Financial Inclusion

SBI Data


Scheme for Financial Inclusion by extension of Banking services through
Business Facilitators/ Business Correspondents

1. Objective
Twin objective of ensuring greater financial inclusion and increasing the outreach of
the Bank

To provide comprehensive financial services to the underprivileged encompassing
savings, credit, remittance, insurance, Mutual Funds and pension products in a cost
effective manner, particularly in untapped / unbanked areas.

To improve process efficiencies and reduce transaction costs by providing linkages
between the existing network of our Branches and the informal and formal agencies
engaged with the poor, by adopting technology based solutions.

To leverage on the strengths of intermediaries in accelerating the process of financial
inclusion.

2. Business Facilitator Model:
(a) Eligible Entities :
NGOs
SHGs
Farmers Clubs
Functional Cooperatives
Community based organizations
I.T. enabled rural outlets of corporate entities
Well functioning Panchayats
Rural Multipurpose kiosks / Village Knowledge Centers
Agri Clinics / Agri Business Centers
Krishi Vigyan Kendras
KVIC / KVIB units
Post Offices
Insurance agents
Social organizations
Individuals such as retired Post Masters and retired School/College
Teachers
Individuals such as auto dealers and FMCG stockists, postal agents,
insurance agents of private insurance companies(IRDA certified)
Retired Govt. employees, Ex-servicemen and retired Bank
employees Common Services Centres (CSCs) established by Service
Centre Agencies (SCAs) under the National e-Governance Plan (NeGP).
Bank employees who have retired on superannuation alone will be eligible.
AMFI Certificate holders
Primary Agricultural Socoieties(PACs)
Individual Kirana/medical/fair price shop owners
Individual Public Call Office Operators ( PCO)
Agents of small savings schemes of Govt. of India/insurance companies
Individual who own petrol pumps.
Any other entity, as may be specified by RBI from time to time.

It would be desirable to identify such entities which have presence and activity
throughout the Circle/State.

(b) Selection Criteria :
Should know the local language/dialect.
Should satisfy the norms of due diligence as laid down
Should have knowledge about the area
Should not be affiliated to any political organization
Should have been referred by at least two persons known to the Bank
and having satisfactory dealings with the Bank.
Should have a satisfactory track record of at least two years (organization).
The organization / office bearers / members should not have any criminal record
(Police verification must be arranged conducted in respect of each applicant found
suitable).
Past dealings, if any, with the Bank should have been satisfactory.
Should not be a Director or officer/employee of the Bank or a relative having the
same meaning under Section 6 of the Companies Act 1956, in the case of
individuals and in the case of entities, be owned or controlled by such person(s).
Wherever felt necessary suitable sworn affidavit may be obtained.
(c) Activities :
Conducting only non-financial business activities i.e., no cash
transactions/handling
Identification of potential customers and activities
Collection and preliminary processing of loan applications / account opening
forms for deposits including verification of primary information / data
Filling of loan applications / account opening forms including nomination clause
and submission to the Bank.
Cross-selling of other financial products like insurance / mutual fund products /
pension products / any other third party product
Assisting in post-sanction monitoring and follow-up for recovery (only after
complying with RBI instructions on recovery agents)
Promoting and nurturing Self Help Groups (SHGs) / Joint Liability Groups (JLGs),
wherever relevant.
Creating awareness about savings and other products and education and advice
on managing money and debt counseling.
As the entire objective of permitting bank to use Business
Facilitator/Correspondent model is to extend savings and loan facilities to the
underprivileged and unbanked population, these models should not beutilized for
collecting NRE/NR(O)/FCNR(B) deposits which are generally of a large value.
3.Business Correspondent Model

(a) Eligible Entities :
NGOs / MFIs set up under the Indian Societies / Trust Acts
Societies registered under Mutually Aided Cooperative Societies (MACS)
Act or the Cooperative Societies Acts of States
Banks can engage companies registered under section 25 of the
Companies Act 1956 as Business Correspondents (BCs) provided that the
Section 25 companies in which NBFCs, banks, telecom companies and
other corporate entities or their holding companies do not have equity
holdings in excess of 10%.
Post Offices
Retired Government and Bank Employees, Ex-servicemen
Individual kirana/medical/fair price shop owners
Individual Public Call Office Operators (PCO)
Agents of small savings shemes of Govt. of India/insurance companies
Individual who own petro pumps
Retired Teachers
Authorised functionaries of well run SHGs linked to Bank

b) Selection criteria :
In addition to the selection criteria prescribed for Business Facilitators, the under noted
aspects would be considered while selecting Business Correspondents:-
Should satisfy the norms of due diligence as laid down.
They should be well established, enjoy good reputation and stature and have the
confidence of the local people.
They should have significant rural / semi-urban presence.
The entity should have a satisfactory track record and should be able to generate
the funds required for this service.
Should not be owned or controlled by any Director or officer/employee of
the bank or a relative having the same meaning under section 6 of the
Companies act, 1956.
Ability to invest in POS devices and other equipment.
Ability to retain the required cash balance at Point of Sale and the balance in the
Current account on continuous basis.
The proposed individual BC should be a permanent resident of the area in which
they propose to operate as required by RBI. A minimum educational qualification
of X
th
pass is stipulated.
In case duly appointed BCs of the Banks, desire to appoint sub-agents at the
grass root level to render the services of a BC, it is to be ensured that-
a) The sub agents of BCs fulfill all relevant criteria stipulated for BC in terms
of the extant guidelines
b) The BC appointed carries out proper due diligence in respect of sub
agents to take care of the reputational and other risks involved.
c) The distance criteria of 30 kms, as applicable from the base to branch in
rural and semi urban centers should invariably be fulfilled in case of all sub
agents.
Where individuals under permitted categories have been appointed as BCs, they
cannot in turn appoint sub agents.
The entity should have a satisfactory track record and should be able to generate
the funds required for this service.
Preference should be given to well regulated entities.

(c) Activities :
In addition to the activities listed under the Business Facilitators Model, the scope of
activities to be undertaken by the Business Correspondents will include:

Opening of no frill deposit accounts and other products as permitted from
time to time by leveraging technology.
Collection and payment of small value deposits and withdrawals (not
exceeding Rs.10,000/- in each case)
Receipt and delivery of small value remittances / other payment
instruments (not exceeding Rs.10,000/-in each case)
In respect of all such transactions, the BC/his agent will be authorized to
accept / deliver cash either at his place of work or at any convenient
location subject to the ceilings per customer(Rs 10000/- in each case).
Furnishing of mini account statements and other account information
Recovery of principal / collection of interest in respect of borrower
accounts. For recovery only after complying with RBI instructions on
recovery agents..
Any other service on behalf of the Bank, duly authorized by the
appropriate authority.
The activities to be undertaken by the Business Correspondents would be
within the normal course of the Banks banking business, but conducted
through and by the entities at places other than the Banks premises.
In respect of all such transactions, the BC/his agent will be authorized to
accept / deliver cash either at his place of work or at any convenient
location subject to the ceilings per day / per customer as laid down. he
Business Correspondents / Business Facilitators will be linked to a nearby
branch (Link Branch).
As the entire objective of permitting bank to use Business
Facilitator/Correspondent model is to extend savings and loan facilities to
the underprivileged and unbanked population, these models should not be
utilized for collecting NRE/NR(O)/FCNR(B) deposits which are generally of
a large value.
4. Security Deposit :

Suitable amount of Security Deposit or Bank Guarantee in lieu thereof will be obtained
depending on the category and business volumes

MYRADA
No.2, Service Road
Domlur Layout
BANGALORE 560 071. INDIA.
Rural Management Systems Series
Paper 46

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E-mail
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[email protected]
http://www.myrada.org


The Role Of Self Help Affinity Groups In Promoting Financial Inclusion
Of Landless And Marginal/Small Farmers Families

