shg- bank linked program

8/13/2019 SHG- Bank Linked Program

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SHG- BANK LINKEDPROGRAM

Submitted By:

Rachit Agarwal

Dipanshu Bansal

Jatin Jain

Ritesh Jain

Ashish Goel


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Introduction

The idea of forming groups to support each other originated in Bangladesh under the Leadershipof Noble Laureate Mohamed Yunus. It is a noble mission- an innovative concept that has itsroots in Bangladesh and also touched every part of the globe. In order to achieve the mission of

reaching those families who did not access to credit by any formal financial institution and,therefore, were dependent on informal sources and moneylenders, the National Bank forAgriculture and Rural Development (NABARD) introduced the SHG - Bank LinkagePr ogramme as a pilot project in 1992. Thereafter, RBI had advised commercial banks to

participate actively in this programme. Subsequently, this programme was further extended toall Regional Rural Banks (RRBs) and cooperative banks. SHGs through the network ofcommercial banks, RRBs cooperative banks, NABARD and NGOs has been largely supplydriven as well as a recent approach in the provision of financial services to the poor.

What is Self Help Group(SHG) Self Help Group is a homogeneous group of micro entrepreneurs with affinity amongthemselves, voluntarily formed to save whatever amount they can conveniently save out of theirearnings and mutually agree to contribute to a common fund of the group from which small loansare given to the members for meeting their productive and emergent credit needs at such rate ofinterest, period of loan and other terms as the group may decide.

Objective:

To meet the credit needs of the poor by combining flexibility, sensitivity andresponsiveness of the informal credit system with the strength of technical andadministrative capabilities and financial resources of the formal credit institutions.

To build mutual trust and confidence between the bankers and the rural poor. To encourage banking activity both on thrift as well as credit side in a segment of the

population that the formal financial institutions usually find difficult to cover.

Eligibility:

The group should

Be in active existence for at least a period of six months. Have successfully undertaken savings and credit operations from its own resources. Maintain proper accounts/records. Work democratically wherein all members feel that they have a say should be evident. Be formed to reflect genuine need to help each other and work together and Branch

Manager should be convinced that the group has not come into existence only for thesake of participation in the project and availing benefits there under.


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Have members preferably with homogenous background and interests.

MODELS OF SHG-BANK LINKAGE PROGRAMME

The strategy behind these models is to form small, cohesive and participative groups of the poorand encourage them to pool their savings regularly and use the pooled savings in order to makesmall interest bearing loans available to the members. Bank credit facility also available to thegroup to augment its resources for the purpose of lending to its members. The SHG-bank linkage

program has proved to be the major supplementary credit delivery system with a wideacceptance by banks, NGOs and various government departments. There are three models ofSHG-bank linkages that have evolved over time, especially in India.

MODEL -I. SHGs formed and financed by banks

In this model, banks themselves take up the work of forming and nurturing the groups, openingtheir bank accounts and providing them with bank loans after satisfying themselves as to theirmaturity to absorb credit. Up to March 2006, about 20% of the total number of SHGs financed

was from this category. This shows an increase of 61.63 percent in bank loan to SHGs over the position as on March 2005 reflecting an increased role of banks in promoting and nurturingSHGs. Here, the banks act as the SHGPI.

MODEL- II. SHGs formed by NGOs and formal organisations but directly financed by thebanks

In this model, groups are formed by NGOs (in most cases) or by the government agencies. Thegroups are nurtured and trained by the agencies. The bank then provides credit directly to theSHGs after observing their operations and maturity to absorb credit. While the bank providesloans to the groups directly, the facilitating agencies continue their interactions with the SHGs.Most linkage experiences begin with this model, where NGOs play a major role. This model hasalso been popular and more acceptable to banks, since some of the difficult functions of socialdynamics are externalized. This model continues to have a major share. About 70 percent of thetotal number of SHGs is financed under this model.

MODEL- III. SHGs financed by banks using NGOs and other agencies as financialintermediaries

For various reasons, banks in some areas are not in a position even to finance SHGs promotedand nurtured by other agencies. In such cases, the NGOs act as both facilitators and microfinanceintermediaries. First, they promote the groups, nurture and train them and then they approach

banks for bulk loans for further lending to SHGs. In other words, banks take the soleresponsibility for promoting, developing and financing SHGs. In fact, this programme requiresconsiderable effort by the bank staff towards the formation of SHG. This model is not soencouraging.


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Extent of Credit

The acceptable proportion of savings to the loan could vary from 1:1 to 1:4 depending on theassessment of the SHG by the Bank.

Security:

Hypothecation of assets created out of Bank's finance. No insistence on collateral security

Security Documents:

Inter se Agreement by all members. Articles of Agreement by authorized members.

Repayment

Bank prescribes appropriate repayment period in negotiation with the Group which may rangefrom 3 to 7 years. Repayment may normally be in regular monthly installments or as determinedat the time of loaning based on local conditions, activities undertaken by members etc. Loansfrom SHGs to members could be repaid in appropriate installments which may be daily, weeklyor market days fortnightly, monthly etc.

The following graph shows the gradual increase of the SHG- Bank Linkage Programme in Indiaover the years.


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The following graph shows the presence of the SHG- bank linked programmes in various regionsof India.


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The following factors attribute to the success of the SHG approach:

At group level :

Group formation and nurturing - the key to successful SHG

Group composition - thrust on affinity and homogeneity Members learn to maintain financial discipline

Members own stake in the group - in the form of savings

Collective wisdom in credit decisions

The peer pressure enable the group to minimise the aggregate risks of failures

Savings and credit is a continuing process and not a one-time injection of loans

Freedom of selecting loan purpose to the members, with benefit of peer counseling

At Bank Level :

The group formation and nurturing process is intensive and should not be rushed through

Emphasis on Grading -Banks grade the SHGs for credit support based on parameters ofgroup dynamics, regularity in savings, internal lending, participation level, etc.

NGOs grade the SHGs before recommending them for bank loan

The weak ones have to wait and overcome weakness

Cost effective, operationally simple and low risk strategy for expanding client base and business

Bank loans only when initial savings and internal lending has stabilised

Banking with disciplined clients and not beneficiaries

More than 95 % on-time repayment from the poor some of whom were possiblydefaulters

Heavy investments by NABARD in formation, nurturing of SHGs, building capacities of NGOs,

Training of banks and other stakeholders - as Investment in human capital development NGOs promote SHGs for deepening the impact of their programmes and furthering their

own social agenda

Banks promote / finance them for expanding quality business coverage and

Governments promote them for multiple developmental objectives


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Future Strategy for the SHG- Bank Linked Programmes should be as follows:

Expansion in the Poverty struck and Tribal areas

Massive capacity building efforts by other stakeholders eg.Banks,NGOs, Govt. Dev.Dept.

Banks to own the SHGs linked with them as their client and nurture them to keep themin good health

Training the SHG members to maintain their books of account themselves or arrangeIRVs/Barefoot accoutant/Smart card etc

Federating the SHGs for future handholding and susta inability

Graduation of SHG members to Entrepreneurship

Skill development training to improve work efficiency and develop quality product,

Arrangement for raw material and other inputs

Design development and consistancy

Marketing of the product