Study on defaults in SHG-bank linkage program in Andhra Pradesh
National Bank for Agriculture and Rural Development (NABARD)
SHG Bank Linkage Programme, which started from a pilot project of linking 500 SHGs of rural poor to banks more than two decades back, has reached 8 million groups as on 31 March 2016. By far this is probably the biggest financial outreach programme, with multitude of SHGs, most of them being women SHGs, having access to formal banking facilities. The programme resulted in group savings of ₹37,000 crores and credit outstanding of ₹51,545 crores (excluding common fund with group and internal lending among group members) as at the end of March 2016. The SHG-BLP model of India has thus emerged as the most successful model of reaching the unreached for formal financial services in the world. However, rising defaults in SHGs has been observed in recent years, which is a major concern in the SHG Bank Linkage Programme.
Andhra Pradesh has remained in the forefront of the SHG-Bank Linkage programme in the country and has been a cradle of several process innovations in operationalizing and strengthening the SHG-BL Program. However, SHGs in Andhra Pradesh also could not remain immune to repayment delinquency and credit indiscipline. While sharp improvement in repayment performance by SHGs in AP has been observed during 2015-16 over the previous year, with a dip in the percentage of NPA of SHG loan A/cs with banks down to 6.25%, the overdue amount is still substantial. As per records available with Society for Elimination of Rural Poverty (SERP), the organisation for overall implementation of the program in AP, there were 566175 loan accounts in the state of AP with an outstanding amount of ₹ 11667 crores by August 2016 of which 62565 loan accounts had overdue amounting to ₹ 515 crores. Considering the above issue, this study was conducted with an objective to understand (i) the reasons behind the incidence of defaults of SHGs in Andhra Pradesh and (ii) the factors contributing to the good financial performance of SHGs in Andhra Pradesh. To achieve the objectives of this study, a structured pre-tested interview schedule was designed to collect responses from 960 respondents of 240 Self-Help Groups (SHGs), from three distinct geographic regions of Andhra Pradesh, i.e., Rayalseema, North-Andhra and Coastal Andhra. From each region one district, viz., Kurnool, Srikakulam, and Nellore representing each geographic region respectively were identified. The SHGs were further stratified into two groups, i.e., defaulting SHGs (40 SHGs from each region) and non-defaulting SHGs (40 SHGs from each region). Data analysis was done using statistical models, i.e., statistical significant tests for mean differences, Probit regression model, Ordinary Least Square Analysis (OLS), and factor analysis.
The causalities of defaults or superior performances (superior performance is the opposite of default in this study) in SHGs were being governed by a set of bank-related attributes, agency-related attributes, village-related attributes, household-related attributes and group-related attributes in the state of Andhra Pradesh.
Bank Attributes related to defaults
The bank representative was the main source of information regarding defaults and compliances. The promptness in attending a SHG client by the bank representative ensures and enhances effective utilization of credit and its timely repayments. Indifference of bank representative in attending SHGs cultivated indiscipline and carelessness among SHG members in their timely repayments. Some times SHGs/members ended up in selecting risky prospects because of their limited understanding on business environment, production practices, marketing opportunities and threats. A regular interaction between bank representatives and SHG members helped the bank representatives to provide early signals to SHGs in case there is likelihood of any delinquencies.
There are instances of bank representatives not being accessible or busy in other tasks and miss attending or entertaining a SHG (SHG members) on a particular day. Such banker accessibility related issue was comparatively not observed in Rayalaseema and North Andhra region. Defaults by SHGs/members were also associated with ‘their visits to the banks’ i.e. more and repeated visits to the banks by SHG/members led to less defaults. While accessibility of bank representatives was a banker-side dimension, SHG’s visit to the bank was a SHG/member-side dimension as far as banker- SHG/member interaction is concerned. Member’s visit to the bank represented the intention and interest of the members or SHGs whereas accessibility of bank representatives represented intention and interest of the bank or bank representatives. Repeated visits to the bank created a seriousness and responsiveness among the members with respect to repayments. This particular phenomenon was noticed across all the regions of Andhra Pradesh.
Defaults were associated with ‘number of loans sanctioned’ and ‘amount of loans disbursed’ in Coastal Andhra and Rayalaseema regions. The probit estimates predicted that the probability of defaults increases when more credits and large amount of credits disbursed in coastal Andhra and Rayalaseema region. This outcome puts two important questions, (i) were the SHGs over lent, and (ii) were SHGs capable of managing repeated and large amount credits? SHGs have responded that they use repeated and larger credits to fuel the growth of the microenterprises undertaken by them. But, the results from this study again put two questions, i.e. (i) was SHGs capable to manage the rapid growth or expansion of their microenterprises and (ii) were credits supplied to SHGs after verifying past credit utilization and repayment records? The survey shows that the defaulting members had a perception that (a) they can easily get a loan and (b) they can afford to delay repayments. The perception that they can easily receive a loan would have been created by a quick and easy lending process by the bank, but at the same time appropriate verification of applications should have been done by the bank.
Agency Attributes related to defaults
The role of the agency was found carrying paramount importance in the performance of SHGs with respect to defaults across all regions in Andhra Pradesh. SERP (Society of Elimination of Rural Poverty) was the prime agency in the state of Andhra Pradesh implementing SHG-BL Program. It was noticed that training programmes conducted by the agency for enterprise development had a greater impact on better performance (default reduction) in Rayalaseema and North Andhra region. Training programmes on enterprise development capacitated the SHG members to run microenterprises profitably. Members perceived that the microenterprise training programmes have built confidence among them and it made them aware of production practices and marketing environments which reduced the risk of business loss substantially.
