BWDA 1 to BFL 2 : Transformation of an NGO into an MFI. D.Yeswanth Institute of Rural Management Anand(IRMA) Abstract

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1 BWDA 1 to BFL 2 : Transformation of an NGO into an MFI D.Yeswanth Institute of Rural Management Anand(IRMA) Abstract Poverty is multi-dimensional in its nature. By providing access to financial services, microfinance institutions play an important role in the fight against poverty. In India, microfinance institution emerged as an alternative to formal financial institutions to offer financial services, which mainly includes credit, savings and insurance, targeting low income populations, the rural poor and women. A wide range of organisations which include NGOs, credit unions, cooperatives, private commercial banks and non-banking financial institutions are working and promoting MFIs in India. NABARD s annual report states that, as on 31 st, March 2004, 1,016,895 SHGs were formed in India under SHG Bank Linkage Programme and Rs 3,56,944 lakhs have been disbursed to the rural poor. Recently, development of MFIs as financial intermediaries, their purpose, delivery mechanisms and future obligations are debated under two diverge schools of thoughts i.e. the Development school / Poverty School and the Financial School / Sustainable School. These diverse schools of thought have led to various new debates re-questioning the MFI operation and need for assigning more responsibility for future functioning of microfinance institutions in providing financial services to all. Given the above context, this case was prepared to understand the microfinance operations of the Bullock cart Workers Development Association (BWDA), an NGO operating in Tamil Nadu. As on January 10 th, 2005, BWDA is working in 5 districts of Tamil Nadu and Pondhicherry. BWDA has been awarded with the Best Performing Organisation honour twice by NABARD for its SHG - bank linkage activities. Recently to extend the microfinance operation to new geographical areas and for a sustainable microfinance operation the organisation is transforming its microfinance intervention under a new legal form. The case presents the changing nature of the organisation (from NGO to NBFC) in terms of its managerial and financial strategies and its challenges in implementing the microfinance programme under NBFC format. 1 Bullock cart Workers Development Association (BWDA) 2 BWDA Finance Limited (BFL) 128

2 BWDA to BFL: Transformation of an NGO into an MFI 3 The transformation of BWDA microfinance activities in line with the BFL mode of operation will not affect or change the mission / vision for which BWDA was started, said Mr.Thambi, Director of Bullock cart Workers Development Association. Mr. Venkat sitting next to him in the board room was not so sure about this optimism. Venkat, researcher from a reputed institution was studying the microfinance activities of BWDA. He had completed his interactions with different field level and managerial staff of BWDA and a perusal of recent annual reports to understand the operational and financial functioning of the organisation. As an NGO, BWDA was finding it difficult to fulfill the increasing credit demand of the members and expand its microfinance programme in a big way. Hence, it formed a separate entity BWDA Finance Limited (BFL) in August 2003 as a Non- Banking Finance Company (NBFC), to render financial and other support services to SHG members in a more effective and formal way. BFL acts as a subsidiary of BWDA microfinance programme to achieve the objective of alleviating poverty and empowering poor women and bullock cart workers in the chosen target areas. Earlier Venkat met Mr. Kumaran who has been working in BWDA for the past 14 years and is presently working as Regional Coordinator of BWDA microfinance programme. Kumaran was a science graduate and joined the organisation immediately after his graduation in He introduced Venkat to Mr.Vinayagam and Ms.Sadana, both working as Programme Officers in BWDA microfinance 3 Management case prepared as part of FPRM course work by D.Yeswanth, MFMI Fellow, IRMA. at pavanyesh@gmail.com 129

