Project Report On

“SELF HELP GROUP – BANK LINKAGE PROGRAMME AND

IMPACT OF MICROFINACE ON RURAL ECONOMY”

Submitted by

Mr. Madhav Marotrao Chavan

Post Graduate Diploma in Agri Business Management

UNIVERSITY OF MUMBAI’S

Garware Institute of Career Education & Development

Vidyanagari, Santacruz (East)

Mumbai 400098
Session 2007-2009

ACKNOWLEDGEMENT
 Acknowledgement in my opinion is very difficult to write in words. Since it is the
part of research activities. Where you may feel emotional and at the same time you
need to recall all those incidents, where I received help from others. So fast and
foremost responsibility, I first thank to God and all those who may have contributed
on providing insight for this project report writing directly or indirectly. Behind the
success of every person there is a hand of few, it may be luck, god, parents,
relatives, family members, advisers, guides. I acknowledge and thank all of them.

I express my profound and deep sense of gratitude to my project guide Mr. S.

N. Salunke, (Chief. Manager, Union Bank of India) for his constant encouragement
and sustained interest right from the suggestion of the problem to completion of
Project work. It gives me immense pleasure to express my heartfelt gratitude and
sincere thanks to, Mr. Y. S. Bhand (Extension Officer, Panchayat Samaiti, Mulshi)
and Mr. Vikas Kudave (Volunteer of Mahila Va Balak Vikas Mandal, Pune) for them
keen interest and valuable suggestion at various stages of this investigation.

I extend my thanks to “Dr. Arun Kshirsagar” Director GICED, University of

Mumbai, “Mr. Shirish Patil” course coordinator

I acknowledge with respects to Mr. Haslekar, Mr. Varadkar (Union Bank of

India, Paud Branch).

I would like to express my gratitude to ever helping hands to my friends and

classmates GICED, PGD-ABM batch of 2007-09.

Madhav Marotrao Chavan

ABSTRACT

More than subsidies poor need access to credit. Absence of formal

employment take them non bankable. This forces them to borrow from local
moneylenders at exorbitant interest rates. Many innovative institutional mechanisms
have been developed across the world to enhance credit to poor even in the
absence of formal mortgage. The present project discuss conceptual framework of
microfinance in India. The successes and failures of various micro finance
institutions around the world have been evaluated and lessons learnt have been
incorporated in a model microfinance institutional mechanism in India.

Microfinance is gathering momentum to become a major force in India. The

self-help group (SHG) model with bank lending to groups of (often) poor women
without collateral has become an accepted part of rural finance. The project
discusses the state of SHG-based microfinance in India. With traditionally loss-
making rural banks shifting their portfolio away from the rural poor in the post-reform
period, SHG-based microfinance, nurtured and aided by NGOs, have become an
important alternative to traditional lending in terms of reaching the poor without
incurring a fortune in operating and monitoring costs. The government and NABARD
have recognized this and have emphasized the SHG approach and working along
with NGOs in its initiatives. Over half a million SHGs have been linked to banks over
the years but a handful of states, mostly in South India, account for over three-fourth
of this figure with Andhra Pradesh being an undisputed leader. In spite of the
impressive figures, microfinance in India is still presently too small to create a
massive impact in poverty alleviation, but if pursued with skill and opportunity
development of the poor, it holds the promise to alter the socioeconomic face of the
India’s poor.

INDEX
Chapter Content Page
No. No.

