APMAS Quality Assessment of SHG Federations

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         Paper presented at SHG Federation Workshop
       Organized by NIPCCD and Coordinated by Sa-Dhan
                      24-25 March 2003

                        CS Reddy & LB Prakash

          Mahila Abhivruddhi Society, Andhra Pradesh
             Plot No. 20, Road No.2, Banjara Hills, Hyderabad-34
            Phone: +91-40-2354-7952/27 Fax: +91-40-2354-7926
           E-mail: cbox@apmas.org       Website: www.apmas.org

How does one say “thank you” when there are so many people to thank? Obviously this paper
is a big “thank you” for all the Quality Assessment team members – Mr N Tirupatiah,
Mr B Vijaya Bhasker, Mr C Nagarjuna, and Ms G Trivikrama Devi, who had put in a lot of
effort in conducting the Quality Assessments of the SHG Federations over the past one year.
Society of Elimination of Rural Poverty (SERP), a Government of Andhra Pradesh promoted
public society to implement the programs under the Poverty Eradication Mission, is
especially acknowledged for their support in developing our assessment system.

The support of all the organisations, which requested for the Quality Assessments to be
conducted and the women of the Federations is gratefully acknowledged. Our appreciation to
all our colleagues at Mahila Abhivruddhi Society, Andhra Pradesh (APMAS) for assisting in
bringing out this paper.

Finally, special thanks to Mr Anand, M-CRIL and Ms S Madhavi, ex-employee of APMAS,
who have been actively involved in the development of GRADES, the Quality Assessment
system developed by APMAS and to Mr Ashish Vohra, who helped in collating all the
assessment data, analysing and helping us.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                  2
                                  Table of Contents

1. SHG Federations in AP – a background
   1.1    Beginning of the Self Help Groups (SHG) movement in Andhra Pradesh
   1.2    SHG-Bank linkage:
   1.3    Piloting of SHG Federations
   1.4.   SHG Networking for sustainability:
   1.5    Registration of SHG federations under the APMACS Act

2. Variations in SHG Federation Models
   2.1    Three-tier structure of UNDP/Velugu project
   2.2    Nested Institutions of DHAN Foundation:
   2.3    Two-tier institutions promoted by NGOs and DRDA
   2.4    Associations of Thrift Cooperatives promoted by CDF

3. APMAS Quality Assessment (QA) of SHG Federations
   3.1    GRADES - QA system for SHG Federations
   3.2    Key Assessment Areas and Final Rating
   3.3    The Quality Assessment Methodology & Process
   3.4    Utility of QA of SHG Federations

4. Major Findings, Conclusions and Recommendations
   4.1 Major Findings
       4.1.1 Governance & Strategy
       4.1.2 Resources
       4.1.3 Asset Quality
       4.1.4 Development & Impact
       4.1.5 Efficiency & Profitability
       4.1.6 Systems & Operational Processes
       4.1.7 Federations & Mandal Samakyas
       4.1.8 Village Organisations of UNDP
       4.1.9 Mandal Samakya vs Village Organization
       4.1.10 SHG
   4.2 Conclusions
   4.3 Recommendations

5. Emerging SHG Federation Model
   5.1 SHG - the building block
   5.2 Village Organization
   5.3 Mandal Samakya

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings        3
                          Status of SHG Federations in Andhra Pradesh
                                  APMAS Assessment Findings
                                                                          By CS Reddy & LB Prakash1

1. SHG Federations in AP – a background
Self Help Group (SHG) methodology is the most dominant form of microfinance in India.
Organisation of women around thrift and credit has emerged as one of the more effective methods for
poverty reduction and women empowerment. Over the past 10 years, close to a million SHGs have
been formed in India2, with almost half of them in Andhra Pradesh (AP). There has been an
exponential growth in the number of SHGs from the year 1997. Skewed development of SHGs has
been witnessed with almost 80% of the SHGs today being in South India, though high concentration
of poverty is in North and Northeastern parts of the country. In the late 80’s, the SHG promotion was
pioneered by the NGOs and a large number of NGOs across the country continue to be engaged in
SHG promotion and strengthening. In the late 90’s, Government has become a dominant player in the
promotion of SHGs, particularly in the South India through the District Rural Development Agencies
(DRDAs) and other Government Corporations and externally aided programs.

While there are large numbers of SHGs, the quality is highly variable. A study by APMAS in 2002 in
three select districts of AP revealed that less than 20% of the SHGs were of reasonably good quality.
In the entire state, less than a third of the SHGs are of reasonable quality. While the NGO promoted
SHGs are relatively of better quality, considerable work is still needed to be done to achieve self-
management and sustainability of SHGs. As per NABARD publications as on December 2002, over
2,300 Self Help Promoting Institutions (SHPIs)3 and 21,000 bank branches of 444 banks have been
involved in the promotion and financing of SHGs. Capacity building of SHPIs and the innumerable
SHGs is a mammoth task requiring an estimated Rs. 4,000 crores as per the study done for the
empowered Committee of Prime Minister’s Office4.

Andhra Pradesh leads the SHG movement in India with almost 439,000 SHGs covering
approximately 54,00,000 women. Cumulatively, over 350,000 SHGs have been linked to banks under
the linkage-banking program in AP. As on date, over Rs. 500 crores is outstanding with SHGs as
loans from the banks. The most important government program involving women in savings and
credit is DWCRA. In AP, almost Rs 500 crores was provided as revolving fund as against a saving of
Rs 550 crores by the groups till March 2002. Velugu Project, a large scale poverty reduction project
funded by the World Bank, which is being implemented in more than 820 mandals5 out of the 1100
mandals of AP, along with other government departments and NGOs is engaged in strengthening the
SHG movement. Velugu Project plans to promote and/or strengthen approximately 253,500 SHGs,
23,000 Village Organizations and 800 Mandal Level Federations over the next five years. Networking

  CS Reddy is the founding CEO of Mahila Abhivruddhi Society, Andhra Pradesh (APMAS). LB Prakash is
the Associate Vice President of APMAS overseeing the Quality Assessment team. APMAS is a state level
institution to strengthen the SHG movement, established in June 2001 with funding support from DFID through
CARE India. APMAS offers Quality Assessment, Quality Enhancement and Research & Advocacy services on
a fee-for-service basis. APMAS is has an illustrious Board with Dr. P. Kotaiah, former Chairman of NABARD,
as it’s Chairman. All the key stakeholders in the sector are on the Board.
  DHAN Foundation Study “Capacity Building for Enhancing Availability of Institutional Finance for the
Unorganized Sector”, April 2002
  SHPI is a well-known acronym among the microfinance practitioners in India. It means those engaged in
promoting SHGs, which includes NGOs, various Government Departments, externally aided Government
Programs, Regional Rural Banks and others.
  DHAN Foundation’s Study on funds required for Capacity Building of SHGs, 2002
  Administrative Unit below the district consisting of a group of Villages/Panchayats (in Andhra Pradesh blocks
were sub-divided in to mandals but retained the administrative and local government functions of blocks).

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                       4
of SHGs and institution building are seen as key strategies for sustaining the SHG movement in AP.
Government, Bankers and NGOs have been working together to enhance the quality of SHGs in the
State. To further supplement the work of these and to maximise the impact, APMAS has been
established as the first of its kind state level technical support institution for strengthening the SHG

This paper looks at the quality and sustainability of Federations undertaking Financial Intermediation
based on the findings of the Quality Assessments of Federations in AP, done by APMAS. This paper
is laid out as follows: Section 1 looks at the history of SHGs and SHG Federations in AP. Section 2
describes some of the variations of the SHG Federation models, being practiced and in vogue. Section
3 describes the Quality Assessment system, process and methodology developed by APMAS, while
Section 4 focuses on the major findings of the Quality Assessments, conclusions and
recommendations. Section 5 delves on the emerging SHG Federation model.

