microfinance an overview -...

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CHAPTER III

MICROFINANCE – AN OVERVIEW

The term “Micro” literally means “Small”. In a simple language, microfinance

means provision of financial services on a small scale to the rural and urban poor,

including the self employed. Broadly, „Microfinance refers to small scale financial

services for both credits and deposits that are provided to people who farm or fish or

herd; operate small or micro enterprise where goods are produced, recycled, repaired, or

traded; provide services; work for wages or commissions; gain income from renting out

small amounts of land, vehicles, draft animals, or machinery and tools; and to other

individuals and local groups in developing countries in both rural and urban areas‟

(Marguerite S. Robinson, 1998).1

The term microfinance sometimes is used interchangeably with the term micro

credit. However, while micro credit refers to purveyance of loans in small quantities, the

term microfinance has a broader meaning covering in its ambit other financial services

like saving, insurance, etc. as well. The taskforce on 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”.

But the task force has not defined any amount. However, as per Micro Credit Special Cell

of the Reserve Bank of India, the borrowing amounts up to the limit of Rs.25,000/- could

be considered as micro credit products and this amount could be gradually increased up

to Rs.40,000/- over a period of time. As per international perceptions a standard for South

Asia roughly equals to $500. However the Micro Financial Sector (Development and

Regulation) Bill, 2007 defined the micro-credit as loans not exceeding Rs.50,000

(Rs. 1,50,000 in case of housing).

1 Marguerite S. Robinson, (1998), “Microfinance: The Paradigm Shift from Credit Delivery to

Sustainable Financial Intermediation”, in Mwangi S. Kimenyi, Robert C. Wieland and J.D Vion

Pischke (eds), 1998, Strategic Issues in Microfinance, Ashgate Publishing: Aldershot, England.

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53

3.1 Evolution of Micro finance

Microfinance as an industry evolved in all the third world countries almost at the

same time span. World over, it was getting widely recognized that improving income

levels of low-income community is essential to improve their well-being – besides the

State sponsored welfare programmers. During the 1970s and 1980s, the micro-enterprise

movement led to the emergence of Non- Governmental Organizations (NGOs) that

provided small loans for the poor. In 1990s, across the world, a number of these

institutions transformed themselves into formal financial institutions in order to access

and on-lend funds, thus enhancing their outreach.

The earliest initiatives to bring microfinance under formal regulation and supervision

were undertaken in Latin America. Around the world, microfinance has been on the agenda of

policy makers, regulators and supervisors. Over 50 countries have implemented or are

considering specific arrangements for regulation and supervision of microfinance either as a

separate new law or as amendments to the existing legal and regulatory framework. In certain

countries, Central Bank has assumed the supervisory and regulatory role, while in others

separate authority (existing authorities or newly created authority/networks) has been

empowered and delegated powers of regulation/ supervision. In some countries

Self-Regulatory Organisations (SRO) has been tried, particularly for non-prudential regulation.

The principles define regulation as set of statutory rules that apply to MFIs while supervision is

the process of implementing and enforcing compliance with these rules. A clear distinction

between prudential and non-prudential regulation is also established. Prudential regulation

mandates capital adequacy requirements, loan loss provisioning, financial solvency, etc., for

protecting the depositors. Non-prudential regulation covers enabling aspects like business

operation, performance monitoring, credit information services, transparent reporting and

disclosure, codes of fair practices and system, consumer protection, fraud prevention, etc. There

have been differences in the extent and application of regulations. Some have extended

prudential to only deposit-taking MFIs. In recognition of uniqueness of MFIs and small, mostly

uncollatoralised loans, lower minimum capital, higher capital adequacy, lower unsecured

lending limits, more aggressive loan loss provision, simpler loan documentation, lower

physical security and branching needs, lower frequency and content of reporting, lower reserve

against deposits, ownership suitablility and diversification requirements are suggested.


54

One of the significant events that helped it gain prominence in the 1970s was

through the efforts of Muhammad Yunus, a microfinance pioneer and founder of the

Grameen Bank of Bangladesh. In 2006, Prof. Yunus was awarded Nobel Peace Prize “for

his efforts to create economic and social development from below”.

The importance of microfinance in the field of development was reinforced with

the launch of the Micro-credit Summit in 1997. The Summit aims to reach 175 million of

the world‟s poorest families, especially the women of those families, with credit for the

self-employed and other financial and business services, by the end of 2015 (Micro-credit

Summit, 2005). The United Nations declared the year 2005 as the International Year of

Micro-credit.

Sam Daley-Harris2 of the Micro-credit Summit Campaign States: “Micro-credit is

not a panacea, but it is the most powerful intervention we have toward cutting absolute

poverty in half by 2015”.

Viewed from a historical perspective, the origin of microfinance can be traced to

the beginning of the Co-operative Movement in Germany, where the movement was

started in 1944 in the field of cooperative based credit system by the Raiffeisen Societies

but Bangladesh has been acknowledged as a pioneer in the field of micro-finance.

Dr.Muhmud Yunus, Professor of Economics in Chittagong University of Bangladesh,

was an initiator of an action research project „Grameen Bank‟. The project started in 1976

and it was formally recognised as a bank through an ordinance, issued by the government

in 1983. The Grameen Bank provides loans to the landless poor, particularly women, to

promote self-employment. In 2006, Prof. Yunus was awarded Nobel Peace Prize “for his

efforts to create economic and social development from below.” He views micro finance

as a „Fundamental Right‟ and defines micro finance as a “foundational need upon which

other rights are built, and which fosters other opportunities for betterment”3.