Aloysius P. Fernandez
August 26, 2006


The Self Help Affinity Group movement has been largely rural based. Hence, this paper refers
to landless/near landless and marginal/small farmers. Where the SHG movement is focused
on the poor, a large number of the SHG members are from the landless/near landless. They
cannot survive on agriculture alone and depend on the SHGs to provide them with credit for
non-farm income generating activities, skills training and consumption. In some parts of the
country some of the marginal/small farmers are increasingly diversifying their livelihood
options both in the on-farm sector where the trend is towards a more integrated and organic
strategy and cash crops, as well as towards livelihood options in the off-farm sector both in
the vicinity as well as in other parts of the country that the youth are increasingly opting for.
These families require several tranches of credit (not just one or two) to enable them to use
the livelihood options available in order to rise above the poverty line and stay there. The
SHGs have provided this credit in areas where they are functioning effectively. There are,
however, parts of the country where the rate of overall growth is comparatively poor and
agricultural growth is stagnant if not declining; plot sizes have decreased. Lands have been
leased out. Out-migration is the only growth sector, and in some areas it is growing rapidly.
Credit provision for agriculture, as a single bullet strategy in these areas to help
marginal/small farmers to rise and remain above the poverty line, is inadequate to provide a
secure livelihood base for families even if they are organised into SHGs. A strategy for all
round growth needs to be implemented. Though this paper focuses on SHGs in the rural
areas, it does not imply that a group strategy is not appropriate to an urban and peri -urban
clientele; but the SHG movement is not large enough in these areas as yet, to draw any
conclusions on which future strategy could be based. Further, several types of groups like the
Joint Liability Groups (and there are many variations even here) are also being promoted both
in the urban and rural areas; this paper does not cover such groups.


Financial Inclusion is a key dimension of the overall strategy envisaged in the Approach
Paper for the Eleventh Plan entitled Towards Faster and More Inclusive Growth. If the
intention is to promote more inclusive growth, then the definition of Financial
Inclusion cannot stop at opening a short-duration account in the name of a hitherto
marginalised individual or group. Growth cannot be achieved by transferring a lumpsum
of money into this account as proof of one loan given, closing both the account after the
loan is drawn (or letting it remain dormant) as well as the file itself after the loan is
repaid and the subsidy adjusted. Financial inclusion is not a one-off event. In terms of
finance provision, it means that hitherto excluded people either as individuals or as
groups now have access to credit on a regular basis for as long as they continue to
abide by the terms of such a credit relationship. For Financial inclusion to promote
growth, it has to move from opening an account in the Bank, to regular savings and
finally to a relationship which enables the borrower to access loans on a regular basis. If
this definition is accepted, it follows that despite the plethora of schemes that have
been promoted by various governments from pre-IRDP days to the current SGSY, the
SHG-Bank Linkage Programme is the only formal-sector scheme till date that regards
excluded people as regular customers who can take loans again and again, as against
being one-time beneficiaries who have to fall back on their own resources once their
turn to benefit from the government scheme is over.

Is it only a group strategy through which such financial inclusion of poorer people can be
achieved? Probably not, but there is little documented experience till date where
marginalised individuals have successfully accessed a facility which enabled them to
repeatedly borrow and repay from mainline financial institutions. A few NGOs and
private banks have initiated efforts in this direction but data is not easily available and
the scale of outreach is still far from what has been achieved through the medium of
groups. This paper, therefore, focuses on SHGs as the strategy to achieve financial
inclusion on a significant scale.

This paper traces the growth of the Self Help Affinity Group (SHG) Movement
particularly since 1992 when the SHG-Bank Linkage Programme was launched by
NABARD[1]. The evidence since 1992 suggests that the SHG strategy has played an
important role in giving the poor and those on the margin of poverty the space to form
their own institutions which could access credit quickly, easily, repeatedly and in sizes
the members require and for the purposes they give priority to be it for so-called
consumption, income generation or trading activities, or for paying back high cost
debts to money lenders. It would be reasonable to conclude that the SAG strategy has
played a significant role in promoting financial inclusion of the poor especially since
2000 when the movement took off.

The key features of the official policy change which helped to provide this space for the
SHGs strategy to grow are: (a) The willingness of the RBI to allow Banks to lend to non-
registered bodies provided they function according to specific norms; this has
contributed to financial inclusion by encouraging responsible group behaviour and by
protecting the group from having to cope with tedious (and often non-transparent)
bureaucratic requirements demanded of registered institutions. (b) The freedom to lend
to groups (as groups) and not only to individuals in groups; this has enabled Banks to
enter into one agreement with the SHG thereby lowering transaction costs to both
parties; loans are extended on the basis of the groups institutional functioning,
repayment performance on loans from the groups own savings and cash flow, (c) The
freedom to lend to the SHG without asking in advance for the purpose of the ultimate
loan that the SHG extends to the member; this has freed both borrowers (groups) and
bankers from having to prepare and debate on the merits of project proposals which,
in most cases, do not follow the proposed plan after the loan is actually delivered, and
(d) the willingness to allow the SHG to lend for any purpose and at any size with its own
rate of interest and schedule of repayments and sanctions. What this has achieved is to
enable the pursuit of more need-based, interest-based and manageable loan taking on
the part of group members, and more honest reporting on loan utilisation.

Apart from these critical features of the new policy, NABARD provided a supporting
environment consistently over a long period which is critical for the growth of a new
initiative by providing funds and technical support for the capacity building of Bankers,
Cooperative Societies, District Central Cooperative Banks, Panchayat Raj Institution
members, Government officers, NGOs and SHGs, by refinancing Banks, by promoting the
movement in States where the SHG-Bank Linkage Programme lagged behind, and finally,
by extending loans to NGOs and MFIs for onward lending to groups. All these initiatives
both on the policy and support fronts resulted in a tremendous growth of the SHG
movement. Moreover, this growth in access to credit has been achieved without any
credit subsidy and the need to bribe. It is these client friendly features that are the
major explanation for the rapid growth of this movement since 2000.

Table 1 gives a picture of the progress of the SHG-Bank Linkage movement. It must be
noted however, that the number of SHGs formed and functioning is far greater than the
number of SHGs linked to Banks and Financial Institutions (FIs). Many SHGs have not
approached the Bank or have not been able to access Bank finance for one reason or the
other. Others are new and have to go through a period of training and functioning to
build their credibility. A rough guess would put the number of SHGs in the country at
around 3 million, of which 1.6 million have had access to credit through the SHG Bank
Linkage programme. It must also be noted that the source of data on the SHG-Bank
Linkage Programme is NABARD, and is based on the refinance that Banks have claimed;
there are many more SHGs financed where the banks have not claimed refinance and
hence, the numbers do not make it to NABARD data sheets. SHGs financed by micro-
finance institutions are also excluded from NABARDs data.

Table 1: Breakdown of the number of SHGs financed agency wise

Agency During 2005-06 Cumulative upto March 31, 2006
SHGs Bank Loan SHGs Bank Loan
No. % Amount % No. % Amount %
CBs 344,567 56 28,284.30 63 1,188040 53 69,874.50 61
RRBs 176,178 28 12,226.02 27 740,024 33 33,221.50 29
Coops 99,364 16 4,480.54 10 310,501 14 10,879.50 10
Total 620,109 100 44,990.86 100 2,238,565 100 113,975.50 100
(Amount in Million Rupees)
Source: NABARD. CB = Commercial Bank, RRB = Regional Rural Bank, Coop = Cooperative Societies.

What is also interesting to note is that in addition to the 539,365 SHGs financed for the
first time in 2004-2005, NABARDs data also indicates that 258,092 SHGs received
repeat finance in 2004-2005, to a tune of Rs.12,676 million.

