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MICROFINANCE : A SELF – LINKAGE SCHEME OF NABARD
Submitted by: Anuj Pundir - 061087 Maninder - 061220 Pankaj - 061278 Sunpreet Singh - 061420 Vikas Vir - 061458
Under the guidance of Dr. Anju Singla
Lecturer Applied Science Department Punjab Engineering College, University of Technology, Chandigarh.
ACKNOWLEDGEMENT (I) INTRODUCTION
I. II. III. IV. V.
1 2 2 2 2 3 3 4 4 5 7 8 9 10 10 11 12 13 14 14 15 15 16 17 18 18
MICROFINANCE EVOLUTION OF MICROFINANCE IN INDIA PROFILE OF MICROFINANCE IN INDIA STATUS OF MICROFINANCE IN INDIA FEATURES OF MICROFINANCE IN INDIA IMPORTANCE OF MICROFINANCE MICROFINANCE INSTITUTIONS IN INDIA UNDERSTANDING THE DEVELOPMENT PROCESS THE PARTICIPATING ORGANIZATIONS
(II) NEED OF THE PROJECT
I. II. III. IV.
(II) OBJECTIVE OF THE PROJECT (III) NABARD
I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII.
INTRODUCTION THE BACKGROUND MISSION TYPES OF REFINANCE FACILITIES CRITERIA FOR REFINANCE OBJECTIVES OF NABARD MAJOR ACTIVITIES ORGANIZATION STRUCTURE ROLES & FUNCTIONS OF NABARD NABARD’S ‘SHG BANK LINKAGE’ PROGRAMME MAJOR ADVANTAGES OF LINKAGE PROGRAMME MAINSTREAMING OF LINKAGE PROGRAMME
(IV) SHG (SELF HELP GROUP)
I. II. III. IV. V.
19 20 21 22 22 25 27 28 29 30
OBJECTIVES OF SHG INDICATORS OF GOOD SHG FORMATION OF SHG SUSTAINABILITY OF SHG SHG APPROACH
(VI) STATISTICS (VII) FUTURE OF MICRO FINANCING IN INDIA (VIII) CONCLUSION (VIII) REFERENCES
We would like to thank Dr. Anju Singla (Applied Science Dept), our respected teacher for her constant support and guidance, for her encouragement and timely advice. It has been our privilege to do our project under the aspiring guidance of Dr. Anju Singla, who helped us enormously in terms of designing the framework. For the project and then helping us work according to it. Her inspiration has helped us prepare this project. We would like to thank her. We express our gratitude to her who helped us gain the valuable knowledge and experience. We are grateful to her, who co-operated us throughout our project with valuable information about NABARD and Microfinance. We would also like to thank all the staff members of MSD department, who have encouraged us in achieving self-discipline.
“Micro-Finance is provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas for enabling them to raise their income levels and improve living standards.” Evolution of Microfinance in India • Microfinance has been in practice for ages (though informally). • Legal framework for establishing the co-operative movement set up in 1904. • Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. • Nationalisation of banks in 1969 • Regional Rural Banks created in 1975. • NABARD established as an apex agency for rural finance in 1982. • Passing of Mutually Aided Co-op. Act in AP in 1995.
Profile of Microfinance in India
• Estimated that 350 million people live Below Poverty Line • This translates to approximately 75 million households. • Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores.
• Cumulative disbursements under all microfinance programmes is only about Rs. 5000 crores.(Mar. 04) • Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 crores. (March 04) • Only about 5 % of rural poor have access to microfinance. • Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs. 5000 crores, the total outstanding is estimated to be only about Rs. 1600 crores. The active borrowers are estimated to have a per capita outstanding of only Rs. 2500. • While 10 % lending to weaker sections is required for commercial banks, they neither have the network for lending and supervision on a large scale nor the confidence to offer term loans to big MFIs.
Status of Microfinance in India
• Considerable gap between demand and supply for all financial services • Majority of poor are excluded from financial services. This is due to the following reasons: 1. 2. Bankers feel that it is fraught with risks and uncertainties. High transaction costs 3. Unfavourable policies like caps on interest rates which effectively limits the viability of serving the poor. • While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. These include: 1. 2. Lack of an appropriate legal vehicle Limited access to equity • Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner).
• • • •
• Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations. About 56 % of the poor still borrow from informal sources. 70 % of the rural poor do not have a deposit account 87 % have no access to credit from formal sources. Less than 15 % of the households have any kind of insurance. • Negligible numbers have access to health insurance (0.4 %) and crop insurance (0.2 %).