2 Daley-Harris, S. Presentation to the UN Social and Economic Council (ECOSOC) Brainstorming

Session, 3/2003

3 Grameen Bank materials, www.grameenbank.org and www.grameenfoundation.org


http://www.grameenbank.org/

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3.2 Emergence of Micro finance sector in India

The birth of microfinance movement in India can be traced to 70s. The main aim

of the movement was to alleviate poverty by delivering financial services to the poor.

The basic idea was to enable poor to access the financial services so that poor can have

an asset base and initiate income generating activities. Self Employed Women

Association (SEWA) is considered one of the pioneers of the microfinance movement in

India.

The post-nationalization period in the banking sector, i.e., 1969, witnessed a

substantial amount of resources being earmarked towards meeting the credit needs of the

poor. There were several objectives for the bank nationalization strategy including

expanding the outreach of financial services to neglected sectors. As a result of this

strategy, banking network underwent an expansion phase without comparables in the

world. Credit came to be recognized as a remedy for poverty. This has lead to the

emergence of several pro-poor financial services, supported by both the State and Central

governments, which included credit packages and programmes customized to the

perceived needs of the poor.

A series of policy measures were taken up by the Govt. of India in the financial

sector, which have facilitated intensification and deepening of microfinance.

These included nationalisation of commercial banking sector in 1969, setting-up of

Regional Rural Banks (RRBs) in 1975, reforms of financial sector (since 1991),

implementation of pro-poor schemes/programmes through credit delivery system, etc.

Similarly, Reserve Bank of India‟s (RBI - the Central Bank of the Country) initiatives in

terms of focus on expansion of rural branches of banks, priority sector norms, financial

inclusion, etc., had positive bearing on microfinance development. The priority sector

norms envisaged that 40% of Net Bank Credit should be directed towards the identified

sectors/activities of which 18% for agriculture, 10% for weaker sections, etc were

allocated. With over 6,00,000 villages and 74% of poor people living in rural areas,

microfinance continued to be the major challenge for rural credit. Thus, the formal

financial sector which consists of about 36,000 rural and semi-urban branches of

Commercial banks, 14,000 branches of RRBs, 13,000 branches of Cooperative Banks


56

and over a hundred thousands of rural Cooperative Societies have been engaged in rural

credit and the bulk of their loan accounts are small size loans within the purview of

microfinance. National Bank for Agriculture and Rural Development (NABARD) was

set-up by an Act of Parliament in 1982 for pursuing the mandate of „integrated rural

development‟ through triple major functions namely financial, developmental and

supervisory. It also played a catalytical role in the microfinance development.

The pioneering efforts at this were made by National Bank for Agriculture and

Rural Development (NABARD), which was given the tasks of framing appropriate policy

for rural credit, provision of technical assistance backed liquidity support to banks,

supervision of rural credit institutions and other development initiatives.

In the early 1980s, the Govt. of India launched a massive poverty alleviation

credit programme known as the Integrated Rural Development Programme (IRDP),

which provided government subsidized credit through banks to the poor. It was aimed

that the poor would be able to use the inexpensive credit to finance themselves over the

poverty line. In 1999, the Government of India merged various credit programmes

together, refined them and launched a new programme called Swaranjayanti Gram

Swarozagar Yojana (SGSY). The mandate of SGSY is to continue to provide subsidized

credit to the poor through the banking sector to generate self-employment through a

self-help group approach and the programme has grown to an enormous size.

Further various studies (Basu, 2006;4 Deshpande and Niraj, 2003;

5 Robin et al, 2004;

6

Yunus, 20037) also revealed that in India, generally banks are for people with money; not

for people without. To overcome poverty, they need to be able to borrow, save and invest

money to protect their families from adversity. Therefore, a need was felt for alternative

polices, systems and procedures, savings and loan products, other complementary

4 Basu, Priya (2006), “Improving Access to Finance for India‟s Rural Poor”, Direction in Development,

International Bank for Reconstruction and Development / World Bank, No. 36448., Washington DC.

5 Deshpande, Ramesh and Niraj Verma (2003), “Review of Rural Financial Institutions in India”,

Background paper prepared for the World Bank, Washington DC : World Bank.

6 Robin, Burgess, Rohini Pande and Grace Wong (2004), “Banking for Poor – Evidence from India”

accessed on http://www.econ.yale.edu/~rp269/website/papers/jeeabankindia.pdf

7 Muhammad Yunus (2003), “Expanding Micro-credit Outreach to Reach the Millennium Development

Goals”, International Seminar on Attacking Poverty with Micro-credit, Dhaka, Bangladesh, January.


http://www.econ.yale.edu/~rp269/website/papers/jeeabankindia.pdf

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services and new delivery mechanisms, which would fulfill the requirements of the

poorest in rural India.

In India, institutional credit agencies (banks) made an entry in rural areas initially

to provide an alternative to the rural money-enders who provided credit support, but not

without exploiting the rural poor. There are 3 main factors that count to the bringing up

of microfinance as a Policy in India.

1. The first of these pivotal events was bank nationalization drive launched in 1969

which required commercial banks to open rural branches in India between 1973 and

1985. Today, India has over 32,000 rural branches of commercial banks and regional

rural banks, 14,000 cooperative bank branches.

2. The second national policy that has had a significant impact on the evolution of

India‟s banking and financial system is the Integrated Rural Development Programme

(IRDP) introduced in 1978 and designed to be „a direct instrument for attacking

India‟s rural poverty.‟

3. The last major event which impacted the financial and banking system in India was

the liberalization of India‟s financial system in the 1990s characterized by a series of

structural adjustments and financial policy reforms initiated by the Reserve Bank of

India (RBI).

