1. Introduction

Resulting consequences of the policy framework did not contribute to self-sustained growth of the rural credit system and it also did not adequately serve the rural poor. It is well known that a part of the subsidies and concessions involved in rural credit were captured by people who were not poor and substantial number of very poor could not be reached under this dispensation. Further, the rural credit delivery system in most of the developing countries was weakened by poor credit discipline among the borrowers resulting in low recovry of dues. High operating (intermediation) costs, burden of subsidised interest rates, non-viability of operations and heavy dependence on concessionary outside funding or refinance support were some of the other constraints in the development of self-sustaining systems. Many credit programmes started with support from the State or a donor agency operated as per their dictates and were abandoned due to poor results.

The erosion in credit discipline has been a fall out of the system of 'targeted credit' where loans were often made in a rush, carried a certain political aura, the lending institutions were identified by borrowers with the Government, and relationships between the lender and borrower rarely developed. In such systems, prospective borrowers were often identified by extension workers who assisted in sanction of grants (where applicable) from the state and generally escorted them to the bank who sanctioned the loan. While the involvement of the extension agents upto this stage was visible and common, their involvement in the recovery of loans so granted was most uncommon.

2. The Core Issue

Besides the high transaction costs, the perception of risks in financing small borrowers who are unable to offer physical collateral, articulate their case or submit proper loan proposals, the urban orientation and the lack of flexibility in their operations are the other constraints which restrict the out reach of the formal banking system for the poor. The poor also often perceive banks as alien institutions which exist to serve the needs of "others". The physical and social distance [in stratified societies] constrain their approaches to bank branches which, for them, do not appear to be functioning with their needs in mind. Credit needs of the poor are determined in a complex socio-economic milieu where the dividing line between credit for 'consumption' and 'productive' purposes is rather blurred making it difficult to adopt the traditional banking apporach to lending. The result is that financial services of the formal banking system have remained unaccessible to majority of the poorer sections of the rural population in most developing countries and their reliance for credit is mainly on the informal credit channels. Informal channels include money lenders who operate outside the legal and policy framework of banks, market vendors, shopkeepers and others including friends and relatives. Credit in the informal system is usually available immediately, when and where required and often without collateral and lengthy documentation formalities, since the lender usually relies on personal knowledge of borrowers and their circumstances. However, interest rates are not only extermely high, but sanctions often include conditions, verbal or writtern, which are heavily loaded in favour of the lender and are sometimes carefully guised and are detrimental to the interests of borrowers. Often credit is associated with other transactions, for example, the purchase of raw material from a supplier, with deferred payment or pre-harvest sale of a crop with immediate payment.

Availability of alternative financial services could do much to improve the welfare of rural poor and their families. In most developing countries, attempts have been made to develop cooperatives by bringing together people of small means for fostering thrift and mutual help for their economic betterment. However, cooperatives have achieved only a limited success in selected pockets. On account of their large size, and the heterogeneous economic status of their members, the decision making gets invariably delegated to a small number of usually well-off and influential members. Such influential members are often also able to corner benefits at the cost of those who are poor and do not command ownerships of productive assest or influence. Besides, since their resource base is often weak, the cooperative by and large depend on resources handed down vertically from higher financing agencies. With dependence for financial assistance and the role which most governments play in their development, growth and monitoring, cooperatives are sometimes seen by people as a "government agency" and not as their own institution.

Against this background, evolving mechanisms for meeting the economic aspirations and credit needs of the rural poor in the form of self-help groups (SHGs) seem another possiblity.

3. The SHG Concept

Involvement of SHGs with banks could help in overcoming the problem of high transaction costs in providing credit to the poor, by passing on some banking responsibilities regarding loan appraisal, follow-up and recovery etc.to the poor themselves. In addition, the character of SHGs and their relations with members offered ways of overcoming the problem of collateral, excessive documentation and physical access which reduced the capacity of formal institutions to serve the poor.

