Starvation cycle

Give money to an NPO, and most donors want to see it spent on the cause, not on rent or office salaries. That instinct sounds responsible. The workbook shows how it can quietly cripple the very organisations donors want to help.

Most institutional donations, such as CSR money, FCRA grants and government scheme funds, come with a restriction: spend it on programmes only. But an NPO still has ordinary running costs: rent, utilities, staff training, research. Since donors will not pay for these, the NPO has to fund them from its own internal resources instead.

Smaller NPOs rarely have much internal surplus to draw on. Their programme-only funding cannot pay for the office, the systems or the training they would need to grow. The workbook calls the result the "starvation cycle": NPOs stay too thin on infrastructure to invest in themselves, which then makes it harder to grow into the kind of organisation large donors trust with bigger grants.

The mechanism, in the workbook's own words (Chapter 2): "donations to NPOs from institutional sources (that are not tax-deductible) are typically permitted to be spent only towards programs, as a safeguard against their misuse. Non-program costs such as rent, utilities, staff training, research, etc. have to be borne by NPOs from internal resources. This has produced the so-called 'starvation cycle', constraining NPOs' ability to invest in essential organisational infrastructure and impeding their growth."

The funding backdrop that sets up the cycle. About 70% of NPO funding comes from four sources: individual donations, FCRA contributions, CSR grants and government scheme grants. As of 2018, only 1.8 lakh institutions had registered and claimed tax exemption. Of those, only about 12% had FCRA funding and 11% CSR funding. Most institutional funding reaches only the large, already-established NPOs in each sector, the ones with least need of it to escape the cycle.

The workbook's proposed way out. Individual, tax-exempt donations carry no restriction on non-programmatic spending, which makes them attractive, but they are small individually and hard to aggregate at scale. The workbook suggests an intermediary structure to pool many small individual donations, and points to the SSE itself as a channel that can route grants and donations to NPOs in new ways.

Illustrative NPO; figures are made up.

Asha Bal Vikas, a child-education NPO in Kanpur, receives a ₹30 lakh CSR grant restricted entirely to running its learning centres: teacher salaries for classroom hours, books and learning materials.

The grant covers none of the trust's ₹4 lakh annual office rent, its ₹1.5 lakh accounting and compliance costs, or the ₹2 lakh it would need to train its own staff in updated teaching methods. Asha Bal Vikas has no large individual-donor base, so it pays these costs from savings built up in previous years, savings that shrink a little further each year.

Three years on, Asha Bal Vikas still runs the same size of programme it started with. It has never had the ₹7.5 lakh a year of unrestricted money it would need to build a proper M&E system, train new supervisors, or apply for the SSE registration that could unlock bigger institutional funding. That is the starvation cycle in miniature.

Chapter 2 (Social Stock Exchange: Introduction, Funding Structures and Instruments), section 2.2.2, names the starvation cycle as the direct consequence of restricting institutional donations to programme spending, and links it to the funding statistics on FCRA and CSR reach. Expect a question naming the cause of the starvation cycle (programme-only restrictions forcing overheads onto internal resources) or asking which funding source carries no such restriction (individual, tax-exempt donations).

• The restriction is on institutional, non-tax-deductible donations. Individual tax-exempt donations do not carry the same programme-only limit, which is exactly why the workbook flags them as a way out.
• The cycle is about overheads, not programme funding. NPOs are not short of programme money in this account; they are short of money for rent, training and systems.
• Only 12% of the 1.8 lakh registered institutions had FCRA funding, and 11% CSR funding, as of 2018 — the workbook's evidence that most NPOs never reach these sources at all.
• Do not confuse the starvation cycle with a general funding shortage. It is specifically the mismatch between programme-restricted money coming in and unrestricted overhead costs going out.