Viability Analysis of SHG Lending in a Commercial Bank An innovative approach of State Bank of India in Central Uttar Pradesh

Transcription

1 RURAL FINANCE PROGRAMME INDIA Viability Analysis of SHG Lending in a Commercial Bank An innovative approach of State Bank of India in Central Uttar Pradesh by Ajay Tankha and Jan Meissner February 2007

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3 Table of Contents List of Abbreviations Introduction Background and objective of the study Methodology Environment of CPC: State Bank of India and its SHG business SBI and SHG business in Uttar Pradesh the organisational set up SBI s Special Focus on SHG-Bank Linkage Chowk branch, Shahjahanpur CPC Bartara and its SHG business in central U.P Viability analysis of SHG lending - single-period perspective Viability analysis of SHG lending - multi-period perspective Business models Scenario 1 SBI s vision for CPC Scenario 2 Alternative model of CPC with higher investment Scenario 3 Considering SBI s NGO incentive scheme Scenario 4 SBI Incentive Scheme and SHG Lending at PLR Observations from the field and recommendations Social banking versus business model Interest rate setting versus investment Summary of Findings and Concluding Remarks Annexure...29 Acknowledgements: The authors are grateful to all the staff of State Bank of India from Lucknow, Bareilly and Shahjahanpur, for their generous assistance during the course of this study. In particular, Mr. R. C. Awasthi and Mr. S. P. Srivastava at Lucknow, and Mr. R.M. Saxena and Messrs. A. P. Singh, Manoj Aggarwal and Ashok Gogna of the Central Processing Cell at Bartara devoted considerable time and effort to help us understand the operations of the cell. From NABARD, Mr. Sukhbir Singh, Mr. Neeraj Verma and Mr. Mohammed Ashraf extended all cooperation. Ms. Vimla Behan and Mr. Ramesh Bhaiyya and team were a most useful source of information on their SHG promotion and other activities and gracious hosts at the VSA campus. Last but not least we are appreciative of the SHG members for their candid sharing of their experiences and their patience during the interviews. A list of persons met and organisations visited is presented in Annex A. 3

4 List of Abbreviations A/C AA-SIC AGM CC CD CPC DCCB DGM e.g. Etc. FY GTZ HO i.e. HRD INR KCC LHO Ltd. M M-Cril MFI MIS NABARD NGO NPA No. p.a. PACS PAR PLR RRB Rs. SBAR SBI SC SGSY SHG SHPI SIC SKA TPM Ts. TSC I TSC II UP VSA Account Amortization amount of SIC (6 years) Assistant General Manager Cash Credit Credit-Deposit Central Processing Cell District Central Cooperative Bank Deputy General Manager Abbreviation of Latin 'exempli gratia': for example Et cetera Financial Year Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH Head office Abbreviation of Latin 'id est': that is Human Resource Development Indian Rupees Kisan Credit Card Local Head Office Limited Margin in % of average SHG loan outstanding Micro-Credit Ratings International Limited Microfinance Institution Management Information System National Bank for Agriculture and Rural Development Non-Governmental Organization Non-Performing Assets Number per annum Primary Agriculture Co-operative Credit Society Portfolio at Risk Prime Lending Rate Regional Rural Bank Indian Rupees State Bank Advance Rate State Bank of India Staff Cost (Sustaining staff cost in SHG lending) Swarnjayanti Gram Swarozgar Yojana (government scheme) Self-Help Group Self-Help Promoting Institution Social Investment (mobilization) staff Cost in SHG lending Samuh Kranti Abhiyan ( Group Revolution Campaign ) Transfer Price Mechanism Thousands Total staff cost I in SHG lending (incl. social investment (mobilization) cost) Total staff cost II in SHG lending after amortization of social investment (mobilization) cost (AA) Uttar Pradesh Vinoba Sewa Ashram 4