Based on local conditons and requirements, the SHGs have evolved their own methods of working. Some of the common characteristics of functioning of these groups are indicated below:

• The groups usually create a common fund by contributing their small savings on a regular basis.
• Most of the groups themselves, or with help of NGOs, evolve flexible systems of working and managing their pooled resources in a democratic way, with participation of every member in decision-making.
• Request for loans are considered by the group in their periodic meetings and competing claims on limited resources are settled by consensus.
• Loaning is done mainly on trust with a bare minimum documentation and without any security.
• The amounts loaned are small, frequent and for short duration.
• The loans cover a variety of purposes, some of which are non-traditional and rather un-conventional.
• Rate of interest differs from group to group and even with purpose. Interest charged is generally higher than that charged by banks and lower than that charged by money lenders.
• Periodic meetings of members also serve as a forum for collecting dues from members.
• Defaults are rare mainly due to group pressure and intimate knowledge of end use of credit.

4. The Linkage of SHGs with Banks

1. to evolve supplementary credit strategies for meeting the credit needs of the poor by combining the flexibility, sensitivity and responsiveness of the informal credit system with the strength of technical and administrative capabilities and financial resources of the formal financial institutions.
2. to build mutual trust and confidence between bankers and the rural poor.
3. to encourage banking activity, both on the thrift and credit sides, in a segment of the population that formal financial institutions usually find difficult to reach.

MODEL 1: The simplest and most direct is a model in which the banks deal directly with the individual SHGs, providing financial assistance for on-lending to the individual members.

MODEL 2: Another model, a slight variant of the first, is where the bank gives direct assistance to the SHG and the SHG promoting instituion (SHGI), usually an NGO, provides training and guidance to the SHG and generally keeps a watch to ensure its satisfactory functioning.

MODEL 3: The third model places the NGO or SHGI as a financial intermediary between the bank and a number of SHGs. The linkage between the bank and the SHGs in this case is indirect. The NGO accepts contractural responsibility for repayment to the bank.

MODEL 4: The fourth model envisages bank loans directly to individual members of SHGs upon recommendations of the SHG and NGO. In this case, the NGO assists the bank in monitoring, supervising and recovery of loans.

It is possible that the linkage may follow an evolutionary process and move from model three to model two and to model one and finally to model four where individuals get direct access to the bank. However, the adoption or acceptance of a particular model would depend on the perception of the bank and the strength of the SHGs and the NGO. Where the banker is able to have a first hand information on the working of a SHG which is functioning satisfactorily and has rotated its pooled resources two/three times, he may well start with model two or even model one. However, a more conservative banker may like to start with model three and rely on the NGO or SHGI.

The Financial Scheme

The financial scheme under the Linkage Programme could be based on the following broad principles:

• Savings first, no credit without saving.
• Saving as partial collateral
• Bank loans to the group, for onlending to members
• Credit decisions for onlending to members by the group
• Interest rates and other terms and conditions for loans to members to be decided by the group
• Joint liability as a substitute for physical collateral
• Ratio between savings and credit contingent upon credit worthiness of the group; increasing with good repayment record.
• Small loans to begin with.

5. The Linkage Project in India

The operational guidelines from NABARD were deliberately kept flexible to enable the prticipating banks and field level bankers to innovate and contribute to building and strengthening the project concept. Stating the advantages of linkages to the bank, the guidelines observed:

"A recognition by the formal credit structure of self-management capabilities of the poor through SHGs and a link up between the two is expected to result in specific advantages to both systems. Under the linkage project, the main advantage to banks would be externalisation of a part of the work items of the credit cycle - assessment of credit needs, appraisal, disbursal, supervision and repayment, reduction in the formal paperwork involved and a consequent reduction in transaction costs. Improvement in recoveries and also in the margins would lead to a wider coverage of the target group. A larger mobilization of small savings would be equally advantageous. For the groups, advantages lie in the access to a larger quantum of resources as compared to their corpus generated through thrift, access to better technology and skill upgradation through different schemes of banking sector and a general improvement in the nature and scale of operations that would accelerate economic development"

Besides providing policy input, coordination and 100% refinance facility at 6.5% interest p.a. to the banks, NABARD has been organizing exposure and dialogue programmes in the linkage project for banks and NGO officials. These exposure programmes, which invariably include field visits, have helped in disseminating the concept and convincing bank officials to participate in the project. So far, 17 such programmes, covering around 350 officials have been organized in collaboration with NGOs and reputed bankers training institutes like the College of Agricultural Banking (CAB) and the National Institute of Banking Management (NIBM).