The systems and procedures of banking institutions was emphasizing complicated

qualifying requirements, tangible collateral, margin, etc., that resulted in a large section

of the rural poor shying away from the formal banking sector. The banks too experienced

that the rapid expansion of branch network was not contributing to an increasing volume

of business to meet high transaction costs and risk provisioning, which even threatened

the viability of banking institutions and sustainability of their operations.

3.3 Demand for Microfinance Services in India

In terms of demand for micro-credit, there are three segments. At the very

bottom, there are landless agricultural labourers and manual labourers. The next market

segment is of small and marginal farmers and rural artisans, weavers and self-employed

informal sectors such as hawkers, vendors and workers in household micro-enterprises.


58

The third market segment is of other farmers who have gone in for commercial crops and

others engaged in dairy farming, poultry, fisheries, etc. Tea shops, provisional stores and

other manufacturing activities are examples of non-farm activities in this segment.

3.4 Supply of Microfinance Services in India

The Indian Microfinance sector is characterized by a variety of microfinance

service providers. These includes apex financial institutions like the National Bank for

Agriculture and Rural Development (NABARD), Small Industries Development Bank of

India (SIDBI) and government owned societies like Rashtriya Mahila Kosh (RMK),

formal sector institutions, Commercial Banks, Regional Rural Banks (RRBs), member

based institutions like Co-operatives, Mutually Aided Co-operative Societies (MACS),

SHG Federations, Private Sector Companies, Specialized Non-Banking Financial

Corporations (NBFCs), Societies, Trusts, etc. Banks are pursuing a new and innovative

approach to microfinance as a potential business and not merely as a social or priority

sector lending obligation.

3.5 Rural India and Microfinance

Micro finance is expected to play a significant role in poverty alleviation and

development. The need, therefore, is to share experiences and materials which will help

not only in understanding successes and failures but also provide knowledge and

guidelines to strengthen and expand micro finance programmes.

The development process through a typical micro-finance intervention can be

understood with the help of the following Chart. The ultimate aim is to attain social and

economic empowerment. Successful intervention is therefore, dependent on how each of

these stages has been carefully dealt with and also the capabilities of the implementing

organizations in achieving the final goal, e.g., if credit delivery takes place without

consolidation of SHGs, it may have problems of self-sustainability and recovery.

A number of schemes under banks, Central and State governments offer direct credit to

potential individuals without forcing them to join SHGs.


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Exhibit 3.1: Development process through Microfinance

3.6 Bank Linkage Scheme – The Model

The SHG Bank Linkage Programme has its origin in a sponsored project in

Indonesia. Launched in 1992 in India, early results of such a programme achieved by

SHGs promoted by NGOs prompted NABARD to offer refinance to banks for collateral

free loans to groups, progressively upto four times the level of group‟s savings deposits.


60

SHGs thus “linked” with banks‟ function as micro-banks were able to access funds from

the formal banking system. The linkage has resulted in the reduction of transaction costs

of banks through the externalization of costs of servicing individual loans and also

ensuring their repayment through the peer pressure mechanism. The three broad models

of linkage are:

Model I: SHGs formed and financed by banks.

SHGs are formed directly by banks under this model. The banks themselves act as

Self Help Group Promotion Institutions in forming and nurturing groups, opening savings

accounts for them and providing them with bank credit after satisfying themselves about

their maturity to absorb credit.

In this case, banks directly promote self-help groups. Here, the bank assumes the

role of NGOs and ensure linkage with SHGs. These SHG-NGO-Bank integration is very

much essential to credit delivery, self-employment and for other business activities which

could be an effective vaccine against poverty. The ultimate goal of this linkage

programme is not just promotion of SHGs but the focus is on poverty eradication. It is an

established fact that micro-finance is an important means of poverty alleviation.

The SHG route is one of the cost-effective methods of credit flow to the poor who need

it most.

Model II: SHGs formed by NGOs and formal agencies but directly financed by banks

These SHGs are called as NGO facilitated SHGs. This appears to be the most

popular model amongst bankers. Under this model, the NGOs and the formal agencies in

the field of micro finance act as facilitators. They propagate the message, organize

groups, train the members in thrift and credit management and nurture them over a

period. Banks in due course link these groups, by directly providing loans to them. More

than 70 per cent of the SHGs have been linked through this model.

Bank SHGs

Bank SHGs

NGO

Facilitator


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In this model, NGO would organize the poor into SHGs, undertake training for

awareness building, entrepreneurship and skill training, help in arranging inputs,

extension and marketing, introduce saving and internal lending, help in maintenance of

accounts and link them with the banks for credit requirements. Banks directly provide

loans to SHG with recommendation of the NGO. In this model, NGO acts as facilitators.

Model III: SHGs financed by banks using NGOs as financial intermediaries

In this model, NGOs take the dual role of facilitators and financial intermediaries.

They help in formation of SHGs, nurture them and train them in thrift and credit management.

Eventually, the NGOs approach banks for bulk loan assistance for lending to these SHGs. In

areas where a very large number of SHGs have been financed by bank branches, intermediate

agencies like Federations of SHGs have come up as links between bank branch and member

SHGs. These Federations are financed by banks, which in turn, finance their member SHGs.

In this case, besides acting as a facilitator, the NGO also works as a financial

intermediary. Here the loan is given to NGOs by the bank for on-lending the

SHGs/individuals. In this linkage model NGO would be largely responsible for

repayment; and would bear the risk of non-payment. Involvement of NGOs in

microfinance system would have positive influence as they are grass-root agencies with

good information about borrowers. Thus, adverse selection and production of recovery

could be avoided. At the same time, NGOs would be in a position to help rural poor,

particularly women to bring them above poverty line and create rural employment.