5 1. Introduction 1.1. Background and objective of the study The provision of viable quality financial services to SHGs through the rural formal banking sector is a precondition for the sustainability of the SHG-Bank Linkage Programme in India. At present there are three predominant models of SHG Bank Linkage. In model one, the bankers form and finance the groups. Under model two, the self help promoting institution (SHPI) forms and nurtures the groups and the bank directly finances the groups. In the third model, the SHPI also acts as financial intermediary between the groups it has formed and the financing bank. Thus the SHPI acts as a micro finance institution. The linkage programme can only be sustainable in the long run if the costs of these services are covered at all levels, i.e., at banks level, at SHPI/MFI level as well as at SHG level. Therefore, sufficient intermediation margins and hence appropriate interest rates are essential at each level of intermediation in each model. All the costs incurred by the financial intermediary have to be reflected in its intermediation margin and the interest rate charged by it. In order to ensure the institution s viability the intermediation margin or spread must be sufficient to cover transaction costs as well as costs of risk or default. The spread includes also the profit of a financial intermediary which can be positive or negative or zero. Non-for-profit organisations acting as intermediaries, however, may not actively seek profits. It has been concluded from studies that the transaction costs at SHG level are negligible or even non-existent. 1 Several studies focusing on the transaction costs of banks and cost of risk have concluded that such costs at banks level are low for SHG lending and hence it is profitable business for the banks. 2 However, a study conducted by M-Cril 3 raised concerns about the Regional Rural Bank manager s ability to assess, monitor and manage costs and risks of its SHG portfolio and concluded that RRBs are not charging sufficient intermediation margins. Hence a series of studies have been commissioned by GTZ under the NABARD GTZ Rural Finance Programme to analyse the viability of SHG bank linkage under different models. The studies are expected to provide practical tools for bank managers and MFIs for cost and activity analysis and interest-rate setting for lending to SHGs. The best practices of banks and MFIs in SHG lending have also been documented and are being disseminated. The present study is on the SHG business of the State Bank of India (SBI) (the largest public sector commercial bank) and the Central Processing Cell (CPC), Bartara which is attached to, and maintained by, SBI s Chowk branch, Shahjahanpur. The CPC was formed in November 2004 to support bank branches in the opening and servicing of SHG accounts and currently serves 32 branches of the SBI in 5 districts of Central U.P., of which 9 branches had been active in lending to SHGs during Of these branches, the Chowk branch has the lion s share of clients covered by the SHG operations of the CPC thus far. The CPC is an innovation in the development of SHG bank linkage pioneered by the SBI in U.P. Through an analysis of the role and current activities of the CPC, supplemented by projection of its coverage in the future, an assessment is made of the viability of the bank s SHG linkage programme developed with the help of this extended arm of the bank branches it serves. This study, the fourth in this series, complements similar studies on the viability of lending to SHGs covering (i) an MFI; (ii) an RRB; (iii) a DCCB and its affiliated PACSs that have been undertaken earlier. 1 Karduck/Seibel (2004): Transaction costs of SHGs in SHG Banking: a study in Karnataka, India 2 For example, Dave/Seibel (2002): Commercial Aspects of SHG-Bank Linkage Programme; Srinivasan/Satish (2000): Transaction costs of SHG lending impact on branch viability; Puhazhendhi (1998): Transaction costs of lending to the rural poor. 3 M-CRIL (2003): The outreach/viability conundrum Can India s Regional Rural Banks (RRBs) really serve low-income clients, Gurgaon. The study was based on 4 RRBs (out of 196) methodology not available

6 1.2. Methodology The viability analysis of a Bank/MFI s operations in general and SHG products in particular is based on the profit centre accounting approach. A profit centre (which can be a branch, or a department, or a product) is an important tool of management accounting. Items covered in the income and expenditure statement are adjusted on the basis of the accruals method of accounting and are attributed directly and indirectly via keys and weights to various profit centres. By defining resource mobilisation and allocation as an overhead for (fund) management, transfer prices charged for lending funds to the clients and transfer price paid for mobilising funds from the clients can be introduced. This type of inter-branch fund transfer price mechanism is practised in most of India s commercial banks at product or branch level, in some form or the other, whether in simplified or sophisticated form. The inter-branch transfer price mechanism (TPM) of a bank defines its strategy for client and product management. 4 Following this logic, for a bank branch the gross spread or intermediation margin for deposit products is calculated as the difference between income from deposit mobilisation - which is a transfer price chargeable on provisioning mobilised funds to the fund management unit - and the effective interest paid by it to the depositors. It comprises operating cost (being the direct and indirect costs of deposit mobilisation) and a residual return or profit from the deposit product (which constitutes the opportunity cost or minimum yield acceptable in the alternative activity, i.e. lending). The intermediation margin of lending products at branch level similarly is calculated as the difference between effective income from lending and the transfer price payable on borrowing funds from the fund management unit. It comprises operating cost (being the direct and indirect costs of lending), a provision for bad debts (reflecting costs of risk or default) and a profit from the loan product (constituting the opportunity cost or minimum yield acceptable from the alternative activity, i.e. deposit mobilisation). The flow of funds from the treasury to the branch or profit centre under the transfer price mechanism methodology is depicted in figure 1 below: Figure 1: Transfer Price Mechanism Methodology - Illustration of Fund Flows Treasury/Fund Management Investments Resource allocation (Fund) Management Resource mobilisation Borrowings Funds from Treasury Funds to Treasury Branch/ Product Funds to Financial income lending Branch Lending Gross spread lending Financial expense transfer prices Transfer price TPM for funds lent Transfer price for funds mobilised Deposit mobilisation Financial income from transfer price Funds from Branch Gross spread deposit mobilising Financial expense deposits Client Client These flows determine the financial income and gross spread available through lending and deposit mobilisation by the branch (or activity or product constituting the profit centre approach) as illustrated in the lower half of the figure. Towards the allocation and analysis of transaction costs of a branch or profit centre one can divide the customer and product activities of a financial intermediary, especially staff inputs and 4 An aspect of the TPM methodology is that indirect costs, in the form of overhead expenses incurred at levels other than the profit centre, are effectively accounted for in the transfer price applied by the central authority. 6