1 Introduction 5

2 Microfinance 8

3 Self Help Groups 28

4 Bank Linkage Programme 42

5 National Bank for Agriculture and Rural Development 53

(NABARD)

6 Swarna Jayanti Gram Swarojgar Yojana (SGSY) 58

7 About Mulshi 59

8 Grameen Mahila Va Balak Vikas Mandal 63

9 Findings 64

10 Suggestions 65

Annexure 70

Bibliography 78

Chapter 1

Introduction
 Finance is frequently called the blood of business. Out of around one billion
people in India, 26% are poor (National Statistical Sample Organization, 2000). At
the bottom the poor need credit for small productive assets, working capital, housing,
illness, and emergencies. The demand for credit here is not only large but
heterogeneous as well. Till the 1990s the rural financial system in India was
predominantly supply driven with the state playing a major role in improving the
access to financial services by the poor. While state intervention considerably
improved the outreach of the banking system and expanded rural credit, it also
allowed rent seeking tendencies and credit indiscipline to grow (Nanda, 2000). By
the late 1980s, the rural financial system had virtually collapsed amid heavy
regulations, distraught market conditions, dual lines of control, and mounting arrears.
The beginning of 1990 saw India face one of its worst balances of payment crises. In
1991, under the initiative of the International Monetary Fund, India undertook a
liberalization of its economy. Liberalization had an important bearing on the financial
sector; banks, which had turned weak, were confronted with the challenge of making
themselves profitable while maintaining their prudential requirements and competing
with private and foreign banks in a new liberalized milieu.

In India, the adaptation of the new microfinance approach by rural financial

institutions assumed the form of the “Self-Help Group–Bank Linkage Program.” After
an initial pilot study the Reserve Bank of India (RBI) set up a working group on non-
governmental organizations (NGOs) and Self Help Groups (SHGs). The working
group made recommendations for internalization of the SHG concept as a potential
intervention tool in the area of banking with the poor. The RBI was quick to accept
the recommendations and advised the banks to consider mainstreaming lending to
SHGs as part of their rural credit operations. The SHG-bank linkage program is
gaining increasing acceptance amongst NGO community and bankers. The National
Bank for Agriculture and Rural Development (NABARD) envisions covering one third
of the rural population in India by establishing one million SHGs. The government of
India has already made announcements for linking 2,00,000 SHGs by year 2002–03.
The task force on microfinance sees the SHG – Bank Linkage Program emerging as
a major way of banking with the poor in coming years. It is estimated that at least
25,000 bank branches, 4000 NGOs, and 2000 federations of SHGs involving 0.10
million personnel of these institutions will be involved in scaling up microfinance to
this magnitude. Under the SHG – Bank Linkage Program, NGOs and banks interact
with the poor, especially women, to form small homogenous groups. These small
groups are encouraged to meet frequently and collect small thrift amounts from their
members and are taught simple accounting methods to enable them to maintain their
accounts. Although individually these poor could never have enough savings to open
a bank account, the pooled savings enable them to open a formal bank account in
the name of the group. This is the first step in establishing links with the formal
banking system. Groups then, meet often and use the pooled thrift to impart small
loans to members for meeting their small emergent needs. This saves them from
usurious debt traps and thus begins their empowerment through group dynamics,
decision-making, and funds management. Gradually the pooled thrift grows and
soon they are ready to receive external funds in multiples of their group savings. Bank
loans enable the group members to undertake income generating activities.

Through the SHG – Bank Linkage Program the RBI and NABARD have tried
to promote relationship banking, i.e., improving the existing relationship between the
poor and bankers with the social intermediation of NGOs. The Indian model is
predominantly a “Linkage Model,” which draws upon the strengths of various
partners: NGOs, who are best in mobilizing the poor and building their capacities,
and bankers, whose financial strength is financing. As compared to other countries
where parallel model of lending to the poor is predominant, the Indian linkage model
tries to use the existing formal financial network to increase the outreach to the poor,
while ensuring the necessary flexibility of operations for both bankers and the poor.
Various credit delivery innovations such as Grameen Bank Replications, NGO
networking, credit unions, and SHG federations have been encouraged by NABARD
for increasing the outreach. It has also instituted a Micro Credit Innovations
Department for planning, propagating, and facilitating the microfinance movement.
Given the network of institutional structures supporting the microfinance movement,
the SHG – Bank Linkage Program has been increasing its outreach substantially.

