Co-operative model of SHG-Bank Linkage:
1. Predominant model of microfinance:
Loan to group
(Group formation and linkage)
• Bank finance individuals or clients directly.
• Branches assess credibility of SHGs and monitor repayment process.
• Origination and supervision by NGO.
• Entire credit risk borne by the bank.
• No incentive for NGO to monitor portfolio.
• NGO has to raise to raise its own funds to cover costs.
• Low rates of growth resulting from –
- NGO reliance on grant funds to meet costs.
- Bank wary of large portfolios in the absence of risk sharing structure.
2. Recently emerging model: financial intermediation by MFIs:
(Banks lends to MFI
based on their capital) (MFI on lends)
On lending of same funds
• Bank finance to intermediary (NGO/MFI).
• The intermediary on lends to groups or individual.
• MFI set risk absorption capacity.
• Artificial increase in transaction costs.
These models could not resolve the paradox of limited supply.
• A burgeoning segment with very large demand for finance.
• Banking system capable for providing large quantum of wholesale finance.
• Grass root agencies capable of providing origination and supervision support in a cost effective manner.
• Supply is still a small function of the demand for finance.
• It needs a structure that is capable of massive scaling up
- Uses capital parsimoniously.
- Permits all costs of operation to be recovered.
- Preserve the incentives of the originator.
Laon 9% - 11%...