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Although it is important to motivate cluster actors and make them aware of the benefits of formal credit, it is also necessary to caution them of its limits. Expectations of the usefulness of credit may in some cases be excessive. It must therefore be ensured that cluster actors understand the responsibilities associated with taking credit and do not confuse bank loans with government grants, which do not have to be repaid. It should also be emphasised that money does not necessarily need to come from external sources and that their own savings and retained earnings can go a long way.
v) Training for Poor Cluster Actors In order for SHGs to maximise the benefits of bank linkage, groups must obtain information and training on a variety of issues. In addition to being familiarised with the concept of the SHG-Bank Linkage Programme, cluster actors must be trained on issues such as rules and rationale for internal lending, responsibilities of group leaders, bank procedures and administrative requirements. They will also need to be made aware of the different financial services available so that they can make an informed decision. Since experience has shown that the quality of groups is a crucial determinant of SHG sustainability and later repayment rates, group cohesion should be stimulated whenever possible - particularly in the early stages of SHG formation.
In a UNIDO project in Kota, Rajasthan, SHG members were initially reluctant to save jointly. Trust levels were low and since only three members had signing authority for the account, the others feared that they would secretly take the money. The CDA therefore had to spend considerable time in explaining the functioning of banks and that all transactions are recorded. Eventually, the members recognised the advantages of saving in a bank: they were less tempted to draw on their savings than if they were hidden at home and family members could not simply take them.
From the beginning, it should be ensured that groups are aware of and do well on those issues on which they will be graded for bank linkage. All SHG members ought to know why the individual criteria are important for their functioning and why bankers put emphasis on them.
The fact that many SHG members are illiterate can hamper the quality and regularity of book keeping. The unreliability of SHGs’ books endangers the survival of SHGs and may thus contribute to banks’ reluctance to serve SHGs. It must therefore be ensured that bankers’ concerns in this area are mitigated, e.g. by identifying someone who can assist SHG members in book-keeping or by providing the necessary training. Initially, groups may rely on the CDA’s team to help with book-keeping. Long-term reliance on UNIDO should, however, be discouraged. Some SHGs have asked their literate children to help with book-keeping or have hired skilled locals such as retired government officials to assist them.
In addition to book-keeping, group members may require training in accounting and record-keeping to help manage their businesses. Experience in Chanderi has shown that many poor cluster actors do not have a complete overview over the cost of their products.
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SYNERGIES BETWEEN CLUSTER DEVELOPMENT AND MICROFINANCE 43With proper training, SHG members can learn how to prepare simple financial statements, which will help significantly in managing their economic activities and in long-term business planning. This will also improve their capacity to manage financial services.
During workshops or training sessions, the importance of maintaining separate accounts for households and businesses may also need to be emphasised. In many microenterprises, the finances of the business and the household are interwoven. Owner-operators tend to extract funds for personal or household use from the business, sometimes without having an adequate overview of the accounts and therefore taking more than the business can bear. This interconnection of household and business funds implies that funds may not be available to meet operating costs or to build up reserves to finance future growth.
Finally, cluster actors should be advised to start with as little capital as possible in order to reduce risk. Initially, it is safer to use a loan to lease equipment or rent premises rather than to invest in their purchase. Only after a business is well established should such investments be undertaken.
vi) Monitoring and Evaluation Sooner or later, the impact of microfinance on cluster actors and on cluster development will need to be assessed. Any observed changes should therefore be noted from the beginning. It is crucial not only to consider the effect of microfinance on productive activities and income. Its impact on reducing other dimensions of poverty, such as health and educational status, is of equal importance and is likely to lead to productivity increases in the mid to long term. Changes may be observed at three main levels, namely the economic, socio-political or cultural, and personal or psychological (Ledgerwood, 1999)26.
Box 3.4 provides a list of indicators, which can be used to assess impact.
Box 3.4 Impact Indicators
• At the cluster level: Is the cluster becoming more vibrant and competitive? Is it growing?
• At the individual enterprise level: Has profitability increased? Has output expanded? Were costs reduced? Have sales risen? Has employment increased? Has asset accumulation increased? Have new technologies been introduced? Has quality improved?
• At the household level: Has income risen? Have savings increased? Has asset accumulation increased? Has child labour decreased?
Sociopolitical or Cultural:
• Has the bargaining power of previously disadvantaged groups (e.g. lower castes, ethnic minorities, low-income groups) within the cluster increased?
• Are there signs of women’s empowerment, such as increased decision-making within the household?
Personal or Psychological:
• Has consumption (of food and non-food items) increased? Has health and nutrition improved Has access to education improved? Has housing improved?
• Has self-confidence of disadvantaged cluster actors increased?
As in all partnerships, it will be difficult to determine whether changes are attributable to the provision of microfinance services or to cluster development activities in general.
vii) Assisting Non-Poor Cluster Actors and Growing Enterprises to Meet their Financial Needs A key component of UNIDO’s projects in Chanderi and Sindhudurg is the fact that the CDA also devotes a significant amount of time to non-poor cluster actors in order to minimise the potential for conflict. Master weavers and traders in Chanderi or owners of SMEs in Sindhudurg are by no means poor. However, their cooperation is necessary for sustainable poverty reduction. They can ensure improvements in workers’ income and health and can outsource production to SHGs.
The financial needs of larger firms or growing microenterprises are unlikely to be met by microfinance. Precisely because relatively large loans can only be accessed after several loan cycles, microfinance is often unsuited for vibrant micro- and small enterprises, which may need larger loans at an early point of time. However, due to insufficient collateral, they may also have difficulties in obtaining the credit they require from commercial banks (see box below).