Microfinance has been recognised and accepted as one of the new

development paradigms for alleviating poverty through social and economic
empowerment of the poor, with special emphasis on empowering women.
Experiences different anti poverty and other welfare programmes within as well as
outside the country as also by the international organisation have shown that the key
to success lies in the evolution participation in credit delivery and recovery and
linking of formal credit institutions to borrowers through approach have been
recognised as a supplementary mechanism for providing credit support to the rural
poor. Microfinance by definition, refers to the entire range of financial services
rendered to the poor and including skill up-gradation, entrepreneurial development
that would enable them to overcome poverty.

Chapter 2

Microfinance
2.1 Definition of Microfinance:
 For the purpose of this study microfinance can be defined as any activity that
includes the provision of financial services such as credit, savings and insurance to
low income individuals who fall just above the nationally defined poverty line and
poor individuals who fall below the poverty line, with the goal of creating social value.
The creation of social value includes poverty alleviation and the broader the impact
of improving livelihood opportunities through the provision of capital for micro
enterprise and insurance and saving for risk mitigation and consumption smoothing.

A large variety of actors provide microfinance in India, using a range of

microfinance delivery methods. Since the founding of the Grameen Bank in
Bangladesh various have endeavoured to provide access to financial services to the
poor in creative ways. Government have piloted national programs, NGOs have
undertaken the activity of raising donors funds for on lending and some banks have
partnered with public organizations or made small inroads themselves in providing
such services. This has resulted in a rather broad definition of microfinance as any
activity that targets poor and low income individuals for the provision of financial
services. The range of activities undertaken in microfinance include group lending,
individual lending the provision of savings and insurance, capacity building and
agricultural business development services. Whatever the form of activity however,
the overreaching goal that unifies all actors in the provision of microfinance is the
creation of social value. Microfinance is therefore defined as much by form as by
intent of the lender or financial service provider.

2.2 History of Microfinance:

It has been approximately 25 years since the birth of Microfinance with the
founding of the Grameen Bank in Bangladesh by Professor Mohammad Yunus. The
field has since spread with the adaptation and evolution of Professor Yunus’ ideas to
various countries and contexts. The UN Year of Micro credit in 2005 indicated a
turning point for microfinance as the private sector began to take a more serious
interest in what has been considered the domain of NGOs. However, with all the
excitement about the prospects of the field to contribute to poverty alleviation and the
integration of the world’s poor into the rapidly evolving global market system, the
Consultative Group to Assist the Poorest (CGAP) estimates that microfinance
probably reaches fewer than 5% of its potential clients. Although this is a very rough
estimate of those not reached by formal financial institutions, it might serve to
provide a general idea of what share of the potential clients of microfinance have yet
to be reached. India is home to a growing and innovative sector of microfinance.
With a large portion of the world’s poor, India is likely to have a large potential
demand for microfinance. For this reason, it makes sense to consider the changing
face of microfinance in India, in order to shed light on comparable changes in the
field all over the world.

The overarching question this study looks to answer in the interests of greater
impact and outreach of microfinance in India is: What are the costs and benefits of a
Microfinance NGO of transforming to a Non-Bank Financial Company (NBFC)? More
specifically, how does organizational form affect a Microfinance Institution’s ability to
achieve success both by financial and social standards? By taking a closer look at
three cases of transformation to or start up as an NBFC; we can better understand
the intricacies, challenges, successes, and opportunities for microfinance delivery of
independent Micro Finance Institutes (MFIs) in India. In looking at three MFIs in
India, we might expect to see several benefits of transformation from an NGO to an
NBFC. These include greater profitability in order to handle being a regulated
financial company and attract commercial funds, greater access to more diverse
sources of funding including equity and debt from commercial banks, greater
outreach due to larger loan portfolios, and greater efficiency due to the pressure to
lower costs to improve profitability.

