IVDP: A Viable and Sustainable Model of SHG-Based Lending
Lessons from Krishnagiri, Dharmapuri, and Vellore districts of Tamil Nadu
By: V Santhakumar, Anant Gangola, Subrat Mishra
The Integrated Village Development Project (IVDP) is a notable non-governmental organisation working in the Krishnagiri, Dharmapuri, and Vellore districts of Tamil Nadu. This is founded by Mr. Kulandai Francis, recipient of the Ramon Magsaysay Award (2012). This organisation has its genesis in the experience and interactions of its founder in a set of villages in an interior part of the Krishnagiri district in the year 1975, while he was studying to be a priest. He started with twenty night-schools and first-aid centres in and around the Natrampalayam village in Krishnagiri district. The acute water scarcity in these villages forced him to mobilise people and resources to store water for agricultural purposes through the construction of check-dams.
Many people in these villages were in debt to money lenders and forced to relinquish their land due to the non-repayment of their loans. Francis’ initial effort was to mobilise charity funds from individuals and international organisations in order to help these people pay back their debts and reclaim their land. Although, with this help too, only a part of their original land holdings could be restored back to them.
These were significant efforts but Francis’ organisation, IVDP wanted to develop a strategy to help the poor people without relying on external funds, which led to the formation of Self-Help Groups (SHGs). The IVDP could mobilise some money from its well-wishers, which it used to provide loans to the needy at a reasonable rate of interest (considerably lower than that charged by the money lenders). The idea was to use peer pressure and monitoring within the SHGs to ensure the repayment of loans. Initially, the SHGs were formed among men but these male SHGs failed because they could not exert enough peer pressure. And so, the focus shifted to SHGs among women. The beginning was the formation of one such group in 1985 with 12 members. Then, the organisation began collaborating with the Tamil Nadu Corporation for Development of Women (TNCDW) to organise more women SHGs in the region. However, there were many obstacles in working with a governmental organisation, such as delays in getting disbursements of loans and also the pressure on the women members of the SHGs to attend public meetings where political functionaries were present.
All these factors steered the organisation into developing a model where the SHGs are directly linked with the banks, with no external collaboration, support or funds. The IVDP considers this SHG-based access to credit as an important instrument in improving the lives of people and in facilitating social transformation in these villages. This report makes an assessment of this model being tried out by IVDP which we find interesting for various reasons that are discussed below. This assessment is important given the subdued interest in, or excitement about, micro-finance, currently. The report starts with a summary of the known problems of SHG-based access to credit.
2. SHG-Based Lending: An Overview
In general, SHG-based lending was seen as a better approach to facilitating the access to capital by the poorer sections of the society. Poor people’s access to formal financial institutions is limited because they do not possess collaterals to pledge against bank loans, and the moneylenders charge very high rates of interest.
Predominantly, there are two kinds of lending through SHGs. The first is the direct lending by banks to the SHGs which may be assisted or facilitated by a promoting agency like a non-governmental organisation (NGO). The second mode is where the banks give loans to the promoting agency, which in turn extends the loan to the SHGs. In this case, the promoting agency acts like a non-banking financial agency and this mode is called, micro-finance. It has been noticed that in certain cases where the promoting agencies provide loans, they may charge a higher interest rate, and this may work against the borrowers. However, the focus of this report is not on such micro-finance but on lending provided by banks directly to the members of SHGs.
The use of lending based on peer-pressure begets important benefits for poor people like freeing them from the clutches of money lenders for their financial needs. It has enabled families to get out of indebtedness. The loan received through SHGs has reduced the cost of borrowing and this, in turn, has benefited poverty eradication, enhanced consumption and the building of assets (including the acquisition of education) in poorer households. It also enhances the peer-dependence of women enabling their work both within and outside the home. The leadership role played by women in SHGs has also encouraged some of them to assume an important role in politics. For example, those who are at the forefront of the SHGs, have become elected representatives in local governments in states like Kerala (when 50% of these positions are reserved for women).
However, the appeal of the SHG-based lending is declining owing to a number of issues that have emerged from its implementation in different parts of the world. One of these is the lower repayment rates in certain cases and where government agencies promote the SHGs, this may become unsustainable due to the continued need for subsidies.