7 costs into (i) build-up or promotion activities; and (ii) maintenance activities. The build-up measures for client development can be seen as an investment in potential customer and product business and the incurred cost should be amortized over the lifetime of the investment. This depends, among others, on the objective or vision of the bank/mfi. Figure 2: Methodology and Components of Transaction Cost Gross spread SHG lending Management Accounting Gross spread SHG deposit mobilizing Direct & Indirect Cost Allocation Based on Time-and-Activity Analysis Composition of analysed Gross spread SHG Lending Profit/Loss Staff cost mobilizaton (investment) Staff cost maintenance (current) Office Cost & Depreciation Composition of analysed Gross Spread SHG deposit mobilizing Profit/Loss Staff cost mobilizaton (investment) Staff cost maintenance (current) Office Cost & Depreciation Cost of Risk/Default Figure 2 provides a detailed breakdown of various types of transaction costs involved in lending and deposit mobilisation. Background information on allocation of staff and other costs based on time and activity analysis is provided in Annex B. Detailed methodology of the viability analysis is contained in Annex C. For the present study a field visit to the State Bank of India s Circle Office in Lucknow, to its Regional Office and Chowk branch in Shahjahanpur and to the CPC associated with the Chowk branch (which is located on the premises of the NGO, Vinoba Sewa Ashram at Bartara) was undertaken for a week during August The audited financial statements for FY and FY as well as the loan outstanding details given by the Chowk branch are analysed and are given in Annex B and C. In the study, as a first step, the organisational structure as well as the delivery channel of SHG business of the SBI is presented and the overall profitability and the viability of the Chowk branch is described and broadly analysed (chapter 2). In a second step, the overall profitability and viability of SHG business at CPC Bartara is analysed for the current period (FY ) in its role as an internal business facilitator for 32 SBI branches in five districts of central U.P., and as a business correspondent for the Chowk branch for which it operates an extension counter for SHG at Bartara as well (chapter 3). In a third step, a medium-term business model is produced over a six-year horizon to ascertain the viability of the SHG business facilitated by CPC, Bartara in terms of the net benefits accruing to the bank branches served by it (chapter 4). SBI applies transfer prices for inter-branch fund transfers from its central office the fund management unit of SBI on the pattern described in chapter 1. At current rates (FY ), urban SBI Branches 5 are effectively compensated for SHG deposit funds provided to the head office at 7.525% and branches pay 5.525% on SHG loan funds borrowed from the head office. The methodology of the study is based on the actual transfer price mechanism (TPM) of SBI as prevailing in March 2006 (Annex B), which acts as an important determinant in the viability analysis at both the branch level and for the SHG business. 5 Like the Chowk branch, Shahjahanpur- which caters to rural SHGs and clients as well. 7

8 2. Environment of CPC: State Bank of India and its SHG business SBI has actively participated in SHG-Bank Linkage programme since its inception in 1992 as a pilot project of NABARD and has made steady progress since. As of March 2006, SBI branches throughout the country had opened 630,067 savings bank accounts of SHGs of which nearly 541,000 SHGs had been provided with credit facilities benefiting more than 7.5 million poor people. This represented about 47% of total SHGs financed by commercial banks. Disbursements to SHGs totalled nearly Rs billion by that date with Rs billion outstanding. Savings account balances of SHGs were over Rs billion. 6 SBI has set itself the ambitious target of credit-linking 1 million SHGs by March As the SHG loan product is embedded in the overall branch operations, it is important to understand the surrounding environment for SHG business. Hence, this section focuses on the organisational set up of SBI, particularly as it relates to responsibilities for SHG operations SBI and SHG business in Uttar Pradesh the organisational set up The SBI provides a wide range of banking services as the largest bank in India with over 9,400 branches and over 4,000 branches of its associate banks. Ranged under its Head Office are 14 Circle Offices (or Local Head Offices) all over India. The Lucknow Circle covers 56 districts of UP with 834 branches. 7 [The remaining 14 districts of (western) UP are come under the Delhi Circle.] Within the Circle Office, SHG development is the responsibility of the lead bank and RRB department, with one officer of the level of manager (supervised by an AGM) being involved. A simplified organization chart of the SBI at Circle, Zone, Region and Branch level is presented in figure 3. Figure 3: Organisational structure of State Bank of India (Lucknow Circle) SBI HEAD OFFICE, Mumbai 14 Circle offices in India Lucknow Circle office Coverage 56 districts of UP (14 with Delhi LHO) with 834 branches/8 CPCs SHG Business coordination 18 Person Months/Year (AGM & M) Total Cost Rs. 1,943,000 (incl. Publicity & HRD) Varanasi Zone Office 11 other Branches Transactions Shahjahanpur Regional Office Gorakhpur Zone Office Facilitation Chowk Branch Coverage 38 branches Extension Counter Coverage 5 Districts/ 32 Branches SHG Business coordination (of branches) Direct (BC): Chowk Facilitation & Transactions Indirect (BF): 31 Others Facilitation Bareilly Zone Office SHG Manager Coordination & Supervision CPC Bartara Transactions SHG Facilitation Facilitation SBI SHG CLIENTS Kanpur Zone Office 4 other Regional offices Lucknow Zone Office Coverage 9 Districts/140 branches Core SHG Business coordination 1 SHG Manager + Support Staff Total Cost Rs. 608,000 (incl. Training) 20 other Branches Transactions By December 2005 SBI branches in the Lucknow circle had promoted 16,103 SHGs. 8