We might also worry that the pressure to become profitable might lead MFIs
to target better off borrowers, offer fewer products and services, and therefore
inadvertently lower their poverty impact. Lastly, we might also expect to see a loss in
the flexibility to innovate and test products that NGOs tend to have if the MFI
becomes a regulated entity with more legal restrictions. The purpose of the case
studies will then be to explore whether the experiences of the three MFIs chosen
conform to these expectations. Some subsidiary questions that arise when
considering a cost benefit analysis of Indian NGOs transforming to Non-Bank
Financial Companies (NBFCs) are: What constitutes sustainable microfinance? And,
is private commercial funding the most effective vehicle for growth in microfinance?
In order to assess the costs and benefits of NGOs transforming to NBFCs, this study
focuses on case studies of three of the largest independent MFIs in India: SHARE
Microfin, BASIX Finance, and SKS, which have all chosen to transform to or become
(NBFCs). SHARE, SKS, and BASIX are useful case studies not only because they
have all made the transformation from an NGO to an NBFC, but they are also
sufficiently different in their experiences with micro credit delivery, client focus, and
organizational evolution.

BASIX employs a hybrid model of microfinance delivery which emphasizes

the combined delivery of financial services, technical assistance, and agricultural
business development services and does not specifically target women. SHARE and
SKS, on the other hand, employ the Grameen Bank model of microfinance delivery
which specifically targets women and focuses mainly on microfinance. While BASIX
showed an early commercial orientation in its operations, SHARE and SKS followed
a more common path in microfinance, that of an NGO, and only recently made the
decision to transform to an NBFC. The comparison between these organizations is
useful in documenting different paths towards transformation and thus, providing a
more robust picture of the costs and benefits of such a process to Indian MFIs. In
order to perform a cost benefit analysis of the selected MFIs, a set of metrics for the
measurement of successful and sustainable credit delivery have been compiled with
the help of industry rating sources. These metrics will be divided into categories of
financial impact, strategic strength, and social impact and are used in order to
evaluate the relative success in credit delivery of the three microfinance
organizations studied.

2.3 The Evolution and Regulation of Microfinance in India:

A complete understanding of the evolution and nature of a country’s financial
system, regulation, and government attitude toward the sector is integral to
understanding the nature of microfinance in any particular country. Such knowledge
allows one to understand what forces shape its growth and what factors constrain it.
Understanding the nature of microfinance regulation is especially important to
assessing the costs and benefits of transforming from and NGO MFI to an NBFC
MFI because regulation outlines the nature of some of those benefits and costs while
also providing the legal basis for the different types of legal form a MFI can take.
 The World Bank has called South Asia the “cradle of microfinance.” Statistics
indicate that some 45% of all the people in the world who use microfinance services
are living in South Asia. However, the overall percentage of the poor and vulnerable
people with access to financial services remains small, amounting to less than 20 %
of poor households in India. The World Bank estimates that more than 87% of India’s
poor cannot access credit from a formal source and therefore they are not borrowing
at all or have to depend on money-lenders who charge them interest rates ranging
from 48% to 120% per annum and sometimes much higher. This demonstrates that
there are potential clients for microfinance in India, depending on the level of
demand for financial services, from those poor without access to it. The provision of
such services, if done correctly, could have a significant impact on the poor. This fact
alone is very compelling and is reason enough to occupy oneself with the careful
questioning of how microfinance can be provided to as many of the poor with a
demand for it as possible. Integral to this questioning is the purpose of this study,
understanding the costs and benefits of providing microfinance in the form of a
financial company rather than an NGO.

With nearly 400 million people in India below or just below an austerely
defined poverty line, approximately 75 million households are potential clients of
MFIs. Of these, nearly 60 million are in rural India, the remaining 15 million being
urban slum dwellers. We are then curious about the penetration of India’s formal
financial system thus far in order to understand the depth of outreach. Understanding
the depth of the formal financial system is what drives the purpose of considering the
benefits and costs to NGOs of becoming NBFCs. How might NGOs and NBFCs
approach this market differently? What in their organizational and legal structure
positions them better or worse to increase their impact in this market? Understanding
the outreach of the formal financial systems provides the necessary information for
answering these questions.

