanding will be only Rs.50,000. Under the C/C system, banks may be tempted to advise the SHGs to draw to the full extent of drawing power at the end of March (financial year closing) so that they can show higher performance under loan assets. Some bankers who are more aggressive would make the SHGs to deposit the drawn funds in the Savings Bank account or Short Term Deposit account so that they can increase the business both under assets and also liabilities side. Of course, this may be construed as a sort of window dressing, but, the temptation will be high to resort to doing this.
Under SHG bank linkage programme, a large number of SHGs, particularly those in the states where the programme is very intensively implemented (Tamil Nadu, Karnataka, Andhra Pradesh, etc) have more than one loan accounts with the same branch of a bank like Revolving Fund Loan, Economic activity loan, etc, particularly under the government-sponsored programmes. It is not clear if the banks would be required to merge all the loans of one SHG under one loan and if so, arriving at the year-wise limit and fixing drawing power would be difficult as the government schemes such as SGSY require maintenance of two separate accounts.
The NPA levels of loans to SHGs by banks have gone up from 2.90 % during 2009-10 to 4.72% during 2010-11. Some banks opine that by converting them into C/C limits, they can classify a large number of those accounts as standard assets. Instructions are not clear as to how these NPA accounts would be treated.
With the National Rural Livelihood Mission (NRLM) replacing SGSY from 2012-13 onwards, the thrust for the financing of SHGs by banks would be more through the federations of SHGs than directly to the SHGs as is being done now. If the federations are going to be financed by banks, then whether the C/C limit would be extended to the federations also. As federations would have some SHGs which have turned NPAs to banks, it will be difficult to monitor non-financing of such groups by the federations from the loans obtained from the banks.
Among the three categories of banks viz., CBS, RRBs and Coop Banks, the Coop Banks would find it more difficult to switch over to CC Limit mode as a number of SHGs would be having accounts with the Primary Agricultural Societies (PACS) or at the branch level of district central cooperative bank. For them to operate CC limits as envisaged under the new dispensation would pose a new challenge as most of them may not be familiar with the operations of such CC limits.
Most of the SHGs are not aware of the change in the pattern of getting bank loans by way of CC limits in lieu of term loans as is done hitherto. Even under the existing dispensation, awareness among SHGs about the terms and conditions of bank loans is limited in a number of states. So, they will rather go with the instructions of the bankers than with their own credit requirements from time to time.
Loan requirements of SHGs would largely depend upon the availability of business activities in the area, the entrepreneurial ability of SHGs or at least some of the members, support available from the promoter NGOs, or the Self Help Promoting Institutions. So, fixing a uniform pattern of a five year CC limit to all the SHGs would make some of the SHGs choke under the burden of higher debt as they would be tempted to borrow when the funds are available without any economic activity to pursue to make their loans a sustainable one.
Apart from banks, a large number of MFIs are also financing SHGs. It is not clear if these MFIs would also be required to issue only CC limits on the lines of the GoI directive or they will be free to issue loans in the manner that best fits their business model.
The following steps could be considered to make the new dispensation workable.
First, make the CC limit for SHGs as a preferred mode of financing by banks and MFIs. This can be done by assessing the total loan requirements of an SHG for a period of say 3 years through a business plan approach and dividing the total loan amount as Term Loan and CC limit.
Second, banks should make all-out efforts in creating awareness among the SHGs about the introduction of CC limits to their loans in lieu of Term Loans. This can be done through print and visual media as a marketing strategy as normally done while marketing any new financial product to their urban clients. This should be done on an on-going basis over a period of at least one or two years until the SHGs begin to understand the implications of using CC limits from banks and MFIs.
Bankers also would need to be trained in the handling of CC limits accounts of SHGs. This is particularly important as most of the bankers would get a feeling that they know very well about operating CC limit accounts. They should understand that handling of normal CC limit accounts of businessmen, enterprises are far different from that of handling of CC limit accounts of SHGs as the latter would require a thorough understanding of the SHGs and providing funds to them according to their requirement.
NABARD should assess the training needs of the bankers particularly those of RRBs and the Cooperative banks and provide them with a well-structured training plan and educate the bankers in handling the new type of financing to SHGs.
While some of the banks have issued detailed guidelines on CC limit operations to their branches, some of the banks have just reiterated the directive of GoI without any operational guidelines. RBI may need to look at this and ensure that all banks issue suitable detailed operational guidelines to their branches so that they can operationalize the CC limit system of financing to SHGs.
Creating a single type of loan product and by standardizing it with conditions of five year CC limit and year wise drawing powers would not allow the freedom for both the lenders and the borrowers to choose the types or combinations of loan products that would suit them best.
As mentioned above, there may be a temptation among the bankers to use the CC limit facility to their advantage at the cost of SHGs which is not desirable. Therefore, the new dispensation has raised more issues than answers.
Both RBI and NABARD would need to spend more sleepless nights to make the bankers and the SHGs to sleep well when they implement the CC limit facility to SHGs. Otherwise, the CC limit facility will turn out to be a Cash and Carry facility with more NPAs at the bank-level and more suicides at the SHG level. Earlier, the regulators step in better for the banks and the SHGs.