9 There are five Modules (Zonal Offices) in the Lucknow circle each headed by a DGM 8. Each zone has one Manager (SHG) 9 exclusively looking after SHG business. This officer supervises the work of the Central Processing Cells (CPCs) that have been formed for this purpose 10. There are 4-5 Regional Business Offices per zone (with a Senior Manager in-charge). The study branch Chowk branch, Shahjahanpur comes under the Shahjahanpur Regional Office of Bareilly Zone which covers 38 branches. The Chowk branch, which is the main branch of the market town of Shahjahanpur catering mainly to an urban clientele, is comparatively large with 10 staff (as of March 2006), i.e. one branch manager, one accountant, one cashier, two supervisors for business relations, two assistants and three messengers. The branch caters to individual clients as well as its affiliated SHGs. All SHGs are directly linked to the Chowk branch by the CPC, Bartara. The latter, however, also receives cash receipts and makes payments at its premises on the VSA campus at Bartara for the SHGs that have been promoted by the VSA. As of March 2006, there were 860 SHG savings bank accounts with the Chowk branch and 266 loans outstanding to SHGs. The share of SHG loans was a little over 4% of the total loan amount outstanding for the Chowk branch at the end of March 2006, while SHG deposits were less than 1% of total deposits with the branch. The CPC also provides services as facilitator of SHG-bank linkage to another 31 branches in 5 districts of Bareilly and Lucknow zone of central U.P. 11, where its role is confined to doing the groundwork, surveys and documentation for credit linkage of the SHG to the bank branch. [These SHGs have been promoted by NGOs, such as the VSA, or other SHPIs. SBI bank staff has not directly promoted SHGs in this region.] As of March 2006 the CPC had facilitated another 1,128 SHG accounts with these branches, which had 1,070 SHG loans outstanding SBI s Special Focus on SHG-Bank Linkage In the state of Uttar Pradesh, the SBI s Lucknow Circle Office has given a special focus on microfinance through SHG linkage. It has pioneered the deployment of Central Processing Cells (CPCs) discussed briefly in the earlier sections. The CPCs operate as separate centers so that staff posted there can concentrate on SHG promotion and linkage for a group of nearby branches without interrupting other branch work. These CPC are intended to work as extended arms of the bank branches. The tasks of CPCs include propagating bank schemes, filing documents, conducting loan appraisals, sanctioning credit linkages with SHGs, and generally dealing with problems of SHGs. Officers and assistants working in the cell are authorized to collect savings and recover loans from the SHGs in the villages. CPC members handling cash are covered by group insurance. The Accountant/Passing Officer at Chowk branch, however, opens accounts and issues receipts for its SHG clients. The CPC, Bartara was responsible for the spadework towards facilitating the linkage of 1,109 SHGs that were credit-linked on a single day at mega credit camp on VSA campus, Bartara on 7 February According to senior officials, the CPCs are still at an investment stage and not treated as profit centers by SBI. For all practical purposes, the profit centre for the operations of CPC, Bartara is the Chowk branch to which it is attached and which is governed by the transfer price mechanism of SBI. However, in the present study the geographical area of 32 SBI branches in 5 districts of central U.P. covered by the CPC, Bartara has been notionally treated as a profit centre for the single period (current) analysis and the multi-period (medium-term) analysis contained in chapters 3 & 4. This analysis has however been carried out using parameters of the transfer price mechanism as applied by the bank for the inter-branch transfer of funds. 8 At Bareilly, Kanpur, Lucknow, Varanasi and Gorakhpur. 9 There is no Manager (SHG) at Gorakhpur. 10 There are 8 CPCs (Central Processing Cells) in Lucknow Circle Office including one CPC at Bartara, Shahjahanpur district the expenses of which are booked to Chowk branch, Shahjahanpur. CPCs are headed by an Assistant Manager who reports to the AGM at the Regional Office or the Manager (SHG), Zonal Office. 11 In addition to Shahjahanpur, the central U.P. districts covered by the CPC are Bareilly, Pilibhit, Sitapur and Lakhimpur-Kheri. 9

10 Towards promoting SHG-bank linkage the SBI Lucknow Circle office has also arranged for: Incentives to NGOs for SHG promotion Mobile vans to a few CPCs or canvassing and publicity of SHGs in rural areas District-wise sensitization workshops for its staff Special credit camps for SHGs at many branches State-level and regional-level meet for NGOs Publicity material for rural areas; and Organized fair/melas for marketing of SHG products Besides this, with the launch of SBI s joint venture company, SBI Life Insurance, insurance and pension products will be introduced by the bank in the SHGs soon. The SHGs linked to the Chowk branch, Shahjahanpur of the SBI have been promoted through the bank linkage programme of NABARD by Vinoba Sewa Ashram (VSA), an NGO located at Bartara, about 15 km. from Shahjahanpur. NABARD sanctioned a grant from its Microfinance Development Fund to Vinoba Sewa Ashram in year 2000 for the promotion of 1,000 SHGs in Shahjahanpur district. The SHGs promoted under this scheme were linked to SBI s Chowk branch. Lending mechanism: Credit linkage is carried out after 6 months of savings by SHGs. However, in exceptional cases SBI has relaxed the norm of six months of prior internal rotation of SHG savings to four months before fixing the cash credit (CC) limit for SHG. Loans to SHGs are disbursed in a flexible way. SHGs can have more than one loan outstanding. The maximum CC fixed for an SHG is Rs. 158,000 for a men s group. The maximum CC for a women s group is Rs. 74,000. As many as four loans have been taken by about 20 groups with most SHGs having taken two loans. Interest rates: The SHGs received loans at an interest rate of 8.5% 12 p.a. during the reference period of Financial Year and on-lent to their members at a maximum interest rate of 18-24% p.a. The operations of the SHGs are generally monitored by the staff of the VSA. This model is characterised by the close relationship between the NGO and the bank staff. The VSA has launched the Samuh Kranti Abhiyan (SKA) ( Group Revolution Campaign ) with the target of formation of 11,000 SHGs (9,000 SHGs with NABARD support, the rest from VSA s own resources) in association with SBI in the 5 districts covered by the CPC, Bartara. The target for March 2007 is 7,500 SHGs Chowk branch, Shahjahanpur In this section, the overall operations, financial situation and performance of Chowk branch, Shahjahanpur are presented. 13 Operations of Chowk branch As of March 2006, the Chowk branch Shahjahanpur had total deposits of over Rs. 200 million and loans outstanding of Rs. 70 million. The share of deposit and loan business by different types is shown in figures 4 and 5. Deposits from the public were only 32% of total liabilities. The major share of deposits was in the form of time deposits which constituted 53% of total deposits. Savings deposits were nearly as high at 46% of total with demand deposits at only around 2%. The bank s lending operations were dominated by long term loans, which constituted 76% of the total amount of loan outstanding. Cash credit loans were 13% of total with overdrafts 7% and demand loans 4%. All in all, the pattern of deposits and loans reflects its primarily urban commercial clientele in rural branches the contribution of short-term loans for agriculture would have been higher. 12 The rate of lending to SHGs for loans less than Rs. 200,000 is fixed at 1.75% p.a. below the SBAR (State Bank Advance Rate) the bank s benchmark prime lending rate (PLR). On 2 nd August 2006, the SBAR was raised to 11% p.a. and the rate of lending to SHGs to 9.25% p.a. The SBAR has been further increased to 11.5% p.a. with effect from 27 th December Analysis of share of SHG accounts at the Chowk branch has not been possible because of the small share of SHG loans and the absence of suitable MIS at the branch level. 10