1.1 Beginning of the Self Help Groups (SHG) movement in Andhra Pradesh
As already mentioned, SHGs have been initiated by NGOs in late 1980s in Andhra Pradesh. The
women’s savings and credit movement in AP can be said to have really began in 1995, in Nellore
district as “podupulakshmi” movement post anti-liquor campaign by women. This led to large-scale
promotion of SHGs in every district of AP. The podupulakshmi movement started with the slogan of
“save a rupee a day”. Almost all the groups across the State began monthly individual savings of Rs.
30 with each DWCRA group consisting of 15 women6.

By 2000, DWCRA became a flagship program of Government of AP to implement all its poverty
reduction programs. State Government introduced schemes like Deepam (subsidized gas connections
for DWCRA women) and State funded Revolving Fund, in addition to the Central Government
Schemes. Several thousands of groups were formed instantly to access various Government Schemes.
To give further impetus to the DWCRA movement, the State Government established a separate
department called “Women Empowerment & Self Employment” under the Rural Development
Department to focus on promoting DWCRA groups, increase bank linkage and to promote micro
enterprises. NABARD played a proactive role in sensitising NGOs, Government Officials and
Bankers on SHG – Bank linkage. Greater Coordination was witnessed among DRDAs, Banks and
NGOs during 1999 – 2002. NGOs that had internal capacities supported capacity building of
DWCRA groups. During 1996-2001, UNDP funded Poverty Alleviation Program was implemented in
Mahabubnagar, Kurnool and Anantapur districts with a total outreach of 3,200 SHGs. In 1999, CARE
began the implementation of a DFID funded project called Credit and Savings for Household
Enterprise (CASHE) to support the emergence of quality SHGs through NGOs and Government.
Instances of competition among NGOs, DRDA and UNDP were also noticed. In June 2000, World
Bank funded District Poverty Initiatives Project (DPIP) was initiated in six poorest districts of AP
based on the UNDP experience. In 2002, the project was scaled up to all the 22 rural districts of AP
with funding support from World Bank and the project is called AP Rural Poverty Reduction Project.

1.2 SHG-Bank linkage:
The primary aim of the SHG - Bank linkage programme is to integrate informal savings and credit
groups with mainstream banking system by providing credit facility to groups to enhance their fund
base. The expectation is that SHG members will be enabled to access frequent and comparatively
small loans from savings and revolving fund from the Government. Once an SHG demonstrates its
capability to absorb outside credit, bank loans are extended to the SHG. The SHG capability is
reflected in terms of amount of savings pooled by the members and their ability to manage such funds
coupled with solidarity and cohesion among members.

    APMAS Feasibility Study Report, 1999

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                    5
Under the SHG Bank linkage program, banks - commercial and rural - lend to SHGs and NABARD
refinances these loans at a subsidized interest rate. The program claims to have a repayment rate of
over 95%. However, a small drop in the repayment rate to banks is noticed in the recent past, which is
a cause for concern. Recognising the program as a commercial proposition, a few banks have
themselves taken on the role of promoting SHGs in areas where NGO presence is minimal.
The SHG Bank linkage program was started in 1992 as a pilot project to link 500 SHGs with Banks
and upgraded to a regular banking program in 1996, and in AP has been expanding rapidly since
2000-01. In 2002-037 alone, 1,23,548 SHGs accessed bank finance to the tune of Rs 339.61 crores.
The SHG Bank linkage programme in AP increased by leaps and bounds, over the years, and the
following table provides an idea about the bank linkage in AP:
              Year              No of Groups    Bank Finance*
          up to 1995-96                  778           201.152
             1996-97                     434           140.669
             1997-98                   1,322           317.548
             1998-99                   6,579         1,274.640
             1999-00                  29,242         5,494.866
             2000-01                  84,939        14,316.786
             2001-02                1,17,352        26,709.188
             2002-03                1,23,548        33,960.660
        * amounts in Rs lakhs

It may be of interest to note that of the 197,653 new SHGs financed by banks during 2001-02 in the
country, 75,939 new SHGs were from AP (38%). Of the 461,478 SHGs (cumulative) financed by
banks up to March 2002, 240,646 (52%) are from AP. All the 41,413 SHGs provided with repeat
finance by banks during 2001-02 are from AP.

1.3 Piloting of SHG Federations
Networking of SHGs was inspired by the felt need of the SHGs that are not able to deal with issues
that are beyond their reach. SHGs having a membership of 10-20 are small and informal groups.
Inter-group lending, ability to negotiate with higher level structures and to gain greater bargaining
power, were the reasons as to why informal SHG networking was initiated by NGOs. Though SHG
networks start as informal networks, they develop into formal legal corporate bodies to better service
the member SHGs. The unique feature of the SHG Federations is that the primaries i.e. the SHGs, are
not legal entities and do not have body corporate status. However, SHGs are recognised as per the
RBI guidelines to engage in financial transactions with banks. The SHG Federations function as per
the subsidiarity principle. SHG Federations have been promoted by the NGOs and the DRDAs from
mid 1990s to address the issues of ensuring quality while upscaling, ensure that costs of promotion are
low, and create sustainable institutions to facilitate withdrawal of the promoting organisation, from
some of its functions and roles.

PRADAN and MYRADA are two NGOs, which also have pioneered the concept of SHG Federations.
MYRADA has promoted unregistered Federations of 15-25 SHGs, which focus primarily on
solidarity building, delinquency management and dealing with social issues. PRADAN in 1992
promoted the Sri Padmavathi Mahila Abhyudaya Sangham (SPMS) in Tirupathi. UNDP’s South Asia
Poverty Alleviation Project started in 1994 in AP and was implemented in 20 mandals spread across
three districts. SHGs in each mandal are federated into a Mandal Samakya (MS) as a three-tier
structure of SHG-Village Organization-MS, and are registered under the APMACS Act.

CARE initiated its microfinance activity in early 1990s in Chevella and nearby mandals of
Rangareddy district, and has established a three-tier Federation structure of SHG-Cluster-Federation.
Based on the experiences, CARE is implementing CASHE project in 3 states of India: AP, Orissa and
West Bengal.

7 As on March 22, 2003

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                              6
In addition to the organisations mentioned above, NGOs like CDF, Hyderabad, GRAM, Nizamabad,
MARI, Warangal, have promoted Federations in AP. DRDAs have also promoted Federations. In the
case of many NGOs and the DRDAs, two tier Federations are promoted.

1.4. SHG Networking for sustainability:
To a large extent, the objectives of networking SHGs are promoter driven. While there is no “best
practice” model that is well documented, various SHG Federation promoters have been learning by
doing. Though networking of SHGs need to be process oriented and evolutionary, compromises have
been noticed. The primary purpose of federating SHGs is to ensure their sustainability. Though the
SHG model of microfinance has been successful in terms of its outreach, resource generation, and use
of funds, it involves tremendous effort and resources of the promoting organisation. Unless federated,
formation and most of the maintenance costs of SHGs have to be permanently borne by the promoter,
thereby making the system inherently unsustainable. If SHG federations exist, they not only ensure
that SHGs bear all their maintenance costs but also absorb part of the costs of promoting new SHGs.