One of the major concerns was the slow progress of the SHG Bank Linkage movement in
the North-east and Central parts of the country. It was even claimed in some quarters that
the SHG strategy was not suitable to the social configurations that prevailed in the North
East. NABARD made special efforts through its network to rectify this situation. As a
result, progress in these States has picked up considerably, as the following Table
indicates:

Table 2

Region/State March
2001
March
2002
March
2003
March
2004
March
2005
March
2006
NE Region 477 1,490 4,069 12,278 34,238 62,517
KBK Region 4,192 9,869 18,934 31,372 45,976 64,550
Orissa 8,888 20,553 42,272 77,588 123,256 180,896
West Bengal 8,739 17,143 32,647 51,685 92,698 136,251
Bihar 4,592 3,957 8,161 16,246 28,015 48,138
Jharkhand 0* 4,198 7,765 12,647 21,531 28,902
Uttar Pradesh 23,152 33,114 53,696 79,210 119,648 163,439
Uttaranchal 0 3,323 5,853 10,908 14,043 16,060
Rajasthan 5,616 12,564 22,742 33,846 60,006 98,171
Himachal Pradesh 2,545 5,069 8,875 13,228 17,798 22,920
Madhya Pradesh 5,699 7,981 15,271 27,095 45,105 58,912
Chattisgarh 0* 3,763 6,763 9,796 18,569 29,504
Maharashtra 10,468 19,619 28,065 38,535 71,146 131,470
Gujarat 4,929 9,496 13,875 15,974 24,712 34,160
All India 263,825 461,478 717,360 1,079,091 1,618,456 2,238,565
Source: NABARD. NE = North-east, KBK = Kalahandi-Bolangir-Koraput *included in the undivided State

The evidence drawn from studies on the growth of the SHG-Bank Linkage movement
since 1992 suggests that the high rate of growth especially since 2000 has had its
downside. The strength of the self help groups is based on the close affinity (relations of
trust and mutual support) that exists between its members, prior to any intervention
.The first step is to establish a good rapport with the village people. Secondly the poor in
the village must be identified a. through participatory methods; this takes at least a day.
They should then be invited to form groups based on the level of trust among them.
They are therefore free to decide on which group to join. Unfortunately, to achieve
targets, groups have been formed in a hurry and based on external criteria, not on the
choice of the members. Members of such groups may share some features indicated by
external criteria, but this does necessary imply that they are willing to work together or
trust one another, though this could be possible in some cases. Many government
programmes insist on forming groups exclusively of families on the BPL (below poverty
line) list even though they may not want to work together or have no affinity based on
relations of trust and support among the members; as always there could be exceptions.
As a result, an external agent like an NGO has to be present to ensure smooth
functioning of the group and often to take control of management; if it withdraws, the
groups collapse. The strategy to identify poor families and to leave them free to form
groups based on affinity takes time and requires that those forming groups in the
context of anti poverty programmes are willing to keep the well-to do out of the groups.

In some cases, to expedite the formation of groups in order to achieve targets as well as
to avoid any conflict with the more well to do and powerful families in the village,
women of these leading families have been asked to form groups; they have selected
families who depend on them or over whom they have control. This scenario has easily
slipped into money lending by the leaders.

Major programmes promoting SHGs have budgeted/allocated up to Rs 10,000[2] to
build the institutional capacity of each SHG; this requires at least 14 modules over a year
and a half. Evaluations made in several States indicate that these funds were spent for
other purposes; often only one-day training has been organised and that too only for the
leaders, not for the whole group. Without any institutional capacity building the groups
were provided with grants and loans. In some States, Panchayat secretaries and
Government functionaries were made the promoters of groups; they had no training in
the concept and in the methodology required to mentor a group; the promoters were
paid a sum for starting a group which subsequently dissolved. Others went further and
encouraged the members to save; these savings were either appropriated by the
promoter or by the leaders of the groups who then became petty moneylenders. In
other cases the groups were used to implement government schemes and became the
final link in the delivery chain rather than respected as peoples institutions with their
own mission. In most of these cases, no investment was made on institutional capacity
building. Differential rates of subsidies for SCs and STs who in many cases were
members of one SHG because they had a close affinity helped to break up well
functioning SHGs. And finally, realising the vote potential of these groups, politicians
endeavoured to claim ownership and to get their allegiance by offering them subsidies
and in some cases demanding that the SHG gets a certificate from the BDO as a
condition for a Bank linkage. As a result, though the number of groups formed is
impressive, the quality of groups has suffered.

If the movement is to survive and to promote a greater flow of credit to the poor,
marginal and marginalised sectors, there has to be a period during which efforts to
expand the number of groups goes hand in hand with a focus on quality. This
requires (a) the ability of promoters to identify groups based on affinity among
members and not on external criteria, as well as investment of funds and time in the
institutional capacity building of each group- of all the members, not just of the
leaders; (b) entrusting the formation, mentoring and assessment of each SHG to NGOs
who are trained or have the experience in mentoring these groups and who have no
other agenda besides supporting the poor to become self reliant; (c) a clear
understanding in Government, Line Departments, Banks and Micro Finance Institutions
about what a self help affinity group really is and what it can be expected to achieve
without undermining its objective to function as a peoples institution with its own
mission and functions. If serious efforts are made to promote these three critical
requirements, the quality of the groups will improve and their credibility to manage
funds will increase which in turn will result in a greater flow of credit to them from
Banks and other FIs. This is one of the objectives that this paper seeks to promote as a
priority in the next plan period. A brief explanation of the three critical requirements to
improve quality is given below:

(a) The need to train promoters to identify groups based on affinity among
members (not just on external criteria) as well as to invest funds and time in the
institutional capacity building of each group- of all the members, not just of the
leaders.

A group based on affinity is one in which the members self select themselves because
there exist relationships of trust and practices of mutual support. Such members tend to
have a similar income and to share similar risk[3].

It is important to note that the affinity relationships exist before the intervention of an
outside agent; they were adequate to support traditional actions like mutual help in
times of sickness or childcare. The outside agent requires good rapport with the people
and a degree of sensitivity to identify these affinity groups and to build their institutional
capacity on these strengths. With new functions emerging in the self help affinity
groups, they have to cope with the demands of effective financial and organisational
management, as well as with the broader social roles that the groups are required to
play, for example, to initiate change in society and in the home, to protect and further
their interests, as well as to establish linkages with supporting services and institutions.

The relationships that members of a group establish among themselves are motivated
not only by material gain which the word capital popularly implies. These
relationships are motivated by a mix of social and material needs. In the case of
womens self help groups, social needs, however, often tend to get priority. Women
need space in our traditional rural societies to meet freely, to share concerns, to express
a sense of togetherness and fellowship. Women in particular, need a place to call their
own, as they are unable to meet (like men) at the village corner or around a shop. As
spots that traditionally provided women with a level of security and privacy have
become scarce like water points some distance from the village the privacy and
security of an affinity group meeting is a godsend. This is why womens affinity groups
take a strong stand against men trying to interrupt their meetings. It is interesting to
note that when other villagers are asked to express their opinion of a womens self help
group, their assessments focus more on the social habits developed by the members,
rather than on their material progress. The most appreciated qualities of the groups
include their regular meetings, the ability of members to manage their affairs in an
organised and transparent manner, to take collective decisions, to impose and accept
sanctions for dysfunctional behaviour and to take the lead in improving their
surroundings; these are the features that others appreciate, far more than their capital
(which they build up by savings which are deposited in the groups common fund) or
material progress. These are also indicators of a well functioning institution with a high
quality of governance.

The need to identify members of SHGs based on affinity will have an impact on the usual
approach adopted in Government programme to target a fixed number of poor on the
basis of certain criteria set under the programme, like SCs, STs, Minorities, BPL list etc.
For example, the first programme sponsored by a State in which SHGs were part of the
design was the one managed by the Tamilnadu Womens Development Corporation and
partly supported by the International Fund for Agricultural development (IFAD); the
credit was provided by the Indian Bank. It began in 1990 in Dharmapuri District. The
project beneficiary target given to the NGO was to form SHGs of 10,000 poor women
selected by external criteria. However, when the poor were identified in the villages
through a participatory method and asked to form groups or to self select the members
of their group, it was discovered that over 18,000 women had formed groups. The
10,000 which fitted the Government criteria were included in this number but had
joined others to form SHGs. Fortunately the issue was resolved since all the members
took loans from the SHGs savings (common fund); the income generating programmes
under the project, however, had to be directed to those who fitted the criteria of the
project. This did distort the programme both because of this directed approach as well
as because of the subsidy component.

