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HYDERABAD, Dec. 12

WHILE lauding the role being played by the non-governmental organisations (NGOs) in the field of micro-finance in the country, Andhra Bank has strongly opposed the idea of transforming NGOs into financial intermediaries.

Delivering the keynote address at the two-day national workshop on "Key dimensions in transformation — from NGOs to formal institutions," being organised by the Small Industries Development Bank of India (SIDBI), at the Indian School of Business (ISB) here on Thursday, the Andhra Bank Chairman and Managing Director, Mr B. Vasanthan, favoured NGOs to adopt a suitable withdrawal strategy wherein the self help groups (SHGs) could manage themselves without depending on them.

According to Mr Vasanthan, if NGOs were involved in the direct financing of SHGs as financial intermediaries, their financial strength and scale of operations might not match the formal financial institutions. With the increased thrust on financial aspects, the developmental role of NGOs in the required areas such as organising and capacity building of people would be relegated.

Further, Mr Vasanthan was of the view that multiplicity of the institutions in the financial sector might create havoc since proper systems for safeguarding public money were not in place. Lack of facilities such as deposit insurance and regulatory mechanism might further aggravate the problems, he said.

Citing the recommendations of the task force on supportive policy and regulatory framework for micro-finance, Mr Vasanthan said linkage of micro-finance institutions (MFIs) with banking system had many advantages such as high recovery performance, reduction in the transaction costs for both banks and MFIs, reasonable margins for both and opportunity to the banks for getting future quality clients.

Further, the Reserve Bank of India (RBI) Act was currently silent about the financial activities of NGOs and MFIs. Currently only MFIs registered as co-operatives and non-banking finance companies (NBFCs) were being regulated.

According to Mr Vasanthan, the need for regulation and supervision of NGOs and MFIs arose from several considerations such as protecting the interests of the small savers, ensuring proper terms of credit and financial discipline and institution of a proper reporting system for their orderly development.

"In the light of these observations and our field experiences, I am of the belief that NGOs need to confine their activities to the formation and nurturing of the SHGs and the financial needs of these SHGs are to be catered by the formal financial institutions like banks," Mr Vasanthan said.

However, he said some of the MFIs other than banks could be encouraged to extend finance to SHGs subject to critical review of their financial position and satisfying prudential norms. Mr Vasanthan was of the view that norms for critical rating of MFIs should be standardised and agencies such as Micro Credit Ratings International Ltd (M-CRIL) should play enhanced role in this regard.

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