There are other concerns also: Is there competition among different SHG-promoting agencies which may lead to multiple memberships by people in different SHGs and an escalation in borrowing by the poorer people? Do people use loans for consumption purposes and if so, does it affect their welfare in the long-run? Are the micro-enterprises promoted by the agencies to ensure that the loans are used for productive enterprises, viable? Does the formation of the SHGs among women and loans available to them increase their burden in meeting the needs of their family? The last is an important concern since there is no concurrent change in gender norms in the society. In this context, it may be insightful to look at the model that is followed by the IVDP.
3. IVDP’s Model of SHG-Based Lending
The IVDP encourages women to come together as SGHs that facilitate savings among their members. Those who need, get loans from three sources:
(1) Banks: These include public sector banks and rural banks (sponsored by the former). The interest rate is around 11-12%. In 2017-18, around Rs. 379 Crore were provided as loans through these banks.
(2) Savings of the SHG: The interest rate is determined by the members of the SHG. At present, it is 24%, per annum. The total amount of loans disbursed through this source is almost equal to the total amount of loans which are mobilised through banks.
(3) IVDP funds: IVDP has a core fund or endowment (around Rs. 10 crores in 2017-18), which is also used for lending to the members of the SHGs. The interest rate is equal to that of the public-sector banks but much lower than the one offered from the savings of the SHGs.
The IVDP has organised more than 12,000 SHGs serving 2,20,000 members in the three districts of Tamil Nadu. The annual increase in the number of SHGs formed with the support of this organisation is more than one thousand. The repayment rate is close to 100%, and out of the 12,000 SHGs which are graded by banks, only six are found to be financially unhealthy, which is an important achievement considering the lower repayment in SHGs which are promoted by governmental and other agencies.
In essence, those members of the SHGs who want loans get these at a rate closer to that of the public-sector banks (except in those cases where they have to depend on the savings of the SHG). Even though there is no subsidy, this enhances access to credit by the poorer sections of the society1.
We discuss a few features of IVDP’s model of SHG-based lending in the following sections.
3.1 No external sources of funding
Though IVDP has received funding from domestic and international charitable sources at the beginning of its operations (especially when it was focused on the construction of check dams), it has not relied on any such external funding in the last couple of decades. There are two major sources of revenue for its operations.
(1) The organization gets 2% of the bank loan to meet all expenditure needed to facilitate the loan transaction between the SHG and the bank. The IVDP founder signs all the documents of loan transactions as a promoter and a facilitator of the SHG.
(2) Interest on the core fund: It receives interest on its core fund by lending it to the SHG members, the rate of which is equal to that of a commercial bank on a deposit.
The functioning of the organisation – its recurring costs and capital expenditure (for example, the building of the central office and those of the federations) are met from these sources. Hence, the organisation does not depend on any external source for its own sustenance. This seems to be a conscious strategy on the part of the founder whose main concerns include, self-respect and financial self-reliance.
3.2 Savings and loans on savings
The revenue of an SHG is the interest it gains on the lending of savings of the group to its members. Each SHG has an animator – the member who organises meetings and keeps the account of transactions. She gets a minimal honorarium paid by the SHG. So, the total revenue minus the cost (such as the salary of the animator) is paid back to the members as a bonus. This is the return for each member who has saved money with the SHG. There are some notable features of this saving and its use for lending among the members.
- Interest rate: As noted earlier, the interest rate of the loans based on savings of the SHG is determined by the members themselves. Currently, the rate is high at 24%. The IVDP has been suggesting that this be reduced but the SHG members are unwilling to do so. This is an income that they get from their own savings, and hence members have a strong incentive to keep the rate at the current level. This bonus is accounted once in two years and distributed among the members. According to one estimate, each rupee that is saved can get a return of 30 – 80 paisa as bonus.
- Cap on individual savings: The higher rate of interest, in this case, can potentially create problems in the community. For example, if in an SHG there is a section of members who are mainly savers and there is another section who are borrowers, the members who `save’ more money may become `money lenders’ who are using the SHG to lend out their money. To avoid this problem, the IVDP has kept a cap on the amount of money that can be saved by each member during two weeks (Rs. 250). During our visits to the meetings with these groups, we could see that almost all members deposit this money. This amount which is less than the daily wage of an unskilled worker does not seem excessive or unmanageable for most members.