3 programme for the past 9 years in Kancheepuram and Cuddalore districts respectively. After formal introductions, Kumaran started describing the main activities of BWDA microfinance programme to Venkat. Bullock cart Workers Development Association (BWDA) was initiated on 2 nd October 1985 as a non profit service oriented development organisation with head quarters at Cuddalore, Tamil Nadu. It was registered under the Society s Registration Act as an NGO on 13 th January The primary objective of the NGO was to provide improved design for the bullock carts and help in promoting human and animal welfare for the unorganized, illiterate and economically poor bullock cart workers in Villupuram and Cuddalore districts. Initially we (BWDA) worked with bullock cart workers but in line with our vision A poverty free prosperous, equitable and sustainable society, we widened our activities to all sections of poor families especially covering women in Pointing to the placard (displayed on the wall) Kumaran said, To empower the poor and vulnerable households, both economically and socially, through organizing, networking and establishing sustained access to financial services and implementing effective and locally relevant poverty reduction programmes " is our mission. Mr.Vinayagam said, Microfinance activity was started in 1992 in two blocks of Villupuram district under the Women s Development Programme of the Tamil Nadu government. Further, we expanded the microfinance activities to other districts mainly with the support of Mahalir Thittam programme of Tamil Nadu Women s Development Corporation (TNWDC) from 1996 onwards. For your information, as on January 2005, the programme covers five districts in Tamil Nadu (viz., Tirunelveli, Kanyakumari, Cuddalore, Villupuram and Kancheepuram) and one Union Territory (Pondhicherry) with 98 full-time staff working under the microfinance programme. Venkat asked how the services are provided to SHG members through BWDA microfinance programmes. Sadana replied, Like other MFIs, we (BWDA) 130

4 promote savings among poor women by forming SHGs and the money is used for internal rotation on a revolving basis among the members. In addition, we also provide various informal savings products, especially for marriages, festivals and for education expenses of the members. In addition to savings, loans are provided to members for various purposes which includes income generation activities (agriculture, animal husbandry), housing loans (repairing and extension), consumption, educational loans and for emergencies (medical purposes). Kumaran added, In addition to regular savings and credits facilities to the members, we provide life insurance policy to members and accident policy for the animals (bullock), in collaboration with Life Insurance Corporation of India (LIC). For the past four years we have also been conducting exhibitions in different districts of Tamil Nadu mainly to promote the sale of SHG products of BWDA. Explaining the operational part of the microfinance programme, she said that secondary data from government agencies are consulted for selection of villages characterized by high levels of poverty. Further BWDA field staffs conduct preliminary surveys which include resource analysis, focused group discussions to identify poor households who are in general unorganized, illiterate and work as daily labourers in agriculture field and construction sites. In addition economically poor women and men are covered under the microfinance programme. For this purpose BWDA field staff is regularly trained through a programme - MATHI to know the specifics of forming SHGs, various operational procedures involved within SHGs and methods to organise village level meetings for women. In addition, exposure visits are organised for field staffs to other established SHGs to understand the microfinance operations. SIDBI provides capacity building funds which is effectively used for the purpose. BWDA staff members motivate the poor women to form SHGs (15-20 members each). Regular training programmes help the staff members to communicate and explain the advantage of savings which helps in motivating and mobilising men and women to form SHGs in the target areas. In addition, the organisation s developmental work in the area for the past one decade and its reputation help in taking the initiative to new levels. In 131

5 BWDA microfinance programmes, members decide the amount and frequency of savings (weekly / fortnightly / monthly) based on their propensity and their ability to save. In general the amount varies from Rs per member in the northern districts to Rs l per member in the southern districts. The Treasurer of the SHG takes the responsibility to collect monthly savings from the members and other transactions (disbursement and collection of loan amount) within the group. Further, the Treasurer deposits the collected amount in the SHG bank account within 24 hours of the group meeting. With years of experience, the organisation has developed and formalized a well defined process of loan facilitation / rules for the SHG members in the target area. (Appendix 1 Loan criteria for SHGs from BWDA and BFL) Micro finance operations of BWDA are headed by the Managing Director of BWDA and the senior management team is supported by two Regional Coordinators managing north and south districts operations respectively, said Vinayagam. Further he added, The Regional Coordinators of the programme are supported by the Branch Managers for handling the branch operations at different field locations and are inturn supported by an Accountant and Field Officers to carry out the day to day lending operations. At the group level, animators or volunteers support the Field Officers in recording the transaction details of SHGs. To manage the expanding microfinance operation, BWDA is developing a strong second line leadership of its existing staff members through regular exposure to various training programmes. It is important to note that most of the senior staff members, regional coordinators and functional heads of microfinance programmes don t hold any professional qualification and expertise but are part of BWDA since its inception and understand the value and mission of its operation. Explaining further about the microfinance operation Sadana said, We organise SHGs from nearby villages into a Panchayat Level Federation (PLF). The PLFs are in turn brought under Cluster Level Federations (CLF) comprising of