Features of Indian Micro-Finance
• About 60 % of the MFIs are registered as societies. • About 20 % are Trusts • About 65 % of the MFIs follow the operating model of SHGs. • Large concentration in South India • 600 MFI initiatives have a cumulative outreach of 1.25 crore poor households
• NABARD’s bank linkage program has cumulatively reached a total of 9.4
lakhs SHGs with about 1.4 crore households.
Importance of Microfinance: The Gap between Demand & Supply
• Since the 1950s, various governments in India have experimented with a large number of grant and subsidy based poverty alleviation programmes. • Studies show that these mandatory and dedicated subsidized financial programmes, implemented through banking institutions, have not been fully successful in meeting their social and economic objectives
• According to a 1995 World Bank estimate, in most developing countries the formal financial system reaches only the top 25% of the economically active population - the bottom 75% have no access to financial services apart from moneylenders-in India too the formal financial institutions have not been able to reach the poor households, and particularly women, in the unorganised sector • Structural rigidities and overheads lead to high cost of making small loans • Organisational philosophy has not been oriented towards recognising the poor as credit worthy All this gave rise to the concept of micro-credit for the poorest segment along with a new set of credit delivery techniques. In the development paradigm, micro-finance has evolved as a need-based policy and programme to cater to the so far neglected target groups (women, poor, rural, deprived, etc.). Its evolution is based on the concern of all developing countries for empowerment of the poor and the alleviation of poverty. With the support of NGOs an informal sector comprising small Self Help Groups (SHGs) started mobilizing savings of their members and lending these resources among the members on a micro scale without security or collateral. Success stories in neighbouring countries, like Grameen Bank in Bangladesh (Yunus Mohammad was person behind this revolution), Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines, etc., gave further boost to the concept in India in the 1980s. Micro-finance services mainly comprises of the following activities:
Microfinance Institutions in India
Microfinance institutions are broadly divided into two categories:• Formal Institutions • Informal Institutions. Formal Institutions provide micro finance services in addition to their general banking activities and are referred to as micro finance service providers. The informal institutions that undertake micro finance services as their main activity are generally referred to as Micro Finance Institutions (MFIs). Both private and public ownership are found in the case of formal financial institutions offering micro finance services, the MFIs are mainly in the private sector.
At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide micro finance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of district level cooperative banks over 14,000 branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks almost 90,000 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 5,000 rural people.
Understanding the Development Process through Micro-finance
In India, a variety of micro-finance schemes exist and various approaches have been practiced by both GOs and NGOs. The ultimate aim is to attain social and economic empowerment.
The Participating Organization
About 450 organisations are involved in micro-finance activities in 11 states of India. There are basically 3 types of participating organizations: 1. 2. Organisations implementing micro-finance activities. Resource organisations or support agencies.
3. Formal financial institutions - Banks and development organisations, like NABARD, SIDBI, Association of MFOs etc.
I. Organisations implementing Micro-Finance activities Organizations implementing micro-finance activities can be categorised into three basic groups on the basis of its functions: a) Organisations which directly lend to specific target groups and are carrying out all related activities like recovery, monitoring, follow-up etc. Some of these organisations are graduating to become exclusive MFOs, but such cases are few. b) Organisations which only promote and provide linkages to SHGs and are not directly involved in micro lending operations. c) Organisations which are dealing with SHGs and plan to start micro-finance related activities.
Resource Organisations or Support Agencies These are the organisations which provide support to implementing organisations. The support may be in terms of resources or training for capacity building, counseling, networking, etc. They operate at state/regional or national level. They may or may not be directly involved in micro-finance activities. A few associations to bring such MFOs on one platform have also been initiated in India. Experience sharing through newsletters and/or meetings/seminars/training is the method adopted by the associations/collectives to support implementing organisations.
Formal Financial Institutions – Banks Commercial Banks, Grameen Banks and Rural Banks provide funds to SHGs (Self Help Groups) and also operate their accounts. Funding agencies and development institutions channelise credit through these FIs. Building gender sensitivity and developmental dimensions amongst these agencies is a major need. Banks prefer to route credit through SHGs, though they directly lend to individuals also. Development Agencies/Nodal Agencies in India, development agencies like NABARD, SIDBI and RMK provide funds for credit. They support MFOs and have separate allocations for SHGs and micro-credit.