- Cap on total savings: The other strategy used by IVDP is to cap the total amount of savings that can be retained by each individual. This amount is around Rs. 20,000 per member. Once the dividend is calculated and disbursed, excessive savings are returned to the members. This strategy also mitigates the possibility of some members using the SHG as a way to lend out their money at a higher interest rate. The IVDP has enforced these practices to avoid the creation of inequalities through the functioning of the SHGs.
3.3 Monitoring and control
A group of around 200 SHGs is organised as one federation, and there is a set of functionaries (employees of the federation) who overlook the functioning of these SHGs. The role of the federation is limited to the monitoring of loan transactions and functioning of the SHGs. The federation is partly an autonomous body like the SHGs. This arrangement is based on the experience of IVDP and other organisations that independent transactions that may take place between the federation and the banks, and the possible failures in this regard, can dent the reputation of these organisations. Therefore, the IVDP has adopted this centralised control in terms of facilitating the functioning of the SHGs by its own employees. All loan transactions between SHGs and banks are monitored by IVDP. This enables effective monitoring and control over financial transactions.
4. Capacity building of members and digitization of transactions
The IVDP also carries out extensive training programs for the members and functionaries of the SHGs every year. These include, training for the animators and representatives from nearly 1000 SHGs and members of new groups (from 762 SHGs); training in accounts for 719 groups; and a general orientation training of nearly 1.5 lakh members on sanitation, including the use of toilets, sanitary napkins, and safe water-use in the year 2016-17. The organisation has also adopted a plan to digitise the operations of the SHGs by creating a database of fingerprints of the members; implementing processes like on-time accounting of financial transactions and relaying of transaction information to members through SMSs.
4.1 Catalyst for social change
IVDP’s role is not limited to the facilitation of access to credit. It believes that if people have access to credit at normal interest rates, they will take appropriate decisions for their own development, for example, for enhancing their agricultural incomes and enabling the education of their children. Hence, IVDP does not intervene in the creation of productive enterprises by those who receive loans. However, the organisation has a vision for social change and uses the SHG-based lending to usher in that change in areas where it operates. It discourages child marriages and encourages SHG members to send their children to schools and colleges. The organisation stipulates that each SHG enrol members irrespective of their caste or religion and thereby reins in the social fragmentations in these villages.
The organisation has encouraged the members of the SHGs to create mechanisms that strengthen mutual support among them. There is a ‘solidarity fund’ created with the contributions by the SHGs. This fund is available for the payment of Rs. 5,000 for the funeral in case of the death of a member; and Rs. 50,000 to the family of the deceased member (after the loan amount due on her has been deducted from it). The founder has witnessed cases of fighting over funeral expenses among the family members of the deceased member and that has prompted him to institute such a provision.
During our interactions with the members of the SHGs, we could see that there is a genuine concern and sympathetic approach among them towards those who were facing serious financial difficulties in the locality. The members are inclined to allow a few of these people to be part of the SHG thereby helping them in getting better access to credit. Also, if sometimes, some members are unable to pay instalments (part of the loan repayment), other members share the burden and pay the instalments of the defaulting members. Genuine difficulties faced by defaulters are taken into consideration by the other members of the SHGs while exerting peer pressure for repayment.
The IVDP also gives cash prizes to children of members of the SHGs who do well in high-school examinations. In an effort to encourage positive lifestyle changes among the members, the IVDP has helped provide them with subsidised solar lighting, low-cost and safe sanitary napkins and water purifiers2. The use of kerosene lamps, a major cause of fire accidents in the region, has been completely eliminated in these households.
The organisation has also helped the setting up of two educational institutions, which serve a wider section of the villagers and not just the families of the SHG members. One of these is an unaided private school, which is managed by the nuns of a Christian congregation. The second is a computer academy which provides IT-related training to adults. The school and the computer academy charge a moderate fee from students to meet the recurring expenses. The IVDP has also facilitated the creation, printing and distribution of guidebooks to improve the pass rate in school examinations in the area. It has spent four crore rupees across 11 years for this purpose.
All these interventions indicate that the IVDP is not just focussed on the provision of loans but it is also striving towards enabling human development and social change in the area.