As per our understanding, SHG Federations are promoted for strengthening existing SHGs, to
promote new SHGs of the poor and to access various services to the member SHGs. Federations play
an important part in SHG capacity building. It is highly impractical for any promoter to engage in
Capacity Building of all the SHGs promoted, without incurring high costs, which probably are not
justifiable. Conflict resolution – both internal and external, is another important function performed
by the Federation. Federations provide a sense of solidarity among members of different SHGs in an
area. It is important to create a sense of ownership since SHGs are generally not self- promoted

Formation of federations ensure that economies of scale exist, transaction costs and default rates are
reduced, value-added services like micro-insurance, input supply are provided, while increasing the
outreach and simultaneously reducing the promotional costs. Federations increase the empowerment
beyond that achieved by the SHGs, produce leaders and provide opportunities to deal with power and
bureaucratic structures at a higher level, where mainstream organisations and government offices
exist. The Federation helps in ensuring that the SHGs survive and function as vibrant entities,
bringing about social and economic empowerment of women.

1.5 Registration of SHG federations under the APMACS Act
Cooperative Development Foundation (CDF), an NGO based in Hyderabad, played a pivotal role in
the introduction of the Andhra Pradesh Mutually Aided Cooperative Societies (APMACS) Act, 1995
by the Government of AP as an alternative legal form for the Cooperatives. The SHG Federations
promoted by both NGOs and Government explored various legal forms such as public society, trust
and APMACS Act for the registration of SHG Federations. APMACS Act was considered as the best
possible legal form for SHG Federations. However, the limitation of this Act is regarding the
membership as the Act can only have an individual as a member of the primary MACS whereas the
SHG Federations consider the SHG as its member. Though MACS Act is not the best legal form
suited for the SHG Federations, it is considered as one of the best forms among the available legal
forms. Over the past five years AP Government is involving the women as active partners in the
development process, making the SHG model as the flagship strategy for rural development. Due to
the best efforts and facilitation of the NGOs and State Government, at present about 1,800 thrift and
credit MACTS are registered. Currently, there is an exponential growth in the number of MACTS.

At the primary level, these Mutually Aided Cooperative Societies (MACS) are federations of 10-500
SHGs, having an individual membership ranging from 50 – 5,000 women spread over 1 - 15 villages.
One concern is that since SHGs are not recognised as body corporate, federating them and registering
under the APMACS Act may result in the SHGs losing their unique characteristics. There is a feeling
that probably, the SHG movement should advocate for a separate law for SHGs Federations.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                              7
The federations have, over the years, evolved into vibrant institutions providing a variety of services
to the constituent SHGs. The structure and the functions of the federations, however, vary from
promoter to promoter and from place to place. AP thus has several models of SHG federations, each
promoted with a specific philosophy and serving a specific need. This chapter is to give a broad
overview of the four major models, which are by no means, exhaustive.

2.1 Three-tier structure of UNDP/Velugu project

This model comprises of three tiers viz., the Federation (also known as Mandal Samakya - MS), the
Village Organisations (VO) and the individual SHGs. The Federation operates at the mandal level,
while the VO operates at the village/cluster level. Though as per the bylaws, individuals are members
of the VOs, they operate more on the concept of a Representative General Body (RGB). This is so
because the MACS Act does not recognise SHGs as legal entities, and the VO becomes the primary
cooperative in which individuals are to be members. The concept of the RGB ensures that, in practice
the SHGs do not lose their existence. At the VO level, one or two representatives from each SHG
become the members of the RGB, depending upon the number of SHGs in the village. Similarly, the
membership in Federation is through representation from the VOs. Furthermore, every SHG in the
mandal can become a member of the MS, by paying the share capital and membership fee. The 3-tier
structure is depicted below.

                                     SHG Federation

                        Village                                         Village
                      Organisation                                    Organisation
                         (VO)                                            (VO)

           SHG          SHG          SHG                      SHG          SHG            SHG

The MS accesses funds from external sources and lends it to the VO at a higher interest rate. Similarly
the VO on-lends to individual SHGs and who then onlend to the SHG members. Each tier earns
income through interest spread. In a few instances, the MS and the VO further collect fee for the
specific services offered, on an annual basis.

This model was promoted by UNDP in Mahabubnagar, Kurnool and Anantapur districts of AP.
Currently, Society for Elimination of Rural Poverty (SERP) implementing the World Bank funded
Velugu project is promoting these three tier federations.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                   8
2.2 Nested Institutions of DHAN Foundation:
The DHAN (Development of Humane Action) Foundation is working with the poor communities of
AP, Tamilnadu, Karnataka and Pondicherry. DHAN formed nested institutions, as shown below, as
part of its Kalanjiam Community Banking Programme (KCBP).

          Women’s Savings & Credit
           Groups (15-20 members)
        Primary Groups at village level

                                                                   Cluster Development
                                                                 Association (15-20 groups)
                                                                    4-5 nearby villages

            Federation of Groups
              (150-200 groups)
             at the Block level

The KCBP focuses on creating access and control for microfinance by poor women through
promoting savings and credit groups and forming their nested institutions. The KCBP works only with
poor women and is reaching 152,384 families as on 30 Nov 2002. The program is spread over 65
locations covering 3,391 villages/slums of 18 backward and drought prone districts of south India.
The program promoted 9,759 primary groups, 701 cluster development associations and 26
autonomous registered federations.

As seen in the diagram, each of the institutions viz., the primary groups, the cluster and the federation
are independent. The primary groups carry out the financial transactions, including thrift and credit.
While the primary group is formed for savings and credit, the cluster is meant to nurture and
strengthen these primary groups. A cluster is small enough to manage and helps meet its operational
costs, including that of the community worker. Furthermore, the cluster ensures the quality of the
primary groups. The federation, on the other hand, provides crucial linkages for meeting the larger
needs of the community. The federation provides institutional status to the primary groups. It also
maintains quality across clusters through self-regulation.

2.3. Two-tier institutions promoted by NGOs and DRDA

The NGOs and DRDA have promoted SHGs across AP and have federated them at the village /
cluster / mandal level into Mutually Aided Cooperative Thrift Societies (MACTS). Though this is
broadly a two-tier structure, each NGO and DRDA operationalise the structure in its own unique way.
The schematic representation of the model promoted by DRDA, Rangareddy district is given below:

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                 9
                         SNEHA                                              SNEHA
                         MACTS                                             SANGAM

         SHGs        SHGs         SHGs         SHGs            *   *   *    *   *   *     *   *

                                                                           * Organisers

An SHG consists of 10-20 members, and in general each member saves Rs. 30-100 per month. SHGs
in a mandal are federated into a Federation. An SHG becomes a member by subscribing to the share
capital of the Federation. DRDA employs an Extension Officer (formerly known as Additional Grama
Sevika), who was initially responsible for the formation of groups. The EO in case of some MACTS
also coordinates the MACTS activities as its Manager. The MACTS normally employs one or two
staff members – a Manager and an Accountant. The MACTS mobilizes funds for SHGs from
commercial banks through bank linkages. In addition, the MACTS also receive funds from DRDA,
SC Corporation and BC Corporation, at varying interest rates.

2.4. Associations of Thrift Cooperatives promoted by CDF

Cooperative Development Foundation (CDF) initiated the Thrift Cooperatives (TCs) promotional
activity in 1990, in Warangal and Karimnagar districts of AP, by mobilising women around mutual
thrift and credit activity. These thrift cooperatives work on the principles of cooperation.

Women’s Thrift Cooperatives (WTCs) were started from 1990 and Men’s Thrift Cooperatives
(MTCs) were setup from the year 1992. Since then, CDF’s fieldwork area has spread to Medak,
Rangareddy and Nalgonda districts. As of 31 December 2002, 401 TCs with 87,945 members, of
which 224 are WTCs with 51,803 members and 177 are MTCs with 36,142 members, are operating in
CDF’s fieldwork area. Though these TCs lie within a limited area, they have an impressive number of
members. Of these 132 WTCs and 107 MTCs have been registered under the APMACS Act.