Identifying affinity groups is only the first step. More important is the investment
required to build the institutional capacity of these groups. Most of the Government
sponsored groups have not received the level of institutional capacity training that is
required for a group to function effectively. Government Departments, in general, do
not realise the importance of building peoples institutions; they either assume that they
exist once they are registered or that their function is to implement Government
programmes. In several cases, only the leaders of the groups are trained, thus increasing
the gap between them and the others. The Capacity Building Modules that programmes
like Swashakti (a programme based on SHGs) found to be effective and which were
given to all the members of each SAG over a period of 12 to 18 months included the
following: 1. A structural analysis of Society; 2. Analysis of local credit sources; 3. Self-
Help Affinity Group the concept; 4. How a meeting of an SHG is conducted; 5.
Communication; 6. Affinity; 7. Vision Building; 8. Organisational Goals; 9. Need for
Planning, Resource Mobilisation, Implementation, Monitoring & self-Evaluation (PRIME);
10. Rules and Regulations; 11. Responsibilities of Group Members; 12. Bookkeeping and
Auditing; 13. Leadership; 14. Conflict Resolution; 15. Collective Decision Making; 16.
Common Fund Management; 17. Self-Assessment; 18. Group Graduation; 19. Linkages
with other Institutions; 20. Building Credit Linkages; 21. Federations; 22. Credit Plus, and
23. Analysing Gender Relations in the Family and Community. These modules have been
originally published in a training manual by Myrada entitled The MYRADA Experience: A
Manual for Capacity Building of Self Help Affinity Groups, and subsequently adapted
and translated into several languages.

Groups will continue to be formed within the context of a Government sponsored
project; yet, in order to reduce the negative impact on institutional building that a
project imposes with its time bound agenda and priority to disbursement, it is important
to ensure the following: (i) the poor in the village need to be identified through
participatory methods. (ii) They must then be free to form groups and to self select their
members; they will normally do this on the basis of affinity, not on the criteria for
beneficiary selection provided by outsiders (iii) At least six to eight months must be
devoted to institutional capacity building before the group is asked to prepare plans for
investment in infrastructure or to apply for grants/loans or for individual assets. During
this period a significant investment in capacity building is required; this should focus on
helping the group to build a vision and a strategy which is not limited by the need to
implement the project on hand but encompasses what the group envisages in the long
term. (iv) If the project envisages provision of credit by Banks, the group should be
assessed on the basis of its institutional strengths (not on the viability of each individual
loan) and a line of credit provided to the group, leaving the group free to decide on the
purpose of each loan, on the interest rates, repayment schedules, and on sanctions
where members fail to conform to agreed schedules or accepted norms of social
behaviour. v) Subsidies of any kind need to be avoided. The approach to subsidies
should be Do not subsidise the asset (cow, sheep etc) but subsidise the support services
required to keep this asset productive vi) As far as possible, credit should be provided
by Banks and FIs including MFIs; no village level institution or even a federation of SHGs
should be entrusted with the function of lending money even if it is asked to manage a
so-called revolving fund. vii) Project interventions should promote MFIs from the
beginning; it may be more difficult to do so, but if properly managed, the MFI is the
appropriate solution to credit provision in the long run in areas where the formal
financial institutions are reluctant to enter.

(b) Entrust the formation, mentoring and assessment of each SHG to NGOs who are
trained or have the experience in fostering these groups and who have no other
agenda besides supporting the poor to become self reliant

It is recommended that the institutional capacity building of SHGs be entrusted to NGOs.
This is not because NGOs are better than others. It is because even in a situation where
Government Departments are equally as good as NGOs, the former are accustomed to
delivering services, not to building peoples institutions which have their own vision,
mission and agenda. For one, the NGO has the experience of institution building while
Government staff work in well-established institutions. An NGO which has no agenda
(political or religious) is a more appropriate institution to build another institution. Other
comparative advantages of NGOs are given below.

NGOs: generally small, face-to-face interactions
between cadres, better continuity of tenure.

Government refers to a SEA of people grey,
faceless, frequently interchanging posts.

Limited objectives. Generally, the ones that are
engaged in SHG promotion may only have one
or two other closely related programmes like
livelihoods development, reproductive and
child health, etc.

SHGs will not be their only programme (e.g.
anganwadi staff have to carry this responsibility
in Karnataka in addition to their already heavy
workloads).
Limited area of operation. Staff-SHG ratios are
generally within manageable proportions.
Large-scale operations. Staff have to cover large
areas. Hence, most often, they end up working
through NGOs anyway, for SHG development.

New staff can easily be oriented to understand
concepts and pick up skills. Continuity of
uniform quality support can be better ensured.
There is generally only a one-time investment
in staff training, with abysmal budgets within
which it has to be done. If staff change due to
resignations, transfers, etc., the replacement
staff are not trained.

Monitoring focus is less on targets and more on
processes. Quality carries some specific
definition that is generally understood by all
the staff. Even though power relationships
exist, the NGO tradition is still to speak their
minds as far as programme quality is
concerned.

Target-based monitoring. Quality is not only un-
defined but even meaningless. The definition of
quality changes with the person in authority.
The cadres are well-trained on how to say just
what their managers want to hear.
Authority is locally located; hence, there is
much shorter turnaround time to respond to
changes in programme requirements.
Flexibility is difficult. The scale of operations
makes it difficult to be other than standardised
and rigid. The boss is either far away or a
nebulous entity or both.

Budgets can be enhanced with donations and
local mobilisations. People are familiar with
being asked to contribute to demonstrate their
stake in the programme.
Budgets are severely limited, with no scope to
enhance locally; no system to account for local
mobilisations. Any attempt to mobilise local
resources is interpreted as corrupt.

Assessment of performance is critical for the growth of any institution. SAGs are no
exception. In fact, the centrally sponsored SGSY programme made provision for this, but
the follow up required to identify who should do this assessment and the methodology
to do it was not undertaken. As a result, except for one or two States, nowhere was this
assessment taken up. The criteria used to assess the performance of SHGs were
prepared by several NGOs; an assessment format was vetted and published by NABARD.
The methodology of assessment needs to be participatory; there are several approaches
which can be adopted and adapted to the local situation. The need for participatory
assessment must be part of the inputs in the capacity building training. This assessment
should be yearly feature, at least. Banks do make an assessment before extending loans,
but the criteria used is usually restricted to the amount of savings (often perceived as
collateral) and the over-all financial performance in terms of repaying previous loans.
There are several cases where an analysis of SHGs with excellent repayment rates
showed that the common fund was controlled by one or two leaders who were basically
moneylenders. The group functioned more like a chit fund than an SHG.

(c) A clear understanding in Government, Line Departments, Banks and Micro-
finance Institutions about what a self help affinity group really is and what it can be
expected to achieve without undermining its objective to function as a peoples
institution with its own mission and functions.

Some of the major reasons identified for the weakness of the SHG movement relate to the
lack of understanding that an SHG is an autonomous peoples institution with its own
vision and mission; it is not the final link in the delivery chain of the government
department. One official indicated with pride that the SHGs were doing a good job by
taking over the ration shops and implementing the PDS programme. This may be true, but
if this is the only function of the SHGs in this area, they are far from being independent
peoples institutions. Several well-intentioned initiatives of Government as well as the
gap between concept/ design of a programme (which is often good) and the
implementation (where all the hurdles arise) have contributed to lowering the quality of
the SHGs and even to their collapse. The SGSY is a good example of where this gap
exists. In brief, these initiatives have had a negative impact on the quality of the SHGs
which is so critical to improve the credibility of the SHG which in turn will promote a
greater cash flow from Banks and FIs.