To Study the role of NABARD in developing the microfinance scheme in India. 1. To Study that, how it has been instrumental in facilitating various activities in microfinance sector, involving all possible partners in the arena, how it has been encouraging voluntary agencies, bankers, and socially spirited individuals, other formal and informal entities and also government functionaries to promote and nurture self help groups. 2. Study its assistance to Self Help Promoting Institutions (SHPIs), Revolving Fund Assistance (RFA) to Micro Finance Institutions (MFIs), equity / capital support to MFIs to supplement their financial resources and provision of refinance against bank loans provided by various banks for microfinance activities including SHGs
NABARD (National Bank for Agriculture and Rural Development)
Formal Financial institutions in the country have been playing a leading role in the microfinance programme for more than two decades now. They have joined hands proactively with informal delivery channels to give microfinance sector the necessary momentum. NABARD, during the early eighties, conducted a series of research studies in association with MYRADA (a leading NGO from South India) and also independently which showed that despite having a wide network of rural bank branches that implemented specific poverty alleviation programmes and selfemployment opportunities through bank credit for almost two decades, a very large number of the poor continued to remain outside the fold of the formal banking system. These studies also showed that the existing banking policies, systems and procedures, and deposit and loan products were perhaps not well suited to meet the most immediate needs of the poor. It also appeared that what the poor really needed was a better access to these services and products, rather than cheap subsidised credit. Against this background, a need was felt for alternative policies, systems and procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfill the requirements of the poorest, especially of the women members of such households. The core of SHG bank linkage in India has been built around an important aspect of human nature - the feeling of self worth. Over the last ten years, it has come to symbolize an enduring relationship between the financially deprived and the formal financial system, forged through a socially relevant tool known as Self Help Groups (SHGs). An amazingly large number of formal and non-formal bodies have partnered with NABARD in this unique process of socio-economic engineering. What had
started off in 1992 as a modest pilot testing of linking around 500 SHGs with branches of half a dozen banks across the country with the help of a few NGOs, today involves about 20,000 rural outlets of more than 440 banks, with an advance portfolio of more than Rs.1, 200 crore ($ 240 m.) in micro Finance lending to SHGs. Financial services have reached the doorsteps of over 8 million very poor people, through 500,000 SHGs, hand-held by over 2,000 development partners.
The high level of dependence of the informal sector on non-institutional sources continued despite a rapid growth of banking network in India in the last five decades. The rural financial system at present functions through an impressively large network of more than 150,000 retail outlets. Despite such phenomenal expansion of the outreach of the formal banking structure, the All India Debt and Investment Survey (GoI), 1981, gave indications that the share of non-institutional agencies (informal sector) in the outstanding cash dues of the rural households was quite high at 38%. It was also seen that households in the lower asset groups were more dependent on the non-institutional credit agencies. The main hurdle faced by banks in financing the very poor seemed to be the comparatively high transaction cost in reaching out to a large number of people who required very small doses of credit at frequent intervals. The same held true of the costs involved in providing savings facilities to the small, scattered savers in the rural areas. Feelings were mutual among the very small savers and borrowers in the rural areas as well, as they tended to view banking as an institutional set up for the elite; even if they tried to reach the bank branch the long distances and loss of earnings on being away from work while visiting bank branch were hurdles and they were never sure whether they would get any service or not if they did approach the branch. The levels of mutual inconvenience and discomfort made the poor look at banking as an almost inaccessible service, and the banks felt that banking with the very poor was not a ‘bankable’ proposition. NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with 1. 2. 3. 4. Providing refinance to lending institutions in rural areas Bringing about or promoting institutional development and Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also:
Acts as a coordinator in the operations of rural credit institutions Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development c. Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development.
