Knowledge Sharing

VALUABLE CONTRIBUTIONS TO SOLUTION EXCHANGE FROM SAMPARK

QUERY 1: Change in Tax Code Affecting Livelihood Promotion - Experiences; Examples.

Sampark was registered under the Societies Registration Act in 1991, 18 years ago. Sampark has worked directly with 3000 households in its field work, and has conducted trainings and provided advisory support to NGOs and donor projects influencing microfinance and micro enterprise programmes which work with over 5 lakh households in India, and over 3 lakh households in Thailand, Bangladesh and Nepal. The annual budget is about Rs. 50 lakhs, varies every year, of which the percentage of budget raised from user fees, training fees or community contributions can vary from 10 to 40%.

Sampark's experience with 80G tax exemption came up for renewal earlier this year. The IT department raised many objections. Sampark has had marketing activity to support NGOs and artisans, and even though currently it is at a very small level, they objected to the small money that was earned (Rs. 20,000) last year, saying this was commercial activity. The second objection was raised to the contribution self help groups (SHGs) had made for printing the account books.

The education programme was not considered charitable activity. The tax officer said if the children go to government schools, and we only prepare the women to stop school drop-out, pay for the education materials, and build strong education committees among parents to improve quality of teaching and child monitoring, these are NOT charitable activities! Only if we run schools this would be considered charitable activity. He told me even if Sampark runs a high-fee-charging school, he would have no problems approving it as charity, but not such capacity building and monitoring work.

Similarly, the SHG capacity building activity was not considered charitable activity. Training women is not a charitable activity, he said to me, are you distributing clothes, food? That would be charity.

I visited this tax officer, and refused to leave till he exhausted all his arguments. I told him I would stay there till I was able to convince him what we do is perfectly valid development work. I told him if NGOs set up schools, who would hold the state's schools accountable? NGOs should help to improve the system, not duplicate it.

Similarly, when banks give loans, why should Sampark do so? We help women to have stable groups, this takes time, to have groups that qualify on the grading criteria of banks. We give Sampark funds only for those activities that the banks don't yet fund, such as education of children. We keep the margin on interest rates (6 to 12% per annum) as a risk fund, and never use it for administrative purposes. Our micro credit activity is a 'charitable' and not a commercial activity.

This went on for a while. Then I told him, just think what you will do if you cancel Sampark's 80G. Companies and philanthropists who now donate, who help us to continue our charitable work, will not do so, and we will be under further pressure to become commercial. He still sent some more questions by the next mail. Once he and his staff were convinced that we would neither pay bribe, nor give up the argument, they accepted that we were a charitable organization and renewed 80G for three years. We opted not to use 'influence' or money.. in this case we succeeded.

Effects on Sampark:

We have completely wound up the little support we were providing through sales of NGO products. NGOs need to raise grants, but these are uncertain at the best of times. Sampark has always raised some money through research, evaluation studies and advisory services. These latter set of activities ensure that we can make long term commitments on the ground, which we cannot if we are only dependent on donors. We could tide over the difficult period of financial crisis only because we had some funds as reserves, else the field project in 35 villages would have wound up by now.

However, now we have no back-up resources left and will need to raise donations or find consultancies. In the latter case, the tax status will be a problem. We have not changed accounting that has to continue to be transparent and reflective of our operations. In Sampark's discussion with its auditors, we have decided to argue our case every year, with the tax authorities, as needed. The argument here is that it is not important HOW WE EARN our money. The classification of charitable or not is on the basis of HOW WE SPEND this money. If it is spent only on development purposes, and not applied to private profit, then we deserve the tax exemptions. If we can prove that we work only with the poor and disadvantaged, to benefit them and improve their livelihoods, then we deserve the tax exemptions. This is the argument we have decided to take. A note from Sampark's auditor, Mr. K. S. Ravi, analyzing his views on the subject, is enclosed here (www.solutionexchange-un.net.in/emp/cr/res05100901.doc).

I do believe that tax authorities need to distinguish between those who are genuine NGOs and those who set up charitable societies with a commercial motive. This is a distinction they have to draw on the basis of some criteria. Unfortunately the current definition of charitable purposes in the Finance Act, 2008 w.e.f. 01.04.2009, is too narrow, and threatens to throw out the baby with the bath water. Sampark has not yet had the energy to do this alone, but together with other NGOs, I propose that we influence the government to withdraw this definition. However, we must also work together to suggest an alternate formulation. And we need to work together for this. Let us formulate an Action Group after the end of this query.