11 Figure 4: Deposit business of Chowk branch as on March 2006 Savings deposits 45% Figure 5: Loan business of Chowk branch as on March 2006 Term loans 76% Overdraft 7% Current & other deposits 2% Cash Credit Loan 13% Time deposits 53% Demand loan 4% Financial Situation of Chowk branch The adjusted balance sheet of Chowk branch as on March 2005 and March 2006 is presented in Table 1. LIABILITIES Table 1: Adjusted Balance Sheet of Chowk branch as on March 2005/06 Balance Sheet items March 2005 March 2006 Average INR % INR % INR % Inter Office accounts 484,200 0% 95,293,433 15% 47,888,816 8% Deposits 197,968,660 39% 200,156,203 32% 199,062,432 35% Current liabilities 308,429,457 61% 335,970,730 53% 322,200,094 56% Other Liabilities 2,396,704 0% 2,145,378 0% 2,271,041 0% TOTAL CAPITAL & LIABILITIES 509,279, % 633,565, % 571,422, % ASSETS Inter Office accounts 72,800,576 14% 70,282,016 11% 71,541,296 13% Cash in hand 428,553 0% 1,505,473 0% 967,013 0% Loan, Cash Credit, Overdrafts Etc. 65,740,229 13% 70,333,544 11% 68,036,887 12% Bills discounted 361,925,448 71% 481,263,794 76% 421,594,621 74% Fixed Assets 1,771,480 0% 1,991,730 0% 1,881,605 0% Other assets 6,612,735 1% 8,189,187 0% 7,400,961 1% TOTAL ASSETS 509,279, % 633,565,744 99% 571,422, % It is observed that (as of March 2006): A high proportion of both liabilities and assets are in the form of current liabilities and bills discounted, reflecting the high level of business clientele. Deposits account for 32% of total liabilities and loans account for 11% of total assets which is relatively low compared to other bank liabilities and assets respectively. The credit-deposit ratio is 1:2.94 or 0.34, i.e., Chowk branch has loans outstanding amounting to 34% of mobilised deposits, which means that Chowk branch is a surplus fund unit. A moderate 11% of total assets are in the form of intra-bank adjustment accounts representing funds that are not used and not earning revenues for the branch (with treasury). The main loan product is the term loan at 76% of total loan outstanding. 11

12 Performance of Chowk branch The consolidated adjusted profit and loss statement for Chowk branch for the FY is presented in table 2. Table 2: Adjusted profit and loss statement of Chowk branch for FY Income and expenditure statement FY Interest received on loans 5,034,984 Other income 1,623,840 Interest received on funds lent to HO (%) 17,594,346 TOTAL Financial revenue 24,253,170 Interest paid on deposits 9,696,260 Interest paid on funds borrowed from HO (%) 3,963,013 TOTAL Financial expense 13,659,273 TOTAL Operating income 10,593,897 Salaries and provisions for employees 5,019,156 Office expenses 1,912,664 Depreciation 619,270 Loan loss provisions* 1,288,000 TOTAL Operating expenses 8,839,090 NET OPERATING INCOME 1,754,807 (*) As on Sept The following conclusions can be drawn from the financial statements for of the Chowk branch: Overall, the Chowk branch is profitable. It has a net operating income of Rs. 1,754,807. However, the main source of the surplus is from interest received on funds lent to Head Office which contributes nearly 75% of its financial income. The branch continues as a net fund provider to Head Office during , though Head Office borrowings have increased from negligible as on March 2005 to around 15% of total capital and liabilities as on March Nearly 57% of operating expenses are towards salaries and other provisions for employees and a further 22% towards office costs with loan loss provisioning taking up 15%. However, in view of the small size of its SHG portfolio, the financial position and performance of Chowk branch does not carry with it any great relevance for the analysis of SHG business to which we now turn CPC Bartara and its SHG business in central U.P. A more appropriate unit for analysis towards the viability of SHG business would be the CPC, whose activities are devoted entirely to the bank s SHG linkage programme - in the present case the CPC at Bartara which is attached to the Chowk branch. Figure 5 below gives the channel of delivery of financial services to SHGs by SBI branches using the CPC, Bartara. 12