Government recognition of an initiative (and its mainstreaming as part of official policy)
is often pursued by NGOs as an indicator of success, but it could, and often has, an
unintended negative impact. On the one hand it provides the thrust required to expand
the initiative rapidly; on the other it becomes vulnerable to the usual Government
pattern of management namely, high (and often unrealistic) targets, the subsidy pattern
of Government programmes and in the case of the SHG programme, predetermined
criteria to identify beneficiaries and form them into groups without assessing the affinity
among the members. The SGSY, for example, offers different subsidies for general
castes, scheduled castes and scheduled tribes even though in many cases all families are
poor and members of the same SHG. This tends to break up the groups. Different rates
of interest on loans to minorities from the Minorities Financial Corporation adds to the
problem. There are several instances where such mixed groups which are functioning
well were asked by government functionaries to break up into separate
castes/tribes/minority groups to facilitate the different rates of subsidies and interest (in
the case of loans from the Minorities Financial Corporation). The policy of divide and
rule is not a feature monopolised by the past. A policy decision is required
which a) standardises the rate of interest on loans given to all SHGs whether their
members are from the minority or majority groups b) standardises the management of
subsidies which seem to be a necessary component of government programmes- so
that the impact of their distortion can be reduced as far as possible? Can all subsidies, if
they have to be given, be transferred to the SHGs common fund? Can subsidies be used
to ensure that supporting institutions have adequate funds to provide services instead
of being used to subsidise the asset given to the beneficiary? At least can all subsidies be
back-ended?

Government schemes promoting peoples groups do not place value on institutional
capacity building. Even where adequate sums were budgeted for capacity building, as in
the SGSY programme, the Government Departments implementing the programme used
these funds in several States not for training SHGs but for other purposes - like
organising large gatherings with a political agenda at the behest of some Minister, or
funding infrastructure of institutions which did little training. In other cases, funds for
capacity building of the whole SHG as described above, were often used for training only
the SHG leaders and not the whole SHG, and even in this case, for a day at most. As a
result, the institutional capacity of the whole group did not improve. The gap between
the leaders and others also tended to increase, which is not a healthy development. In
general, Government functionaries tend to give little weight to institutional capacity
building. Most of them take the stand that once a group is registered, it becomes an
institution. Building an SHG involves identifying an affinity group, providing training to
the whole group and mentoring it over 2 years. In many Government driven
programmes, this period of stabilisation and strengthening is cut short or totally left out
since the targets in terms of numbers and disbursement of grants have to be achieved.
As a result, groups are formed without any participation of people to identify the poor
and those linked by affinity and, in many cases, grants and subsidies from Government
are given to these groups within a month of their formation. Adequate time and
resources for training in institutional capacity is not provided for. Government
functionaries do not have experience in this area as there has not been any previous
Government sponsored scheme to promote institutions of people. They understand
training in particular skills mostly if they are related to production or at most for training
in book keeping skills required by SHGs. As a result, the confidence of groups to
provide larger loans to its members was undermined; this in turn had an impact on the
confidence to access larger loans from financial institutions.

Politicians are keen to translate the success of the SHG movement into political capital;
so political parties begin to claim ownership of these groups instead of realising that
they are owned by the members. (One politician who insisted on giving grants to SHGs
was very upset when she lost the election and considered the SHG members to be
ungrateful. In fact the capacity building training and mentoring provided had made
them capable of exercising their franchise with greater care and to avoid external
pressure and persuasion to vote for particular people. It is not uncommon to hear in
election speeches that this politician or that was the originator of the SHG movement. In
fact, most of them did not even know of the SHG movement till the late 1990s, a good
15-20 years after it started). Many SHGs are tempted not to repay their loans once they
come under political patronage.

The practice of the bureaucracy to use the SHGs to implement state sponsored
programmes is another hurdle to the growth of good SHGs which, in turn, see
themselves as part of government rather than as institutions which can grow by
accessing credit from a financial institution. This practice of the bureaucracy flows from
the subsidy pattern of Government programmes and a culture that these SHGs are the
final link in the delivery chain and not institutions with a mission and programme of their
own.

As often happens, the SHG strategy has frequently been promoted as the answer to the
search for a one bullet strategy to eradicate poverty; this tends to place undue
importance on credit provision while neglecting the other initiatives required that
promote all round development which creates livelihood options and opportunities for
the effective use of credit to improve livelihoods in a sustained manner by reducing risk,
providing appropriate infrastructure and inputs to increase productivity. When the one
dimensional strategy did not achieve the objective to promoting livelihoods, the SHG
approach was discredited.

The unhealthy competition among States to claim the best performance in terms of
forming SHGs without concern for quality led to a rapid increase in forming SHGs; many
were formed on the basis of external criteria (not affinity) and provided matching funds
and even loans within the first month, with little or no institutional capacity building. As
a result, many SHGs collapsed or were hijacked by the leaders who became
moneylenders using the common fund of the group; this in turn led to a certain
hesitation on the side of promoting agencies to pursue the programme and thereby the
flow of credit from financial institutions declined or did not grow as expected.

Several Micro Finance Institutions, especially those pursuing a high growth curve (often
at all costs) have broken up many good SHGs. They have done this by insisting on
extending loans to individuals in the SHGs without adequate investment in group
capacity building as well as by carving out Joint Liability Groups from good SHGs thus
breaking up the SHG into smaller groups for their administrative convenience.

Banks are reluctant in some parts of the country to adopt the linkage programme
wholeheartedly; this is coupled with poor banking infrastructure and performance in
some States. Some States in the north, some central States, and most of the States in
the east of the country fall in this category. However NABARD has made serious and
sustained efforts to correct this imbalance.

Another development which could have a negative impact on the SHG Bank Linkage
programme and the level of credit flow is the amalgamation of RRBs. As Banks grow
bigger, the trend is for loans sizes to grow larger. Based on available data, a loan to an
SHG does not exceed Rs. 4 lakhs and this is in rare cases, mostly with MFIs. Therefore it
is difficult to expect large RRBs after amalgamation to push the SHG Linkage
programme. Their smallest loan will probably hover around Rs.10 lakhs. Besides, the
corporate culture of RRBs is also changing, leaving little difference between them and
the Commercial Banks.

As the SHG movement spread, promoting institutions had different interpretations of
the organisational structure and functions of a self help group. The SHG concept is also
mixed up with previous groups under Government programmes (e.g. DWCRA) formed
on the basis on common activity (which was expected to provide the link to keep
members together) or on the basis of all members being self employed which allowed
Government programmes to provide them with subsidies and loans for their income
generating activity. The SHG group concept is also not distinguished from the Joint
Liability Groups where loans are given separately to each member but the liability to
repay is shared. There are also the Grameen Bank Groups where loans are given to
individuals in groups with the group applying pressure for repayments. Since the major
drive to collect data on SHGs came from financial institutions, their function was largely
viewed as financial provision and management; this tended to downplay the major role
they have played (or have the potential to play) in empowerment of the poor and
marginalized sectors. Though this did not inhibit the spread of the SHG movement, it
surely gave it a bias towards financial functions, which tended to distort the concept.
Given the obstacles to growth in our country, it is not enough to teach the poor to fish
when they cannot reach the river. Their access to the river is obstructed by social,
political and cultural hurdles including their inability to read the sign posts and their
vulnerability to disease which holds them up. Unless SHGs therefore are provided with
the space and the networks and the members with the skills required to influence
change in society and the family, the confidence and capacity to access and use a larger
flow of credit required by members will not materialise.

The second objective of this paper is the following: To convince policy makers that the
rural poor and those on the margin have major problems to achieve food security
entirely from an agricultural base. Therefore, for financial policy to focus only on
loans for agriculture and related activities will not open all the windows that these
families require to be included into the financial system. It needs to focus on
livelihood options. But given the seasonal and increasingly uncertain sources of
livelihood options that leave gaps in the income/input flow of these families, focusing
on livelihoods alone is also not adequate; they also need credit to live, to have
access to credit for consumption and for urgent needs like illness in order to survive.

