SCHOOL OF ECONOMICS DAVV, INDORE

ASINGNMENT ON CREDIT LINKAGES

BY: MUKESH RAJAK SARVESH PANDEY KAMLESH KUMAR SINGH ADITYA NANDAN MBA (F.S) (BATCH OF 2010-12)

CREDIT LINKAGES
The ability to buy (or sell) a contract on one exchange and later sell (orbuy)the same contract on another exchange. Linkage occurs when an investor is able to purchase a security on one financial exchange and sell it on another. Certain depositary receipts, such as American Depositary Receipts (ADRs), allow for linkage, which means that an investor can purchase shares of a company on a foreign exchange, such as the Toronto Stock Exchange, and then sell those shares on a domestic exchange, such as the New York Stock Exchange.

Linkage should not be confused with arbitrage situations where an investor looks to profit from price discrepancies for equivalent securities trading on different exchanges. As financial markets progress, specifically with the growth of electronic exchanges spreading, the phenomenon of linkage will become more relevant and useful for investors in the future.

EVOLUTION
In meeting the credit demand of farmers, governments in developing countries have sponsored formal institutions in environments where private banks reluctantly enter on their own. These institutions have performed poorly. Many of their failures can be traced to the difficulties associated with disbursing and collecting credit in risky agricultural environments. Informal private lenders such as moneylenders, friends, relatives, and landlords can overcome some of the lending constraints.

By residing close to villagers and free of the bureaucratic layers of formal creditors, these private lenders can meet demand in a quick and flexible manner. Private lenders are still limited by the size of the market. Formal lenders can rely on nationwide funds from savings mobilization and re-financing support from governments. With comparative advantages in different areas, linking the formal and informal sectors can improve the disbursal of credit to farmers. Linkages fall under two categories: explicit or implicit. Under the former, formal lenders actually hire other lenders. Under the latter, formal lenders recognize that borrowers resort to their lenders as well and incorporate that information in their lending decisions

 In creating linkages, formal lenders must structure incentives for informal lenders to cooperate and not collude with borrowers. Thus, lenders face a mechanism design problem and the recent development of principal-agent models aid in formalizing these incentives.

FUNCTIONING OF SHG BANK

The SHPI trains the members to maintain simple accounts of the collected thrift and loans given to members. The regular meetings also provide a platform to discuss and resolve many social and common issues, thus fortifying them together. A savings bank account is opened with a bank branch and regular thrift collection and loaning to members build up the financial discipline among the members to encourage the bank to provide larger loans to the group.

The conceptual thinking behind the SHG philosophy and the Bank Linkage could be summarised as under: Self Help supplemented with mutual help can be a powerful vehicle for the poors effort to socioeconomic upward transition Participative financial services management is more efficient and responsive. Poor can save and are bankable Poor not only need credit support but also savings and other services Small affinity groups of the poor, with initial outside support, can effectively manage and supervise micro credit among their members

Collective wisdom of the group and peer pressure are valuable collateral substitutes
SHGs could be a pre- microenterprise stage for a majority of rural poor SHGs as client, facilitate wider outreach, lower transaction cost and much lower risk costs and Empowerment and confidence building of poor, especially of poor women, is a major outcome

The mismatch between the expectations of the poor and capabilities of the formal banking system needs to be minimised

What makes the SHG approach succeed ? At group level : Group formation and nurturing - the key to successful SHG Group composition - thrust on affinity and homogeneity

Members learn to maintain financial discipline

Members own stake in the group - in the form of savings Collective wisdom in credit decisions The peer pressure enable the group to minimize the aggregate risks of failures

Savings and credit is a continuing process and not a one-time injection of loans

Freedom of selecting loan purpose to the members, with benefit of peer counseling

At Bank Level : The group formation and nurturing process is intensive and should not be rushed through.

Emphasis on Grading -Banks grade the SHGs for credit support based on parameters of group dynamics, regularity in savings, internal lending, participation level, etc.
NGOs grade the SHGs before recommending them for bank loan. The weak ones have to wait and overcome weakness Cost effective, operationally simple and low risk strategy for expanding client base and business.

Externalising some of the credit functions to SHG. Bank loans only when initial savings and internal lending has stabilized. Banking with disciplined clients and not beneficiaries

More than 95 % on-time repayment from the poor some of whom were possibly defaulters.
Heavy investments by NABARD in formation, nurturing of SHGs, building capacities of NGOs,

Training of banks and other stakeholders - as Investment in human capital development. NGOs promote SHGs for deepening the impact of their programmes and furthering their own social agenda. Banks promote / finance them for expanding quality business coverage and Governments promote them for multiple developmental objectives

ISSUES in SHG :

Regional Imbalances Quality of SHGs Impact of SGSY on SHG-bank linkage programme Provision of micro-insurance to the SHG members Micro Enterprise Promotion among members of Mature SHGs

Future Strategy
Expansion in the Poverty struck and Tribal areas Massive capacity building efforts by other stakeholders eg.Banks,NGOs, Govt. Dev. Dept . Banks to own the SHGs linked with them as their client and nurture them to keep them in good health Training the SHG members to maintain their books of account themselves or arrange IRVs/Barefoot accoutant/Smart card etc Federating the SHGs for future handholding and sustainability

Graduation of SHG members to Entrepreneurship

Skill development training to improve work efficiency and develop quality product,

Arrangement for raw material and other inputs Design development and consistancy Marketing of the product Ultimate aim is to make her an independent and self dependent entrepreneur

THAN K YOU