13 Figure 5: Channels of delivery of SBI s financial services to SHGs CPC as extension service counter for SHGs (Business Correspondent) SBI Chowk Branch Interest & Principal CPC Bartara Loan disbursement Facilitation, Promotion Transactions and Monitoring SHGs Linked to Chowk Branch Collaboration & Support VSA Promotion & Monitoring CPC as Business Facilitator and Promoter of SHG-SBI Linkage CPC Bartara Support Introduction & Collaboration Introduction & Collaboration Facilitation until Credit Linkage VSA & Other SHPIs Promotion Other 31 SBI Branches Interest & Principal Loan disbursement SHGs Linked to other 32 branches In its dealings with the Chowk branch the CPC, Bartara acts both as a business facilitator and business correspondent (by undertaking cash collection and disbursement functions as well), while in the case of the remaining 31 branches in 5 districts its role is confined to facilitating credit linkage with the staff of the respective branches handling transactions thereafter. The SHGs in turn are initially formed and promoted by various SHPIs (including VSA), often with grant support from NABARD. Table 3: Operations of CPC Bartara (all SHG Business) As on March 2006 TOTAL CPC Chowk Others Branches 32 3% 1 97% 31 No. of Deposit Accounts SHG 1,988 43% % 1,128 Deposit Amount of deposit in Rs. 3,606,000 43% 1,560,000 57% 2,046,000 No. of loans disbursed 1,230 25% % 924 No. of loans sanctioned (cumulative) 1,763 42% % 1,029 Loans No. of loans outstanding 1,336 20% % 1,070 Amount of loans disbursed in Rs. 11,957,000 26% 3,058,000 74% 8,899,000 Amount of loans sanctioned (cumulative) in Rs. 83,048,000 29% 23,766,000 71% 59,282,000 Amount of loan outstanding in Rs. 11,500,000 26% 3,000,000 74% 8,500,000 CPC Bartara was formed in November It is envisaged by SBI as a unit with one officer and one clerical staff. However, during the past year (August August 2006) an additional officer has also been deputed to take care of the initial work load. He has since been withdrawn. Table 3 above gives the progress in opening of SHG deposit accounts and lending by the SBI branches served by CPC, Bartara. A total of 1,988 deposit accounts have been opened with the assistance of the CPC team and 1,230 loans disbursed. An estimated Rs million is outstanding to SHGs covered by the branches Rs. 3 million from Chowk branch and Rs. 8.5 million from other branches. 13

14 3. Viability analysis of SHG lending - single-period perspective As observed earlier, in was not possible to conduct an analysis of SHG business of Chowk branch due to limitations posed both by the relatively small percentage of its SHG business to total operations and the absence of an appropriate MIS tracking SHG loans and deposit transactions that would enable deeper analysis. However, the CPC, Bartara, which is attached to the Chowk branch and caters to the SHGs promoted by the VSA, Bartara and other agencies, provides an instance of business process re-engineering or a new way of organizing the development of SHG business by the bank. Therefore, we treat the SHG business realized through the CPC established by the SBI as a profit centre and examine under this model the overall viability of SHG business of the 32 branches of 5 districts of central U.P. covered by the CPC. Two types of exercises are attempted: (i) single period (current) analysis, covering FY : and (ii) multi-period (mediumterm) analysis covering a period of five and a half to six years, FY to since the formation of the CPC in November By March 2006 the CPC had barely completed 16 months of functioning. Its activities covered mainly the Chowk branch and a handful of other branches. The SHG credit linkages too were mainly established during the course of a loan mela late in the financial year As a result, both the scale of operations and the resultant income flows in the period under review for the current or single-period analysis (FY ) are extremely small. In the current analysis deposit mobilization and lending have been treated as different activities and allocation of staff time and costs and other inputs have been made by computing the transaction costs for both types of financial services. As set out and explained in the methodology (chapter 1) SBI s transfer price mechanism for funds transferred to and received from the central unit by its branches, as operational in March 2006, has been used in determining the costs of fund mobilization for lending operations for SHG business and for the income generated from SHG deposit mobilization. The single-period viability analysis of the CPC Bartara covering Chowk and other branches, for FY has been undertaken using the following parameters and assumptions: Financial income is estimated based upon the 8.5% p.a. - the lending rate for SHGs during the reference period - for the average loan amount outstanding. Financial expenses are based upon 3.5% p.a. rate of interest paid on SHG savings bank deposit accounts on average SHG deposits. Cost of funds for the viability analysis have been estimated by using the transfer price mechanism of SBI for its branches. In addition, SBI provides a transfer of Rs. 500 for each savings bank account opened and Rs. 5,000 for lending under each new SHG account through its TPM system. Salaries and provisions for employees are based on data for three staff engaged during the reference year and the proportion of their time spent on deposit mobilization and lending as well as social mobilization activities. Other operating costs relating to transport, stationery, etc. have been allocated as per appropriate keys and weights analyzed. No costs have been imputed for rent and electricity and telephone as these have been provided for the CPC by VSA on its campus at Bartara. 15 Loan loss provisioning has been carried out at 0.25% as per SBI guidelines and norms for standard assets the classification of SHG loans as per statement of the Chowk branch and the CPC. The exercise takes into account incentives provided by the bank to NGOs as per SBI guidelines by contributing to their promotional costs ,109 SHGs were credit-linked at mega credit camp organized by SBI on the VSA campus, Bartara on 7 th February This will be considered in the medium-term analysis. 16 Rs. 375 for savings linkage and Rs. 375 for credit linkage per SHG and Rs. 25 per month payable to SHGs towards bookkeepers fees as provided for in SBI circular letter dated 18 November

