GOVERNMENT OF ANDHRA PRADESH
National Bank of Agriculture and Rural Development (NABARD) - Working Group of
financing SHG Federations/MACs/MFIs - For securing financial assistance from banks to
support SHG members - Orders - Issued.
PANCHAYAT RAJ AND RURAL DEVELOPMENT (RD.III) DEPARTMENT
G.O.Ms.No.237 Date: 30-07-2003.
Read the following:
G.O.Rt.No.625, PR&RD (RD.III) Dept., dt.19.04.2002.
From the Chief General Manager, NABARD, D.O.Lr.No.NB/ HYD/1846/
From the Commissioner, WE&SE, Hyderabad, Lr.No.3919/ WE/DWCRA(2)
O R D E R:
The State of Andhra Pradesh has been a trendsetter in promotion and credit linking of
Self Help Groups. With the emergence of new institutions like SHG
Federations/MACS/MFIs in micro finance scene of Andhra Pradesh, it is Imperative for
banks and promoting institutions to understand the evolutionary patterns of SHGs and
appropriately position their services. NABARD organized a State Level Consultation on
SHG Federations/MACS/MIFIs at Hyderabad on March 14, 2002 to promote consensus
among various parterns in SHG Bank Linkage Programme on aspects relating to different
micro finance structures, their styles of functioning, various financial and non-financial
services offered and their strengths and weaknesses so as to develop suitable strategies to
harness their potential. As a sequel to the deliberations at the Consultation, Government
of Andhra Pradesh constituted a Working Group vice their Government Order No.625,
dated April 19, 2002 with the following terms of reference.
To deliberate and ecide the norms for selection of SHG Federations/MACS/MFIs
for financing by banks.
To suggest various options for banks to finance SHG Federations/MACS/MFIs
together with terms and conditions appropriate for such credit products.
To recommend various capacity building measures required for SHG
Federations/MACS/MFIs to enable them to achieve the benchmarks.
2. The Working Group has finalized its report after detailed discussions with all the
stakeholders. Working Group has suggested an institutions building methodology to
ensure that Self Help Group is a building block of the Federation even while ensuring
that it operates within the limit of AP MACS Act 1995. These recommendations were
discussed at a Workshop at Hyderabad during July 19-20, 2002 involving leaders and
functionaries of SHG Federations/MACS/MFIs besides other stakeholders. State Level
Bankers Committee has accepted the financing guidelines recommended by the Working
Group and advised member banks to initiate measures to circulate the same among their
branches operating in Andhra Pradesh.
3. Government after careful examination of the recommendations of the Working Group
have decided to adopt its recommendations as given in the annexure which will be
followed by different departments / agencies promoting SHG Federations with a view to
securing financial assistance from banks for supporting member of Self Help Groups.
(BY ORDER AND IN THE NAME OF THE GOVERNOR OF ANDHRA PRADESH)
SPECIAL CHIEF SECRETARY TO GOVERNMENT.
The Commissioner, Women Empowerment & Self Employment, Hyderabad.
The Chief Executive Officer, Society for Elimination of Rural Poverty, Hyd.
All District Collectors in the State.
All Project Directors in the State.
Principal Secretary to Government.
Finance and Planning Dept.
PS to Chief Secretary to Government.
PS to Special Secretary to Chief Minister.
Addl.P.S.to Minister, EG, DWCRA & Velugu.
PS to Minister (PR).
PS to Special Chief Secretary to Government (PR&RD)
PA to Additional Secretary to Government (RD)
// FORWARDED BY ORDER //
The goal of networking SHGs into a SHG Federation is promotion of stable growth
oriented self-governed human organization that responds to socio-economic aspirations
of the community it serves and is also able to internally meet all its expenses in a
The process of Institutional building should follow consistency principle and adopt set of
all those practices that go to promote organizational efficiency and effectiveness,
particularly in the following areas:
Strategic posture of the Federation
Constitutional orientation of the Federation
Products & Services.