There were incidences of defaults when agency provides grants to SHGs in the coastal Andhra region. The counselling of the agency to defaulting members was found effective in coastal Andhra. Counselling helped the members to internalize the importance of loan repayment and financial discipline. Counselling also helped the agency to convey that the demand for loan waiver was not a members’ right and may not be in group interest and default is a legally punishable act. In coastal Andhra, members’ defaults were significantly impacted by agency’s support on enterprise development. The enterprise development of the agency helped the non-wilful defaulters to improvise enterprise performance and ensured their loan repayments. A stronger support by agency in the forward and backward linkage ameliorated the repayment performance while a weaker support by agency in the forward and backward linkage deteriorated the repayment performance.
Agency’s support in book keeping of the SHG impacted the defaults/non-defaults in Rayalaseema and North Andhra region. The default rate was high in places where the agency was not very active in SHG book keeping. Defaults were lesser when agency paid more number of visits to the SHGs in coastal Andhra and Rayalaseema. An increase in the number of visits to SHGs created alertness in SHGs, thereby increasing the seriousness and accountability of SHG members for repayments. Similarly, in North Andhra region the SHG defaults were reduced where agency participated in the SHG meeting and vice-versa.
Village Attributes related to defaults
The study did not find significant village attributes contributed to defaults in the state of Andhra Pradesh. However, proximity of bank branch from SHGs has influenced the defaults in all the three regions. The probit model estimated that the probability of defaults is higher if the bank is located at a greater distance from the SHG.
Member’s Household Attributes related to defaults
It was noticed that “member’s defaults’ had a positive correlation with the “presence of old members in the family” in all the regions of Andhra Pradesh. More number of old members in the family demanded higher consumption credits, especially on health and food consumptions. Hence SHG members have rotated the production credits for consumption needs. This experience was observed more in case of SHGs whose main motive was social welfare.
In Rayalaseema and North Andhra region it was noticed that members tendency to default is high in two cases i.e., (i) there are less educated members in the SHGs and (ii) if there are lesser number of higher educated members in the family of the SHG member. The presence of higher educated family members negatively correlated to defaults. Less educated members manipulated credits and repayments and often misused credits. In Rayalaseema and North Andhra it was also noticed that the defaults were lesser in number when the SHG member’s family had more number of earning members. Similarly, in Rayalaseema region, defaults were lesser in number when the family income of SHG member was higher. [There was a difference between high income and high assets position.] It was observed that there were families in which assets position was high and income was less, the consumption in those families were higher due to family legacy and maintenance of false ego due to possession of high assets position. A higher consumption need of those families forced them to default the credit (i.e. production credit was used for consumption purpose). High income families had understood the importance of earning, pain of losing money and hence avoided defaulting.
Coastal Andhra demonstrated lesser defaults when the members were unmarried/ or larger number of unmarried members in the SHG or family of the SHG members or joint enterprise started by SHG members. The unmarried members were better performers and more serious with respect to loan usage compared to the married members. It was observed that the married members had many family obligations and many a times these obligations were more important than SHGs, credits and microenterprises. In the process of entertaining family obligations, married members defaulted and underperformed in managing their microenterprises. Therefore, in such cases, the members’ family should be counselled by the agency and the bank.
SHG Attributes related to defaults
SHGs defaulted less when their group contained a higher number of educated members in Coastal Andhra. However it is observed that such members were overconfident, often manipulated credits and rotated for other purposes; cribbed against interest rates and demanded more loan waiver. Again, these SHGs were politically empowered and often more verbal. Their defaults were not associated with business loss or non-wilful default due to family exigencies, but it was associated with carelessness and a higher demand of loan waiver. These SHGs require serious efforts from agency and bank in counselling, monitoring, and supervision of credit use and repayments. These SHGs were inclined to default more and more when the banks’ interaction and regular demand for repayments were lesser.
The probability of default increased with increase in the age of microenterprises promoted by SHGs/members in Coastal Andhra and North Andhra region. It was observed that new enterprises performed better hence they better serviced their loan accounts compared to existing enterprise. Members running relatively old enterprises defaulted to a higher extent which could be due to the fact that they lack skill to upgrade their operation because of their overconfidence in business, carelessness and laidback attitude. SHGs having the core principle of social welfare had a higher probability of default in Coastal Andhra and Rayalaseema regions. The social welfare motive was dominant over business motive in many SHGs in those regions. The social welfare motive did not pay attention to (1) misuse of credit, (2) timely repayment and (3) rotation credit from production to consumption [as verified in the Focus Group Discussion during validation process]. These SHGs were more attentive to attending social problems, leaving behind enterprise performances. Many of these SHGs were perhaps persuaded to undertake enterprises by agency and peers from their village.
The study reveals that probability of default decreased when the monthly membership saving in the SHG increased in Rayalaseema and North Andhra region. The higher group-saving by members ensured their responsiveness and attachment to their SHGs. They realized that any default related issues in SHG may lead to loss of their saving. In the fear of losing saving, they chose to avoid default in credits as much as possible. The long tenure of president and secretary makes the SHG vulnerable for defaults in coastal Andhra and North Andhra. However, the exact causality was not found out but members accused the president and secretary of SHG for defaults.
It was observed that defaults decreased with a dropout of members from SHGs in last two years in North Andhra and Rayalaseema. A higher peer pressure forced defaulting members to sign out from the group; hence the increase in group performance. The default was lesser when the group size was bigger [membership in the SHG was larger] in North Andhra. A higher group size in North Andhra created a high peer pressure in managing credits and avoiding defaults. It was observed that lack of high peer pressure led to a few groups in North Andhra continuing in defaults. The probability of defaults in Rayalaseema decreased when the “number of visits by the SHGs to the banks” was increased.