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Self Help Groups (SHGs) and Microfinance Institutions

What are SHGs?

Self-Help Groups are informal associations of people who choose to come together to find ways to improve their living conditions. They help to build Social Capital among the poor, especially women.

 The most important functions of a Self-Help Groups are

• to encourage and motivate its members to save

• to persuade them to make a collective plan for generation of additional income

• to act as a conduit for formal banking services to reach them.

Self-Help Groups have emerged as the most effective mechanism for delivery of micro-finance services to the poor. The range of financial services may include products such as deposits, loans, money transfer and insurance.   

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 General Issues related to SHGs

• Agricultural Activities: Most of the SHGs work at local level and engaged in agricultural activities

Lack of Technology

Access of market: Also the goods produced by SHGs do not have access to larger market place.

Poor Infrastructure: Most of these SHGs are situated in rural and far reach areas that lack connectivity via road or railways. Access to electricity remains an issue.

Lack of training and capacity building

Politicization: Political affiliation is also a major reason for group conflicts.

Credit Mobilization: A study has shown that about 48% of the members had to borrow from local money lenders, relatives and neighbors because they were getting inadequate loan from groups. Also issues like hoarding of money was witnessed.

System of monitoring: The general reports on the progress of SHGs show statistics of growth and spread of SHGs without questioning the process and internal health of the SHGs.

Socio-Cultural Hurdles in Penetration of SHGs in Rural Areas

There has been uneven distribution in the spread of SHGs in India. Socio-cultural factors along with government support and presence of NGOs have been major reasons for that.

In March 2001, 71% of the linked SHG, were from southern region consisting of Andhra Pradesh, Karnataka, Kerala and Tamil Naidu.

• These are also the states where society is deeply entrenched in patriarchy with limited financial and social role for women.

• Due to family responsibilities, majority of the women members cannot give their attention to their enterprises.

• One of the major hurdles in lack of support from family members.

• Due to male dominated society, women members could not uplift their business followed by lack of social mobility.

• In many SHGs strong members try to earn a major share of the profit of the group, by exploiting the ignorance and illiterate members.

 Measures Taken by the Government to Promote the SHGs

Self Help Group-Bank Linkage Programme: On the recommendations of SK Kalia

Committee, the SHG-Bank linkage programme was started at the initiative of NABARD in 1992 to link the unorganised sector with the formal banking sector.

Under this programme, banks were allowed to open savings accounts for Self-Help Groups (SHGs). Banks provide loans to the SHGs against group guarantee and the quantum of loan could be several times the deposits placed by such SHGs with the banks.

 Banks should consider entire credit requirements of SHG members, namely,

(a) income generation activities,

(b) social needs like housing, education, marriage, etc. and

(c) debt swapping”.

It is being implemented by commercial banks, regional rural banks (RRBs), and cooperative banks.

Priority Sector Lending: GOI has included SHG as a priority sector to mandate and enhance banks focus on them. Bank credit to members of SHGs is eligible for priority sector advance under respective categories viz., Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure and Others.

• SHG, have been allowed to run grain banks to secure the food security in food & care regions.

Priyadarshini scheme, with NABARD as the nodal agency, has aimed at women empowerment and livelihood enhancement through SHGs.

Deendayal Antodaya Yojana – National Rural Livelihoods Mission (DAY-NRLM): It seeks to alleviate rural poverty through building sustainable community institutions of the poor. Mission closely works with the Department of Financial Services (DFS), Reserve Bank of India (RBI) and the Indian Bank Associations (IBA) to provide bank credit to SHGs.

Mahila Kisan Shashaktikaran Pariyojana: In order to promote agro-ecological practices that increase women farmers’ income and reduce their input costs and risks, the DAY-NRLM Mission has been implementing the Mahila Kisan Shashaktikaran Pariyojana (MKSP).

Suggestions to Improve the Working of SHGs

Credit needs to be provided for diversified activities including income generating livelihood activities productions, housing consumption loan and against sudden calamities.

• The delivery system has to be proactive and should respond to the financial needs of the farmers.

Training programmes relating to management of finances, maintaining accounts, production and marketing activities etc. should be given.

Simplify the process of giving loans, i.e. reduce the number of questions to important non repetitive ones.

• Provide gender sensitization training to bank staff so that they are sensitized to the needs of rural clients especially women.

Adequate insurance coverage should be provided to the business units promoted by SHG against the financial losses to safeguard the interest of the entrepreneurs.

 What are Microfinance Institutions?

Microfinance, also called microcredit, is a type of banking service that is provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services.

Microcredit has gained much traction as a tool for ensuring the welfare of the most impoverished in the society but there are certain flaws in the model.

What is microcredit?

Microcredit refers to the granting of very small loans to impoverished borrowers, with the aim of enabling the borrowers to use that capital to become self-employed and strengthen their businesses. Loans given as microcredit are often given to people who may lack collateral, credit history, or a steady source of income.

MFIs operate in a number of forms and shapes in India:

o Joint Liability Groups

o Self Help Groups

o The Grameen Bank Model

o Rural Cooperatives.

Role of Microfinance Institutions in Development

Women Empowerment:

 By offering financial services to the poor unprivileged women of the country, the institutions have opened a door for their economic growth.

Uneducated, poor and unemployed women usually don’t get access to loans from typical lending organizations and this is where the MFIs have come to their help.

Rural Development: More than subsidies, poor need access to credit. Absence of formal employment make them non ‘bankable’. This forces them to borrow from local moneylenders at exorbitant interest rates. MFIs enhance credit to poor even in the absence of formal mortgage.

Financing the unfinanced: The microfinance sector consistently focuses on understanding the needs of the poor and on devising better ways of delivering services in line with their requirements, developing the most efficient and effective mechanisms to deliver finance to the poor.

• The World Bank estimates that more than 500 million people have directly or indirectly benefited from microfinance-related operations.

Why are microcredit institutions failing to deliver long-term benefits?

  1. Lack of evidence of transformative effects of microfinance on the average borrower.
  1. stringent repayment schedule offered by most microcredit institutions.
  2.  institutions offering microcredit are unable to judge the risk associated with lending to certain borrowers.
  3. To lower the risk of defaulting, microcredit lenders therefore resort to repayment schedules that demand an initial repayment that is almost immediate, after which borrowers must adhere to an inflexible weekly schedule for repayments.
  4. The effect of this is that borrowers are unable to use the loans on investments that will take some time to be fully realised, and instead are forced to use the loans they receive on short term investments that only boost production to an extent, and the overall growth of their incomes remains meager.

Issues Related to Microfinance Institutions

• Higher rates of Interest

• Over-dependence on banking sector

• Lack of awareness of financial services

• Regulatory Issues: RBI is the regulator for MFIs. But needs and the anatomy of micro finance industry is supremely different from that of banks.

How can the microcredit system be reformed to have greater benefits for borrowers?

  1. Revise repayment schedule with some grace period to begin repayment.
  2. Switch from weekly repayment schedule to a monthly one.
  3. As for the barriers to assessing credit risk, these can be mitigated by using community information.
February 2024