In 1999-2000, financial assets in India amounted to about US$430 billion in

nominal terms as reported by a 2005 World Bank report, compared to US$250 billion
in Argentina and US$386 billion in Mexico. However, India had a lower per capita
income in 1999 of US$440 compared to Mexico’s $4,440 and Argentina’s $75,505.
With a per capita income in 2004 estimated at US$620, India still ranks among the
poorest countries in the World6. Historically, credit to the poor in India was viewed as
a government program that required large amounts of subsidy. This has changed
somewhat in that the trend has been a move towards more commercial forms of
financing. This trend has been the product of a long evolution of the financial sector,
which can be characterized by three major events.

The first of these pivotal events was Indira Gandhi’s bank nationalization drive
launched in 1969 which required commercial banks to open rural branches resulting
in a 15.2% increase in rural bank branches in India between 1973 and 1985. Today,
India has over 32,000 rural branches of commercial banks and regional rural banks,
14,000 cooperative bank branches, 98,000 Primary Agricultural Credit Societies
(PACs), and 154,000 postal outlets that are required to focus on deposit mobilization
and money transfers. India’s deep financial system is attributable to its vast network
of financial institutions. The average population served per commercial bank branch
in India in 2002, 15,000 people, compares favourably with other developing
countries. Unfortunately, the World Bank indicates that no official survey of rural
access to finance has been conducted since 1991 but the World Bank NCAER
RFAS-2003 allows for analysis of some trends between 1991 and 2003. Following
bank nationalization, the share of banks in rural household debt increased to
approximately 61.2% in 1991. Despite these achievements, there still has been little
progress in providing the rural poor with access to formal finance. Rural banks serve
primarily the needs of richer rural borrowers with some 66% of large farmers having
a deposit account and 44% with access to credit in contrast to 70% of
marginal/landless farmers that do not have a bank account and 87% that are without
access to credit. Access to other financial services such as insurance are even more
limited for the rural poor.

The second national policy that has had a significant impact on the evolution
of India’s banking and financial system is the Integrated Rural Development Program
(IRDP) introduced in 1978 and designed to be ‘a direct instrument for attacking
India’s rural poverty.’ This program is interesting to this study because it was a large
program whose main thrust was to alleviate poverty through the provision of loans
and it was considered a failure. It therefore provides a comparison of what has failed
in the past and how this affects the provision of microfinance through private means
today. The IRDP was reputed as one of the largest poverty alleviation programs in
the world with the number of loans advanced since its inception having reached
approximately 45 million Indians with financial assistance worth US$6.17 billion
disbursed. Despite the massive support for the IRDP however, a government
evaluation in 1989 revealed that it had not achieved the expected results with only
28 % of those assisted under the IRDP crossing the poverty line in contrast to
private-sector-led services and business micro-enterprises which performed better
with 33 % of those involved in the sector that crossed the poverty line. According to
the Indian government, the main factors contributing to the program’s poor
performance were loose targeting, bureaucratic delivery systems resulting in high
transaction costs, unsuitable financial products ill suited to the needs of the poor,
poor coordination of program support, and political tolerance of loan defaults
resulting in extremely poor loan recovery performance. The problem with targeting
that the government identified was that the subsidy orientation of the scheme
created a huge temptation for the non-poor to participate in the program by
dishonest means. There was no effective mechanism for enforcing the selection of
the poor clientele based on the official ‘poverty line.’ The means through which the
IRDP endeavoured to provide the poor with access to productive assets was credit
advanced by commercial banks which the government subsidized. The subsidy
provided by the government varied from 25% for small farmers to 50% for scheduled
castes and tribal people. The overarching goal of the program was to enhance the
income of the rural poor sufficiently so as to enable them to cross the poverty line.
Therefore, by this standard the IRDP did not achieve its expected results.