1. Promoting sustainable and equitable agriculture and rural development through effective credit support, related services, institution building and other innovative initiatives. 2. In pursuing this mission, NABARD focuses its activities on: 3. Credit functions, involving preparation of potential-linked credit plans annually for all districts of the country for identification of credit potential, monitoring the flow of ground level rural credit, issuing policy and operational guidelines to rural financing institutions and providing credit facilities to eligible institutions under various programmes. 4. Development functions, concerning reinforcement of the credit functions and making credit more productive 5. Supervisory functions, ensuring the proper functioning of cooperative banks and regional rural banks NABARD's credit functions cover planning, dispensation and monitoring of credit. This activity involves: 1. Framing policy and guidelines for rural financial institutions 2. Providing credit facilities to issuing organizations 3. Preparation of potential-linked credit plans annually for all districts for identification of credit potential 4. Monitoring the flow of ground level rural credit
Types of Refinance Facilities
Agency Commercial Banks
Credit Facilities Long-term credit for investment purposes Financing the working capital requirements of Weavers' Co-operative Societies (WCS) & State Handloom Development Corporations
Short-term Co-operative Short-term (crop and other loans) Structure (State Co-operative Banks, District Central CoMedium-term (conversion) loans operative Banks, Primary Agricultural Credit Societies) Term loans for investment purposes Financing WCS for production and marketing purposes Financing State Handloom Development Corporations for working capital by State Co-operative Banks
Long-term Co-operative Structure (State Co-operative Agriculture and Rural Development Banks, Primary Co-operative Agriculture and Rural Development Banks)
Term loans for investment purposes Pilot scheme for financing short term loans in three states
Regional Rural Banks (RRBs)
Short-term (crop and other loans) Term loans for investment purposes
Long-term loans for equity participation in co-operatives Rural Infrastructure Development Fund (RIDF) loans for infrastructure projects Revolving Fund Assistance for various micro-credit delivery innovations and promotional projects under 'Credit and Financial Services Fund' (CFSF) and 'Rural Promotion Corpus Fund' (RPCF) respectively
Non-Governmental Organisations (NGOs) - Informal Credit Delivery System
Criteria for refinance
1. Technical feasibility of the project and adequate response from prospective beneficiaries
2. Financial viability and adequate incremental income to ultimate borrower to repay the loan within a reasonable period 3. Organisational capability to ensure close supervision The refinance is provided to SCARDBs, SCBs, CBs and RRBs. However, the beneficiaries of the programme are partnership concerns, companies, state-owned corporations or cooperative societies. But, finally the assistance reaches the individuals, who are members of the primary credit institutions. The refinance is usually 50% to 95% of the project cost. The balance will be met by the banks and the concerned state governments or the Government of India in the case of SCARDBs. With a view to ensure credit flow to certain thrust areas, the quantum of refinance is enhanced to 100% as in the case of special category beneficiaries like SC/ST members and self help groups.
NABARD was established in terms of the Preamble to the Act, "for providing credit for the promotion of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting IRDP and securing prosperity of rural areas and for matters connected therewith in incidental thereto". The main objectives of the NABARD as stated in the statement of objectives while placing the bill before the Lok Sabha were categorized as under: 1. The National Bank will be an apex organization in respect of all matters relating to policy, planning operational aspects in the field of credit for promotion of Agriculture, Small Scale Industries, Cottage and Village Industries, Handicrafts and other rural crafts and other allied economic activities in rural areas. 2. The Bank will serve as a refinancing institution for institutional credit such as long-term, short-term for the promotion of activities in the rural areas. 3. The Bank will also provide direct lending to any institution as may approve by the Central Government. 4.The Bank will have organic links with the Reserve Bank and maintain a close link with in.
• Preparing of Potential Linked Credit Plans for identification of exploitable
potentials under agriculture and other activities available for development through bank credit.
• Refinancing banks for extending loans for investment and production purpose in • • •
rural areas Providing loans to State Government/Non Government Organizations (NGOs)/Panchayati Raj Institutions (PRIs) for developing rural infrastructure. Supporting credit innovations of Non Government Organizations (NGOs) and other non-formal agencies Extending formal banking services to the unreached rural poor by evolving a supplementary credit delivery strategy in a cost effective manner by promoting Self Help Groups (SHGs) Promoting participatory watershed development for enhancing productivity and profitability of rainfed agriculture in a sustainable manner. On-site inspection of cooperative banks and Regional Rural Banks (RRBs).
