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MICROFINANCE & SELF-HELP GROUPS (SHGs)

MICROFINANCE & SELF-HELP GROUPS (SHGs)


On going through this chapter, the candidates will be able to understand the concept of microfinance in the Indian environment and the role of Self Help Groups (SHGs) in the microfinance activities of banks.

MICROFINANCE
Micro Finance/Credit has been defined as the providing credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their living standards. Microfinance Institutions (MIFs) are those, which provide these facilities. Availability of loans to rural people without obtaining Collateral for income generating purposes in order to reduce the poverty levels

MICROFINANCE & SELF-HELP GROUPS (SHGs)


Despite priority sector lending targets over the last decade, banks outreach to small borrowers in the bottom of the pyramid has progressively declined, both as proportion of credit and in terms of total number of bank accounts. To fill the gap, Microfinance Institutions (MFIs) have emerged as key providers of financial services for the poor. Majority of the MFIs are not-forprofit organizations that facilitate the formation of grameen groups or Self Help Groups (SHGs) and link them with formal banks. The model accounts for about 70% of microfinance in India.

Microfinance: what is it?

15%
R1 / R2

37%
R3 Microfinance = provision of financial services to the poor

48%
R4

Microfinance: How it works?

MICROFINANCE DELIVERY MODELS


MFIs use two basic methods in delivering financial services to their clients. These are: (1) Group Method and (2) Individual method 1) Group Method This is one of the most common methodologies for providing micro-finance. Group method primarily involves a group of individuals, which becomes the basic unit of operation for the MFIs. As MFIs have to provide collateral free loans, group methodologies help in creating social collateral (peer pressure) that can effectively substitute physical collateral. Group becomes a basic unit with which MFIs deal. The advantage of group methodology is that: Groups are trained to own joint responsibility for loans that are taken by individuals in the group. Groups ensure repayments from all individuals in that group and incase of a default Groups functions as the forum where the credit discipline and other related issues are discussed. Group may have to jointly own the responsibility of defaults and pay on behalf of defaulting client. Group also help credit appraisal and provide opinion on creditworthiness of each individual in the group. Groups methodology also helps in controlling cost

MICROFINANCE DELIVERY MODELS

2. Individual Method MFIs are also increasingly providing loans to individuals. In Individual lending method, MFIs provide loans to an individual based on his/her own personal credit worthiness. Individual lending is more prevalent with clients who generally need bigger size loans and have the capacity to produce guarantee and generate enough comfort to the MFI. MFIs generally base their decision on personal knowledge of the client, his/her reputation among peers and society, clients income sources and business position. MFIs also ask for individual guarantors or take post-dated cheques from clients. Individual guarantors come from friends or relatives well known to the borrower and who are ready to take liability of repaying the loan, in the event of the borrower fail to do so. If the loan is significantly larger, then MFIs may also take some collateral security.

MFIs Financial Intermediaries Models

This model is a go-between lenders and the borrowers. The intermediary plays a critical role of generating awareness and educating the borrowers about savings, credit etc. These activities are aimed at raising the credit worthiness of the borrowers to a level attractive enough to the lender. The links developed by the intermediaries, could cover funding, programme links, training and education and research. Micro credit can thus be provided by the financial institutions either directly to individuals or the group of individuals or through intermediaries. NGOs provide the most effective intermediation in micro finance. They not only identify the right kind of borrowers but also ensure the success of the project through development of skills and community participation.

SHG-Bank Linkage Bank

Bank-MFI Linkage

Bank

Branch NGO SHG

MFI

Ind./SHG/JLG

Branches assess credibility of each SHG and monitor repayment process Group formation by NGOs

Bank on lends to MFIs based on their capital

The Self Help Group (SHG)


We have seen the models through which microfinance is delivered to the rural poor. We have also seen that the success of microfinance depends on the group dynamics exerted to the benefit of both the lenders and the beneficiaries. One such delivery channel for micro lending is the Self Help Group (SHG) model in the micro credit delivery system.

SHG - DEFINITION
Self Help Group is a voluntary association of poor formed with the common goal of social and economic empowerment Microfinance through SHGs offer the best form of credit reaching the unreached and the under-reached. The members volunteered to organize themselves into a group for the eradication of poverty of the members. They agree to save regularly and convert their savings into a common fund known as the group corpus. The members of the group agree to use this common fund and such other funds that they may receive as a group through a common management.

The Self Help Group (SHG). . Need for SHGs The Rural Poor are socially backward, illiterate, with low motivation and a poor economic base. Individually they are week in socio-economic sense and lacks access to knowledge & information which are most important for development.

However, in a group they are empowered to overcome many of these weeknesses and hence there are needs for SHGs.