15 It also takes into account per SHG post-linkage staff cost at Chowk branch and pre-linkage and post-linkage staff cost at branches other than the Chowk branch for which the CPC plays only a facilitation role up to the stage of credit-linking of SHGs. 17 Table 4: Transaction Costs and Viability of SHG Operations, area served by SHG business of CPC-Bartara, FY Income and expenditure statement Note CPC TOTAL Deposit Lending Financial Income (+) 1 509, % 509, % Transfer price payable (-) 2 331, % 331, % Financial Expenditure (-) 3 79,555 79, % 0 0.0% Transfer price receivable (+) 4 171, , % 0 0.0% TOTAL Operating Income (Gross Spread) 269,944 91, % 178, % Salaries & Provisions (employees) 5 775, , % 515, % Other operating cost 6 236,400 69, % 166, % TOTAL Operating expenditure 1,011, , % 682, % Loan Loss Provisioning applicable 7 28,750 n/a 28, % NET OPERATING INCOME I -770, , % -532, % Promotional Costs payable to NGOs 8 1,090, , % 590, % Costs accrued at branches 9 403,000 83, % 319, % NET OPERATING INCOME II -2,263, , % -1,442, % Bonus from TPM 2&4 6,377, , % 5,620, % NET OPERATING INCOME III 4,113, , % 4,177, % Average deposit/loan outstanding 2,273,000 5,998,500 Table 4 above presents the transaction costs and viability of SHG business for the 32 branches of 5 districts of central U.P. covered by CPC Bartara for FY [A detailed form of this table (including explanatory notes 1 to 9 on the above income and expenditure items) is given in annex C.] It is seen from table 4 above that the income from SHG loan business is very small in the initial stages and does not even meet the administrative costs of operations. Similar is the case for returns to deposit mobilization operations. The net operating income from SHG business after taking into account total operating expenditure and loan loss provisioning as per the bank s criteria is -10.4% of average deposits for deposit mobilization and -8.9% of average loan outstanding for lending operations. If we further take into account promotional costs payable as incentives to NGO, and the costs accrued during FY outside the CPC - at Chowk and other branches - the net income declines steeply to -24% of average loan outstanding for lending operations and to -39.1% of the average deposits for deposit mobilization. It is only by including the one-time bonuses 18 resulting from the incentives given under the TPM to the Chowk branch which houses the CPC that leads to positive income flows during FY (also see note C.2 & C.4). There is no provision by the Chowk branch for the deployment of these funds and they only serve to inflate the income and surplus of the Chowk branch. These are not likely to be sustained as the SHG business develops. A stand alone static perspective to analyze the viability of SHG deposit mobilization and lending may lead to misinterpretation of the results as a considerable share of the staff activities in terms of staff cost are in fact investment or social mobilization cost in terms of forming and linking SHGs. At 17 Cost of time input of officer and clerical staff have been estimated at Rs. 150 and Rs. 100 per hour on the basis of data on salary and perquisites of CPC staff. Post-linkage work at Chowk branch per SHG is imputed at 1/2 hour of clerical staff time per year, or Rs. 50. Pre-linkage staff input at other branches is estimated at 2 hours of officer s time per SHG per year, or Rs. 300; and post-linkage staff input at one hour of officer s input and one hour of clerical staff input, or Rs. 250 per SHG per year. These input levels have been used to estimate additional costs over and above costs incurred at CPC level in both the single period and multi-period analysis. 18 Rs. 500 on opening of a new SHG deposit account and Rs. 5,000 on disbursal on each new SHG account of the CPC. 15

16 CPC, 9.2% of total staff cost or 13.8% of staff cost for SHG lending activities are social mobilization cost in the FY (BC: 9.2%; BF: 26.8%). By amortization of this social mobilization cost over a period of 6 years the share of staff cost in SHG lending would decrease from 8.6% to 7.6% of average loan outstanding. This is still much higher than the gross spread of SHG lending which is 3%. Nevertheless, by ignoring these incentive payments and social mobilization we would still not obtain an accurate picture of the potential for SBI branches to viably use the CPC for SHG business. This would be better illustrated by taking a longer-term perspective which is consistent with the vision and time horizon for the functioning of this cell. For this purpose, in chapter 4 a multi-period analysis (over a six-year period) is carried out in the form of a business model for the bank s expanding SHG business in areas of five districts of central U.P. covered by the branches served by CPC, Bartara. 16