Roles and Functions
• • •
NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas. It is an apex refinancing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas It takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. It co-ordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India and other national level institutions concerned with policy formulation. It prepares, on annual basis, rural credit plans for all districts in the country; these plans form the base for annual credit plans of all rural financial institutions It undertakes monitoring and evaluation of projects refinanced by it. It promotes research in the fields of rural banking, agriculture and rural development NABARD conducted studies in the mid-eighties that brought out the simple fact that the most important and immediate banking needs of the poor households, in the order of their priority were: • Opportunities to keep safe their occasional small surpluses in the form of thrift • Access to consumption loans to meet emergent needs, and • Hassle-free access to financial services and products, including loans for micro-enterprises
Viewed against this demand, there were serious limitations on the supply side, as the existing products and services of the banking system were largely meant for a different type of customer segment. In trying to fulfill the credit needs of the poor for financial services, the banks had to contend with regulated interest rates, high transaction costs and high cost of mobilization of funds. In cases where credit was made available to the poor through special programmes, absence of an integrated savings component and something to fall back upon in case of any adversity was leading to poor repayment performance. The problem was further confounded, as the users were unable to distinguish between the State support (grants/reliefs) and bank credit as the rural and agricultural banking system was getting identified with the State. The political expediency for ‘removing poverty at a stroke’ was putting resources for running micro enterprises in the hands of the poor without nurturing them to handle such resources. The high cost of appraisal and monitoring led many banks to jettison those systems in the context of low-value advances, aggravating the already vitiated repayment climate further. Based on the results of action research conducted, NABARD developed the Self Help Group [SHG] - bank linkage approach as the core strategy that could be used by the banking system in India for increasing their outreach to the poor. The strategy involved forming SHGs of the poor, encouraging them to pool their thrift regularly and using the pooled thrift to make small interest bearing loans to members, and in the process learning the nuances of financial discipline. Bank credit to such SHGs followed. NABARD saw the promotion and bank linking of SHGs not merely as a credit programme but as part of an overall arrangement for providing financial services to the poor in a sustainable manner leading to empowerment of the members of these SHGs.
NABARD's 'SHG Bank Linkage' Programme
The launching of the Pilot phase of the SHG (Self Help Group) Bank Linkage programme in February 1992 could be considered as a landmark development in banking with the poor. The strategy involved is simple viz. forming small, cohesive and participative groups of the poor, encouraging them to pool their thrift regularly and using the pooled thrift to make small interest bearing loans to members, and in the process learning the nuances of financial discipline. Subsequently, bank credit also becomes available to the Group, to augment its resources for lending to its members. It needs to be emphasized that NABARD sees the promotion and bank linking of SHGs not as a credit programme but as part of an
overall arrangement for providing financial services to the poor in a sustainable manner and also an empowerment process for the members of these SHGs. More than 400 women join the SHG movement in India Every Hour. The NABARD commenced a Pilot Project country in 1992 aimed at promoting and financing 500 SHGs across the country. Since then the SHG- bank linkage strategy has come a long way. The strategy includes financing of SHGs promoted by external facilitators like NGOs, bankers, socially spirited individuals and government agencies, as also promotion of SHGs by banks themselves and financing SHGs directly by banks or indirectly where NGOs and similar organisations act as financial intermediaries. Many self-help groups, especially in India, under NABARD's SHG-bank-linkage program, borrow from banks once they have accumulated a base of their own capital and have established a track record of regular repayments. This model has attracted attention as a possible way of delivery microfinance services to poor populations that have been difficult to reach directly through banks or other institutions.
Major advantages of the Linkage Programme
a) By aggregating their individual savings into a single deposit, self-help groups
b) c) d) e)
minimize the bank's transaction costs and generate an attractive volume of deposits. Through self-help groups the bank can serve small rural depositors while paying them a market rate of interest. An economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers Lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts, Borrowers as part of an SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.
Mainstreaming of SHG Bank linkage programme
The Pilot phase was followed by setting up of a Working Group on NGOs and SHGs by the Reserve Bank of India in 1994, which came out with wide ranging
recommendations on internalisation of the SHG concept as a potential intervention tool in the area of banking with the poor. The Reserve Bank of India accepted most of the major recommendations and advised the banks to consider lendings to the SHGs as part of their mainstream rural credit operations. Based on very successful feedback of the pilot run of the Programme, NABARD in 1998 crystallized its Vision for providing access to one third of the rural poor through linking of 1million SHGs by 2007. What followed was massive scaling up of the training and capacity building awareness programmes by NABARD covering a large number of officials and staff of NGOs, banks, government agencies and rural volunteers in SHG promotion, nurturing, appraisal and financing. The vision of linking 1 million SHGs was achieved in the year 2004.