6 -55 SHGs and are further coordinated at block level into Block Level Federations (BLF). As on March 2005, 434 Panchayat Level Federations, 109 Cluster Level Federations and 20 Block Level Federations have been organised under the microfinance programme comprising of 5635 SHGs. The SHG members decide and elect representatives comprising of President, Secretary and Treasurer for different levels and they are responsible for the functioning of the PLF and CLF. Inline with the objective of empowering SHG group members, BWDA staffs facilitate and support the representatives in smooth functioning of the programme. By involving SHG members at different levels in the operation of microfinance programmes, BWDA tries to promote a bottom-up approach in the disbursement of credit and identification of loan products. The above mechanism helps in continuous growth, ensure credit discipline of members and sustainability of the microfinance programme over the years. Explaining the group level operation Kumaran said, In general the transactions at the monthly meeting of SHGs include regular group savings, disbursement and collection of loans within the members of the group and discussing / reporting various group activities. As mentioned earlier, the average monthly savings from the SHG members range from Rs 1 per member in the northern branches to Rs 100 per member in the southern branches. Collection of membership fee from SHG members helps in creating a fund at the federation level which helps in managing the travel expenses and for providing loans to members for special purposes. Observing the group activities at field Venkat noted that awareness about the organisation s rules or norms is high among members and they display a clear understanding of loan products, installment amounts and interest rates charged reflecting a high degree of consistency in the policies of the organisation and organizational effectiveness in dissemination of information to the members. Placing the BWDA annual report ( ) in front of Venkat, Kumaran said, After its formal inception in 1999 the microfinance programme has grown, both in terms of 133

7 outreach and outstanding portfolio. As on March 2005, the programme have reached about 1,01,483 women who are organised into 5300 groups and 6230 men who are organised into 335 SHGs. Also the number of active clients increased from about 3,600 in December 2001 to around 29,173 in March The increased circulation of internal loans within the federations was mainly due to the increase in internal group savings from Rs 3.7 crore in December 2000 to Rs crore in March Handing over the loan details file to Venkat, Sadana said, We avail loans from different financial institutions for our microfinance operations and the amount is in turn lent to the Cluster and Panchayat Level Federations for lending to SHGs at 15 per cent interest rate at declining loan amount. As on March 2005, cumulatively we have disbursed Rs 1, lakhs as total loan to 29,173 members in the regions of operation (Exhibit 2 and 3). Through bank linkage Rs lakhs have been disbursed to 2764 SHGs and through SGSY programme 1821 SHGs are financed with a loan amount of Rs lakhs (Exhibit 4) with a repayment rate of percent. Recognising the efforts of our organisation NABARD has twice awarded BWDA with the Best Performance Award for SHG bank credit linkage services at state level. Depending upon the amount of loan transactions in the SHGs, annual targets are set by the Branch Managers in consultation with the Regional Coordinators and the estimates are accumulated region wise and communicated to the head office for mobilising external funds. The mobilised loan amount is then transferred to individual branches on a fortnight basis. BWDA has mobilised funds from various financial institutions and timely repayment of loans helps BWDA to build its credit worthiness to mobilise further loans. External auditors are appointed by BWDA to audit the records of SHGs annually, which is preceded by the BWDA staff inspection of accounts at the SHGs / PLFs / CLFs level. BWDA has appointed one full time internal monitor and two assistant internal monitors to detect and 134