While banks and NGOs facilitiate SHG formation, the reporting of credit linkage

of SHGs is under SHG Bank Linkage Model and MFI-Bank Linkage Model since

2007-08. From the year 2006-07, SBLP follows a two model strategy where the focus is

on credit linkage to SHG.

Model I – SHG Bank Linkage Model: SHGs are directly financed by the banks.

Model II – MFI-Bank Linkage Model: Banks lend to MFIs for on-lending to SHGs.

Bank SHG NGO Financial

Intermediaries


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Table 3.1

Model-wise distribution of linked Self Help Groups

Year Model I Model II Model III Cumulative

Total

Savings and Credit Linkage

2000-01 34297 200507 29021 263825

2001-02 73836 346109 41533 461478

2002-03 143472 516499 57389 717360

2003-04 215818 776946 86327 1079091

2004-05 339876 1165288 113292 1618456

2005-06 447713 1656538 134314 2238565

Model I

(SHG Bank Linkage Model)

Model II

(MFI-Bank Linkage Model)

Credit Linkage

2006-07 4160584 550 4161134

2007-08 5009794 1109 5010903

2008-09 6121147 1915 6123062

2009-10 6953250 1659 6954909

2010-11 7461946 2315 7464261

2011-12 7960349 1960 7962309

2012-13 7317551 2042 7319593

Source: Status of Micro Finance in India, NABARD Report. www.nabard.org

It can be seen from Table 3.1 that majority of the Self Help Groups were linked

under Model II under SBLP upto 2006. It shows that NGOs and SHPIs have helped

banks to increase the outreach under SBLP. The overall outreach was growing at a rate

of 124 percent per annum during the period from 2001-2006. After 2006, however, it can

be seen that majority of SHGs are linked under newly defined model I where banks

linked the SHGs directly. Overall, the number of credit linked SHGs was increasing

from 2006-07 and has reached its maximum in 2011-12 and has declined in the year

2012-13.


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3.7 Progress and Highlights of the Linkage Programme

The Self Help Group Bank Linkage Programme is assumed to be the dominant

model of microfinance in India, in terms of both number of borrowers and loans

outstanding (Ghate, 2006)8. The programme exhibited significant growth in terms of

coverage and outreach of credit to the rural poor. Studies reveal that the on-time

repayment of SHG loans to banks was over 90 per cent and highly profitable for the

banks relative to other financial products despite interest rates which are among the

lowest in developing countries (Seibel and Dave, 2002)9.

The SHG – Bank Linkage Programme shows a tremendous growth over the

period from 1993-93 to 2012-13. The programme exhibited a significant growth in terms

of coverage and outreach of micro-credit to the rural poor. Beginning with a modest

number of 255 Self Help Groups in 1992-93, a total of 1219821 Self Help Groups were

credit linked with banks in 2012-13. The cumulative disbursement of bank loan was

Rs.0.29 crores in 1992-93, which increased to Rs.20,585.36 crores in 2012-13. Total

refinance increased from Rs.0.27 crore in 1992-93 to Rs.22,396.24 in the year 2012-13.

The progress is notable in case of granting bank loan to the beneficiaries, refinance

programme and then the number of groups linked.

8 Ghate, Prabhu (2006), “Indian Microfinance: The Challenges of Rapid Growth”, Sage Publications,

New Delhi.

9 Seibel, Hans. D and Dave H.R (2002), “Commercial Aspects of SHG Banking in India”, Paper

presented at the Seminar on SHG Bank Linkage Programme at New Delhi, November 25-26, 2002.


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Table 3.2

Progress of Self Help Group Bank Linkage Programme

(Amount in Crores)

Year

(end of

March)

No. of SHGs

financed by

banks Cumulative

Bank loam

Cumulative

Refinance

Cumulative

(During the

year)

(During the

year)

(During

the year

1992-93 255 255 0.29 0.29 0.27 0.27

1993-94 365 620 0.36 0.65 .019 0.46

1994-95 1502 2122 1.79 2.44 1.67 2.13

1995-96 2635 4757 3.62 6.06 3.53 5.66

1996-97 3841 8598 5.78 11.84 4.99 10.65

1997-98 5719 14317 11.92 23.76 10.74 21.39

1998-99 18678 32995 33.31 57.07 30.67 52.06

1999-00 81780 114775 135.91 192.98 98.07 150.13

2000-01 149050 263825 287.89 480.87 244.85 394.98

2001-02 197653 461478 545.47 1026.34 395.26 790.24

2002-03 255882 717360 1023.33 2049 622.47 1412.71

2003-04 361731 1079091 1855.53 3904 705.44 2118.15

2004-05 539365 1618456 2995 6899 967.76 3085.91

2005-06 620109 2238565 4499 11398 1067.72 4153.63

2006-07 1105749 - 6570.39 - 1292.86 -

2007-08 1227770 - 8849.26 - 1615.5 -

2008-09 1609586 - 12253.51 - 2620.03 -

2009-10 1586822 - 14453.30 - 3173.56 -

2010-11 1196134 - 14547.73 - 2545.36 -

2011-12 1147878 - 16534.77 - 3072.59 -

2012-13 1219821 - 20585.36 - 3916.64 -

Note: Data relates to Commercial Banks, RRBs and Co-operative Banks from 2006-07 onwards. Data on

number of SHGs finance by banks and bank loans are inclusive of „Swarnajayati Gram Swarozar

Yogna‟ (SGSY) SHGs and existing groups receiving repeat loans; owing to this change, NABARD

discontinued the publication of data on a cumulative basis from 2006-07.

Source : SHG- Bank Linkage, Status of Microfinance, various years, NABARD.


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Table 3.3

Highlights of the SHG-Bank Linkage Programme (2011-12 & 2012-13)

S.