SHG (Self Help Group)
A SHG is a group of about 20 people from a homogeneous class, who come together for addressing their common problems. They are encouraged to make voluntary thrift on a regular basis. They use this pooled resource to make small interest bearing loans to their members. The process helps them imbibe the essentials of financial intermediation including prioritization of needs, setting terms and conditions and accounts keeping. This gradually builds financial discipline & credit history for themselves, as the money involved in the lending operations is their own hard earned money saved over time with great difficulty. This is ‘warm money.’ They also learn to handle resources of a size that is much beyond their individual capacities. The SHG members begin to appreciate that resources are limited and have a cost. Once the groups show this mature financial behaviour, banks are encouraged to make loans to the SHG in certain multiples of the accumulated savings of the SHG. The bank loans are given without any collateral and at market interest rates. Banks find it easier to lend money to the groups as the members have developed a credit history. ‘Cold (outside) money’ gets added to the own ‘warm money’ in the hands of the groups, which have become structures, which are able to enforce credit discipline among the members. The members have experienced the benefits of credit discipline by being able to save & borrow regularly without many hassles. The groups continue to decide the terms of loans to their own members. The peer pressure ensures timely repayments & replaces the “collateral” for the bank loans.
The core of SHG bank linkage in India has been built around an important aspect of human nature - the feeling of self worth. Over the last ten years, it has come to symbolize an enduring relationship between the financially deprived and the formal financial system, forged through a socially relevant tool known as Self Help Groups (SHGs). An amazingly large number of formal and non-formal bodies have partnered with NABARD in this unique process of socio-economic engineering. What had started off in 1992 as a modest pilot testing of linking around 500 SHGs with branches of half a dozen banks across the country with the help of a few NGOs, today involves about 20,000 rural outlets of more than 440 banks, with an advance portfolio of more than Rs.1, 200 crore ($ 240 m.) in microfinance lending to SHGs. Financial services have reached the doorsteps of over 8 million very poor people, through 500,000 SHGs, hand-held by over 2,000 development partners. Members make small regular savings contributions over a few months until there is enough capital in the group to begin lending. Funds may then be lent back to the members or to others in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery of microcredit. Self-Help Group (SHG) is a small voluntary association of poor people, preferably from the same socio-economic background. They come together for the purpose of solving their common problems through self-help and mutual help. The SHG promotes small savings among its members. The savings are kept with a bank. This common fund is in the name of the SHG. SHG is a group formed by the community, which has specific number of members like 15 or 20. Usually, the number of members in one SHG does not exceed twenty. In such a group the poorest would come together for emergency, disaster, social reasons, economic support to each other have ease of conversation, social interaction and economic interactions.
OBJECTIVES OF SHG
The SHGs comprise very poor people who do not have access to formal financial institutions. They act as the forum for the members to provide space and support to each other. It also enables the members to learn to cooperate and work in a group environment. The SHGs provide savings mechanism, which suits the needs of the members. It also provides a cost effective delivery mechanism for small credit to its members. The SHGs significantly contribute to the empowerment of poor.
• • • • • •
To sensitize people of target area for the need of SHG and its relevance in their empowerment process. To create group feeling among members. To enhance the confidence and capabilities of members. To develop collective decision making among members. To encourage habit of saving among members and facilitate the accumulation of their own capital resource base. To motivate members taking up social responsibilities particularly related to development.
Indicators of a good SHG I. Homogeneous membership As far as possible, the membership of an SHG may comprise people from comparable socio-economic background. Though difficult to define in clear terms, a major indicator of homogeneity in membership is absence of conflicting interests among members. II. No discrimination There should not be any discrimination among members based on caste, religion or political affiliations. III. Small membership Ideally, the group size may be between 15 and 20, so that the members are participative in all activities of the SHG. In a smaller group, members get
opportunity to speak openly and freely. However, the membership may not be too small that its financial transactions turn out to be insignificant. IV. Regular Attendance Total participation in regular group meetings lends strength to the effectiveness of SHGs. To achieve this, the SHGs should place strong emphasis on regular attendance in the group meetings. Transparency in functioning It is important that all financial and non-financial transactions are transparent in an SHG. This promotes trust, mutual faith and confidence among its members. Maintenance of books of accounts as also other records like the minutes book, attendance register, etc., are important. Set of Byelaws The SHG may discuss and finalize a set of byelaws, indicating rules and regulations for the SHG's functioning and also roles and responsibilities of members. It is better to have a written set of byelaws. The Self Help Promoting Institution (SHPI) and bank may guide the SHGs in this.
