1. SHG Federations: Development Costs and Sustainability Girija Srinivasan Ajay Tankha Microfinance India Summit New Delhi, 16 November 2010

2. Study objectives Federations are very critical to ensure sustainability of SHGs; however, their need for financial intermediation role is a matter of debate. To examine and compute the social investment required for the development of financial federations, their operational costs and profitability and the prospects for their financial and organizational sustainability. The second objective is to build scenario for the future roles of such institutions considering the financial inclusion agenda of Reserve Bank of India, expansion of micro lending by banks and exponential growth of MFIs.

3. Financial federations Financial federations mobilise equity, savings and other contributions from members, mobilise loan funds where necessary and provide need based financial services to the members. After analysing the various typologies and models, the study team excluded the following types of federations from the study. Federations formed for the purpose of channelizing investments in corporate MFIs. Federations which rotate mostly grants/revolving funds. Federations which have formed a company (section 25/NBFC) and scaled down/ceased to be financial intermediaries.

4. Snapshot of federations studied NamePromoterLocationStartFormSHG members IIMFGRAMAP2004MACS38836 PMSSPragati SewaAP2004MACS45489 SangineeParivartanOrissa2005Coop11707 ASSSL CECODECONRajasthan2005Coop3742 SaveraIBTADARajasthan2006Trust1469 Boondh Bachat Sangh Shramik Bharti UP2002Trust2436 PALMAPWDSTamil Nadu2008Trust6960 GMSTChaitanyaMaharash2009Unregd2365 BMASSGovt of OrissaOrissa1999Society14537 IKPGovt of APAP2003MACS16284

5. Development Costs of SHG Federations Background During 2001-02 several studies examined cost of promotion of SHGs and the emerging SHG federations. Estimates for cost of SHG promotion under different promotion regimes in two studies were in the range of Rs. 1,200 to Rs. 20,400 and Rs. 4000 to Rs. 16,000 per SHG. Also reported costs in the range of Rs.15,000 to 25,000 per SHG up to the federation stage for the development of structures of SHGs linked to livelihoods; and Rs. 15,000 per SHG for development of the three-tier structure of SHGs, village organizations and the financial intermediary mandal samakhyas under the UNDP-SAPAP – the forerunner of the Velugu/IKP in A.P. Thereafter no major attempt at estimation of cost of SHG promotion and development of SHG federations

6. Methodology Study covers 10 federations of different vintages. The oldest federation over ten years old while two have less than two years of operations. Development cost of an SHG federation is defined as average total cost of promotion per member SHG, i.e., the per SHG costs incurred at NGO/project level for promoting and sustaining a federation of SHGs engaged in financial intermediation until its independent functioning. These costs generally have been incurred or are planned over a period of about five years. Different methods of computation: (i) Averages computed for complement of existing SHGs under different expenditure heads from historical records (ii) ‘Modelled’ from per SHG input norms for activities and operations using historical prices; and (iii) For ongoing programmes, computed as in (i) from current records along with projections of future costs

7. Methodology Estimates prepared by respective promoters with support from study team Distinguish between two broad phases: (i)SHG promotion and social mobilisation (ii)Federation formation and stabilisation For comparative analysis, cost estimates adjusted (i) to current (2009-10) price levels; and (ii) to cover five years of expenses/support Limitations (i) Use of recall data and projections (ii) Comparisons across federation models and physical and socio- economic environment

8. Findings Average total historical development cost of the study federations estimated at Rs. 19,676 per SHG. When adjusted for price differences and normalized for five years of support the average total cost is Rs. 20,521 per SHG (for 10 study federations) and Rs. 23,511 per SHG for 8 NGO promoted federations. Development costs for two government initiatives significantly lower. Range for seven NGO promoted federations (excluding PALMA): Rs. 15,434 per SHG to Rs. 26,577 per SHG and average development cost per SHG Rs. 20,300.

9. Findings Of unadjusted average total cost for eight NGO federations, SHG promotion and social mobilisation was 43% and federation formation and support was 57%. Greater variation in SHG promotion/social mobilisation cost than federation formation and support Staff costs main item of expense for federations – constitute over 60% of development support cost of financial federations Revolving loan fund provided only in three cases – significant contributor to cost where provided. No clear pattern regarding development support required across models/legal forms

10. Scale of Operations and Development Costs Only three out of eight NGO promoted federations had a ratio of average loan outstanding per SHG ( as on 31.3.2010) to adjusted average development cost per SHG of over 3:1 Remaining five federations had a ratio of 1.2 or less: of which three federations (including one less than two years) had ratios below 0.7.

11. Financial and organisational sustainability Design and determining factors - Strength of SHGs, capability of the promoter to ensure organisational processes and systems, policy environment and viability of operations. Financial sustainability can be achieved; organisational sustainability needs longer engagement and investment.

12. Financial and organisational sustainability Challenges are many– quality of SHGs, ability and willingness of SHGs to contribute a larger share of their resources, Capital structure and ownership, legal form, competition, resource limitations to growth, squeeze on margins – but a few of the federations show resilience.

13. Financial and organisational sustainability NGO promoters more process oriented and their design exhibit larger chances of sustainability Role of promoter is for a longer term; continued investment in governance; nature of engagement changes.

14. Future Direction Federations and financial intermediation role – the space appears to be limited for a lending function - prudent to weigh the option; get the structure and design right. SHG maintenance role critical;Invest in SHG strengthening and need based services. Need for agility in business model; competitive advantage is in savings services and products. Government programmes – need for balance and partnerships; federations’ own agenda and not the last link in government supply chain.

15. Future direction Evolution over time – foray into enterprises, legal form, external equity, the basic building block – SHG Vs JLG. Policy direction – limited recognition and support so far. Well working financial federations need appropriate funding support.