The Self-Help Group and Bank Linkage Programme in India : Review and Way Forward

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Agricultural credit is a vital input in the improvement of agricultural productivity of the country. Since personal resources of the farmers are low, Financial Inclusion will go a long way in not only improving agricultural productivity but also in reducing inequalities of income distribution amongst various sections of rural poor. Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelarating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself. The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between the mode of operation followed by financial institutions and the economic characteristics and financing needs of low-income households. For example, commercial lending institutions require that borrowers have a stable source of income out of which principal and interest can be paid back according to the agreed terms. However, the income of many self employed households is not stable, regardless of its size. A large number of small loans are needed to serve the poor, but lenders prefer dealing with large loans in small numbers to minimize administration costs. They also look for collateral with a clear title - which many low-income households do not have. In addition bankers tend to consider low income households a bad risk imposing exceedingly high information monitoring costs on operation. Over the last ten years, however, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs and grassroot savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies. In India, the Self-Help Group(SHG) and Bank Linkage Programme has emerged as a major microfinance programme. It has proved to be an effective way of providing credit to very small borrowers and has contributed significantly to financial inclusion. The National Bank for Agriculture and Rural Development (NABARD), in India, launched its pilot phase of the Self Help Group (SHG) Bank Linkage programme in February 1992. SHGs are small informal associations with an average size of 6-20 rural poor from a homogeneous class, created for the purpose of enabling members to reap economic benefit out of mutual help, solidarity and joint responsibility. These small and homogeneous groups involved in savings and credit activities are capable of taking care of the risks through peer monitoring. These groups are encouraged to make voluntary thrift on a regular basis and small interest bearing loans are made to members from this pooled resource. This process imbibes in the members the essentials of financial intermediation, setting of terms and conditions and accounts keeping. They begin to handle resources far beyond their individual means. The group gradually imbibes a certain financial discipline and then banks are encouraged to give loans to the group. Risk to the...
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