Systems and Procedures.
SHG AS BUILDING BLOCK IN SHG FEDERATION
Institution building methodology has to ensure that SHG remains the building block of
the Federation, even while it operates within the ambit of AP MACS Act 1995. To
achieve this, appropriate provisions in the byelaws of SHG Federation in the following
areas has to be made.
Membership: While full membership could be given to individuals as per the
requirement of the law, the voting and ownership rights could be divorced from it
and conferred on SHG basis. At the same time nominal membership could be
extended to Self Help Groups as an operational arrangement of the society to deal
with full members.
Ownership: Ownership pattern or shareholding pattern could also be decided on
Self Help Groups basis to equalize the influence of individual members with a
Self Help Groups on the hand and various Self Help Groups on the other. Again,
the shareholding pattern could be split into two portions. While the first one will
confer rights and obligations, the other one will decide the entitlement of member
Self Help Groups for accessing financial and other services from Federation.
Rights and Duties: Rights and duties of members could be so determined as to
flow from their membership in Self Help Group concerned, while the SHG itself
will not have any rights even as a nominal member.
Voting Rights: In order to neutralize the dominant influence of Self Help Groups,
a clause to provide equal voting rights to all groups irrespective of their
shareholding pattern, size of membership and standing. In other words, all
members have equal rights within Self Help Groups (protecting Sec 3(b) of the
Act) and all groups will have equal rights across the Federation.
Representative Governance: Representative character of SHG Federation can be
ensured through a mechanism of Representative General Body or Board of
Directors where each Self Help Group (Instead of the separate individual
members) will nominate their member(s) as a delegate in the governance
Access to services by SHG: The Federation should provide access to its financial
and non-financial services primarily to Self Help Groups. This will also not
contravene the provisions of the Act where Self Help Group will be an
operational arrangement to deliver services to member groups. However, it can
also design a few financial products catering to higher end of micro finance
market that necessitate individual saving/lending.
Accounting Unit: Since the ownership and access to financial services will be
made on SHG basis, the acid test deciding the federal character of SHG
Federation will be the unit of accounting. Accordingly Self Help Group is made
an accounting unit in order to articulate the rights and liabilities of Federation
MODEL BYELAWS AND STANDARD ACCOUNTING PACKAGE
To ensure certain amount of uniformity in basic structure that meets both, the
requirement of law as also aspirations of member Self Help Group. Byelaws and
Standard Accounting Package encoding the best practices have been prepared by the
Working Group. At the same time, adequate flexibility has been given to Federations to
improvise their systems and procedures to best serve the interest of their constituents. The
Byelaws and Standard Accounting Package have been separately prepared for small
Federations operating at Village Level and large Federations functioning at
Cluster/Mandal Level. The institutions promoting SHG Federations will be guided by the
GUIDELINES FOR FINANCING SHG FEDERATIONS/MACS/MFIs
These guidelines are applicable to Self Help Group Federations with following features
that were considered Non-Negotiable. These include:
The Federation that has only Self Help Groups as its constituents. In other words,
they are primary Federations.
The Federation whose area of operation is confined to the boundaries of a
The Federation whose membership does not exceed 500 Self Help Groups for
Cluster/Mandal level Federations and 30 Self Help Groups for Village/Cluster
The SHG Federation should demonstrate a track record of minimum two years in the
Continuous thrift and credit activity from own funds.
Operating Profit from thrift and credit operations.
Commitment to democratic governance.
Approval of duly audited accounts in annual general meetings.
However, for village/cluster level Federation with membership not exceeding 30 Self
Help Groups, the minimum period of track record could be reduced to one year.
No SHG Federation should have on its Executive Committee or Board of Directors a
member who is concurrently holding a political office.