4.2 Evolving strategies
The current practices that are in use by the organisation have evolved through its own experiences. For example, the realization that some members may not pay back loans despite taking all precautions, and that this may affect the reputation of the SHG and also the promoting organisation, has led to the creation of a Risk Management Fund. The fund is used to pay back those unpaid loans. This has enhanced the confidence of, and enabled, bank managers to continue to extend loans to the SHGs promoted by IVDP.
Similarly, the solidarity fund which is used to support the families of the deceased members of the SHGs has evolved in response to the challenges faced. In some cases, the family members (especially husband or sons) were not willing to pay back the loans taken by the deceased. Or in certain other cases, the families were in financial distress and could not pay the loan back. The solidarity fund mitigates such situations that affect the financial health of the SGHs and its reputation with the banks.
IVDP’s approach towards the formation of federations of the SHGs has also changed with its experience. According to the founder, some employees and bank officials started hijacking the federation and that created problems for the organisation. The current approach is to use federations for the purpose of monitoring while the financial transactions are only between the SHGs and the banks, facilitated by IVDP. The IVDP has also desisted from entering the realm of micro-finance based on its understanding of the inappropriate practices that such intermediations may involve.
Given the complexity of the contexts in which these social organisations function, it is important to be open to learning from experience and to change strategies from time to time, as necessary. The IVDP has shown this flexibility of approach and that could be a major contributor to its success.
4.3 Dealing with multiple memberships
One concern that the spread of the SHG-based lending has raised recently is the possibility of multiple-memberships and its impact on the welfare of the poorer people. This happens when multiple organisations – both governmental and non-governmental – promote SHGs in the same locality and people become members of more than one SHG, thus borrowing from multiple sources. Each of these facilitating organisations may promote borrowing directly or indirectly. The loans from one source may be used to pay back the loan taken from another source. If one organisation provides loans at a lower interest rate, people may use it to pay back loans taken from another source, and the dependence on credit at a higher interest rate may not come down. This is especially so in cases where people use loans for consumption purposes and not necessarily for enhancing their incomes in the long-run. All these may enhance the indebtedness of the poor people.
The founder of IVDP tells us that though they are not completely impervious to the problem of multiple memberships, it is not very severe for a number of reasons. First, IVDP has more or less, a dominant position as a facilitating organisation of SHG-based lending in the region. Other non-governmental organisations, that have attempted, have not been as successful and hence their operations have declined. Governmental organisations have also not succeeded because their performance is often marred by the issues of ineffectiveness and corruption. The IVDP and SHG members are also careful in avoiding those who are members of or are dependent on other SHGs. It may be noted that the members of SHGs are aware of the presence of other SHGs that may be operating in their localities. All these factors have helped IVDP in ways that multiple-memberships is not a serious issue among its members.
5. The Impact of IVDP
It is difficult to have a statistically rigorous, quantitative assessment of the impact of the work of an organisation like the IVDP which has been in operation for more than two decades. This is due to the absence of a proper baseline data and the long years of operation that make the separation of the contribution of this organisation from that of the other probable socio-economic and political factors, difficult. However, qualitative and anecdotal evidence-collection and a process-based assessment of the impact of IVDP are possible.
There are a few obvious indications of the positive impact of IVDP. The smooth functioning of almost twelve thousand SHGs facilitated by it is itself an indication that it meets certain social requirements. In the absence of such a felt need on the part of the people, it would have been difficult to ensure the effective and smooth functioning of so many SHGs. Though there have been efforts to create and run SHGs by other governmental and non-governmental organisations in these localities, there are indications that the IVDP has been far more successful on a consistent basis. A number of prizes and medals which have been received by IVDP from banks which have extended loans and from other national and international organisations are also an indication of its success. Its life-transforming impact on people whether they are the direct beneficiaries of scholarships or of other support through various altruistic projects of the IVDP is for all to see.
While interacting with the members of the SHGs, one frequently hears the stories of individuals whose lives have been transformed through the functioning of the IVDP. The decline of the practice of illegal money-lending has been noted by many. Apparently, the families of the money-lenders have moved to other enterprises like the running of private schools. Some of them have also joined the SHGs as members.