Box 3.5 Credit Needs of a Rapidly Growing Microenterprise in Sindhudurg
The main reason why cashew and fruit-processing microenterprises in Sindhudurg require access to credit is to finance their working capital needs, in particular to enable procurement of raw materials. For S. Gawande, the owner of a rapidly growing microenterprise in Sindhudurg, to be able to process 200kg of raw cashews per day, he needs about Rs 240,000 (USD 5,280) per month.
Although he has previously received bank loans, they were too small to allow him to purchase the amounts of raw cashews he would have needed to be able to process throughout the year. His first loan had been for Rs 200,000 (USD 4,400). To obtain the second loan of Rs 400,000 (USD 8,800), he had to deposit Rs 100,000 (USD 2,200) with the lending bank, mortgage his land worth Rs 1.6 million (USD 35,200) and find two guarantors for the loan amount. He knows that he could profitably extend his processing capacity in the next year if he could obtain a larger loan. However, this would require that he increases his deposit with the bank and provides additional collateral. He is confident that he may obtain a loan of Rs 600,000 (USD 13,200) in the following year, because he has begun to build a storage facility for cashews on his land, which has increased the value.
Nevertheless, even a loan of Rs 600,000 is insufficient to enable him to exhaust his processing capacity. He estimates that to keep his factory running from the end of the cashew season until the new season begins, he would require about Rs 2.1 million (USD 46,200). He has so far used his savings to invest in the factory (e.g. to purchase cashew cutters and a boiler) and is planning to purchase a vacuum packaging machine in the future.
Meeting the financial needs of the economically active poor and microentrepreneurs will have a more direct impact on poverty reduction than meeting the financial needs of growing and larger firms within the cluster. Nevertheless, the indirect contribution of finance for these firms on poverty reduction (e.g. increased employment or job stability achieved through firm growth) is also likely to be significant. Through past interaction with bankers, the CDA may be in a position to link non-poor cluster actors to financial institutions at little additional cost. A case can therefore be made for assisting non-poor cluster actors in meeting their financial needs.
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SYNERGIES BETWEEN CLUSTER DEVELOPMENT AND MICROFINANCE 45The Cluster Development Programme’s experience in other Indian clusters has shown that mutual guarantee associations (MGAs) are an effective way to assist enterprises whose credit needs exceed those of microfinance clients but are unable to meet the collateral requirements of banks. This is likely to be the case for growing micro- and small-scale enterprises. MGAs are solidarity groups formed by small firms without access to credit due to insufficient collateral. MGAs evaluate their members, recommend them to the lender, provide guarantees and pursue defaulting borrowers for loss recovery. They do not, however, extend credit directly to their members. Guarantees are backed by the capital of the MGA, which is based on the share capital provided by all members and by a risk fund.
Hence, each member accepts a commitment for part of the guarantee. Since guarantees are only extended to members, the borrower himself is also liable. Shares can only be sold if the owner’s liabilities have been extinguished. Since their contribution is at stake, members have an incentive to ensure that only credible borrowers receive loans. As not all members require a loan at the same time and only a small percentage of borrowers is likely to default, members’ contributions can have a significant leverage effect.
MGAs have extensive knowledge of the operating sector of a member and are thus aware of factors such as competition within the sector, market trends or production techniques.
Additionally, they assess the viability of an applicant’s project by taking the entrepreneur’s background, business performance and reputation into account. MGAs are therefore often able to make better-informed decisions than banks.
The decisive characteristic of MGAs is that, like SHGs, they are based on social capital in addition to financial capital. However, in contrast to SHG members, members of MGAs are typically not poor and their credit needs exceed those of SHG members. UNIDO, in cooperation with SIDBI, has successfully introduced the Mutual Credit Guarantee Fund Scheme (MCGFS) in the Indian clusters of Jaipur and Ambur27.
An alternative to MGAs are state credit guarantee schemes. The Government of India, in association with SIDBI, introduced a Credit Guarantee Fund Scheme in 2000. The scheme aims to assist new and existing industrial units in the SSI sector to obtain collateral-free credit by guaranteeing loans up to Rs 1 million (USD 22,000) extended by scheduled commercial banks and selected RRBs. To operationalise the guarantee scheme, a Credit Guarantee Fund Trust For Small Industries has been set up by Government and SIDBI. Of the credit facilities extended by eligible institutions, the Fund guarantees, in case of default by the borrower, up to 75% of the defaulted principal amount. However, as with the SHGBank Linkage Programme, bankers’ willingness to participate is fundamental. In Sindhudurg, for example, banks have so far been reluctant to implement either the MCGFS or the state guarantee scheme.
E. A Note of Caution Linking cluster actors with financial institutions is a time-intensive task. It is important to work with small groups at a time and not to attempt to link the entire cluster at once. In addition, it is not useful to encourage everyone to take out a loan. If other inputs are See Technical Working Paper no. 10, Credit Guarantee Schemes for Small Enterprises: An Effective Instrument to Promote Private Sector-Led Growth?, available at http://www.unido.org/en/doc/18252 © United Nations Industrial Development Organization
46 SME TECHNICAL WORKING PAPERS SERIESmissing, borrowing can lead to a debt trap. Access to savings facilities and skills training are likely to be more appropriate in these cases.
Finally, it cannot be emphasised enough that access to finance is only one - and frequently not the most important - constraint for cluster actors. Thus, while sufficient and timely attention to improving access to financial services is crucial, it should not come at the expense of equally important activities, such as training or linkage with support institutions.
©United Nations Industrial Development OrganizationCHAPTER IV:Conclusion