8 prevent accounting errors and misappropriation of transactions at the branch level. After this understanding Venkat enquired Kumaran, If BWDA microfinance programme is doing so well, then why you want to transform the operation under BWDA Finance Limited (BFL)? Explaining the reason in detail Kumaran replied, Tamil Nadu government supported NGOs in promoting group activities but recently with the direct intervention of the government in promoting SHGs through Mahalir Thittam and similar programs has reduced the funding opportunity. Recently competition from other NGOs involved in similar activity has increased in terms of availing government support and external donor funding forcing BWDA to develop new operational strategies for mobilising external funding, which inturn emphasized the need for achieving financial sustainability of the existing microfinance operations. To add, The Societies Registration Act restricted BWDA in mobilising and using the internal member s savings. The above constraints in mobilising fund coupled with BWDA s vision to expand its microfinance programme to new areas motivated the organisation to adopt a new legal status and transform its microfinance activity under the more effective and formal way which resulted in the formation of BWDA Finance Limited (BFL) registered under Non- Banking Finance Company (NBFC). We are sure that with the expansion of BFLs activities, we will render financial support and credit services to more number of SHGs members in the new target area. Continuing further Mr. Kumaran said, To avoid the cumbersome licensing process involved in starting a new NBFC, we have taken over the Nagercoil Prompt Finance and Investment Pvt Ltd (NPFIL) which was functioning as an NBFC since 1995 in Nagercoil, and renamed it as BWDA Finance Limited (BFL). The process of taking over and renaming NPFIL as BFL was completed in August Though NPFIL did not have any real assets or liabilities, we have paid Rs 6 lakhs to its earlier promoters for taking over the NBFC. The BFL Board consists of representatives from the BWDA board, NPFIL promoters and senior staff members of BWDA (Appendix 3 - Board of Directors). To share, the main 135

9 challenge in the operation of BFL is to achieve the criteria of owning rupees two crore net owned fund set by Reserve Bank of India for NBFCs operation. We are mobilising the amount through share capital from our SHG members and the general public by issuing preferential shares of Rs 10 per member. Curiously Venkat asked how BFL operations differ from BWDA. Vinayagam said, In terms of human resources, no separate field level or managerial staff is appointed to carry out the BFL activities as on March BWDA microfinance staffs are trained to carry the operations of BFL and are guided by senior staff members who had attended training programmes in reputed institutions to deal with the operations of NBFC. To add in case of BFL, in addition to SHG members of BWDA loans are extended to independent individuals and institutions / firms in the target areas. He also added that individuals and firms operating in the target areas need to satisfy various criteria to avail loans from BFL (Appendix 2). Referring to the operational manual Vinayagam said, Individuals availing loan from BFL need to submit original documents of fixed assets like house and land, whose value is more than the value of the loan availed, which are then checked by the loan appraisal team. In addition, the individual should get recommendation from an SHG operating in the area to get the loan. In case of an organisation / firm, the auditor s statement, annual reports for the past three years need to be submitted with a guarantee statement by the Board of Directors. When the required documents are submitted they are reviewed and checked by senior members of the BFL staff. After proper appraisal of the loan form, it is reviewed and sanctioned through any one member of BFL board. We are taking the above measures to avoid any default problems. As on March 2005, BFL has disbursed a total loan of Rs lakhs to 21,827 borrowers from 3035 SHGs. The number of beneficiaries (availing loan from BFL) mainly includes SHG members explains the fact that mission of reaching more and more of the poor is achieved through the operations of BFL. (Exhibit 6) 136

10 During his stay at BWDA, Venkat visited different SHGs operating under BWDA microfinance programme and also interacted with the field staff and SHG members to know more about the programme. During his visit Venkat met Krishnan, a Programme Officer of microfinance programme in Kancheepuram block and working with BWDA for the past 8 years. After initial discussions, Venkat asked, What are the general problems you face in the implementation of the microfinance programme? Krishnan replied, We don t have many qualified computer personnel to take care of the computer operations at branches and lack a proper online monitoring system to supervise the transactions at various levels. In addition, we lack adequate funds to meet the loan demands of SHGs requiring large amount. To avoid disappointment of members, we facilitate direct bank linkage of SHGs with banks. But over time, we loose our control over the groups due to the interaction of the banks directly with the groups. Explaining the infrastructure and human resource problem Krishnan added, As you see due to lack of funds, we are operating in a less spacious building, with inadequate computer facilities and few professional staff. At present the BFL operations are performed by regular staff members of BWDA and are guided by senior members of BWDA. After his field visits, Venkat discussed his observations about different operations of BWDA and BFL with Mr.Thambi, Director of BWDA. Venkat enquired the Director, Is it possible for you to transform the operations completely from current form to NBFC form and run the microfinance programme equally successfully? Thambi was surprised by the query and replied, Venkat, we are competent enough to run the programme in NBFC mode and the transformation is over a period of time and not sudden. But tell me, why do you feel this way? Venkat said I noticed most of the functional and managerial staff members in the organisation face difficulty in running the programme mainly because of lack of professional expertise and experience in NBFC mode of operations. Though the organisation is planning to scale up its activity in new districts in coming years, 137