The Self Help Group (SHG). . Need for SHGs


The specific terms are as under:
1. Mobilize the resources of individual members for their collective economic development. 2. To uplift the living conditions of the members. 3. To inculcate savings habits. 4. For utilization of local resources. 5. To mobilize individual skills for the groups interest. 6. To create awareness about the rights and responsibilities. 7. To assist the members financially in the times of need. 8. For entrepreneurship development. 9. To identify problems, analyzing and finding solutions in the group 10. To act as a medium for socio-economic development of the village. 11. To develop linkages with institutions of NGOs. 12. To organize training for skill development. 13. To help in the recovery of loans. 14. To gain mutual understanding, develop trust and self-confidence. 15. To build up teamwork. 16. To develop leadership qualities.

The Self Help Group (SHG) Organizing the Group A homogeneous group of about 15 to 25 Every member to save a small amount regularly. Pooled savings kept in a savings bank account in SHGs name transaction costs of both the poor and bank reduced ! SHG to use pooled savings to give interest bearing loans to members decisions taken in group meetings Every member learns prioritization and financial discipline. Their capacities to think and handle larger resources improves! Depending on the SHGs maturity, bank gives loan to the SHG as a multiple of the pooled savings. Bank loan added to the SHG kitty. Adequate & sustained access to financial services!

The Self Help Group (SHG)- Bank Linkage Programme Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements, in the case of marginal farmers, landless labourers, petty traders and rural artisans belonging to socially and economically backward classes and tribes whose capacity to save is limited or too small to be mopped up by the banks. For various reasons, credit to these sections of the population has not been institutionalized. The studies conducted on the informal groups promoted by non governmental organizations (NGOs) brought out that Self-Help Savings and Credit Groups have the potential to bring together the formal banking structure and the rural poor for mutual benefit and that their working has been encouraging.

Limitation of the predominant model

SHG-Bank linkage model


Loan at 9% Bank SHG

No liability

NGO

Group formation/ linkage

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Other condition of indirect finance to SHGs through NGOs:


As regards financing NGOs or MFIs, the following are important points:

a) NGO must be registered under the Society/Company/Partnership or Cooperative Act. b) It should submit audited balance sheet for three years. Bank will analyze it for its performance. c) The Bye-laws of NGO must provide for borrowing for SHG activities. This should be supported by a resolution to borrow from bank and a statement of credit required by SHGs.

The following criteria would broadly be adopted by NABARD for selecting SHGs:
a) The Group should be in existence for at least six months. b) The Group should have actively promoted the savings habit. c) Groups could be formal (registered) or informal (unregistered). d) Membership of the group could be between 10 to 25 persons. The advances given by the banks to the groups were treated as advances to "weaker sections" under the priority sector. While the norms relating to margin, security as also scales of finance and unit cost for lending to the SHGs, would be decided by the banks.

The Guidelines for formation of SHGs:


a) The number of members in a Group should not exceed 25. However, in the difficult areas this number may be from 5-20. b) Generally, all members of the group should belong to families below poverty line. c) Incase of Govt. sponsored schemes, maximum 30% can be taken from above poverty line. But the members of above poverty line are not eligible for subsidy and they cannot become office bearers of the Group. d) The Group shall not consist of more than one member from the same family. e) A member should not be a member of more than one Group. f) The Group should devise a code of conduct. This should be in the form of regular meetings, functioning in a democratic manner, allowing for free exchange of views, participation of all the members in decision making. g) The members should build their corpus through regular savings. h) The Group should maintain simple basic records, minutes, attendance, loan ledger and individual passbooks.

Design features of SHGs


Enables exclusion of rich Self-Self-selection Focus on women Saving first and credit later
Intra group appraisal systems and prioritization

Credit rationing Shorter repayment terms Market rates of interest Progressive lending

Self Help Groups (SHGs) and PMRY


Educated unemployed youth satisfying the eligibility criteria as laid down under the scheme, volunteer to form SHG to set up selfemployed ventures (Common Economic Activity). A self Help Group may consist of 5-20 educated unemployed youth. There is no upper ceiling on loan. Loans are provided as per individual eligibility, taking into account the requirement of the project. SHG may undertake a common economic activity for which a loan sanctioned without resorting to onward lending to its members. Subsidy is provided to the SHG as per the eligibility of the individual members. Required margin money contribution (Subsidy and margin to be equal to 20% of the project cost) should be brought in by the SHG collectively. No collaterals up to a limit of Rs.1 lac.

Self Help Groups (SHGs) and SGSY SCHEME

The SGSY scheme came into operation replacing other old schemes like the IRDP, TRYSEM Etc. The objective of the scheme is to bring the poor people above the poverty line within three years. For this purpose, an emphasis has been laid on group financing and group activities, taking into account the natural resources available in the area and the activities suitable to that area. Preference will be given to well functioning SHGs in the villages both under the group finance and individual finance.

CAPACITY BUILDING OF THE self Help Groups (SHGs)

The SHGs which are in existence for about six months and have demonstrated the potential of a viable group, it receives a revolving fund of Rs.25,000/- from the bank as cash credit facility. DRDA will give a sum of Rs.10,000/- to the bank and asking the bank to charge interest on the sum above Rs.10,000/-. The subsidy of Rs.10,000/released by DRDA is adjusted against the loan at the end of cash credit period on the request of the group.

THANKYOU

STATE BANK OF INDIA

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