No. Particulars

2011-12 2012-13

Physical

(No. in

lakh)

Financial

(Rs. in

crore)

Physical

(No. in

lakh)

Financial

(Rs. in

crore)

1 Total number of SHGs saving

linked with banks

79.60 6551.41 73.18 8217.25

Out of total (of which) exclusive

Women SHGs

62.99 5104.33 59.38 6514.87

2 Total number of SHGs credit

linked during 2011-12

11.48 16534.77 12.20 20585.36


Women SHGs

9.23 14132.02 10.37 17854.31

3 Total number of SHGs having

loans outstanding as on 31

March 2012

43.54 36340.00

44.51 39375.30


Women SHGs

36.49 30465.28 37.57 32840.04

4 Average loan amount outstanding/

SHG as on March (in Rs.)

83455.01 88455.31

5 Average loan amount

disbursed/SHG (in Rs.)

144046.41 168757.26

6 Estimated number of families

covered upto 31 March

103

millions

95

million

Source: Status of Microfinance in India, 2011-12 & 2012-13, NABARD Report.

2011-12

The initiative of 1992 to make the traditional and formal banks to extend financial

services to deprived sections through informal Self Help Groups (SHGs), has now

blossomed into a “monolith” microfinance initiative. It has been recognised as a

decentralised, cost effective and fastest growing micro-finance initiative in the world,

enabling over 103 million poor households‟ access to a variety of sustainable financial

services from the banking system by becoming members of nearly 8 million SHGs.

The linkage with banks has provided the members of the groups the facility of not only

pooling their thrift /savings and access to credit from the banking system, but also created


66

a platform through which they could launch a number of livelihood initiatives and also

facilitate the empowerment process.

Together, the 8 million SHGs of the poor maintain a balance of over Rs.6,550

crore in the Savings Bank accounts with the Banks, while they are estimated to have

harnessed savings of over Rs.22,000 crore of which nearly 70% (over Rs.15,000 crore)

goes for internal lendings. Over 4.4 million SHGs are regularly availing credit facilities

from the Banks. During 2011-12 alone, over 1.15 million groups availed loans amounting

to Rs.16,535 crore from Banks and together 4.4 million groups have loans to the extent of

Rs.36,340 crore outstanding against them with the financing banks.

2012-13

The journey so far traversed by the Self Help Group – Bank Linkage Programme

(SHG-BLP) crossed many milestones – from linking a pilot of 500 SHGs of rural poor

two decades ago to cross 8 million groups a year ago. Similarly, from a total savings

corpus of a few thousands of Indian rupees in the early years to a whopping Rs.27,000

crore today, from a few crore of bank credit to a credit outstanding of Rs.40,000 crore

and disbursements touching Rs.20,000 crore during 2012-13. The geographical spread of

the movement has also been quite impressive now spreading to even the most remote

corners of India. Over 95 million poor rural households are now part of this world‟s

largest micro-credit initiative.

The SHG-BLP though made impressive progress during the last two decades of

its existence, is at an inquisitive juncture now. For the first time since the programme was

launched two decades ago, the number of SHGs linked to Banks showed a decline during

2012- 13. Similarly, fresh loans to SHGs have been near stagnant for last few years,

though it showed a marginal rise during 2012-13.

Under the SHG-Bank linkage programme, the coverage of rural households

having access to regular savings through SHGs linked to banks came down by around 8%

during the year to 95 million as on 31 March 2013. A similar decline of number of SHGs

savings linked to Banks was also observed with only 73.18 lakh SHGs linked to Banks as

against 79.60 lakh a year ago. Number of SHGs having outstanding credit with banks,

however, showed a marginal increase of 2% to 44.5 lakh as against 43.5 lakh the previous


67

year. The average loan outstanding of SHGs with banks is Rs.88,500 against Rs.83,500 a

year ago. There has also been a 6% spurt in the number of SHGs getting fresh loans from

banks during the year to 12.2 lakh (up from 11.5 lakh the previous year) and the quantum

of fresh loans issued also showed a significant growth of about 24% during the year.

The share of exclusive women SHGs in the total number of SHGs savings linked to

banks now stands at 81% of the total number of groups.

3.8 Regional Spread of SHG – Bank Linkage (Region-wise)

The SHG Bank Linkage has made inroads into different regions in India. Table

3.6 has recorded the trends in cumulative growth of SHGs linked to Banks.

Exhibit No. 3.2 SHG - Bank Linkage Programme - Regional-Wise Progress

(Cumulative)

0

10

20

30

40

50

60

70

80

Ba

nk

Lin

ka

ge

Years

Northern Region North Eastern Region Eastern Region

Central Region Western region Southern Region


68

Tab

le 3

.4

SH

G -

Ba

nk

Lin

kage

Pro

gra

mm

e -

Reg

ion

al-

Wis

e P

rogre

ss (

Cu

mu

lati

ve)

