Some Do's and Dont's in
Linking Banks and Self Help Groups (SHGs)
The following list is taken from a pilot project initiated by India's National Bank for Agriculture and Rural Development (NBARD) on Linking Banks with Self-Help Groups. The project was started on the recommendation of Reserve Bank of India, the central bank for India. The list was part of a set of guidelines issued to all commercial banks soliciting their participation. While the list is aimed specifically at bank managers and other officials, there are a number of lessons to be learnt for people's groups, NGOs, and others involved in providing credit to low-income groups, not in the least a changing attitude apparant in the banking institutions in India. This list was prepared in February, 1992.

  1. Pilot Project for Linking Banks with self-help Groups (PPLBG)
    • Treat the PPLBG as your own bank's programme or scheme
    • Make use of the guidelines given by the National Bank but feel free modify it to suit the local situatio, type of target group, risks involved etc.
    • Examine the guidelines carefully but don't disregard some of them without good reason (eg. guidelines regarding selection criteria of SHG, providing loans as a multiple of SHGs savings, providing loans of shorter maturity with on or very short grace period to begin with, etc.)
    • Take your won initiative. Find your own NGO or SHG

  2. Prepare your Bank for PPLBG:
    Train the staff involved (branch managers, development manager for Argiculture etc) by deputing to training programmes conducted by the National Bank or to programmes specially designed by your own training colleges.

  3. Selection of NGOs for collaboration
    • Though the National Bank will select a few reputed NGOs for the PPLBG project, banks may also select NGOs which are capable of providing adequate guidance to SHGs.
    • An NGO selected should meet the following criteria: (a) it shoud have a good track record; (b) a proper system of book-keeping and audited balance sheets for the last three years; (c) approach of promoting and working with groups of people belonging to weaker.

  4. Selection of SHG for Linking
    • The following criteria may be considered: (a) village government leader should not normally be the officer bearer or the leader of the SHG; (b) there should not be any interference from the local authority; (c) satisfactory internal savings and credit activity for at least six months; and (d) proper book keeping system and procedure for lending and savings.
    • If any of these criteria are not met, steps should be taken to remeby the situation by training, by arranging visits to SHGs working well, etc., if necessary, with the assistance of an NGO.
    • It would be prudent to select SHGs only from a smaller geographical area so as to provide effective guidance and exercise and exercise proper supervision.
    • Banks may be required to provide training to members of SHGs in book keeping, financial management, income generating activities, etc. with the help of an NGO.
    • No credit to SHG without training or before ensuring it has necessary capability to participate in the PPLBG.

  5. Savings
    • Internal savings mobilization is the core of Self-Help.
    • External finance must not replace adequate self-financing and internal savings.
    • Banks may provide proper guidance to stimulate savings of SHG.
    • SAVINGS FIRST: ALL CREDIT MUST BE PRECEDED BY SAVINGS
    • Banks may consider covering members of the group under Group Insurance Scheme of an insurance company.

  6. Use of loans for productive purposes

    • Loans to SHGs for group enterpries be discouraged in the initial stages as they have generally failed. Exceptions should be very carefully examined and supervised.
    • The purpose for which loans are to be given by the SHG should be determined by the SHG and its members.
    • SHG should be strongly encouraged to use loans for productive purposes. Loans should normally not be used for non-productive purposes. However, internal savings of SHG may be used for meeting emergent needs of its members.

  7. Loan ceilings
    • There is no general recommendation concerning loan ceilings to SHGs
    • In principle, loan ceilings should be based on estimated absorptive capacity which in turn is based on the capacity to save, invest and repay.

  8. Ratios of savings and credit
    • Banks may coonsider two alternativees. One, to begin with, provide loans to a SHG which is two times the savings of that SHG. This ration can be increased to a maximum of 1:4 as the bank gains greater confidence in the SHG.
    • Second, request a deposit of blocked savings before a loan is granted. To begin with, start with a conservative ration of 1:1 or 1:2 of savings to credit depending upon the bank's assessment of risks involved. With satisfactory repayment, the ratio may be increased after each cycle, until the absorptive capacity of the group and its members have been reached.
    • Under both the alternatives, it should be ensured that internal or blocked savings are genuine savings of the group and its members and it has not been borrowed from external sources.

  9. Repayment Period
    • Maturities should be differentiated and not uniform. Particularly, loans should not all be at the recommended maximum maturity.
    • Shorter maturities have two advantages which should be strongly emphasized in consultation with NGOs, SHGs and members: (a) they are easier to handle and thus less risky, (b) they permit a more dynamic growth of the loan portfolio.
    • First loans under PPLBG to NGOs, SHGs or members could have shorter maturities. Subsequent loans may have longer maturities if justified.

  10. Lend first cycle of loans without a grace period
    • First loans from banks or NGOs to SHGs and from SHGs to members should be without a grace period.
    • Exceptions should be carefully examined. Even if a loan is used for agricultural purposes, borrowers usually have income from various sources which permit monthly repayments.
    • If shorter grace periods (eg. one, two or three months) are given, the loan amount should be kept small.

  11. Insist on timely repayment
    • Banks, NGOs and SHGs must insist on timely repayments. This is to be strongly emphasized at the time of lending, during discussions prior to lending and in training programmes.
    • Loans from banks or NGOs to SHGs and from SHGs to members must be repaid in regular installments.

  12. Loan repayment installments
    • Loans from banks to SHGs could be repaid normally 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 should be repaid in appropriate installment which may be daily, weekly on market days, fortnightly, monthly etc.

  13. Deliver credit publicly
    • If possible, credit delivery to SHGs and members should be simultaneous and in public, ie during the regular meeting of the SHG.
    • If this is not possible, credit delivery to a SHG should always be in the presence of several office bearers of the SHG and selected members, at least one or two of the major borrowers. A loan must never be handed over to a single representative of the group.
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Hari Srinivas - hsrinivas@gdrc.org
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