The last major event which impacted the financial and banking system in India
was the liberalization of India’s financial system in the 1990s characterized by a
series of structural adjustments and financial policy reforms initiated by the RBI. The
result was a partial deregulation of interest rates, increased competition in the
banking sector, and new microfinance approaches of which the most notable was a
movement to link informal local groups called Self Help Groups created by NGOs to
commercial banks like the NABARD. These financial policy reforms in the 1990s
were very significant to microfinance because they involved scrapping the interest
rate controls for credit to the poor and other types of credit. These financial
liberalization measures then made it possible for NABARD to transform what was
then a small research project into a full blown microfinance program for the whole
country.

This program was better known as the ‘SHG Bank Linkage’ model which has
come to be one of the most well known and widespread microfinance models in
India. Since many consider the SHG Bank Linkage model of microfinance to be one
of the major successes of microfinance delivery in the country it will provide the most
important direct contrast to the delivery of microfinance services by individual MFIs.
The number of women’s SHGs linked to banks was reported at 800,000 in 2004 by
the World Bank. The rough estimate of women reached was about 12 million.
Originally, NABARD provided subsidized refinancing to encourage banks to lend to
SHGs, although the demand declined as banks began to discover that SHG lending
is quite profitable. Banks would lend to SHGs at about 12% per annum and groups
would on-lend to individual members at a rate they determine, typically this would be
around 24% per annum. The hypothesis for why individual MFIs not reached as
many poor as the SHG Bank Linkage Program has been that individual MFIs have
been constrained mainly due to lack of resources and capital. Another important
point to consider is that the SHG bank linkage model is dependent on the formation
of SHGs, something that in India has been done by NGOs and therefore requires
subsidy. This provides a helpful separation of activities that require subsidy, the
creation of SHGs, and those that can operate on a commercial bas is such as bank
lending to those SHGs.

The focus of this study is on organizations that have microfinance at the core
of their operations, even if they may be diverse in their operational organization and
orientation. The main forms of legal status or organizational forms used by
microfinance institutions in India are Non-Governmental Organizations (NGOs), Non-
Bank Financial Companies (NBFCs), Local Area Banks (LABs), Cooperative
Societies under the cooperative society act, and Public Societies/Trusts. The oldest
MFIs in India are the cooperative networks while the newer entrants are Grameen
replicators such as SHARE. According to the World Bank, the major challenges to
the successful provision of microfinance in India can be summarized as improving
governance, professionalizing management, improving internal transparency,
lowering costs, better targeting of the poor, expanding beyond credit to meet the
diverse needs of borrowers, and a better financial infrastructure in order to scale up.
The question of interest here is whether the (Year of Micro-credit Conference:
Microfinance can be the biggest instrument in the fight against poverty, says Bank
Vice President) transformation from an NGO to and NBFC helps or hinders an MFI’s
ability to meet these challenges.

2.4 Principles of Microfinance:

1. Poor people need a variety of financial services, not just loans. Like everyone
else, the poor need a range of financial services that convenient, flexible, and
affordable. Depending on circumstances, they want not only loans, but also
savings, insurance, and cash transfer services.

2. Microfinance is a powerful tool to fight poverty. When poor people have

access to financial services, they can earn more, build their assets, and
cushion themselves against external shocks. Poor household use
microfinance to move from everyday survival planning for the future: they
invest in better nutrition, housing, health and education.

3. Microfinance means building financial systems that serve the poor. In most
developing countries, poor people are the majority of the population, yet they
are the least likely to be served by banks. Microfinance is often seen as a
marginal sector – a “development” activity that donors, governments or social
investors might care about but not as part of the country’s mainstream
financial system. However microfinance will reach the maximum number of
poor clients only when it is integrated into the financial sector.