The individuals who have taken, used and paid back loans, have through this process, enhanced the productivity of their sources of livelihood and income. The story of a self-employed coir- worker who has improved the technology of weaving, from hand-based through semi-mechanised to a fully mechanised machine, is notable. There are many families that have used these loans to meet the cost of education, either in private schools or colleges, and a section of them has benefitted through remunerative jobs. The socio-economic transformation of these people resulting from the access to credit is a remarkable contribution.
The lived experience of the founder is also important in this regard. He has not only earned respect for the contribution he has made towards the society but has also derived personal gratification from having led a meaningful life for himself, in the service of others. A number of women who now work as employees of the IVDP had started as members of the SHGs and have now become animators or field organisers of the organisation. These women have not only earned jobs but have also gained self-esteem by participating in a socially constructive project.
6. Future of IVDP
The functioning of the IVDP depends to a great extent on the experience and supervision of Mr Kulandai Francis which may have enabled the preservation of certain values with which the organisation has been founded. It is also interesting to note that all the supervisors of the organisation are women who have earlier been with the SHGs facilitated by the IVDP and have a commitment towards the organisation that is above and beyond that of an employee. However, it is time for the organisation to think about its transition to the next generation of leaders and managers. Ensuring a transition which will enable the organisation to continue to work with the core values and effectiveness that it is known for, could be a challenge.
7. Development Challenges Before Tamil Nadu and the Role of IVDP
We have visited a set of villages in Northern Tamil Nadu as part of the field work on IVDP and noticed a visible improvement in the life of the people there. People have access to, and use, toilets in urban slums and rural areas. Almost all boys and girls go to school. Most people have access to food and basic healthcare. The poorer people get a basic income from unskilled work including that from the Employment Guarantee Scheme (EGS). There has been a sharp decline or even complete disappearance of practices such as sex-selective abortions and infanticide. It appears that the people of Tamil Nadu have addressed the issue of severe underdevelopment. The competitive populism of the two Dravidian political parties has to a great extent ensured the availability of basic goods and services to the people, though the issues of corruption and ill-governance go largely unresolved. The state faces, what can be called, the second-generation challenges in terms of development. Though almost all children go to school, the quality of education is not beyond apprehension.
However, what is striking is the attitude towards the employment of girls. Given that most children go to school, it is notable that the girls are more likely to successfully complete grades X and XII. A significant percentage of girls go for higher education – graduating in arts or commerce from local colleges. But when the focus turns to marriage, despite her educational qualifications, a girl’s family has to mobilise a dowry in order to find a husband to `take care’ of her. Many girls with college degrees, because their families do not have the means to `procure’ educated boys, are married off to boys who may not have completed their schooling and may be working as construction workers or auto-drivers.
After marriage most husbands and their parents who have strong views against women’s employment expect the girls to stay at home and take care of the housework and kids. Very often, a few years after marriage, husbands fall prey to alcohol abuse and other misdeeds, increasing the financial burden on the family, and girls are compelled to step out to earn. When they cannot find suitable work, these girls who have passed school or even graduated have no option but to work as agricultural labour in areas close to their marital family where they are under the watchful eye of the husband or his family3.
Girls also end up in distress employment in the agricultural and other unskilled sectors because they are not willing or encouraged to acquire skills such as that of an electrician or a plumber after schooling as these are not in line with the socially accepted notions of femininity. However, when the marital family’s financial situation deteriorates, these standards of femininity are lowered for the daughter-in-law who must then find employment.
There are households where girls have acquired higher education and taken up employment that requires such education. However, the investments which are made by the poorer households (using the money borrowed through SHGs) for the education of girls would lead to full benefits only if there is a change in gender norms that discourage girls from participating in employment. There have to be concerted efforts to bring about an attitudinal change in the society towards the employment of girls. This can be an agenda for the IVDP and other such organisations interested in enhancing the welfare of the poor people in the state of Tamil Nadu.
V Santhakumar, Professor, Azim Premji University
Anant Gangola, Associate Director, Field Practice and Students Affairs, Azim Premji University
Subrat Mishra, Program Manager, Field Practice and Students Affairs, Azim Premji University
The preparation of this report has been possible due to the sincere collaboration of a number of functionaries of the IVDP.