The pilot project has made progress during the last two years. As of 30 June 1994, 637 groups have established credit links with 16 commercial banks and 12 RRBs; the total loan sanctioned by banks amounting to Rs.7.9 million and refinance released by NABARD amounted to Rs.7.6 million. Progress has been good in the states of Karnataka, Andra Predesh and Orissa. The project has been picking up in other states too. The list of state-wise number of SHGs linked with banks and loan sanctioned is given below:

Pilot Project on SHG - Summary Progress Report
Figures in thousand ruppees

   State           No. of   No.of    Bank Loan    NABARD
                    SHGs    Women    Sanctioned   Refinance
                            SHGs

   Gujarat            19       -       398          310
   Karnataka         172      97      1232         1232 
   Madhya Pradesh     14      14       168          148
   Orissa            180     180      1906         1906
   Assam               2       -        75            - 
   Andhra Pradesh    139     131      2660         2553  
   Rajasthan          16       5       224          222
   Tamil Nadu         74      63       881          864
   Bihar               2       2        20            -
   Maharastra         17      15       376          376
   Kerala              2       2        32           32
   Total             637     509      7971         7643    

1. Larger participation in the project is of women savings and credit management groups, particularly in resource poor regions.
2. Membership of SHGs has come mostly from the poorest sections of the society.
3. Demand for credit is frequent and for small amounts, at unpredictable times and sometimes not necessariy for purchase of income generating assets.
4. Even the very poor are able to save and their savings increased with addition to their incomes.

   Further, some good features have come to light such as shift in credit from consumption purposes to acquisition of income generating assests, use of credit for non-traditional economic activities, increase in income levels of group members, development of thrift and self-help among members, reduction in transaction cost for both banks and SHG members and an almost 100% recovery of loans.

Transaction Costs

The high transaction cost for rural credit is a core problem and viability of the system is critically affected by it. NABARD has recently conducted a study to quantify the effect of intermediation by NGOs/SHGs on transaction cost. The initial findings are:

1. The intermediation of SHG led to reduction in time spent by bank staff on identification of borrowers, documentation, follow-up and recoveries. This resulted in 40% reduction in transaction cost which could increase further with increase in loan sizes.
2. The intermediation also significantly reduced transaction costs for the borrower due to elimination of cumbersome documentation procedure and time spent and cost incured on repeated visits to banks etc. The reduction was place at 85%.

6. Conclusion

Highlights of Findings

I. SHG per se

1. NGO took 6 months to one year for forming the groups. The process of evolution of SHG was found to be voluntary.
2. Source of funds to SHG was initially savings and NGO's contribution. Bank credit came later.
3. The share of loan for income generating activity increased from 22% in the first year to 74% in the third year.
4. Activities financed by the SHGs were need based and the SHGs were flexible in their approach.
5. The groups adopted flexible approach in charging interest on loans ranging from 18% to 36%, but the interest was lower that the rate charged by money lenders.
6. Shorter repayment periods were fixed and the repayments were made from all available resources i.e. by also including other income besides income from activity financed through the SHG loan. The members were therefore able to take more than one loan in a year. The general opinion was that long periods of loan with grace years and infrequent loan instalments lead to overdues as in the case of formal credit delivery system.
7. Conducting regular weekly meetings was one of the hallmarks of functioning of the groups.
8. The groups had gradually developed to maintain 11 books.

1. Income per member had registered a significant increase during the period of last three years of group formation.
2. Group formation helped the members in attending individual and common problems more effectively.
3. Some SHGs have started creating common assets owned by all members. These common assets also provide additional income to the group.
4. Role of NGO/VA is important for group formation, sustenance of SHG, fund support, training and advice. The VA had also helped in providing necessary linkage for economic activities.

1. Branch manager extended loan after getting convinced about SHG. Visits to SHG meetings helped in this regard. The average loan amount to SHG was Rs. 9570.
2. All the SHGs were having savings account with the banks since inception.
3. After obtaining the loan application, group resolution, sponsorship letter from the VA and membership list, commercial banks sanctioned loans at branch level whereas branches of RRBs forwarded the proposals to their head offices for sanction.
4. The SHGs were regularly making monthly repayments, and recovery for banks under SHG lending was to the extent of 98%.
5. The bankers were concerned about sustainability of the groups in the long run. They were also concerned about the groups functioning in the event of withdrawal of the NGO.
6. Some branch managers have expressed that groups with members having defaulters to the banking system should not be financed.
7. The cost of lending through SHGs on a rough basis showed a decline of 38% in transaction cost compared to normal lending.