11 lack of adequate infrastructure, weak internal audit system, absence of a computerised accounting system and management information system (MIS) appear to be a block for the expansion strategy. Lack or closed organisation human resource policy within the organisation in recruiting professional staffs and experts to run the NBFC operations is a concern to consider. At the field level, the total number of borrowers covered by individual field staff has increased from 40 to 148 members in the recent years which coincides with increasing defaults and drop outs in some groups raising the issue of target oriented approach adopted by the organisation recently. Further, I doubt the potential of mobilising the minimum capital requirement for NBFC (Rs 2 crore) from the SHG members and general public as the organisation is yet to achieve financial sustainability of its microfinance operation. With the push towards financial sustainability goal and changing loan disbursement policy of BFL by including individuals and organisations / firms in addition to the SHG members will also affect the basic mission for which BWDA was started. After listening to Venkat s observations, Thambi reiterated, Transformation of BWDA s microfinance activities inline with the BFL will not affect or change the mission / vision for which BWDA was started. 138

12 Exhibits Exhibit 1: Details of BWDA Microfinance programme (As on 10 March 2005) S. No Details Women Men Total 1 Total number of SHGs Total number of members Total savings of SHGs (Rs in lakhs) Internal rotation within SHGs - (Rs in lakhs) Loan amount disbursed (Rs in lakhs) Repayment (Rs in lakhs) Loan outstanding (Rs in lakhs) Repayment in % Exhibit 2: Region wise loan disbursement details of BWDA (As on March 2005)* S.No Regions Total number of SHGs Total number of borrowers Total loan amount (Rs in lakhs) 1 Villupuram Kolliyankulam Rasapalayam Acharapakkam Thuckalay Panagudi Ambai Alangulam Chengottai Total S.No Exhibit 3: Consolidated institution wise loan details of BWDA (As on March 2005)* Name of the bank / donor agency Total number of SHGs benefited Total number of borrowers Total loan amount (Rs in lakhs) 1 RMK Vallalar Gram Bank (RRB), Villupuram IOB SIDBI,Chennai HDFC,Chennai FWWB, Chennai State Bank of Travancore Dhanalakshmi Bank Total

13 Exhibit 4: Credit Linkage of SHGs S. No Name of the District Direct Bank loan Total SHGs Amount (Rs in lakhs) Total SHGs SGSY Loan Amount (Rs in lakhs) 1 Kancheepuram Villupuram Cuddalore Tirunelveli Kanyakumari Total Exhibit 5: Institution wise loan details of BFL (As on March 2005)* S.No Name of the bank / donor agency Loan amount (Rs in lakhs) Loan Repayment (Rs in lakhs) Outstanding loan amount (Rs in lakhs) Rate of Interest (%) 1 FWWB, Chennai SIDBI,Chennai ABN AMRO Total Exhibit 6: Loan disbursement details of BFL (As on March 2005)* S.No Name of the bank / donor agency Total SHGs benefited Total number of borrowers Loan amount (Rs in lakhs) 1 Share FWWB, Chennai SIDBI,Chennai ABN AMRO Total * BWDA - annual report

