Financial Intermediation of Microfinance NGOs - An Alternative Role in the Credit Delivery System - A Study in the Indian Context

Abstract

Banks are basically commercial organizations. Hence, they were initially hesitant to reach the large number of poor strewn all over the country requiring access to credit. Grass-root level initiatives on the part of several voluntary organizations/NGOs thus became necessary to overcome the resistance of the banks. Taking the lesson from the experiences of other developing countries like Bangladesh, a combination of formal and informal financial intermediaries was suggested to take a lead in providing sustained and valuable services to the rural poor. As such, a supplement credit delivery system has been developed by encouraging microfinance NGOs to act as facilitators and intermediaries. Currently the micro credit sector is dualistic in nature. The formal structure has a legal and regulated component, which provides credit and other services to the non-formal sector. The non-formal structure largely comprising NGOs operates outside the legalized structure. Thus, in the matter of micro finance to poor, the banks, micro credit institutions and the NGOs have become intermediary agencies. This partnership has broadened the infrastructure for credit delivery resulting in increased outreach. With a view to develop a supplementary credit delivery mechanism to reach the poor, the SHG-Bank Linkage Programme in 1992 was introduced. Microfinance through SHGs is propagated as an alternative system of credit delivery for the poorest of the poor. The SHGs, Banks and the NGOs are three agencies on the constitution of the SHG-Bank Linkage Programme. In the evolution of an alternate credit delivery system, the banks and NGOs have certain specific strengths of their own. Accordingly, the bank-NGO collaboration under the alternative credit system aims at forging a synergy which will complement the role of one another. As such, the NGOs have become a formal interface between SHGs and the banking system. Under the SHG-Bank Linkage Programme also, lending to NGOs for further on lending to SHGs has been recognized as a legitimate financial intermediation activity of the NGOs more recently. In the credit delivery process, the NGOs have emerged as a key player in the field of micro credit. The role of NGOs has evinced as facilitator on the one hand and as intermediary on the other hand. As a facilitator, their role is limited to non-financial services, whereas as an intermediary, the role is similar to that of a bank in credit acquisition and credit disbursement. The NGOs establish a link with the banks for the acquisition of funds and a link with SHGs in credit disbursement. This has brought the poor into the formal banking system of the country. As such, the NGOs have been acting as a financial intermediary between the microfinance institutions and SHGs. In this context, an attempt has been made to evaluate the role of NGOs as financial intermediary in the credit delivery system.