What makes the TCs special is that they are not in the game of accessing mainstream banking, or
“graduating” from being beneficiaries to becoming clients. They are into banking, assuming the
much more powerful role of owners and controllers of the financial institutions that they are setting up
to service themselves. The primary difference between a TC and a bank is that the functioning of a TC
is more transparent and involves every single one of the members. In a TC, each member has easy
access to information about the status of the available funds, the number of loans sanctioned and the
everyday transactions of the cooperative. It may be of interest that TCs are not institutions of the poor,
but open to all eligible members (women and men) of the community. However, men and women
have separate TCs and Associations of Thrift Cooperatives (ATCs), and there are no mixed TCs.

The TC members have further divided into 5 member Joint liability Groups (JLGs). When one
member of a JLG is sanctioned a loan, the other four members have to stand as guarantors, and have
the responsibility of making sure that the loan is repaid on schedule. These JLGs facilitate
decentralised decision-making, ensures benami loans don’t exist and better loan tracking. JLGs helped
the TCs in controlling the default rate to a large extent.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                10
The following diagram indicates the structure of the thrift cooperatives structure:


                     JLG          JLG



The Association of Thrift Cooperatives were formed later to facilitate cross learning among the TCs
and to find solutions to their common problems. ATCs were formed with the aim of bringing together
the best minds in the TCs to come up with solutions that benefit each individual member. Presently
there are 23 Associations of WTCs and 19 Associations of MTCs. The ATC’s main function is to
simplify the functioning of the TCs so that they are effectively meeting members’ needs. The
members of the governing bodies of the TCs form the general body of the ATC. The presidents of the
TCs form the governing body of the association. The ATCs are registered as secondary MACSs.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                          11
                  3. APMAS Quality Assessment of SHG Federations

While the numbers in the SHG movement is quite impressive, there is a lack of quality in the
movement. There is growing attention to enhance the quality of SHGs and their Federations, and
everyone, including the Chief Minister of AP, is insisting on quality of the SHGs. With almost one
year’s work of APMAS with various stakeholders like Government of AP, NABARD, Bankers and
NGOs, on establishing Quality Assessment systems for SHGs and SHG Federations, the demand for
Quality Assessment (QA) is increasing. To ensure sustainability of these Self Managed Micro Finance
Institutions (SMFIs), awareness about the standards and Quality Assessment process is critical.

A large number of bankers, DRDA staff and NGOs are using the Critical Rating Index developed
under NABARD’s leadership to promote bank linkage and for offering other government programs.
The rating is also being used for designing a more targeted capacity building input. NABARD is in
the process of finalising the guidelines for SHG Federation linkage with banks. In this context, The
SHG Federation Quality Assessment System developed by APMAS, called GRADES is gaining

3.1. GRADES - QA system for SHG Federations

Working towards a common acceptance and wide use of quality as well as organizational capacity
assessment processes for SMFIs8, APMAS has developed a Quality Assessment (QA) system –
GRADES in collaboration with Micro Credit Ratings International Limited (M-CRIL), New Delhi.
The system, to be revised regularly on a periodic basis, is developed for SHG Federations and is
currently being used for the assessment of UNDP/Velugu promoted MSs (Mandal Samakyas) in the
state of AP.

A state-level QA team based in Hyderabad, AP does assessment where needed in the state. APMAS
has assessed MACS in several districts. Till date, APMAS has assessed about 100 MACS (Mutually
Aided Cooperative Societies)9 in several districts. APMAS plans to identify, train and develop
regional level Assisted Quality Assessment Agencies (AQAAs), for taking the Quality Assessment
process closer to the field.

3.2   Key Assessment Areas and Final Rating

GRADES represents the key assessment areas of the Federation Assessment – Governance &
Strategy, Resources, Asset Quality, Development & Impact, Efficiency & Profitability, Systems &
Operating Processes in addition to the SHG Performance. As mentioned earlier, it was also decided
that APMAS shall broadly use the parameters of CRI for assessing the SHG performance. The
weightage and the broad parameters to be assessed in GRADES are as follows:
      S# Assessment Area                       Weightage
      1   Governance & Strategy                      15%
      2   Resources                                   8%
      3   Asset Quality                               8%
      4   Development & Impact                        7%
      5   Efficiency & Profitability                  9%
      6   Systems & Operating Processes              13%
      7   SHG Performance                            40%

  SHGs, SHG Federations and other forms of member-owned and member-managed savings and credit
9 SHG Federations registered under the AP Mutually Aided Cooperative Societies Act, 1995 are being referred
to as MACS in this section

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                  12
On completion of the QA, the SMFI being assessed will be given a letter grade to indicate its rating,
along with the report. The grading scale (C to A+++) is spread over 10 grades with a range of 5-
percentage spread, for each grade.

3.3. The Quality Assessment Methodology & Process
The QA of an SHG Federation involves three calendar days of field assessment by a two-member
professional team (assessment is always done by a 2-member professional team). The QA process is
highly participatory and also serves as a Capacity Building input for the promoters and the Board of
the SHG Federation. The level of effort involved in doing a QA is a minimum of 14 person days (2
more person days, if a report is to be also prepared in Telugu), as indicated below:

Quality Assessments are more participatory and also involve staff of the promoting organisation.
Quality Assessment involves building rapport with the top management (Board) of the SHG
Federation (also referred to as SMFI), facilitating small group discussions and presentations made by
the Office Bearers, Board members and staff, about the SMFI functioning.

A draft report is prepared by the Assessment Team and shared with the promoting organisation for
feed back, before the report is finalised. The promoting organisations facilitated changes in the
Federations based on the QA reports and recommendations. This helped the QA team to realise the
importance and significance being given to the assessment reports. Based on initial experiences,
APMAS also realised the need to have a de-briefing meeting with the representatives of the federation
being assessed and the promoting organisation, rather than just sharing the reports, by mail.

QA team is less protective about its QA system and as it understands that the QA system is more for
the Quality Enhancement of the SHG movement and do not view themselves and APMAS as a rating

3.4. Utility of QA of SHG Federations

The assessment will have the following benefits:
 Leverage products & services by SMFIs e.g., Loans from Banks, Linkages with marketing
   Assessment of Credit Worthiness.
   Assessment of Self Management, Financial Viability and long-term Sustainability.
   Lowering of the appraisal & transaction costs for lending institutions and borrowers.
   Identifying Gaps for planning Capacity Building inputs.
   Benchmarking for promotion of Best Practices and enhancement of quality consciousness, among
    key stakeholders.
   Generating awareness on indicators for Self-Assessment
   At a macro level, up gradation of SMFI sector in the state of Andhra Pradesh

Also, the Quality Assessment will be a Capacity Building input in itself for the SHG
Federation, to improve its performance.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                            13
               4. Major Findings, Conclusions and Recommendations

A total of 29 SHG Federations were assessed by APMAS over the past one-year using
GRADES and are spread over six districts of AP. Of the 29 Federations assessed, analysis is
complete for 24. The details of the Federations assessed is given below

  Federation          #          Districts                 Promoter               Remarks
Mandal               14    Mahabubnagar,                 UNDP                   3-tier
Samakyas                   Kurnool, Anantapur                                   Federation
MACTS                 3    Ranga Reddy,                  DRDA                   2-tier
                           Anantapur                                            Federation
MACTS                 7    Nizamabad,                    NGOs – GRAM,           2-tier
                           Nalgonda, Anantapur,          YIP & VIP              Federation
      Total          24

The numbers of Mandal Samakyas, Village Organisations (VO) and SHGs assessed are:

        Federations & Mandal Samakyas *                                        24
        Village Organisations (2 for each Mandal Samakya) #                    26
        SHGs                                                                  104
       * 6 Federations have been registered as Public Societies and of the 50Federations and VOs, 32 have
       been registered as MACS
       # VOs not assessed for one Mandal Samakya and hence figures not included

4.1 Major Findings
In this section, Federation refers to mean both, the Mandal Samakya in a 3-tier Federation
and the Federation in a 2-tier Federation.