Yea

r

Northern

Region

%

North Eastern

Region

%

Eastern

Region

%

Central

Region

%

Western

region

%

Southern

Region

%

All India

%

20

01

-02

19

231

4.1

7

14

90

0.3

2

45

892

9.9

4

48

181

10

.44

29

318

6.3

5

31

726

2

68

.75

46

147

8

10

0

20

02

-03

34

923

4.8

7

40

69

0.5

7

90

893

12

.67

81

583

11

.37

42

180

5.8

8

46

371

2

64

.64

71

736

0

10

0

20

03

-04

52

396

4.8

6

12

278

1.1

4

15

823

7

14

.66

12

700

9

11

.77

54

815

5.0

8

67

435

6

62

.49

10

790

91

10

0

20

04

-05

86

018

5.3

1

34

328

2.1

2

26

562

8

16

.41

19

736

5

12

.19

92

266

5.7

0

93

894

1

58

.01

16

184

56

10

0

20

05

-06

13

309

7

5.9

5

62

517

2.7

9

39

435

1

17

.62

26

791

5

11

.97

16

625

4

7.4

3

12

144

31

54

.25

22

385

65

10

0

20

06

-07

18

201

8

6.2

2

91

754

3.1

4

52

588

1

17

.98

33

272

9

11

.38

27

044

7

9.2

5

15

221

44

52

.04

29

249

73

10

0

20

07

-08

13

478

3

3.7

2

10

342

4

2.8

5

75

304

8

20

.77

32

676

3

9.0

1

44

655

0

12

.32

18

613

73

51

.33

36

259

41

10

0

20

08

-09

16

651

1

3.9

4

11

781

2

2.7

9

93

348

9

22

.10

33

211

6

7.8

6

39

349

9

9.3

2

22

809

11

53

.99

42

243

38

10

0

20

09

-10

15

882

9

3.4

6

85

276

1.8

6

98

509

4

21

.48

49

734

0

10

.84

43

919

9

9.5

7

24

214

40

52

.79

45

871

78

10

0

20

10

-11

14

910

8

3.1

2

15

002

1

3.1

3

11

055

33

23

.09

35

887

2

7.5

0

31

682

1

6.6

2

27

064

08

56

.54

47

867

63

10

0

20

11

-12

21

204

1

4.8

7

15

941

6

3.6

6

98

532

9

22

.63

35

245

2

8.0

9

28

947

2

6.6

5

23

557

32

54

.10

43

544

42

10

0

20

12

-13

21

395

5

4.8

1

14

366

0

3.2

3

10

206

56

22

.93

36

252

1

8.1

4

29

545

1

6.6

4

24

151

91

54

.25

44

514

34

10

0

Sourc

e :

SH

G-

Ban

k L

inkag

e, S

tatu

s o

f M

icro

finan

ce, var

ious

yea

rs, N

AB

AR

D R

eport

.


69

The data has revealed that the Southern region accounts for a huge share in the

total SHGs of the country. The progress is low in the northeast and northern regions.

A series of initiatives have been taken by NABARD to propagate micro finance in

Northern, North Eastern region and Central region. The southern region continues to lead

in terms of share in client outreach as well as loan disbursement and outstanding.

It shows that the share of the southern region was 68.75 percent in 2001-02 and still it has

a larger share of 54.25 in 2012-13.

3.9 Agency-wise Distribution of SHGs financed

NABARD has been instrumental in the formation and nurturing of quality SHGs

by means of promotional grant support to partner agencies. The partners include

Commercial Banks, Co-operative Banks and Regional Rural Banks (RRBs). Almost all

Public sector Commercial Banks, Private sector Commercial Banks, Regional Rural

Banks, State Co-operative Banks and District Co-operative Banks participated in

SHG-Bank Linkage Programme. Further, Self Help Promotion Institutions (SHPIs) over

the years resulted in the expansion programme throughout the country.

Exhibit No. 3.3 Agency-wise distribution of SHGs financed (cumulative)

0

10

20

30

40

50

60

70

80

Age

ncy

-wis

e d

istr

ibu

tion

Years

Co-operative Bank Commercial Banks Regional Rural Banks


70

Tab

le 3

.5

Agen

cy-w

ise

dis

trib

uti

on

of

SH

Gs

fin

an

ced

(cu

mu

lati

ve)

(Rs.

in

Cro

res)

Yea

r

Co

-op

erati

ve

Ba

nk

C

om

mer

cial

Ban

ks

Reg

ion

al

Ru

ral

Ba

nk

s

No

. of

SH

Gs

Ba

nk

Loan

N

o. of

SH

Gs

Ban

k L

oan

N

o.

of

SH

Gs

Ba

nk

Lo

an

No

%

N

o

%

No

%

N

o

%

No

%

N

um

ber

%

2001

-02

3

99

06

8

79

5

8

272247

54

6009

58

1

88

73

8

38

3

45

9

34

2002

-03

7

89

59

11

1

72

0

8

361061

50

11495

56

2

77

34

0

39

7

27

2

36

2003

-04

1

34

67

1

12

3

71

1

9

538422

50

22548

58

4

05

99

8

38

1

27

82

33

2004

-05

2

11

13

7

13

.04

63

98

.47

9.2

8

843473

52.1

1

41159.5

60.3

8

56

38

46

34

.83

20

99

5.4

7

30

.44

2005

-06

3

10

50

1

13

.87

10

87

9.4

7

9.5

4

1188040

53.0

7

69874.5

61.6

1

74

00

24

33

.06

33

22

1.4

7

29

.15

2006

-07

2

72

23

4

9.4

8

04

3.5

6.5

1893016

65.4

87638

70.8

7

29

25

5

25

.2

28

01

7.6

2

2.7

2007

-08

3

71

37

8

10

.2

11

30

0.9

6.5

2378847

65.6

114755

67.5

8

75

71

6

24

.2

44

21

0.4

2

6

2008

-09

4

15

13

0

9.8

1

30

60

5.8

2831334

67.1

161494

71.2

9

77

83

4

23

.1

52

24

4.1

6

23

2009

-10

5

10

11

3

10

.51

17

28

9.8

6

6.1

7

3237263

66.7

3

201647

71.9

2

11

03

98

0

22

.76

61

44

5.8

2

21

.91

2010

-11

4

51

79

8

9.4

4

19

07

8.5

7

6.1

1

3053472

63.7

9

218833

70.0

9

12

81

49

3

26

.77

74

30

0.5

2

23

.8

2011

-12

4

43

43

4

10

.18

19

16

1.3

5

5.2

7

2617199

60.1

1

258102.8

9

71.0

3

12

93

80

9

29

.71

86

13

5.7

8

23

.70

2012

-13

4

80

09

6

10

.79

22

14

6.2

4

5.6

2

2643971

59.3

9

266394.4

4

67.6

6

13

27

36

7

29

.82

10

52

12

.29

26

.72

So

urc

e :

SH

G-

Ban

k L

inkag

e, S

tatu

s o

f M

icro

finance

in I

nd

ia,

var

ious

yea

rs,

NA

BA

RD

Rep

ort

.