Study Report - SHG: Tamil Nadu

Highlights of Findings

I. SHG per se

1. Savings by members serve as the main bond for being together in the group. Average annual increase in savings was 25% over the previous year.
2. Pattern of savings differs from one group to another mainly on the basis of income generating activities of the members.
3. Flexibility in norms for lending with least importance for documentation was found in all the groups. While some groups charge penal interest for delayed payment of principal, some others waive the same.
4. The groups which kept longer repayment period and high flexibility in the amount of instalment to be repaid show a little higher percentage of overdues than the groups which keep more regulated and shorter loan period.
5. Members of the SHGs were not very much aware of the NABARD scheme of linking the groups with banks.
6. Only one loan is generally allowed to a member at a time. However, in case of emergency, second loan is also considered if the group agrees for such assistance.
7. Group activities by the SHGs are encouraged b the VA through its 'Seed Money Assistance' programme.

1. There was a definate shift in the loan pattern of the members from non-income generating activities to income generating activities. 70% of loan availed was for productive purposes, while only 30% of the loans were for non-income generating activities.
2. Some of the members of Women SHG availed of IRDP, Sericulture loans etc. and were confident of increasing their activities through bank credit. The groups act as facilitators in recovering the dues of the members and remit to the banks.
3. Most of the purposes financed by the groups were for unconventional activities not covered by traditional banking.
4. The new groups show greater awareness of the need to graduate out of the present level and look for new opportunities through bank assistance.

1. Recovery of loans by banks is excellent without any default. Other loans issued to the members are also repaid without any delay. Only 4% of the loans was found to be overdue at the groups level.

1. NGO has been playing a pivotal role in ensuring proper training, coordination to the groups and putting them on a scientific approach.
2. VA plans to withdraw from the existing group by creating an apex body in each of the areas it is operating. This 'Apex body' was expected to provide umbrella support the SHGs in future.

Study Report - SHG: Andra Pradesh

Highlights of Findings

I. OPERATIONS

1. Before sanction of loans to the VA for on-lending to groups, bank branch managers had visited the groups and participated in meetings to satisfy themselves about the functioning of the group.
2. Satisfied by the excellent recovery under the programme, the banks have shown interest in extending loans through the VA.
3. Bankers felt that direct lending to groups can be done once the groups attain maturity.
4. The VA provided training in maintenance of books of accounts at SHGs level either at its training centre or through the village animator.
5. he rate of interest charged was 3% per month on the loans given out of the thrift amount and 1.10% per month on loans given for income generating activities under the linkage with bank.

1. The VA had pledged the savings of all the members of the SHG as collateral for the loans availed even though at the SHG level only some of the memebrs were financed. This has been done with the concent of all members to ensure buildup of groups pressure. This feature can be emulated by other SHGs.
2. The members have been regular in repayment of loan instalments without any default.
3. Income from other sources such as farm labour was utilized for repayment of instalment during the period where there was no income from existing milch animals bought through credit from SHG.

1. The SHGs maintained small amounts as 'emergency funds' to meet consumption requirement of the members.

1. The weavers expressed that their earnings owning to increased production consequent to availability of loan for purchase of raw materials and other input.
2. Most of the SHGs were reported to have undertaken group activities such as plantation, running of Balwadis (kindergarten schools) and other community development work with financial assistance aquired from the VA. However, no bank finance was involved in undertaking these activities.

Abreviations:

NABARD: National Bank for Agriculture and Rural Development

SHG: Self-Help Group

SHGI: Self-Help Group promoting Institution

NGO: Non Governmental Organization

RRB: Rural Regional Bank

VA: Voluntary Agency

Rs. 30 = USD 1 - approx. 1995

Y. C. Nanda
Chief General Manager
National Bank for Agriculture and Rural Development
Sterling Centre, Dr. Annie Besant Road,
Post Box no. 6552, Worli
BOMBAY - 400 018
India

Return to the Documents Section

Hari Srinivas - hsrinivas@gdrc.org
Return to the Virtual Library on Microcredit