4.1.1. Governance & Strategy
It has been observed that the Board quality has a significant impact on the overall
performance of the Federation. Interestingly, attendance in Board meetings seem to improve
the Board quality, more because issues get discussed at length during these meetings.
Irrespective of the promoter, it is observed that dependency on the promoter is high at the
Federation level, and low at the Village Organisation level. Also, there is a general lack of
awareness across the Federations about the legal framework in which the Federations work,
and the legal obligations to be complied with. Absence of second line leadership and staff
domination is also observed as a general phenomenon.

Board members lack awareness about the APMACS Act under which the SHG Federations
and some of the Village Organizations are registered and its compliance. Elections are held
democratically, but not in accordance with the byelaws. The MACS Act and bylaws require
that the Board members retire on a rotational basis (as in the case of the Rajya Sabha), but the
elections to the Board are being held once for each term and all Board members retire at a
time, as in the case of the Lok Sabha.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                     14
Strategy of the Federation, and therefore the range of activities, services and products offered,
is highly influenced by the promoter. Credit is the predominant product offered by the
Federation to the member VOs/SHGs. Some Federations have initiated activities like
agricultural input supply and output marketing.

Decision-making is democratic and based on majority. However, only a few Board members
participate in the discussions, and many a time decisions are as suggested by the President
and/or Secretary. However, where VOs exist, decision-making is more participatory at the
VO level.

                                       Recovery Rate vs Attendance



                          1      3     5     7    9     11 13       15 17      19 21       23
                    Attendance         Recovery Rate                     Federation

                                            Attendance vs Idle Funds

                           1     3      5     7    9     11    13   15    17   19     21    23
                          Attendance                   Idle Funds              Federation

There is a marked absence of second line leadership, at the Federation level. This is due to
the compulsory change of leadership advocated by the promoter. Suddenly, some “become”
leaders, and by the time they come to terms with the Federation functioning, it is time for
them to retire. Second level leadership isn’t much of an issue at the Village Organisation
level, primarily because the decision-making is more participatory, and even SHG members
are more aware of the VO activities and its functioning, geographical proximity being the
factor. Absence of second level leadership at the Federation level and professional staff
deputed by the promoter to work at the Federation level is resulting in staff dominating the
decision making and influencing policy, over a period of time.

Overall performance and Board Quality have a good correlation (0.82). Within Board
Quality, awareness levels of the Board members about the Federation functioning and

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                          15
functioning of member VOs/SHGs have a high correlation with the attendance levels of the
Board members. Interestingly, it is noted that at the Federation, the attendance level has an
inverse relationship with the Board strength. More the number of Board members lower the
attendance and vice versa. Also, attendance levels have a positive correlation with the
recovery rates and a negative correlation with idle funds level ie., higher the attendance level,
higher the recovery rates and lower the idle funds.

4.1.2. Resources
The Federations are heavily dependent on the promoter for their resources. Many a time, the
Federations receive grants, both as corpus and for meeting recurring expenses. All
Federations are dependent on grants funds for meeting their operational/ recurring expenses.
It is generally observed that the accounting does not clearly reflect that the amounts owned
by each tier in the structure, whether related to grant funds, seed capital etc. This results in
ambiguity of ownership of funds, within the structure. Grants, which were received by
Federation, were given to SHG directly in a few cases. In some villages, SHGs are not
repaying those grants resulting in serious repayment problems and “defunct” VOs and

Due to grants from promoters, federations have a good fund base. However, it is observed
that in Federations where fund mobilization (funds per SHG) is high, and where credit is the
primary service offered, there is less focus on SHGs and their strengthening.

There is high Capital Adequacy at Federation (16 of 24 Federations have a CAR10 above
80%), primarily because of donated equity (grants) or savings of member SHGs. As own
funds are limited at the VOs (VOs in 10 of 13 Federations have an average CAR of less than
15%), and funds are borrowed from the Federations, there is a good leveraging of funds at
VO level. Idle funds are high at Federation - 14 of the 24 Federations have idle funds equal to
or greater than 10%, while it is comparatively less at the VO (10 of the 13 VOs have idle
funds less than 6%, of which 6 have less than 1%). Probably this might be due to the fact that
Federations have more corpus funds available with them, which provides them with a sense
of “security”. Interestingly, it is also noticed that in the Federations idle funds have an
inverse relationship with the recovery rates ie., higher the recovery, the more are the loans
given resulting in low idle funds.

                                        Idle Funds vs Recovery Rate

                          1     3      5     7      9   11   13     15     17     19     21     23
                   Idle Funds       Recovery Rate                      Federation

      Capital Adequacy Ratio and is calculated as “Net worth/Risk weighted assets (loan portfolio)”

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                               16
Federation borrowing is based on repayment performance. CAR and Portfolio at Risk (PAR
of 90 days)11 of the Federation have a strong negative correlation indicating that Federations
having a high PAR have fewer funds available for lending.

                          Capital Adequacy Ratio vs Portfolio At Risk

                          1      3   5     7      9     11     13     15     17     19    21     23
                  CAR      PAR                                              Federation

Staff quality is relatively higher when deputed from the promoting organization compared to
those recruited locally/directly by the Federation. Though staff are committed and are able to
carry out routine work efficiently, they need to gain knowledge on subjects like legal aspects,
fund management, accounting. The Federation staff though display commitment towards
their work, see themselves more as staff of the promoting organization. They seem to be
more comfortable to be accountable to the promoter rather than the Federation, as the
promoter recruits many a time the Federation staff, and generally come from outside the
Federation’s operational area. Where staff comes from within the operational area, they seem
to be accountable to the Board, and this can be observed more in the case of a VO.

4.1.3. Asset Quality
It is generally observed that at the VO level, there is a 100% repayment of external
borrowings ie., loans from Banks and other Financial Institutions including MFIs. Loans
from Federation are seen more as internal loans, and many a time will be given a second
priority, in case of repayment. Repayment schedules are more as a benchmark for repayment
of last installment. Generally repayment to Federation and VOs is in line with cash flows at
the VO and SHG respectively.

Loan Diversification is confined primarily to Agriculture & Animal Husbandry (primarily
dairy). These two major sectors have more than 60% share of the loan portfolio. High
exposure of the loan portfolio to agriculture and animal husbandry makes the repayment
performance dependent on the monsoon. Trade & service sector seems to slowly increase its
share of the loan portfolio, and is more when it is nearer to a district headquarter or
commercial town.

Recovery Rate at the Federation ranges from 30% - 100%, with the recovery rate in 14
Federations being above 75%. Where promoters manage the Federations, recovery rate is

      Ratio of principal balance outstanding on all loans with over dues greater than or equal to 90 days to the total
     loan outstanding on a given date

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                             17
generally in excess of 85%. Arrears Rate12 in the Federations generally range between 0% -
20%, with a few exceeding 20%. Portfolio at Risk in the Federations generally ranges from
0% to 60%, with 13 of the 24 Federations having a PAR in excess of 30%. The high PAR is
attributed by women mainly to the severe drought conditions existing in the state, though we
believe that it is because of inadequate systems, Board awareness and the importance
attached to be run as Financial Institutions on business lines. It may be noted that in the
Federations, which are managed by promoters, the PAR is around 10% or less.