Smita Premchander

Query 2: National Women Literacy Campaign for Empowerment and Development - Experiences; Examples

We would like to answer this query based on our experience in Sampark, an NGO based in Bangalore which works in Koppal North Karnataka. We are coordinating initiatives in women's empowerment through literacy programmes being implementing in 30 villages. Our survey on existing Government adult literacy programmes at grassroots level revealed that these are not properly introduced nor are women being motivated to join as a result no one benefits from these programmes. The facilitators who are supposed to teach women functional literacy have not received their remuneration for over 2 months, their lack of motivation and discouragement finally led to the failure of the programme. The interesting material which was prepared under this programme is currently lying in Gram Panchayat store rooms. In order for such programmes to succeed there is a need to have separate implementing strategies and structures for close monitoring and follow up.

Another point I would like to share is the definition of women's literacy is not learning to sign their names without even learning alphabets. We need to tackle this problem at the roots starting with the girl child. In addition there is a need to be careful in designing these programmes for women, as most women are overloaded with household work as well as in earning a livelihood. Sometimes such programme from the Government or the NGO's are added pressures for these women. To reduce pressure and motivate women towards literacy the programme should be designed to empower and improve livelihoods a basic requirement for women from poor families.

Sampark is pilot testing an initiative by introducing one literacy centre in one village with one facilitator to work on functional literacy for empowerment and improve livelihoods of women. It is still in its initial stages, after a year, we will have a model to show how this strategy would work out at the grassroots.

Chinnamma and Prameela, Sampark, Bengaluru
http://www.solutionexchange-un.net.in/gender/cr/cr-se-kar-gen-25090901.pdf

QUERY 3: Transformation of Organizations into MicrofinanceInstitutions - Experiences; Advice.

It is good that Punit has raised this query at a time when the transformation drive is very popular among NGOs to become MFIs. I have spoken to many NGOs who have transformed and MFIs who have bought existing NBFCs. My understanding is as follows:

What have been the key triggers, trends and experiences of MFI- transformation from supply (MFIs) as well as demand side (Client) perspective?

The triggers are mostly supply led. Donors want financially sustainable MFIs, and so NGOs transform. Few NGOs who do not want to transform can now find support in the MF sector, this is the reality.

The women themselves do not even understand the difference. They are often not consulted either. They say yes to whatever NGOs/MFIs explain to them. Development agencies tell the women what they want them to hear, believe and approve and this is another reality.

What are the appropriate legal options, their benefits/bottlenecks and legal compliance related formalities that need to be considered by the organizations intending to transform into full-fledged MFIs?

NGOs by definition, not for profit organizations can do lending but can not collect the savings. They do not attract donor funds for MF any more.

Section 25 companies - No investor finds this interesting, as they cannot make profits, so finding equity for this is difficult.

Cooperatives - member owned organizations: Again, they cannot take external equity investments, we need to critically evaluate the laws and find ways out that protect the cooperation character of the organization, while at the same time allowing for profit sharing with external investors.

NBFCs, these then are the most popular, as they can be profit making and can attract external equity investment, so that financial investors can make profits and help the finance operations to grow.

Is it surprising that we find a drive towards NGOs transforming into NBFCs? Profits are now mandatory in MFIs, so NBFCs are the most preferred route.

What preparations are required for functional transformation in terms of portfolio transfer, human resources, fund acquisition and management, systems-development and governance?

I have seen organizations transform in two ways:

When the organization transforms with all its activities, in this case the non profit making activities reduce or stop, such as capacity building.

The second option is when an NGO takes with it the microcredit portfolio, and leaves behind training, capacity building, research and other grant based activities in the NGO. In either case, I have seen the development oriented staff dejected and worried about their continuing role and importance, and the credit staff elated and delighted about the separation and about a clear focus on financial profits and growth. These divisions are inevitable, whatever be the type of transformation. The recent article on SKS in Forbes magazine only highlights what is happening in many small NGOs that have transformed.

When organizations bring large amounts of funding, they are also in a position to dictate who leads the organization. Venture capitalists (VC) have always influenced management and internal decisions in organizations, this lesson is very common in VC industry, the MF sector is learning it rather painfully, as it has not learnt from the banking industry's experiences and is caught unawares.

As an organization that is helping NGOs transform, Sa-Dhan should do some background work on compiling lessons that mainstream banking and financing has to offer to microfinance, and then you will be able to prepare them better for the corporatization that comes with it.

Smita Premchander