14 Appendix 1 Loan criteria for SHGs from BWDA and BFL 1. SHG should have completed a minimum of three months after opening the bank account. 2. A minimum of Rs 3000 should have been saved by the group. 3. A minimum amount of Rs 3000 should have been rotated by the group. 4. Repayment should be at least 85 % from members. 5. The animator / representative and members should have been trained. 6. Attendance of members in group meetings should be at least 90%. 7. Registers and Books of Accounts should have been maintained in the double entry system. 8. Community organisation programmes should have been conducted by the group. 9. A registration fee of Rs 500 should have been paid to the BWDA welfare scheme. 10. All loan payments to SHGs will be by cheques and repayment will be made through BWDA branches. 11. Loans will be of months duration, with repayment commencing after one month from the time of loan distribution and will have 5 days grace period after due date. 12. All repayments will be done through a triple challan system. After receiving the money the SHG will be given one counterfoil by the bank, the second will be handed over to the BWDA and the third will be retained by the bank. Where the payment is made to a cash point of BWDA, double challan system will be used. 13. A service fee (risk fund contribution) of 1% of loan amount will be collected from the borrowers. Also 5% of the loan amount will be retained as caution deposit, which is repayable after 3 years with 5% interest. 141

15 Appendix 2 Loan criteria for individual borrower of BFL 1. Individual should be a resident of BWDA / BFL target area. 2. Individual s name should be in the ration card or must possess voter ID for identification purpose. 3. Individual should have assets worth more than the loan amount for mortgage. 4. Individual should get guarantee or witness from nearest BWDA SHG in the form of a resolution. Individuals are given loans of up to Rs 1 lakhs with maximum 36 monthly installments for income generating operations and 48 months for housing. Interest charge of 15% per annum is charged on the reducing balance for the loan amount. Loan criteria for Institution / Organisation / Firm / Federation 1. Minimum 3 years of operation. 2. Minimum 3 years of auditor s statements and annual reports to be submitted. 3. Surety given by Board of Directors of the Institution / Firm and from Board of Directors of BWDA Finance Ltd is required. 4. Except Federations, others should have asset value of more than the loan amount. Maximum loan amount of Rs 5 lakhs is given with 48 monthly installments to Institutions/ Firms / Federations. The interest rate varies between 8 to 15 % (reducing balance) based on the purpose of the loan. As mortgage the original documents with legal opinion by the institution should be furnished against the loan amount. 142

16 Appendix 3 Board of Directors BWDA S.No Name Designation Responsibility Ex. Principal, United Theological 1 Dr. Gnana Robinson President College, Bangalore 2 Mr. M. Jesudasan Ex. Regional Director, RBI Vice President 3 Mr. C. Joslin Thambi Director, BWDA Secretary 4 Mr. V. Ramasamy Ex. Programme Officer, IDARA Treasurer 5 Dr. V. S. Mani 6 Mr. Charles Stephen 7 Dr.Mrs.Pankajam Ex. Joint Director, Animal Husbandry Development Officer,LIC, Villupuram Ex. Vice Chancellor, Gandhigram Rural university Executive Member Executive Member Executive Member 8 Mrs. Flowrance Robinson Social Worker Executive Member 9 Mrs. Prabala J. Ross P.G.Assistant Executive Member Board of Directors BFL S.No Name Designation Responsibility 1 Mr. C. Joslin Thambi Director, BWDA Managing Director 2 Dr. Gnana Robinson Ex. Principal, United Theological College, Bangalore Director 3 Mr. M. Jesudasan Ex. Regional Director, RBI Director 4 Mr. V. Ramasamy Ex. Programme Officer, IDARA Director 5 Mr. R. Ramamoorthy Advocate Director 6 Mr. Rallyn P.George Share market dealer Director 7 Mr.J.A.M.Ross BWDA Director 8 Dr.Mrs.Pankajam Ex. Vice Chancellor, Gandhigram Rural University Director 9 Ms. P.S.Santhi Senior Manager, BWDA Director 10 Mrs. M.Sarojini Women s Co-coordinator, BWDA Director 143

17 Organisational Structure of BWDA Executive Committee Director Administration Programme Coordinator (Administration and Training) 1. Women s development 2. Microfinance Managers Regional Coordinators Accountants and Research Assistants District Coordinators Clerks Block coordinator Drivers, Office assistants Community Organizers / Cluster Coordinator Watchmen / Attender Animators / Volunteers Note: Separate field level / managerial staffs were not appointed under BFL. As on March 2005, the staffs of BWDA Microfinance programme took care of the BFL operational activities. 144