Thrift The habit of thrift (small savings) is fundamental to the SHG and helps in building up a strong common fund. Utilising savings for loaning Once an SHG has accumulated sizeable amount in the form of savings say for a period of about 3-6 months, the members may be allowed to avail loans against their savings for emergent consumption and supplementary income generating credit needs.
Formation of SHG
Non Governmental Organisations (NGOs) Social Workers, health workers, village level workers, etc Informal Associations of local people Development
oriented government departments Banks Bank personnel and other individuals (in their personal capacities) Farmers' Clubs under the Vikas Volunteer Vahini (VVV) Programme of NABARD Other development institutions.
The SHG-bank linkage programme is targeted to reach the poorest sections, which are bypassed by the formal banking system. Therefore, it is essential that only the very poor be considered as the target group for the SHG -bank linkage programme.
An SHG can be all-women group, all-men group, or even a mixed Group. However, it has been the experience that women's groups perform better in all the important activities of SHGs. Mixed group is not preferred in many of the places, due to the presence of conflicting interests.
Sustainability of SHG
• Members come together due to felt need, on platform of affinity and commonality • • • • •
of problems. SHGs are savings led and act as adhesive. They are characterized by collective and participatory wisdom. They give doorstep access to micro finance with near zero transaction cost. They offer interface with banking network. They offer platform for women's empowerment.
One major advantage of the ‘Indian’ SHG approach to micro-finance is its reliance on the existing very large network of banks, which are already legally and institutionally able to mobilise deposits and make loans. The SHG system does not require new ‘MFI’ (micro-finance institutions), which are slow and expensive to develop and whose competence and financial strength may be questionable. The SHG system uses existing marketing channels, the banks, to bring formal financial services to a new market segment, the poor and particularly women. It does however involve a new sub-retailer to reach this market, namely the SHG itself, and these new intermediaries have to be developed. In an ideal world, the banks would themselves be expected to take on this marketing channel development task, without any assistance. The banks have had very little previous experience of dealing with poorer women, but their experience with the male members of this market segment has been bad, and it is not self-evidently profitable. Their initial reluctance to invest in the development of this market is understandable.
SHG development, or ‘promotion’ as it is usually called, therefore must at least in the earlier stages of the movement be subsidised, and must often be undertaken by different institutions, known as Self Help Promotion Institutions, or SHPIs.
Five types of Self Help Promotion Institutions are as follows: 1.
NGOs are trusts or societies which promote SHGs for bank linkage. MFIs are themselves financial intermediaries. SHG promotion may be a major or a minor part of the NGOs work, but it must have the clear aim of linking the SHGs to a bank for savings and credit. The NGO may pay for this from its own resources, or from a NABARD or similar grant. 2. Banks are themselves SHPIs when branch staff themselves promote SHGs, from scratch, and then mobilise their savings and lend to them. The banks may be commercial banks, or RRBs, or co-operative banks. 3. VVVs are farmers’ clubs which have been set up, usually with assistance from NABARD, and initially to improve the credit culture in their community. They are strictly local community voluntary organisations, usually unregistered, and a number of them have recently started to promote SHGs in their own communities for bank linkage. Some do this without pay, or they may get financial assistance from NABARD or elsewhere. 4. Government agencies is a term which covers a wide range of state and central government entities which have started to promote SHGs under various schemes, usually but not always with an element of subsidy, with bank linkage as part of the scheme. 5. Self-employed individuals are people who promote SHGs not as employees or members of an institution but as individuals. They may do this as genuine volunteers, without any remuneration, or they may earn some income from the activity. There is a long history of using individual commission agents to improve the outreach of banking services, and many of these have promoted groups to facilitate their own work, particularly in urban areas. Savings collection agents working for Indian Bank and for Bank of Baroda, for instance, have promoted large numbers of informal savings groups; the concept of individual group promoters is not a new one. NABARD has recently started an experiment in five States to encourage individual ‘volunteers’ to promote SHGs, and a variety of experiments
with commission agents (or local unpaid volunteers) are being undertaken by various MFI and some banks.
Conceptual Thinking behind SHG Philosophy & Bank Linkage can be summarized as follows:
• • • • • • • • • •
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. Self Help supplemented with mutual help can be a powerful vehicle for the poors’ effort to socio-economic 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 SHG’s 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
a) • • • • 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 minimise 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
b) 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 stabilised • 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.