4.1.4. Development & Impact
Board members of the Federation and VO are aware about the social issues within their area
of operation, and take steps to “solve” them and also participate actively in development
programs implemented by the government. Focus on social issues is in direct relationship to
the promoter philosophy, and the importance the promoter attaches to address social issues
through the Federation. Most of the Federations have developed linkages with external
agencies, primarily on social issues.

While the Federations have an impressive geographical coverage (most of them work in 90%
of the villages within the mandal), coverage of target population (poor and poorest of poor) is
low and is around 56%. Increasing the membership coverage would also enhance the
efficiency of the staff, due to compactness of operations.







                           1   2   3   4    5   6   7   8    9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

                  Geographic               Target Population                                  Federation

Where the Federation has a three-tier structure, it is noticed that strengthening of the SHGs is
given less importance and more focus is on the Federation and VOs. Support services to
SHGs eg facilitating bank linkages, market linkages, business development services,
monitoring performance and providing Capacity Building training is low.

4.1.5. Efficiency & Profitability
The cost of operations at the Federation level is higher than at the VO level. The Operating
Cost Ratio (OCR)13 for the Federations generally ranges from 10%-25%. In total, seven out
of 24 Federations (of which two are 3-tier federations and five are 2-tier federations) have an

   Ratio of the total amount of principal over dues greater than or equal to 90 days against the total loans
   outstanding on a given date
   Ratio of salaries, travel, administrative costs and depreciation expenses to the average loan portfolio

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                        18
OCR equal to or less than 10%, while VOs of seven Federations (out of 13) have an OCR of
less than 10%. This clearly demonstrates that OCR is generally higher in case of 3-tier
federations as compared to 2-tier federations, due to compounding of operating costs. In
those Federations that are not receiving any grant funds to meet the operational costs, and the
costs are higher than incomes, there is a decapitilisation.

With the operational costs being higher for the Federations, the Operational Self Sufficiency
(OSS)14 of the Federations range from 24% – 98%, (average is 79.7%) with a couple of
exceptions, on the higher side. As expected, the 3-tier Federations have a low OSS as
compared to the 2-tier Federations – eight of the fourteen 3-tier Federations have an OSS of
less than 60%, while it is so for only one 2-tier Federation.

For the VOs the OSS is between 57% - 125% (average is 105%), with one exception of
211%. While five Federations (out of 24) have an OSS greater than 90%, VOs of 9
Federations (out of 13) have an OSS greater than 90%, of which VOs of six Federations have
an OSS greater than 100%.

Interestingly, there is an inverse correlation between the OSS of Federations and VOs. As the
OSS of the Federations goes down, the OSS of the VOs increases. This is so because, the
OSS is dependent as to who meets the salaries of the VO staff and para professionals
employed by the Federation in the 3-tier structure - the VO or the Federation.

                                          OSS of VOs and Mandal Samakyas


                           1     2    3      4     5    6     7     8      9   10   11    12    13

                    OSS at VO Level              OSS at MMS Level

As in the case of the OSS, the Financial Self Sufficiency (FSS)15 of the 3-tier structure
Federations is less than that of the 2-tier Federations. Ten of the fourteen 3-tier Federations
have an OSS of less than 40%, while it is so in the case of three (out of ten) 2-tier
Federations. Except in the case of one Federation, VOs have an FSS more than 50%. VOs of
7 Federations (out of 13) have an FSS of more than 75%, of which VOs of four Federations
have an FSS greater than 90%.

  Ratio of the total income to the total expenditure during the year
  Ratio of total income to total adjusted expenditure for the year. Adjustments are made for subsidized cost of
funds (w.r.t market interest rate), equity (w.r.t. inflation) and in-kind donations.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                                       19
4.1.6. Systems & Operational Processes
The Accounting System being practiced is inadequate in many Federations, is complex and
multiple cash books are being maintained – one for each activity/fund source. This practice of
multiple cashbooks, and at times multiple bank accounts lead to huge cash (idle) balances.
The books of accounts are generally not up-to-date, and in six Federations only Cash Book is
maintained, General Ledger is absent.

In the Federation structure (SHG – VO - MS) data is available at all levels and moves from
SHG to VO to Federation. However, it lies as data and is not processed, analyzed and
reviewed. There is absence of two-way information flow. Information flows from SHG 
VO  MS but not vice versa. In all the Board meetings (Federation & VO), activities and
expenditure are reviewed. However, activities are not reviewed against plan and similarly
expenditure is not reviewed against budget. Default tracking system is not in place.

4.1.7. Federations
– Federations have strong leadership. Leaders are well articulate and understand their roles
    and responsibilities. However, there is no focus on second level leadership.
– Attendance in meetings is reasonable and is 78% on average. Fifteen of the 24
    Federations have an attendance equal to or greater than 80%.
– Good fund availability – more than Rs 13,800 per SHG. This is quite good when seen in
    light of the per group finance of Rs 22,322/- by NABARD in FY 0216.
– Repayment performance is related to attendance in meetings and quality of Leadership.

4.1.8. Village Organisations of UNDP
– Leaders are aware about SHG performance
– Attendance in meetings is similar to that in Federations and is 77%, on average
– VO staff have basic education and “technical” skills
– Excellent fund availability – Rs 27,900/- per SHG
– Fund management is good. Idle funds are low in majority of the cases and in some cases,
    almost non-existent.
– As mentioned earlier, repayment of external loans is good.
– There is a limited awareness on social issues and development programs. There is a
    marked increase in political consciousness, and many are voting in elections. In some
    instances, SHG members have contested in elections to Village Panchayat and Mandal
– The VO Board and staff have limited capacity to conduct training, to help improve the
    SHG performance.
– Systems to monitor SHG performance are not adequate.
– There is a need for better bookkeeping and accounting systems at the VO level.
– The VO is highly self-reliant in managing its affairs, and rarely depends on the Federation
    and/or promoter for its day-to-day functioning.
– In many of the 2-tier federations, Federations are lending directly to individuals. In some
    of the 2-tier federations, SHGs function more as groups, which collect savings and loan
    repayments on behalf of the federation.

     NABARD statistics of its microfinance operations in Andhra Pradesh

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                      20
4.1.9. Mandal Samakya vs Village Organisation
The following table provides average values of some of the key financial parameters for the
Mandal Samakyas and VOs.

         S#             Parameters                    MS             VO
          1    Idle Funds                            14.4%           5.3%
          2    Recovery Rate                         77.0%          73.7%
          3    Portfolio At Risk (> 90 days)         33.0%          23.7%
          4    Operating Cost Ratio                  18.8%          14.3%
          5    Operational Self Sufficiency          59.0%         106.1%
          6    Financial Self Sufficiency            35.8%          76.8%

It may be observed that the VOs are more efficient in fund management while having lower
operational costs, which helps them have a better Financial Self Sufficiency (FSS) and
Operational Self Sufficiency (OSS). Recovery Rates are lower and Portfolio At Risk (PAR) is
higher at VO level when compared to the Mandal Samakya, more because at times, VOs
repay to Mandal Samakya from their own funds.

As mentioned earlier, VO leaders have a greater understanding of the performance of the
member SHGs, and are more member-driven and managed compared to that of the Mandal
Samakya which is more leader and/or promoter driven. It is also observed that, at the VO
level, the staff are accountable and managed by the VO leaders where as in the case of
Mandal Samakya, staff generally are deputed from the promoting organisation, are more
knowledgeable than the Board members, and hence generally “patronizing” towards the
Board and accountable to the promoting organisation.