The SHGs have provided credit for agriculture, for several non-agricultural livelihood
options as well as for consumption. These loans have been provided quickly, easily,
repeatedly and in sizes they require. This is a major reason for their growth and success.
An emerging issue is the increasing evidence that marginal and even small farmers
especially those in dryland areas no longer find agriculture a worthwhile occupation.
Most of the youth of these families are out-migrating for non-farm jobs. Only the older
generation is left behind to attend to the fields or lands leased out. As a result, the
potential for growth of credit in agriculture especially to marginal and small farmers in
drylands is limited. For example, a recent analysis of the purposes of loans given by 238
SHGs - all in rural areas during a one year period (2003-2004) - showed that out of a
total of 5,880 loans advanced to 3558 members during one year (2003-2004) , 1,574
loans were for agriculture (27%); while the amount lent for agriculture was Rs.6,568,397
(25%) out of a total amount of Rs 26,280,230. Animal husbandry accounted for 457
loans (8%) amounting to Rs 3,131,854 (12%). The average amount lent for agriculture
was Rs.4,173 which was the lowest when compared to averages of all other purposes
except consumption (Rs.2,915). The highest average amount was Rs 12,672 for
repayment of high cost loans from moneylenders and towards release of mortgaged
lands and assets[4].

Apart from the poor and those on the margin of poverty, there is another group (both in
urban and rural areas) that is already integrated into the farm and non-farm growth
sector in terms of livelihood occupations (like farmers growing cash crops and youth in
farming families who have acquired some off farm skills, like pump mechanics, etc.). This
group is not able to access the daily or weekly requirements of credit to pay for the
inputs they require; they may not be classified as poor but they are marginalized
from the financial sector, Several initiatives to address this need for credit like the Kissan
Credit Card for the farming sector have been introduced, but there are still millions to be
reached both in and outside the farming sector. This paper proposes that the SHG
strategy be extended to cover even these groups (who may not fall strictly in the poor
category) so that they have access to credit. Adaptations in the SHG strategy may be
required to cope with the different aspirations of the members.

There is another reason why the SHG may be a strategy that is timely for farmers falling
in this group of those who have adequate assets or skills to earn a livelihood but are
marginalized from credit institutions. Farmers who have committed suicides fall largely
in this category. Most of them have adequate land, have invested in cash crops and due
to several reasons (including erratic and poor rainfall, the collapse of the marketing
support structure and their lack of marketing experience since it was provided as a
safety net by Government, the crash of financial institutions and fall in output prices due
to subsidised imports, etc.) decided to take their lives since they could not earn enough
to feed their families and to repay moneylenders. In a recent article by Pratap Bhanu
Singh (President, Centre for Policy Research) he points out to another possible cause: In
times of great social change, as traditional structures break down, settled moral norms
dissolve, special bonds become less effective and the individual is thrown upon
himself and he continues The need of the time, therefore, is to invent new forms
of sociability; associations and support structures that reconnect individuals to society.
The SHGs could fill this role. The article then refers to farmers suicides: Surveys done in
districts with high farmer suicides suggest that they were pretty much on their own.
Most people, including their own family members, did not have intimations of the depth
of their economic problems or suffering. As they are drawn into wider and more
extensive chains of dependency on outside forces - the State and the market - structures
of cooperation within villages begin to weaken. But perhaps the most dramatic
illustration of the kind of anomie facing most farmers is this: the lack of a real
associational life in which they can participate and be recognised.

The Third objective of this paper is to present a case that the SHGs have the
potential to extend several loans and of adequate and manageable sizes for the poor
to build a sustainable livelihood base.

Critics who point out to the limited impact of the SHG approach on livelihoods argue
that the average loan is small the amount differs from study to study but hovers
around Rs 2,000 to Rs 2,500 and insufficient to increase incomes substantially to raise
the members above the poverty line. Secondly, they argue that evidence points out to
the SHGs being appropriate institutions to provide loans to smoothen consumption but
not to support income generation and livelihoods.

Let us first address the perception that the structure and functioning of an SHG is
appropriate only to extend small loans for consumption smoothening and to provide
only loans that are too small to provide an adequate livelihood base. If this is true then
one cannot expect the SHG approach to carry the members further in developing an
adequate livelihood base. Several studies of the purposes of loans including and the
recent sample study of 238 SHGs referred to above, indicate that it is misleading to give
an average of all loans given by the SHG as is often done to support the claim that the
SHG can give only small loans. For example in the sample study, the average size of a
loan for clothing is Rs 1080, for travel it is Rs.360. But the picture that emerges when the
averages are disaggregated differs considerably; this is described in detail in the
following paragraph. The average size of a loan within each Sector (like Agriculture,
Household expenses, animal husbandry etc.), and of each purpose within a sector
(within the Agricultural Sector there are several purposes like purchase of inputs,
payments for labour, hire of equipment/bullocks, development of land etc.), gives a
more relevant picture. Further these studies also show that a large number of loans are
given for income generation and to lessen the outflow of income resulting from earlier
high cost loans taken from moneylenders.

For example, the pilot study of 238 SHGs indicates that the purposes of loans fall at least
into 7 broad Sectors. Each of these seven Sectors has several purposes as indicated in
the footnote below[5]. There are purposes where the average size of each loan is over
Rs.10,000 (For example: Under the Household sector, the average size of loans for
Purchase of jewellery is Rs.15,750; Under the Debt release sector, the average size of
loans for repaying high cost loans to Moneylenders is Rs.12,903 and for Release of
mortgaged lands Rs.10,000. Under the Animal Husbandry sector the average size of
loans for Poultry Units is Rs.16,000; for purchase of milch animals the average size is
Rs.7,217; for sheep/goats it is Rs.5,686; and for Donkeys, rabbits etc Rs.6,233. Under the
House related sector the average size of loans for House repair is Rs.16,549). In the Non-
Farm sector, the average size of loans for Cottage industries is Rs.9,528, for Small
businesses it is Rs.5,363. Under the Agriculture sector, the average size of loans for
Purchase/Hire of Agricultural equipments is Rs.5,904, for Fencing of lands adjacent to
forests it is Rs.8,500; for wells, pumpsets, etc. Rs.7,922 and for Sericulture it is Rs.8,840.
Interestingly, loans for agriculture inputs mostly on drylands averaged less than
Rs.5,000. It is reasonable to conclude, therefore, that the SHGs do provide a window
that allows a wide diversity of purposes as well as a significant difference in the size of
loans for various purposes. However, it is also becoming evident that loans for inputs in
agriculture are smaller than for all other purposes except for consumption. Does this
indicate peoples assessment of the viability of such loans in dryland agriculture? While
Government may have its own priorities based on good intentions, people decide to
take loans to meet their most urgent need (in order to live) as well as for investments
that they consider manageable rather than what financial institutions may consider
viable. Further, sectors that Government may consider a priority in the national
interest may not be the same for the small and marginal farmers cultivating dryland
below three acres.

As for the opinion that the SHGs are mainly providing: consumption smoothening
loans, the pilot study indicates otherwise. Of the 5,880 loans given to 3,558 members
of 238 SHGs during one year (2003-2004), 1,954 loans (33%) were for food, clothing,
other household expenses and socio religious ceremonies which could be called
consumption smoothening. However the total amount for these loans is only 21% of
the total amount loaned. 66% of the number of loans advanced and close to 80% of the
amount advanced as loans went into sectors that were production related (including
getting out of earlier debts, and investment in education).

There is also an implicit assumption behind many of the official programmes that one or
two loans are adequate to raise and keep a family above the poverty line. Hence,
comparatively large loans are required. Evidence from the SHGs indicates that as many
as 5 to 7 loans are required over a period of 5 to 6 years before a family has a stable
livelihood base. The total amount borrowed through these 5 to 7 loans may equal and
even exceed the amount borrowed by one or two large loans under government
programmes. This indicates that people tend to borrow in amounts that they find
manageable rather than what is considered viable; for this, they also need to have
the confidence that there is a source from where they can borrow more than once; this
prevents them from bargaining for a large loan in the first or second instance which they
cannot utilise productively. The pilot study itself indicates that in one year 5,880 loans
were given to 3,558 members. Assuming that all the members took loans it works out to
an average of 1.65 loans per person in a year. A trend analysis also indicates that the
loans are small during the first two years but increase in size after that[6]. The example
of Sundaramma given in the footnote (6) describes one case where several loans were
taken. There are thousands such Sundarammas in the SHGs.

