SHG- BANK LINKED PROGRAM

Submitted By: Rachit Agarwal Dipanshu Bansal Jatin Jain Ritesh Jain Ashish Goel

Introduction The idea of forming groups to support each other originated in Bangladesh under the Leadership of Noble Laureate Mohamed Yunus. It is a noble mission- an innovative concept that has its roots in Bangladesh and also touched every part of the globe. In order to achieve the mission of reaching those families who did not access to credit by any formal financial institution and, therefore, were dependent on informal sources and moneylenders, the National Bank for Agriculture and Rural Development (NABARD) introduced the SHG - Bank Linkage Programme as a pilot project in 1992. Thereafter, RBI had advised commercial banks to participate actively in this programme. Subsequently, this programme was further extended to all Regional Rural Banks (RRBs) and cooperative banks. SHGs through the network of commercial banks, RRBs cooperative banks, NABARD and NGOs has been largely supply driven as well as a recent approach in the provision of financial services to the poor. What is Self Help Group(SHG) Self Help Group is a homogeneous group of micro entrepreneurs with affinity among themselves, voluntarily formed to save whatever amount they can conveniently save out of their earnings and mutually agree to contribute to a common fund of the group from which small loans are given to the members for meeting their productive and emergent credit needs at such rate of interest, period of loan and other terms as the group may decide. Objective:

To meet the credit needs of the poor by combining flexibility, sensitivity and responsiveness of the informal credit system with the strength of technical and administrative capabilities and financial resources of the formal credit institutions. To build mutual trust and confidence between the bankers and the rural poor. To encourage banking activity both on thrift as well as credit side in a segment of the population that the formal financial institutions usually find difficult to cover.

Eligibility: The group should

Be in active existence for at least a period of six months. Have successfully undertaken savings and credit operations from its own resources. Maintain proper accounts/records. Work democratically wherein all members feel that they have a say should be evident. Be formed to reflect genuine need to help each other and work together and Branch Manager should be convinced that the group has not come into existence only for the sake of participation in the project and availing benefits there under.

Have members preferably with homogenous background and interests.

MODELS OF SHG-BANK LINKAGE PROGRAMME The strategy behind these models is to form small, cohesive and participative groups of the poor and encourage them to pool their savings regularly and use the pooled savings in order to make small interest bearing loans available to the members. Bank credit facility also available to the group to augment its resources for the purpose of lending to its members. The SHG-bank linkage program has proved to be the major supplementary credit delivery system with a wide acceptance by banks, NGOs and various government departments. There are three models of SHG-bank linkages that have evolved over time, especially in India. MODEL -I. SHGs formed and financed by banks In this model, banks themselves take up the work of forming and nurturing the groups, opening their bank accounts and providing them with bank loans after satisfying themselves as to their maturity to absorb credit. Up to March 2006, about 20% of the total number of SHGs financed was from this category. This shows an increase of 61.63 percent in bank loan to SHGs over the position as on March 2005 reflecting an increased role of banks in promoting and nurturing SHGs. Here, the banks act as the SHGPI. MODEL- II. SHGs formed by NGOs and formal organisations but directly financed by the banks In this model, groups are formed by NGOs (in most cases) or by the government agencies. The groups are nurtured and trained by the agencies. The bank then provides credit directly to the SHGs after observing their operations and maturity to absorb credit. While the bank provides loans to the groups directly, the facilitating agencies continue their interactions with the SHGs. Most linkage experiences begin with this model, where NGOs play a major role. This model has also been popular and more acceptable to banks, since some of the difficult functions of social dynamics are externalized. This model continues to have a major share. About 70 percent of the total number of SHGs is financed under this model. MODEL- III. SHGs financed by banks using NGOs and other agencies as financial intermediaries For various reasons, banks in some areas are not in a position even to finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and microfinance intermediaries. First, they promote the groups, nurture and train them and then they approach banks for bulk loans for further lending to SHGs. In other words, banks take the sole responsibility for promoting, developing and financing SHGs. In fact, this programme requires considerable effort by the bank staff towards the formation of SHG. This model is not so encouraging.

Extent of Credit The acceptable proportion of savings to the loan could vary from 1:1 to 1:4 depending on the assessment of the SHG by the Bank. Security: Hypothecation of assets created out of Bank's finance. No insistence on collateral security

Security Documents:

Inter se Agreement by all members. Articles of Agreement by authorized members.

Repayment Bank prescribes appropriate repayment period in negotiation with the Group which may range from 3 to 7 years. Repayment may normally be in regular monthly installments or as determined at the time of loaning based on local conditions, activities undertaken by members etc. Loans from SHGs to members could be repaid in appropriate installments which may be daily, weekly or market days fortnightly, monthly etc. The following graph shows the gradual increase of the SHG- Bank Linkage Programme in India over the years.

The following graph shows the presence of the SHG- bank linked programmes in various regions of India.

The following factors attribute to the success of the SHG approach: 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 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 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 and Governments promote them for multiple developmental objectives
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Future Strategy for the SHG- Bank Linked Programmes should be as follows: Expansion in the Poverty struck and Tribal areas Massive capacity building efforts by other stakeholders eg.Banks,NGOs, Govt. Dev. Dept. Banks to own the SHGs linked with them as their client and nurture them to keep them in good health Training the SHG members to maintain their books of account themselves or arrange IRVs/Barefoot accoutant/Smart card etc Federating the SHGs for future handholding and sustainability Graduation of SHG members to Entrepreneurship Skill development training to improve work efficiency and develop quality product, Arrangement for raw material and other inputs Design development and consistancy Marketing of the product