Shift to the New Paradigm
Perceived thrift as their strength as also as the bonding factor among themselves. • Realised that timely and adequate credit was preferable and productive than subsidies and doles. • They needed hassle-free delivery mechanisms. II. NGO’s • Acted as catalysts of change.
• Combined social and economic agenda with synergistic effect. • Recognised sustainability as the core factor in development.
Banking system Accepted SHG-bank linkage as a cost effective means of reaching the
poor. • Accepted peer pressure as collateral substitute for excellent recovery of loans. IV. • V. Government Formulated supportive policy framework.
• Encouraged routing of social programmes through SHGs.
Reserve Bank Of India • RBI policy pronouncements on micro Finance led to increased involvement of banks. • Liberalized interest rates and deregulated interest rate structure for micro credit, leading to flexibility in lending rates.
NABARD Provided inputs in capacity building for banks and partner agencies.
Promoted the idea of organizing thrift and credit groups among the NGOs as an add-on activity and encouraged linking them with banks. Provided loanable funds to banks and financial support to eligible MFIs, to ease the fund flow position to the sector
Highlights of SHG bank linkage programme as on 31 March 2006.
During the period April 2005 to March 2006, 620109 new SHGs were financed by banks to the tune of Rs 44.99 billion by way of loans. Cumulatively, banks have lent Rs 113.97 billion to 2238565 SHGs. b) NABARD has extended a refinance of Rs 10.68 billion to banks during 2005-06 bring the cumulative refinance amount to Rs 41.60 billion. c) 44362 branches of 545 banks (Commercial banks- 47; Regional Rural banks-158; & Cooperative banks - 340) situated in 583 districts in 30 states of the country are participating in the programme. d) About 32.98 million poor households have gained access to formal banking system through SHG bank linkage programme. e) Nearly 90% of the groups are women groups. f) NABARD estimates that there are 2.2 million SHGs in India, representing 33 million members that have taken loans from banks under its linkage program to date. This does not include SHGs that have not borrowed. g) "The SHG Banking Linkage Programme since its beginning has been predominant in certain states, showing spatial preferences especially for the southern region – Andhra Pradesh, Tamil Nadu, Kerala and Karnataka. These states accounted for 57 % of the SHG credits linked during the financial year 2005-2006." h) Nearly 60 per cent of the linked SHGs which have been promoted by government agencies are said to be in the State of Andhra Pradesh. i) Only 16,300 or under 12%, of the linked SHGs promoted by NGOs have been promoted with financial assistance from NABARD.
Future of Micro Financing in India
Projections of Indian Micro-Finance for the future
To get an Annual growth rate of about 20 % during the next five years.
• 75 % of the total poor households of 80 million (i.e. about 60 million) will be reached in the next five years. • The loan outstanding will consequently grow from the present level of about 1600 crores to about 42000 crores.
Challenges ahead for Indian Micro-Finance
• • • •
Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Ability to attract and retain professional and committed human resources.
• Design of apt MIS including user friendly software for tracking accounts and operations. • • • • • Appropriate loan products for different segments. Ability to innovate, adapt and grow. Bring out a compendium of small and micro enterprises for the MF clients. Identify and prepare a panel of locally available trainers. Ability to train trainers.
• Capacity to provide backward linkages or create support structures for marketing.
There is a great deal of discussion as to whether microfinance reaches the so-called ‘poorest of the poor’, and whether, if it does, it benefits them. It seems to be generally agreed that the main beneficiaries of microfinance are ‘the economically active poor’. It is not clear whether the SHG system reaches very poor people as effectively as the more internationally familiar Bangladesh Grameen Bank system, which is of course also being used in India and is growing, albeit from a smaller base, as rapidly as the SHG system. It appears most probable, however, that it does not. There is even less evidence as to whether the distribution of benefits within SHGs is equitable. It was found that poorer people in some SHGs in the Northern areas of Pakistan which have been promoted and financed by the Aga Khan Rural Support Programme (AKRSP) were benefiting very little from their membership. Some members had never taken loans, either because they were nervous of the debt or had no profitable investment opportunities, and were doing no more than lend their savings as free collateral for loans taken by their less poor fellow members. Similar situations have been found in Bangladesh, Kenya and elsewhere. Although banking with SHGs is slowly coming to be appreciated as profitable business, but the original and still the over-riding aim is to provide poor people with access to formal financial services.
References www.nabard.org www.et.com
Annual Report Statement of NABARD www.wikipedia.com
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