17 4. Viability analysis of SHG lending - multi-period perspective 4.1. Business models The analysis of SHG lending data for FY suggested that SHG business would not be profitable on account of the relatively high transaction costs due to the low volume of business. However, if we consider the potential activities of the CPC, Bartara over the coming years, and the SHG business of the 32 branches it serves in central U.P. the position changes substantially. SBI intends to expand its involvement in SHG business on a large scale in the coming years. A total of 11,000 SHGs are planned to be promoted by March 2008 by VSA, the NGO located at Bartara, operating in the 5 districts covered by the CPC 19. These SHGs are earmarked for linkage to SBI branches after pre-linkage surveys and necessary processing by CPCs 20. Using parameters of costs from CPC, Bartara and Chowk branch data for the period up to FY and projections of income based upon SHG savings rates and the corresponding credit flows to the SHGs, it is possible to model the viability of SHG business with the CPC, Bartara acting as business facilitator for SHGs linked to its current complement of 32 branches (including Chowk branch) as well as a business correspondent in the form of an extension counter of the Chowk branch servicing its SHG clients. It is helpful to view the development of the SHG clientele and business as including an initial investment phase and a post-linkage maintenance phase. The CPC, Bartara is primarily engaged in the investment stage in all branches and additionally in the post-linkage activities of SHGs attached to Chowk branch. The CPC level costs are supplemented by costs incurred at various branches as also included in the single-period analysis in chapter The investment phase also includes SHG promotion expenses incurred separately by the NGO (which are ignored in this viability exercise) and the incentives to NGOs provided by the bank on achievement of savings and credit linkage (which are included only in scenarios 3 and 4 of the exercise discussed below) 22. For the viability exercise, four alternative scenarios have been developed covering the two (BF and BC) components of CPC operations described above, which are really a form of outsourcing of functions within the SBI. These scenarios have been developed and analyzed for a six-year period FYs to Under each of these scenarios the cumulative net income over the years is tracked as also the crossover point in order to obtain a rough estimate of the profitability of SHG business and the viability of the business model 24. Details of the scenarios and the mediumterm viability analysis are available in Annex D. The four scenarios are: Scenario 1: This scenario roughly corresponds to SBI s vision for the CPC as a two-person branch with the current level of basic facilities as provided by the VSA at its present location with no investment in computers and other equipment. Cost of risk is assumed to be 2% of the average loan outstanding per year 25. Promotion costs incurred by the bank are not taken into account. Scenario 2: This scenario simulates a larger, better-equipped team at the CPC which is in a good position to handle the growing business. It envisages a CPC with 3 staff members 2 officers and one clerical staff - and with higher investment and running expenses for office automation, computers and other facilities. As a result a lower cost of risk at 1% of the 19 The initial social investment costs of promoting 9,000 SHGs are expected to be met through NABARD grants and for 2,000 SHGs from other resources of the VSA. 20 A new CPC has also started operating out of Bareilly, the zonal headquarters of SBI, soon after the study visit. 21 These are set out in detail in FN These costs are detailed in FN 17. They also include costs of the bank s support to SHGs for engagement of bookkeepers which extends to the maintenance phase. 23 However, since the CPC was launched in November 2004, the first year covers only about five months of its functioning. 24 Gross spread or intermediation margin from SHG business less total operating costs and cost of risk yields net operating income from SHG business annual and cumulative. 25 The cost of risk is expressed in the form of a percentage of average loan outstanding taken to be non-performing assets and written-off each year along with the cost of suspension of interest income on this account. 17

18 average outstanding per year is assumed 26. Promotion costs incurred by the bank are not taken into account. Scenario 3: Under this scenario, to the parameters of scenario 2 are added the promotional costs incurred by the bank by way of incentives to the NGOs/SHGs - in order to consider the effect of including the costs of SBI s scheme for promoting SHGs on the viability of the SHG business of the branches covered by the CPC. Scenario 4: This scenario considers the level of SHG business and costs and income as in scenario 3 but revises the interest rate on SHG loans from its existing unviable levels to 11.5% p.a. - the level of the SBAR (the bank s PLR) as of December The following overall parameters, based upon observed levels of the CPC s SHG operations for the period , and projected for FYs to , are common to all scenarios: i) Savings rate per member per SHG of 15 members is Rs. 40 per month, i.e., Rs. 7,200 per year 28. ii) iii) iv) 30% of cumulative savings are maintained in savings bank accounts with SBI branches on which 3.5% rate of interest is paid, the rest being kept within the SHG. The loan sanction limit is taken to be four times the cumulative SHG savings and the average loan outstanding as half the aggregate loan sanction limit 29 for the cumulative number of SHGs credit-linked in any year. The CPC, Bartara team is expected to be able to process 1,600 new SHGs for credit linkage each year during the coming years 30 at the level of its performance 31 and the cost pattern prevailing across Chowk and other branches during this year. v) Interest rate on bank loan to SHGs is 8.5% p. a. for the period up to March 2006 and 9.25% p. a. for the year onwards as per SBI s current policy of providing SHG loans at 1.75% below its PLR. vi) vii) viii) ix) The transfer price mechanism of the SBI Corporate centre for its (urban) branches 32 is assumed to operate on the same interest rates as applicable for % for savings accounts and 65% for advances for agriculture and SHGs. This has been used to compute the cost of funds for lending and the financial income for the deposits of SHG business generated through the operations of CPC, Bartara 33. It results in an available spread in FY of 4.025% per annum on savings mobilization and 2.975% per annum on lending. While the CPC Bartara presently enjoys the free use of its current premises at the VSA campus, a provision of Rs. 1,000 each per month towards rent for premises and electricity charges equally allocated to Chowk and other branches - has been made from onwards. Other costs, such as those for transport (hiring and running costs), stationery, tea, messenger boy etc., are based upon reported figures for the period An annual increase of 5% has been assumed for all items of costs on account of inflation with the exception of fuel and vehicle maintenance costs which have been increased at 10% p.a. 26 This is on account of relatively greater CPC staff time with (and better knowledge of) SHG clients; as well as greater measures for on-time loan repayment. 27 Under existing regulations there is no restriction to the bank charging the PLR to the SHGs. 28 Savings rate is taken to be only 50% of this level in the first year. 29 As described in section 2 cash credit limits are fixed by the CPC for eligible SHGs after a period of about six months of regular savings. 30 This has been assumed to include an additional 400 SHG accounts per year for the Chowk branch and 1200 accounts for the other branches over and above the March 2006 level until a limit of 2,000 SHGs is reached for the Chowk branch, after which all new SHG accounts would be for the other branches. 31 The feasibility of this level of operations was confirmed by Manager (SHG), SBI Zonal Office, Bareilly. 32 As applicable to the urban Chowk branch. 33 However, the one-time incentive of Rs. 500 for new SHG deposit accounts and Rs. 5,000 at the time of disbursal of new SHG accounts available to Chowk branch during FY have not been included in the medium-term exercise. 18