VO functioning is less complex in nature, as it does only financial intermediation to a large
extent. This facilitates recruitment of local individuals as staff, who with some training are
able to meet the minimum requirements of the VO.

4.1.10. SHG
– Almost all (85%) SHGs are homogeneous. Members come from similar socio-economic
    background, and are from the same neighbourhood.
– The primary objective/purpose of coming together is credit
– Meetings are regular, but attendance is low (76%).
– Adequate records are maintained, but accuracy in recording information is low.
– SHG members are well aware about functioning and activities of the SHG and VO.
– In majority of the SHGs, all transactions are within the group.
– Limited leadership rotation. Many a time leadership is based on considerations like who
    can afford time to participate in meetings at the VO, transact with the bank etc.
– Almost all SHGs provide multiple loans to their members. It is also noticed that many a
    time, the leaders take either more number of loans or a large chunk of the portfolio as
– SHGs have good availability of funds, irrespective of bank linkage. Average availability
    is in excess of Rs 25,000/- per SHG. These funds comprise of member savings, loans
    from VO/Federation, Banks and other Financial Institutions (FIs).
– Idle funds are low (less than 6%) or almost non-existent.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                          21
– As is seen with the VOs, repayment of external loans is good, and almost 100%.
– Though there is limited awareness on social issues and government development
  programs, there is an increased political consciousness. Almost all eligible members go in
  for family planning operations. However, there is limited awareness of birth spacing
  methods. Focus on children’s education, personal health & hygiene has improved.
– SHGs have limited linkages with external agencies and limited to Financial Institutions.
– SHGs are highly self-reliant in managing their affairs

4.2. Conclusions

Governance is a key area, which requires immediate attention. Leadership rotation, without
giving adequate time for the leaders to understand the functioning of the Federation and its
intricacies, would result in the Federation being directed more by the promoters and staff.
Federations and Village Organisations are being registered under the APMACS Act, and
almost all Board members are unaware of the bylaws and compliance of the same along with
compliance of the APMACS Act. In certain situations, legally, the Board ceases to exist, due
to noncompliance of the Act, which could create a legal problem. This assumes importance,
not just in terms of legal compliance, but also in terms of operational issues like accessing
external loans. Staggered rotation of the Board members, as in the case of the Rajya Sabha,
would ensure continuity in decision-making and hand holding of the new Board members by
the older members.

Second line leadership development is not being given emphasis, particularly at the
Federation level, and promoters seem more comfortable to work through the staff, who are
articulate and are more comfortable in “understanding” issues. This hampers knowledge
development of the Board members, and also leads to staff domination at a later stage. It has
been noticed that the Federation staff, while competent and efficient, see themselves as being
accountable to the promoting organisation, rather than to the Board.

Promoter philosophy has a major influence on the range of products and services offered by
the Federation. Dependency on the promoting organisation is another cause for lack of
emergence of leadership, as the promoters drive many a time, the strategies and activities and
the Board has limited role to play. Where the promoter is more of a facilitator and not a
manager, the quality and range of services seem to improve at a slower pace. However, these
are the Federations, which are more member-managed, as their pace is relative to the Board
capacities. Where staff is recruited locally, though capacities are low, they are more
accountable to the Board. The promoters are paying limited attention to improve the
capacities of the Board and staff.

Coverage: Efforts at improving target population coverage, as compared to geographical
coverage would also help influence emergence of an institution, which is more cohesive,
member-sensitive, viable, sustainable and replicable. Where the Federation is located at the
Mandal head quarters, due to coverage of a large geographical area, the Federation Board is
not aware about the status and performance of the SHGs. Absence of a simple, user friendly
MIS accentuates this.

Lending: As the Federations start seeing themselves more as Financial Institutions, direct
lending to members and bypassing the SHG starts becoming the norm. Lending through
SHGs ensures that SHG continues to be the building block of the Federation, and not lose

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                      22
relevance. Across Federations, it is noted that SHG members have simultaneously taken more
than one loan, and many a time differentiation is made between loans from SHG funds and
loans from Federation/Bank funds. SHG leaders use their influence either to take a larger
chunk of the SHG loan portfolio or take more number of loans simultaneously.

Where fund mobilization in Federations is high and credit is the primary service, there is a
limited focus on SHGs. Federations function more as Financial Institutions interested in
giving loans and recovering them rather than focus on the SHG performance, which is its
building block. It has also been noted that recovery rates have an inverse relationship with
idle funds, which indicates that Boards are vary of lending when recovery rates drop.

Capital Adequacy at the Mandal Samakya level (122% for the UNDP Federations) being
high as compared to the low capital adequacy at the VO level (26.8%) emphasises the fact
that donated equity is at the Mandal Samakya level, and this probably explains the sense of
“security” in the Federation and the resulting less focus on SHGs. Also, this probably
explains as to why in a 3-tier structure, strengthening of SHGs is given less importance.

Recovery rates being high at the Mandal Samakya level compared to the VO reinforces to
the fact that the Mandal Samakyas are more focused on loan recovery, as is the case with any
Financial Institution. It may be noted that the average recovery rate in the 3-tier structure is
higher than that of the 2-tier structure. This probably explains the higher Operating Cost
Ratio of the 3-tier structure, as more resources go into loan recovery.

Two way communication, instead of the current bottom-up only data transfer, would help in
SHG members being more aware about the Federation activities and functioning, and would
help facilitate emergence of second line leadership. It is noted that many a time there is a data
transfer between the SHG  VO  Federation. However, this data is not shared in a format
that would help the Board analyze the information and understand the performance of the
member SHGs/VOs.

Systems and Operating Processes is another area requiring immediate focus. Quality and
regularity of book keeping and MIS are the two major areas which need to be improved.
Though the records maintained at the SHG level are adequate, accuracy and timeliness in
recording information is low. With Federations handling multiple activities, and geared to
play a major role in the social and economic empowerment of women, having strong systems
would help in building institutions with long term sustainability. SHGs being the building
block of the structure, a simple and user friendly MIS would help in the Village
Organisations and the Federations to understand the status of SHGs better and work towards
strengthening the SHGs, by providing appropriate capacity building inputs and interventions.

Better book keeping, coupled with a regular review of plan vs. progress and budget vs.
expenditure would help achieve the goals and objectives of the Federation. Improved fund
management and a system of tracking loan overdue would help in the VOs and Federation
achieves a better OSS and FSS.

SHG member awareness about and control of the Federation seem to be dependent on the
distance/proximity of the Federation from the member and the number of tiers in the
structure. The SHG members are more aware of the VO functioning and are almost unaware
of the Federation functioning, in a three-tier structure. Also, where the Federation is located

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                        23
at the Mandal Headquarters, which is normally not frequented by the members, member
awareness about the Federation functioning and activities seem to be low.

To conclude, the important areas for a sustainable member-owned member-managed micro
finance institution are the role definition of the Village Organisation and the Mandal
Federation. Leadership and Governance, coupled with robust and user-friendly systems, also
help in their creation.

4.3. Recommendations

Based on the assessment findings, parameters like PAR, idle fund, OCR, OSS and FSS show
a better performance at the VO level, as compared to the Federation. Coupled with the better
financial performance, greater understanding of the SHG performance at the VO level, and
the scope offered for member-control, it may be appropriate for the SHGs to federate at the
village or cluster level and form a Village Organisation (VO). While forming VOs,
proximity and number of groups should be the deciding factor. The Village Organisation
should act as the financial intermediary. Such a system would improve financial viability of
the VO.