It will therefore be reasonable to conclude that well functioning SHGs do have the
potential to provide loans for purposes and in sizes and numbers that have the potential
to support a livelihood base. However, much more support of a focused nature is
required to release this potential - which is the next objective that this paper seeks to
promote as part of future strategy. This leads to the next objective of this paper.

The fourth objective of this paper is to highlight the need for certain supporting
initiatives if SHG members are to graduate from income generating activities to
Micro-enterprises[7].

To achieve this graduation in a systematic and cost effective manner, it is necessary to
(a) analyse the purposes of loans given to members by the SHGs; (b) accept that all the
SHG members may not want to graduate to micro enterprises and that even if many so
desire they may not be able to since the supporting infrastructure and linkages are
missing; (c) test a new form of community based organisation which may be more
appropriate to support members who engage in micro enterprises than SHGs

If the loans taken by SHG members are considered comparatively small, many of them
do provide an income, which, though important for the member, may not be adequate
to meet rising expectations. The trend of loan taking in the SHG is towards several small
loans rather than one large one. There are thousands of examples where the members
prefer to take several small loans rather than a large one; these small, loans together
amount to anywhere between Rs 40,000 to Rs 60,000, which is a substantial amount.
This trend is due to several reasons the member may not be comfortable to manage a
large loan, and/or the SHG members may decide to distribute their risk Yet, there is also
need to address the need for a one-time large loan of Rs 50,000 and above which some
members may require to meet with rising expectations. . Some of the Banks may be
willing to provide loans of this size directly to the individual. If this individual is a
member of an SHG, the Bank may base its decision on his/her performance in the SHG,
but if he/she is not a member of an SHG the bank may require some kind of institutional
guarantee apart from other forms of collateral. In both cases (member of SHG as well as
non-member) there is a need for a community based organisation similar to an SHG
which could provide an institutional framework to lessen the risk of repayments and
improper use of funds as well as ensure that the borrower can be easily contacted. Each
of the three supporting initiatives required will be considered in greater detail in the
following paragraphs.

a) The need to analyse the purposes for which loans are given to the members. The
national programme led by NABARD to promote micro finance has laid emphasis on the
following major dimensions of the programme:
Strengthening the capacity of SHGs.
Training bankers and NGOs.
Starting and promoting the SHG bank Linkage Programme.
Persuading and supporting Banks to lend directly to SHGs and to intermediaries
for on lending.
Promoting initiatives of Banks to form SHGs and to build their capacity before
lending to them.
Refinancing Banks loans to SHGs.
Investing in extending and promoting the programme where it is lagging like in
the central, north and eastern states
Performance in repayment of loans
Integrating the programme in State sponsored programmes to form SHGs, albeit
under different names. Introducing changes in policy, practice and systems so that
structural and organisational hurdles to the programmes growth are removed.
Collecting and publishing data to assess progress in the SHG-Bank Linkage
programme. Progress however focused on: i) the number of SHGs formed by region
ii) the number of SHGs linked to banks which have taken loans iii) the amount of
loans, iv) the average size of loans for all purposes taken together nation wide, v) the
number of loans given to a SHG (one or more) and vi) performance in repayment.

An analysis of the above initiatives shows that the focus and thrust has been on the
supply side largely on the credit flow to SHGs and the repayment. The RBI allowed the
Banks to lend to groups without asking in advance for the purpose of each loan given by
the group top each member.[8] Banks/MFI are expected to assess the SHG as an
institution including its performance in organisational and finance management and in
achieving certain social objectives that it set for itself. Criteria for assessing the SHGs as
institutions were designed by NABARD and several NGOs. Several studies showed that
people who were given loans in government-sponsored schemes, based on standard
sizes and costs (viable units and unit costs) and purposes (restricted to income
generating/assets) used these loans not only for the stated purpose but also for several
others. On the other hand, when loans were extended to SHGs under the SHG-Bank
Linkage Programme the members were free to take loans for any purpose and of any
size. Yet this did not increase the default rate. In fact, it raised the repayment rate to
over 95%. Interestingly, an in-house study by Myrada of purpose-driven loans where
the repayment was over 75% showed that over 60% of the repayment did not come
from the asset for which the loan was provided; repayments were based on cash flow,
which originated from various activities including labour wages.

While this decision of the RBI to lend to groups without asking for the ultimate purpose
was historical and path breaking, it should have been followed up by a requirement that
an analysis is made subsequent to the loan utilisation of the purposes of loans given
by the SHG to members. Since the SHGs were free to decide on the size and purpose (as
well as on the scheduled of repayments and interest rate) it was reasonable to assume
that the purpose and size would be much closer to reality. This analysis among other
learnings would have provided the basis on which to build strategy which is more
focused to promote and support livelihood activities of scale and with added value and
micro enterprises. For example if the analysis showed that several members of 10-15
SHGs in a village or two borrowed for buying and selling raw hides, these members could
be brought together to be trained in tanning. If all (or even a few) of them decided to
take the step, they would borrow from their respective SHGs and perhaps come
together later for better marketing. The training would then be far more effective as it
builds on the initial free choice of members. This in turn would increase the potential to
access and use larger loans as well as the success rate of their enterprises. However, no
serious effort has been made to collect and analyse this data and to evolve future
strategy to support income-generating initiatives. The next phase in the SHG movement
needs to fill this gap. The learnings from this analysis would also help to assess whether
development initiatives have had an impact in the area by increasing the potential for
credit flows, as well as to plan for the future. More specifically, this analysis will help in
the following:

To find out whether the purposes and amounts of loans for consumption (food
and clothes) decreases over a period of 3-4 years. If there is no reduction then it is
reasonable to assume (allowing that consumption patterns and expectations do
change) that the other investments/interventions made to lessen the risk in dryland
agriculture, to increase productivity and market access, for promotion of on-farm
and off-farm livelihoods and linkages have not been sufficiently effective; in other
words, that incomes have not increased to cope with basic needs especially for food
and clothes.
To find out whether a pattern of similar loans emerges since this may indicate
that there is a comparative advantage in the area which supports such activities. For
example, in a particular village where 56 SAGs function, data shows that one or two
members from each SAG borrow for a particular activity like poultry or weaving. A
focused strategy would follow up by organising a training programme for these
individuals to help them add value or scale but not to form them into a new group;
after the training they return to their own SHGs from where they borrow for the new
activity if they decide to take it up. The new activities would require large loans
which in turn would increase the quantum of credit required by the SHG. The current
programmes in enterprise development training are often not really effective since
they are rarely based on an analysis of the purposes of loans which SAG members
decide on. Rather, they cater to those who raise their hands when asked whether
they are interested in joining any training programme
To find out whether the size of loans in agriculture and related activities grows at
a faster rate in some areas than in others. This indicates that extension work may
have been effective in some areas when compared to others. The reasons for this
success or failure would help to develop appropriate strategy and take remedial
measures which together will increase the credit flow in agriculture.
To find out whether the average size of loans for a particular purpose can give
financial institutions some indication of the amount that people really require to
ground an activity, and whether the official unit costs tend to coincide with these
average figures.

b) It is realistic to accept that all the SHG members may not want to graduate to micro
enterprises and that even if many so desire they may not be able to since the supporting
infrastructure and linkages are missing

There is a prevailing assumption behind some programmes that all the members of an
SHG want to or can graduate from smaller to larger loans. This assumption is not
substantiated by data. There are members who continue to take a number of small
loans for income generating activities over several years. Each member of the family is
engaged in a separate activity which requires only one member to manage it. As
observed above, the SHGs are appropriate institutions to provide several loans in small
amounts as and when required for productive purposes. Many members will continue to
remain in the SHGs and not opt to approach the banks for a large individual loan. The
assumption that all families need one large loan for a micro enterprise in which all
members of the family (and even workers from outside) are engaged is not borne out by
evidence from the field. In some cases this is because there is ample potential for small
activities but not for larger ones. In other cases, it is because the family does not wish to
put all its eggs into one basket. Larger enterprises require linkages and skills which the
family does not possess.