71

Commercial Banks and SHG-Bank Linkage Programme

Commercial Banks have had a larger share in the linkage programme right from

the initial years. The percentage of SHGs linked with the banks was 54% in 2001-02

which increased to its maximum (67.1%) in 2008-09 and started decreasing thereafter.

In 2001-02, its share in total loan amount to SHGs was 58%, which increased to 71.92%

in 2009-10 and thereafter it started to decrease. Public sector banks have been in the

forefront of SHG-Bank Linkage Programme.

Regional Rural Banks and SHG-Bank Linkage Programme

Regional Rural Banks were more liberal than the Co-operative Banks and were

conservative compared to Commercial Banks. Regional Rural Banks had a share of 34%

in disbursing loans in 2001-02 and 26.72% in 2012-13. Its coverage of the Self Help

Groups was 38% in 2001-02 and in the year 2012-13 it was 29.82%. Regional Rural

Banks have been functioning as Self Help Promoting Institutions (SHPIs) with grant

support from NABARD.

Co-operative Banks and SHG-Bank Linkage Programme

Co-operative Banks have been late entrants to microfinance through Self Help

Groups. The performance of co-operative banks has to a large extent influenced by the

State government policies. Co-operative banks had a share of 8% coverage of Self Help

Groups in 2001-02 and increased to 10.79% in 2012-13. Its share in disbursing loans was

8% in 2001-02 and has decreased to 5.62 in 2012-13. Co-operative banks also act as

SHPIs. They form an important link to SHGs and monitor their performance with their

own staff of Primary Agricultural Credit Societies.

3.10 Self Help Groups

A Self Help Group is a group of like-minded people especially women, who come

together to pool their small savings to a common fund and agree to meet their emergency

need on mutual help basis. The group decides whom the loan should be given to, for

which purposes, on what terms and at what schedule of recovery.

SHGs are considered a new lease of life for the women in villages for their social

and economic empowerment. Since SHGs have been able to mobilize savings from


72

persons or groups who were not normally expected to have any „saving‟ and also to

recycle effectively the pooled resources amongst the members, their activities have

attracted attention as a supportive mechanism for meeting the credit needs of the poor

(NABARD, 2004)10

.

3.11 Objectives of Self Help Groups

The main objective of targeting women for giving micro-credit is to empower

women in the household through helping them to create self-employment by establishing

micro-enterprises.

The main characteristics of SHGs are as follows:

a) The ideal size of an SHG is 10 to 20 members (In a bigger group, members cannot

actively participate),

b) The group need not be registered,

c) From one family, only one member (More families can join SHGs this way),

d) The group consists of either only men or of only women (Mixed groups are generally

not preferred),

e) Women‟s groups are generally found to perform better,

f) Members have the same social and financial background (Members interact more

freely this way), and

g) Compulsory attendance (Full attendance for larger participation).

3.12 Function of Self Help Groups

The SHGs in India are small, informal and homogenous groups of not more than

twenty members each. Among them, a member is selected as an “animator” and two

members are selected as representatives. The animator is selected for a period of two

years. Members of the group meet every week. They discuss social and community

programmes, group savings, rotation of funds, bank loan and repayment of loan.

10

NABARD Report, 2004.


73

The group members are encouraged to make voluntary thrift on a regular basis.

These pooled resources are used to make small interest bearing loans to their members.

The process helps them imbibe the essentials of financial intermediation including

prioritization of needs, setting terms and condition, and accounts keeping. This gradually

builds financial discipline in all of them. Once the groups show this mature financial

behavior, banks are encouraged to make loans to the SHG in certain multiples of the

accumulated savings of the SHG. The bank loans are given without any collateral and at

market interest rates.

Exhibit 3.4: Role of Group Corpus

It is seen from the above chart that, while the funds from the Government enrich

the group corpus by way of subsidy, the NGOs and the banks supply credit as per the

needs of the group. The group is then involved in inter-loaning activities for consumption

Govt. Banks

Corpus of

SHG

NGOs

Inter Group

Loaning

Consumption

purposes

Production/

income

activities

Employment

opportunities

Income

Generation

Profitability

Expenditure on

Education,

Health,

Hygiene, etc.,

Repayment as per

the time schedule


74

and production purposes. By pursuing productive economic activities, the group enhances

its income, repays the loan amount to the bank and spends it on basic health, education,

etc, so as to drive out of poverty trap.

3.13 Growth of Self Help Groups in India

India is brimming with Self Help Groups which are part of a bank linkage

programme supported by the National Bank for Agriculture and Rural Development

(NABARD). This programme involves banks, NGOs and Government agencies

throughout the country. It is now the largest microfinance movement in the world, with

95 million rural households in the microfinance sector in India. Self Help Groups or

SHGs represent a unique approach to financial intermediation. The approach combines

access to low-cost financial services with a process of self-management and development

for the women who are SHG members. Micro-finance schemes using Self Help Groups

(SHGs) were designed and NABARD considered this „SHG – Bank Linkage Model‟ as a

core strategy for rural development.

