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M.Saravanan, Research Scholar in Commerce, Sree Narayana Guru College, K.G.Chavadi,
Coimbatore 641 105
Email.: Mobile No.: + 91 99434 37749

It is now recognized fact that microfinance can help rural poor people to increase their income
through viable micro enterprises. It could be a powerful instrument for achieving economic and
social empowerment of rural poor especially women.
As the poor people cannot have huge amount of savings, the demand for cheap and low cost
funds are high. Although there are a number of rural banks in India, the rural poor rarely perceive
those banks as alien institutions. As a result, majority of rural poor could not come purview of
formal credit system. The following are the reasons behind the failure of formal credit system:

Formal banks impose burden of loans on the poor who have no repaying capacity. Thus
the credit becomes counter productive.

Habitual poverty invalidates the hopes and aspirations of poor people.

Credit programme for the poor may be highly feeble.

Credit provides only temporary relief to poor.

Credit for the production activities sometime used as other social and consumption needs.

Micro credit for micro enterprise is useless if the micro credit is not accompanied with
training for capacity development, marketing skill, technological skill etc.

In rural India it can be seen that the poorer sections of the society of and destitute cannot avail of
the credit from banks and other formal institutions due to their inability to deposit collateral
security and mortgage property. At this point of view, micro financing of group lending is being
looked upon as the instrument that can be considered as the golden stick for poverty alleviation
vis--vis rural development.

The term microfinance is of recent origin and is commonly used while addressing the issue of
financial support to micro-entrepreneurs. There is, however, no statutory definition for
microfinance. The taskforce on Supportive Policy and Regulatory Framework for Microfinance
has defined microfinance as 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.
Micro Financial Sector (Development and Regulation) Bill, 2007 defines Microfinance services
as credit, life insurance, general insurances and pension services. While micro credit has been
defined as loans not exceeding Rs. 50000 (Rs. 1,50,000 in case of housing).
The different Models of Microfinance are:
1) SHGs promoted and financed by banks.
2) SHGs promoted by NGOs/Govt. Organisations and finance by banks.
3) SHGs promoted by financed through by NGOs by raising bank loans
4) The federated SHG approach.
5) SHGs promoted by NGOs/Societies/other organizations and financed by Microfinance
6) SHGs promoted and financed by MFIs (Grameen Replicator Approach)
7) Individuals directly financed by MFIs
8) The Urban Corporation Banking Model.
9) The Multi State Cooperative Solidarity group model.
10) The NBFC approach.
Rural Development means over-all development of rural areas to improve the quality of life of
rural people. It is an integrated process, which includes social, economic, political and spiritual
development of the poorer sections of the society.
Right from independence in fact even in the pre-independence era, rural development vis--vis
poverty alleviation had been considered as a major challenge to our country. Initially it was

assumed that various poverty alleviation programmes such as IRDP, TRYSEM, DWCRA, ICDP,
SITRA, etc. could be able to enhance income level of the rural masses through trickle down
effect. But these programmes failed to achieve the target because trickle down effect of
economic growth cannot be achieved if the growth is not accompanied with infrastructure
development; which is essential for speedy percolation of the benefit of such programmes.
Most poverty alleviation schemes also faced the problem of credit mobilization to the rural
masses. In the earlier schemes like IRDP, DWCR, etc. the beneficiaries perceived the loan as
grant. They did not feel the responsibility of repaying the loan. Bankers too did not have the time
or mechanism to monitor the repayment process. Due to poor recovery of loan the schemes
became non-viable (Rath, 1995 and Rao, 1990). The urgent need is capacity building of the poor
masses so that they can progress themselves; mere financial support cannot be useful in Rural
Development in the long term. Group approach can make rural people more capable for
considerable improvement in their quality of life.
Self Help Group (SHG) is a homogeneous group of poor, women, users etc. This group is a
voluntary one, formed on areas of common interest so that they can think, organize and operate
for their own development. SHGs function on the basis of co-operative principles and provide a
forum for members to extent support to each other. SHGs play a crucial role in improving the
savings and credit and also in reducing poverty and social inequalities. They can play pivotal role
1. Preventing exploitation of the poorer sections by creating self-reliance.
2. Building leadership qualities among group members.
3. Helping group members in documentation for obtaining credit.
4. Motivating members for prompt repayment of credit.
5. Providing training to its members.
National Bank for Agriculture and Rural Development (NABARD) was established as a
development bank for providing and regulating credit and other facilities for the promotion and
development of agriculture, small scale industries, cottage and village industries etc. The

objective of NABARD is to facilitate and support the orderly growth of the microfinance sector
through diverse modalities for enlarging the flow of financial services to the poor particularly for
women and vulnerable sections of society consistent with sustainability.
The first effort was taken by NABARD in 1986-87 when it supported and funded an action
research project on savings and credit management of self help groups of Mysore Resettlement
and Development agency (MYRADA).Then NABARD launched a pilot project to provide
micro-credit by linking SHGs with bank in 1991-92. The SHG-Bank Linkage Programmes aim
was to improve rural poors access to formal credit system in a cost effective and sustainable
manner by making use of SHGs.
Under the NABARD approach of SHGs linkage, banks extend loans to SHGs either directly or
through NGOs. NABARD extends 100 par cent automatic refinance facility to all banks against
their lending to SHGs or through NGOs to SHGs. As on 31 March 2007, 41,60,584 SHGs were
maintaining savings bank accounts with the banking sector with outstanding savings of Rs.
3512.71 crore, thereby covering more than 5.8 crore poor households under SHG Bank Linkage
The Commercial Banks had the maximum share of savings from 22, 93,771 SHGs (55.1%) with
savings amount of Rs. 1892.42 crore (53.9%) followed by Regional Rural Banks with savings
bank accounts of 11, 83,065 SHGs (28.4%) and savings amount of Rs. 1158.29 crore (32.9%)
and Cooperative Banks having savings bank accounts of 6, 83,748 SHGs (16.4%) with savings
amount of Rs. 462.00 crore (13.2%). The share of SGSY SHGs in the total was 9, 56,317
forming 22.9% of the total SHGs having savings accounts in the banks.
Based on the studies mentioned above and 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.
True sustainable development is achieved only when the communitys plans and actions
recognizes various aspects of Economy, Environment, Equity and Society simultaneously. We
can say that the SHGs formed under various programmes provide a great scope of convergence
of the programme / activities of various ministries, departments and organizations.
The Micro credit SHGs model has got tremendous attention in recent years. Micro credit is an
alternative source of credit for the poor who earlier were considered as non bankable. This
system not only provides credit, most important input for development, to the poorer section of
the society, but also aimed for their capacity building. It has also been observed that group
lending has distinct advantage in the form of excellent recovery rate improvement in the income
level. The phenomenal growth of SHGs indicates that the weaker sections of the society are also
capable to sharpen their micro-entrepreneurial skills with the help of their own savings and
additional bank credit, as needed. At this point, micro credit SHGs integration could be the way
out for overall rural development vis--vis poverty alleviation
Karmakar, K.G. (1999), Rural Credit and Self-help Groups: Micro finance Needs and Concepts
in India, New Delhi, and Sage Publication.
Dasgupta R. (2001) An informal Journey through Self-Help Groups, Journal of Agricultural
Economics Vol.56 (03) pp.370-385
Satis P. (2001) Some issues in the Formation of Self Help Groups, Journal of Agricultural
Economics Vol.56 (03) pp.411-418