COMPLIANCE TO LAWS AND BYELAWS
Considering that SHG Federations manage financial resources of both members and
supporting institutions, substantial public interest is involved. Further, wide dispersal of
SHG Federations across the State with near absence of any supervision or regulations
mechanism for their financial operation, SHG must comply with provisions of law in the
first instance. Similarly uniform disclosure norms / methods coupled with commonly
accepted performance benchmarks will usher the concept of Self Regulations among
them. Accordingly, these have been made internal to Guidelines for Financing SHG
Federations. These include:
Registration of SHG Federations: The SHG Federation should have been duly
registered under any relevant State or Central enactment that not only facilitates
but also casts, clear responsibility upon them for prudential financial
intermediation. Most Federations in Andhra Pradesh have been registered under
Andhra Pradesh Mutually Aided Cooperative Societies Act 1995. The promoting
agencies may discourage unregistered Federations, as they do not have capacity to
enter into legal obligation.
General Body Meeting: The Federation should have convened Annual General
Meetings, Representative General Body Meetings in accordance with the
provisions of law in any case, the Federation should have conducted at least one
Annual General Meting within a period of six months from the close of
Elections: Elections for filling up various posts must have been held in the
manner specified in the byo-laws of the Federations.
Board Meetings: The Federation should have convened meeting of it Board of
Directors on regular basis at least once a month in previous two years. The
discussions at such meetings should have structured agenda and the minutes of the
discussions be recorded properly.
Audit of Accounts: The federation should have got their accounts audited by a
Chartered Accountant during last two years and placed the audited financial
statements before its General Body within a period of six months form the close
of relevant accounting year.
Disclosure of Accounts: The Federations should follow the disclosure norms
suggested by the Working Group while finalizing their financial results. Further,
whey may be encouraged to disclose present their duly audited financial
statements as per the common chart of Accounts approved by the Working Group
given in annexure, similarly, Auditors for Federations may be guided by these
norms while issuing their Audit Certificate.
Filling of Returns: The Federation should have field annual returns before the
statutory authorities in accordance with provision of relevant laws. They are
generally required to file returns within 30 days.
Rating of Self Help Groups: The Federation should undertake rating of their
constituent Self Help Groups as per the Critical rating index and at least 75% of
the groups should have been rated as ‘A’ Category.
Share Capital Mobilization: The Federation should have mobilized the share
capital in full from the members Self Help Groups and ensure that there is no
arrear in its collection.
Minimum Capital Requirement: SHG Federation must, therefore, maintain core
capital to a minimum extent of 20 percent of its loan assets during the previous
one year. Here the core capital refers to the net position of capital after deducting
losses and investments of SHG Federation in share capital of higher finance
agencies. Since several Federations will not be able to meet this benchmark
immediately, this ratio would be worked out in relation to own funds employed
(i.e core capital + Donated equity) for a period upt March 31, 2005. This would
encourage them to progressively raise their core capital over a three-year period.
Level of Savings (efficiency in thrift collections): The efficiency of SHG
Federations mobilizing compulsory thrift is reflected in the collection of such
thrift amounts. The efficiency in thrift collection is also measured using the
formula – Level of Savings _ Total cumulative thrift / (No.of member SHGs X
No.of months X monthly savings). This benchmark has been fixed at 90% of the
pre-determined amount. In other words, the level of Savings should be at least
Liquidity Reserve: SHG Federations mobilizing compulsory of optional savings
from constituent Self Help Groups of individual members in Self Help Groups,
must maintain a liquidity reserve in the form of investment outside the business,
preferably in fixed deposit receipt, to the extent of at least 10% of the deposit
outstanding obtained as on the least working day of previous quarter. SHG
Federations should meet this benchmark by March 31, 2004.
Velocity of Lending (Loaning Efficiency): The velocity of lending reflects
loaning efficiency of the SHG Federation. This is measured using the formula:
Velocity of Lending = Cumulative loan disbursements / Working fund. The
rotation of minimum 1.5 times of the working fund to the loan or loans to
constituent SHGs will augur well for a Federation well for a Federation having
lending experience of more than 2 year.