There is also ample evidence that a single bullet strategy of providing credit is far from
adequate to trigger growth. Credit needs other supporting services and linkages in order
to be used. Members of SHGs functioning within the context of NGO sponsored projects
which are broad based (and where these interventions lower the risk of investing in
drylands, increase productivity and linkages with institutions providing services and with
markets, improve literacy, health, confidence and skills) and those which function in
areas where there is all round economic growth tend to take large and more numerous
loans for an increasingly diverse portfolio of purposes. The members are able to find
opportunities which they can exploit. However, for micro enterprises to be successful,
the all round investment required is much larger, which NGOs cannot provide. Besides a
large loan they would require a regular line of credit, reliable power supply, adequate
transport to reach the market, market information and the power to access resources in
a scarce scenario where bribes are required for sanction s and permission. This is where
there are several major blocks[9].

c) It will be necessary to develop/test a new form of community based organisation
other than SHGs which may be more appropriate to support members who engage in
micro enterprises. Those members of an SAG who opt to graduate to micro enterprises
could be formed into Joint Liability Groups (JLG) or into some similar organisation. Banks
may be more inclined to lend to individuals in this group based on the performance of
each member in the SHG as well as on the assumption that a JLG will provide some
degree of mutual guarantee. There is evidence however, that the relations of mutual
trust and support which is described as affinity in a SAG tend to be weaker in a JLG.
Therefore, new forms of collateral or guarantee may have to be worked out.


Aloysius P. Fernandez
MYRADA
Bangalore
August 26, 2006




[1] NABARD National Bank for Agriculture and Rural Development - The first grant from
NABARD to promote SHGs was given in 1987. It was given to an NGO, Myrada both to train the
SHGs (about 300 had emerged in Myradas projects at this time; many emerged from a break-up of the
Co-op Societies) and to match their savings. Between 1987 and 1992 several studies initiated by
NABARD provided adequate evidence that this alternate credit strategy would work. In 1991 the RBI
gave permission for Banks to lend to groups and in 1992 NABARD brought out guidelines and
launched the SHG-Bank Linkage programme

[2] The SGSY Programme allocated Rs 10,000 while NABARD allocates Rs 2000 for each SHG

[3] The history of how the self help affinity groups emerged may shed some light on affinity. Between
1983 and 1985 several of the Co-operative Societies started by MYRADA with over 100 members
broke up because of lack of confidence in the leadership and poor management. Members
met MYRADA staff in small groups; they expressed their willingness to repay their loans
to MYRADA but not to the Co-operative Society, which was a large and heterogeneous group and
dominated by one or two individuals. They were informed that since they had not taken the loans
from MYRADA, the issue of repayment to MYRADA did not arise. When asked: Why not repay to
the small group of people assembled here? They agreed. The large Co-operative broke down into
several small groups and the group members repaid their loans to whichever group they chose to join.
Thus was born the first set ofSelf Help Affinity Groups. On analysis, MYRADA realised that there
was a strong feeling of affinity which linked the members of each of these small groups together.
This affinity was based mainly on relationships of trust, relations that were non-exploitative, on
certain social features (like a degree of homogeneity among the members, of voluntarism and self
reliance and willingness to support one another in need), on certain structural features like a common
origin (blood or ancestral village) or the same livelihood base (all daily wage earners, landless or
marginal farmers, even though from different castes, religions or communities), on gender bonds (all
women, or all men, though about 5% of the groups were mixed). In a few cases they were based
on similar activities undertaken by each member (like basket weavers though caste also had a role
to play here; besides a large group of households undertaking a similar activity often decided to break
up into smaller groups of 10-15 on the basis of affinity). Interestingly no groups were formed on the
basis of political party affiliations. Briefly, the affinity groups were unpolished diamonds hidden under
stones; the NGO staff just happened to kick these stones aside by accident; all that the staff can be
credited for is that they stopped to look, to learn, to identify peoples strengths or the potential of the
diamond and then to build on them. When these affinity based groups emerged in MYRADA in 1984,
they were called Credit Management Groups; the focus was on management of savings and credit
rather than on the provision of credit; when MYRADA entered into a contract with NABARD in 1986-
1987 to take up a pilot project to promote these groups, the name was changed to Self Help Groups.

[4] This analysis was done of 238 SHGs with 3,558 members randomly selected from 5 projects of
Myrada over three southern States. Of these 238 SHGs, 70 were 1-2 years old, 142 between 3-6 years,
17 between 7 10 years and 9 above 10 years.

[5] i) Household expenses: food, clothing, socio-religious, health, travel, jewellery, vehicles; ii) Debt
release: release from bondage, repayments to moneylenders, release of mortgaged assets; iii) New
opportunities like education and skills training; iv) agriculture: input purchases, equipments
purchases/hire, labour costs, fencing, draft animals, irrigation, sub-sector investments, etc. v) animal
husbandry: purchase of large animals, small animals, poultry, feed and fodder investments, animal
health, etc. vi) Non Farm activities: cottage industries and small businesses; vii) Housing
related: construction, improvements, toilets.

[6] Sundaramma from Holalkere is 38 years old; she lives with her husband and two children. They do
not have any land; she and her husband work as agricultural labourers. They live in a rented house and
have opened a small provision store at the front of it. She is a member of a group that is 4 years old.
She saved regularly during the first six months and then asked for a loan of Rs.5,000 from the SAG to
expand the provision store. After repaying the loan she took another of Rs.10,000 (Rs.5000 to expand
the store and Rs.5,000 to purchase a milking cow). She repaid this loan and took another loan of
Rs.5,000 to purchase 6 sheep; the flock expanded to 12. She sold 7 for Rs.10,000 and invested the
amount in a chit fund since she still owed money to the SAG and could not take another loan. When
her turn came to get the chit, she purchased one house site and took 2 acres of coconut farm on lease
for 1 year for Rs.5,000. Her husband started selling tender coconuts. She took another loan of
Rs.15,000 (Rs.5,000 for one milk buffalo, Rs.5,000 to expand the provision store and Rs.5,000 to
purchase wholesale bakery items which her husband then started to sell along with the coconuts). The
family now has assets worth Rs.1 lakh. The total loan taken was Rs.40,000.

[7] Though there are several interpretations, the term Micro enterprises here is used for I) income
generating activities on and off farm which require larger one time loans of Rs 50,000/- and above -
which takes the loan out of the category of micro finance ii) activities in which more than one person
is employed iii) activities which earn at least 75% of the income required by the family to remain
above the poverty line and to grow further.

[8] Studies showed that the extra transactions costs in writing out individual applications which
restricted loans only to income generating activities and based on unit costs and viability prior to
extending loans was literally a waste of time since money is fungible and people took loans for assets
and used part of the loan to fund their consumption needs. Some Banks still asked for individual loan
purposes before extending the loan to the groups, but none took the records too seriously provided the
repayment was good. In general, therefore, the time and energy devoted to analysing the purposes of
loans and the size per purpose of loans was limited and in most cases non-existent

[9] To give one example, two members of an SAG recently asked for a loan of Rs.25,000 to start a
small flour grinding business; the SAG sanctioned this loan. A month later, they returned it to the SAG
because they had to pay a bribe of Rs.10,000 to get an electric connection how can micro enterprises
succeed in a scenario of shortages of essential inputs like electricity, water and adequate infrastructure
and transport? Poverty cannot be eradicated without power (not just political power) to add value to
products. For the poor to climb out of poverty and stay there, therefore, requires not only easy and
quick access to resources but also adequate infrastructure, power, water and information. Adequate
investment in these sectors is a matter of Government policies and priorities.