SHGs may federate at the Mandal level to form an independent but interdependent
Federation, to play the role of a catalyst to bring about social change, functions like an
NGO/PIA (Project Implementing Agency) and focus on strengthen the VOs & SHGs. This
would help the social agenda not getting mixed with the financial activity, and thereby not get
diluted. Such a Federation would also help creation of a pressure group of the members, to
ensure proper functioning of the Village Organisations. This Federation may not be a viable
entity, and may depend on grant funds for it’s functioning, while also raising resources on a
fee-for-service basis from the VOs and SHGs.

Such a system, with the concept of a Representative General Body providing for SHG to be
the building block of the Federations would help the Village Organisations and the
Federation to have a clear vision and role clarity. Federations should look beyond financial
intermediation and focus on social change, at the individual level.

Efforts should be made to ensure attendance at all levels (SHG, VO and Federation) to be in
excess of 90%, at all times and have a compact Board with the members not exceeding 12.
Leadership, Governance and Participatory Decision making are making a perceptible
difference in the functioning and performance of these microfinance institutions, and
therefore, should be strengthened.

Promoters may wish to look into the aspects of compulsory leadership rotation and offering
of various savings products. The aspect of offering various savings products (eg Fixed
Deposits, Recurring Deposits, Voluntary Savings) by the Village Organisation may be
thought of, considering the complexities (of managing cash flows) involved and capacities of
the VO Board and staff. The aspect of mandatory leadership rotation may be looked into,
considering that good leaders are not available easily, and it would take time to groom second
level leadership.

Across the organizations, there is a serious problem of good accounting, monitoring and
MIS. For the financial institutions to run efficiently and effectively, accurate and up-to-date

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                       24
accounting and reporting is necessary. The capacities of the Board of Directors of Federations
need to be built to interpret the financial statements such as balance sheet, receipts and
payments and income & expenditure statement.

Building large number of institutions of the poor requires adequate availability of
professionals with adequate knowledge, skills, competencies and experience. The available
human resources for facilitating emergence of SHG Federations in the form of clusters,
village organizations and higher level federations. There is a need to make significant
investments in developing professionals and para-professionals to escort the emerging SHG
Federations. Capacity building, including on-the-job support and exposure visits, needs to be
provided to the staff of the Federations and members of the federations on an on-going basis
to enhance the function of the federations.

While networking has distinct advantages, it also has several disadvantages. It is absolutely
critical that these federations are built based on the felt need of the members through a
process-oriented approach. The promoters need to have long-term vision on developing
sustainable institutions of the poor. While SHGs are informal groups, SHG Federations
registered under an appropriate legal form have a body corporate status. Building such
institutions is complex, time consuming and resource intensive. The task becomes even more
challenging if these institutions are to be owned and managed by the poor women. The
institution building task become tougher as these poor women have to own and manage
financial institutions. The processes and systems must result in these federations eventually
become self-managed. Perpetual dependence of the Federation on the promoting organization
is not desirable.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                    25
                        5. Emerging SHG Federation Model

In AP, a three-tier structure is emerging as the SHG Federation model. In AP, various SHG
Federation promoters like DHAN, UNDP, Velugu project and some NGOs have chosen a
three-tier model of SHG – Cluster/Village Organization – Federation. The SHG is the
primary unit and the building block of the SHG Federation model. The SHGs, 15-25 in
number, are federated at the village/cluster level as a Village Organisation (VO). These VOs
then federate at the mandal level as a Mandal Samakya (MS).

5.1. SHG - the building block
As already discussed, 10-20 women form an SHG. Studies conducted periodically by
MYRADA, other organisations and individuals indicate SHGs have several positive features
that are the building blocks of self-reliance and empowerment. The positive features are:
- Cost effective credit delivery mechanism
- Provide individual member with the flexibility required over timing, size and schedule of
- Collective learning forum
- Promotion of democratic culture where rights are responsibilities are equally valued and
    internalised; and where sanctions are imposed and accepted
- Firm and stable base for dialogue and cooperation

In addition to being channels for accessing credit and participate in development programs of
the government, the SHGs provide opportunities for women to actively participate in
activities, which are micro in size, while leading to socio-economic and political
empowerment. SHGs have the potential to provide space and support so that each of its
members can identify and use opportunities for her empowerment both in private and public

5.2. Village Organization
Village Organisation, the federation of SHGs is formed at the village/habitation/cluster level
depending on the number of SHGs. In some cases where there are a large number of SHGs in
a single village, more than one VO may be formed. With the lessons learnt in UNDP and
Velugu, the financial intermediation is to be vested with the VO. The VO will have the
following responsibilities, to complement and support the initiatives of its members.
 Capacity building of SHGs
 M&E of SHGs including SHG grading
 Audit of SHG accounts
 Prepares household investment plans to identify the services required
 Access bulk loans from Banks and development projects for on-lending to member SHGs
 Establish linkages with line departments and NGOs for services

The members of SHGs constitute the general body and SHG representatives will be on the
Board/Executive Committee (EC) of the VO. The EC will elect its President and Secretary.
The VO may be registered under the APMACS Act.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                    26
5.3. Mandal Samakya
Mandal Samakya (MS), the federation of VOs at mandal level, is currently registered under
the APMACS Act. MS is expected to be a social intermediary, and take up the responsibility
for advocacy and capacity building of VOs. MS is also expected to facilitate linkages for
SHGs and VOs with Banks and other financial institutions without getting involved in
financial intermediation. The objectives of the MS being primarily social, a more appropriate
legal form would be a Public Society.

The other activities of MS may include:
 Work on various social issues which are context specific
 Provide Social Risk Management services
 Take up advocacy on macro issues of development at mandal/district level
 Monitor the performance of member VOs and grading of VOs
 Manage the Human Resources
 Networking and Promotion of VOs
 Market linkages and Business Development Services (BDS) for livelihood promotion
 Promotion & Development of Commodity Cooperatives
 Linkages with Government Programs

There are several limitations observed of MS in the earlier experiences such as SHGs and
VOs being neglected, over dependency on NGO/Promoters, financial non-viability and
subservience of SHGs to federations. However, with clarity of roles and responsibilities, it is
expected that the concerns of the women in SHGs be addressed comprehensively.

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                     27

APMAS, 2002, “Study of SHGs in AP”, Hyderabad, India

Ajay Nair, 2002, “Sustainability of Microfinance Self Help Groups in India: Would
Federating Help?” Princeton University, USA

Ajay Tankha, 2002, “Self-help Groups as Financial Intermediaries in India: Cost of
Promotion, Sustainability and Impact”, New Delhi, India

BASIX, 2000, “Savings and Credit Movement of Andhra Pradesh, Lessons for the Rest of
India”, Hyderabad, India

CDF, 2000, “Saving for a better tomorrow …”, Hyderabad, India

CDF, 2001, “Saving forever…” Hyderabad, India

DHAN Foundation, “Building Nested Institutions of Savings and Credit Groups: Kalanjiam
Experience”, Madurai, India

MYRADA, 1998, “The MYRADA Experience - Alternate Management Systems for Savings
and Credit of the Rural Poor”, Bangalore, India

NABARD, 2002, “Banking with the poor – Financing Self Help Groups”, Hyderabad, India

NABARD, 2002, “Ten years of SHG-Bank Linkage (1992-2002)”, Mumbai, India

SERP, 2002, “Progress Report (June 2000 – March 2002) Andhra Pradesh District Poverty
Initiatives Project”, Hyderabad, India

Status of SHG Federations in Andhra Pradesh – APMAS Assessment Findings                 28