Repayment performance: The Federation should also demonstrate a minimum
repayment performance of 90% as at end of previous accounting year.
Asset Quality: The Federation should have at least 95% of their loan assets in
Loan Loss Provisions: SHG Federation should make adequate provision against
non performing assets (to the extent of total loans outstanding) on the following
o For loans overdue between 90-120 days – 25%
o For loans overdue between 120-180 days – 50%
o For loans overdue for above 180 days – 100%
Operating profit: SHG Federation should have made operating profit form its
thrift and credit operations in the previous year. The income should be recognized
by the Federation on accrual basis in respect of performing assets only and
adequate provisions made for non-performing assets.
Self Sufficiency Indices and performance Ratios: The micro Finance
Institutions must plan their portfolios to earn adequate income (particularly
interest income) to meet their operational costs and cover their financial expenses
and risks. Since most SHG Federations are in the initial stages of evolution,
setting of benchmarks in this regard will be considered subsequently. However,
independent assessment by financing and other supporting agencies must cover
evaluation of those indices.
TYPES OF FINANCIAL ACCOMMODATION THAT BANKS CAN OFFER
The banking system could offer financial accommodation in the form of term loans,
revolving fund limits or cash credit limits. However, the nature, indent and type of
financial accommodation will depend upon the growth plans and pattern of cash flow of
micro finance institutions.
The credit decision for extending financial assistance to an SHG Federation will
generally be based on strengths of its financial systems and procedures and procedures
and attractiveness of the project. A financing bank could determine the maximum
permissible bank finance to SHG Federations as the least option lf the following five
Project Estimates – The bank finance will be primarily guided by the resource Gap
projected by SHG Federation. Phasing of lending programme and the cash flow estimates
of the project will reveal if latter part of the programme can be met partly out of resource
build up in the system in normal course.
Maximum borrowing power prescribed in the byelaws – Any financing in
excess of the borrowing power will be considered ultra-vires. The borrowing
power is generally linked to multiples of capital or own funds position in the
byelaws of the Federation. Hence, this factor becomes critical in determining the
Capital Fund Multiplier (4X): Shareholders funds in the system will have direct
bearing on its borrowing power. While on one hand minimum capital requirement
will determine the aggregate ability of the institution to mobilize external
resources. Net Owned Funds position will limit the exposure a bank could have
for a micro Finance institution on the other. The maximum permissible bank
fiancé is therefore fixed to four times the Capital Funds deployed by SHG
Federation obtaining as at the close of the previous year.
Working Funds multiplier (2X): Similarly, the aggregate fund under rotation
indicates the carrying capacity of the micro Finance Institution. Bank finance is
linked to twice the working fund of SHG Federation obtaining as at the close of
the previous year.
Cash flow Multiplier (10X): The bottom line for credit estimation is perhaps, the
ability of the micro Finance Institution to assimilate and manage loaned funds.
This is directly reflected in their management of monthly collections and
disbursements position (cash flow) cash flows. The limit of finance is fixed to ten
times average monthly cash flows or an amount equivalent to total fund
collections made by the SHG Federations in last ten months.
TERMS OF CREDIT
Policy regime for mF sector has been quite liberal in terms of interest rates, margin and
security margin norms. However, the terms of credit extended by banks to SHG
Federations will be guided by instructions given by Reserve Bank of India on the subject
from time to time.
Detailed instructions for financing SHG Federations / MACS /MFIs is by banks will be
being circulated to member banks with the concurrence of State Level Banker
MONITORING OF BANK FINANCE TO SHG FEDERATION / MACS / MFIs
The promoting institutions and financing Banks should develop suitable systems for joint
monitoring of bank finance.
TRAINING OF SHPLS AND BANKERS
NABARD will conduct a series of workshops and sensitization programmes for Self
Help Promoting Institutions and banks for facilitating credit linkages for SHG
Federations / MACS/ MFIs.
SPECIAL CHIEF SECRETARY TO GOVERNMENT
// FORWARDED :: BY ORDER //