Micro-finance through SHGs has proved the notion wrong and showed that even

the poor are bankable. The SHG members thrift, mobilize the savings and investment in

micro-enterprises had reported that the recovery rate was around 95 percent and micro-

finance through SHGs has evolved as an accepted institutional framework to provide

financial services to the poor. It is regarded as a better mechanism to reduce poverty

gradually as against giving one loan for productive assets which may or may not lead to

sustained increase in income (Madheswaran and Dharmadhikary, 2001)11

.

11

Madheswaran S. and Dharmadhikary A. (2001): Empowering Rural Women through Self Help

Groups: Lessons from Maharashtra Rural Credit Project, Indian Journal of Agricultural Economics,

Vol. 56 (3), 427-43.


75

Table-3.6

Position of Women Self Help Groups in India

(in lakhs)

Particulars Year Total

SHGS

%

Growth

Women

SHGs % Growth

% of Women

SHGs to Total SHGs

Saving

Linked to

SHGs

2007 41.60 - 32.71 - 78.63

2008 51.00 (22.6) 39.86 (21.8) 78.16

2009 61.21 (20.0) 48.6 (21.9) 79.40

2010 69.53 (13.6) 53.1 (9.3) 76.37

2011 74.62 (7.32) 60.98 (14.84) 81.72

2012 79.60 (6.7) 62.99 (3.3) 79.1

2013 73.18 (-8.1) 59.38 (-5.7) 81.1

Bank Loans

Disbursed to

SHGs

2007 11.06 - 9.58 - 86.62

2008 12.28 (11.03) 10.41 (8.66) 84.77

2009 16.09 (31.03) 13.75 (32.08) 85.4

2010 15.87 (-1.37) 12.94 (-5.89) 81.54

2011 11.96 (-24.64) 10.17 (-21.41) 85.03

2012 11.48 (-4) 9.23 (-9.2) 80.4

2013 12.20 (6.3) 10.37 (12.4) 85.1

Bank Loans

Outstanding

with SHGs

2007 28.94 - 23.89 - 82.55

2008 36.26 (25.29) 29.17 (22.1) 80.45

2009 42.24 (16.49) 32.77 (12.34) 77.6

2010 48.51 (14.84) 38.97 (18.92) 80.33

2011 47.87 (-1.32) 39.84 (2.23) 83.23

2012 43.54 (-9) 36.49 (-8.4) 83.8

2013 44.51 (2.2) 37.57 (2.9) 84.4

Source: Status of Micro Finance in India, NABARD Report. www.nabard.org


76

The table 3.6 indicates the share of exclusive women SHGs in the total number of

SHGs savings linked to banks now stands at 81% of the total number of groups.

The number of SHGs linked to Banks showed a decline during 2012-13. Similarly,

fresh loans to SHGs have been near stagnant for last few years; though it showed a

marginal rise during 2013. The coverage of rural households having access to regular

savings through SHGs linked to banks came down by around 8% during the year 2013.

A similar decline of number of SHGs savings linked to Banks was also observed with

only 73.18 lakh self help groups linked to Banks as against 79.60 lakh a year ago.

There has also been a 6% spurt in the number of SHGs getting fresh loans from

banks during the year to 12.2 lakh when compared to 11.48 lakh self help groups in the

year 2012.

The number of self help groups having outstanding credit with banks, however,

showed a marginal increase of 2% to 44.5 lakh as against 43.5 lakh the previous year.

3.14 Origin of Self Help Groups in Tamilnadu

Mahalir Thittam is a socio-economic empowerment programme for women

implemented by Tamil Nadu Corporation for Development of Women Ltd. It is based on

Self Help Group (SHG) approach and is implemented in partnership with

Non- Governmental Organisations (NGOs) and Community based organizations.

Tamil Nadu Women Development Project under the name of “Mahalir Thittam”,

with State funding covers all rural and urban areas of the entire State, except the six city

corporation areas since 1.4.2000. The original announcement made in 1996 can also be

seen as a path-breaker, involving a massive replication of TNWDP to cover about 10 lakhs

poor women of the State. This scheme is intended to promote economic development and

social empowerment of the poorest women through a network of Self Help Groups

formed with active support of NGOs. These groups would not only engage in productive

economic activities, but also function as important sustainable rural organisations, for

dissemination of knowledge about health, nutrition, literacy, education, adoption of new

agricultural practices, farm and non-farm sector economic activities and help prepare

women to take up leadership positions.


77

The objectives of the project are Social empowerment, Economic empowerment

and Capacity Building of the poorest and most disadvantaged women in the State.

The hallmark of the SHGs promoted by Mahalir Thittam is the systematic training

provided to the SHG members and the office bearers. This capacity building brings about

qualitative changes in the attitude of the women and promotes cohesion and effective

functioning of the group. In addition, SHG members who are interested in starting

economic activities or develop skills to get self employment are provided skill training.

The SHG approach was started in a small way in Dharmapuri district in the year

1989. Today the SHG movement is a very vibrant movement spread across all districts of

the State. In Tamilnadu, Chinnapillai an illiterate woman in Parparanpatti, Madurai

District, initiated the feedback of SHGs in the State, she was honored by the former

Prime Ministers of India, Honorable Atal Bihari Vajpayee, for forming a group and

nurtured saving habits among the illiterate women in the village.

The Indian microfinance sector has witnessed a tremendous growth over the past

two decades and the geographical spread of the Self Help Group - Bank Linkage

Programme through various agencies has reached even the most remote corners of the

country by covering 95 million poor households with 81% exclusive women groups.

After 2006, majority of SHGs are linked under newly defined model I where banks are

directly linked with the Self Help Groups.

Of SHG Women By SHG Women For SHG Women

Mahalir Thittam


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