4. Microfinance can pay for itself and must do so if it is to reach very large
numbers of poor people. Most poor people cannot get good financial services
that meet their needs because there are not enough strong institutions that
provide such services. Strong institutions need to charge enough to cover
their costs. Cost recovery is not an end in itself. Rather, it is only way to reach
scale and impact beyond the limited levels those donors can fund. A
financially sustainable institution can continue and expand its services over
the long term. Achieving sustainability means lowering transaction costs,
 offering services that are more useful to the clients and finding new ways to
reach more of the unbanked poor.

5. Microfinance is about building permanent local financial institutions. Finance

for the poor requires sound domestic financial institutions that provide
services on a permanent basis. These institutions need to attract domestic
savings, recycle those savings into loans and provide other services. As local
institutions and capital markets mature, there will be less dependence on
funding from donors and governments including government development
banks.

6. Micro credit is not always the answer. Micro credit is not the best tool for
everyone or every situation. Destitute and hungry people with no income or
means of repayment need other kinds of support before they can make good
use of loans. In many cases other tools will alleviate poverty better – for
instance, small grants, employment and training programs or infrastructure
improvements. Where possible such services should be coupled with building
savings.

7. Interest rate ceilings hurt people by making it harder for them to get credit. It
costs much more to make many small loans than a few large loans. Unless
micro lenders can charge interest rates that are well above average bank loan
rates, they cannot cover their costs. Their growth will be limited by the scarce
and uncertain supply soft money from donors or governments. When
governments regulate interest rates they usually set them at levels so slow
that micro credit cannot cover its costs, so such regulations should be
avoided. At the same time a micro lender should not use high interest rates to
make borrowers cover the cost of its own inefficiency.

8. The role of government is to enable financial services, not to provide them

directly. National governments should set policies that stimulate financial
services for poor people at the same time as protecting deposits.
Governments need to maintain macroeconomic stability, avoids interest rate
caps and refrain from distorting markets with subsidized, high default loan
programs that cannot be sustained. They should also clamp down on
corruption and improve the environment for micro- businesses including
 access to markets and infrastructure. In special cases where other funds are
unavailable, government funding may be warranted for sound and
independent MFIs.

9. Donor funds should complement private capital, not complete with it. Donors
provide grants, loans and equity for microfinance. Such support should be
temporary. It should be used to build the capacity of microfinance providers to
develop supporting infrastructure like rating agencies, credit bureaus and
audit capacity and to support experimentation. In some cases, serving spares
or difficult to reach populations can require longer term donor support. Donor
should try to integrate microfinance with the rest of the financial system. They
should use experts with a track record of success when designing and
implementing projects. They should set clear performance target that must be
met before funding is continued. Every project should have a realistic plan for
reaching a point where the donor’s support is no longer.

10. The key bottleneck is the shortage of strong institutions and managers.
Microfinance is a specialized field that combines banking with social goals.
Skills and systems need to be built at all levels; managers and information
systems of microfinance institutions, central banks that regulate microfinance,
other government agencies and donors. Public and private investments in
microfinance should focus on building this capacity, not just moving money.

11. Microfinance works best when it measures and discloses its performance.
Accurate standardized performance information is imperative, both financial
information (e.g. interest rates, loan repayment, and cost recovery) and social
information (e.g. number of clients reached and their poverty level). Donors,
investors, banking supervisors and customers need this information to judge
their cost, risk and return.

2.5 Microfinance and Poverty Alleviation:

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, accelerating 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 grass root savings and credit groups around the world have
shown that these micro enterprise loans can be profitable for borrowers and for the
lenders, making microfinance one of the most effective poverty reducing strategies.

To the extent that microfinance institutions become financially viable, self

sustaining, and integral to the communities in which they operate, they have the
potential to attract more resources and expand services to clients. Despite the
success of microfinance institutions, only about 2% of world's roughly 500 million
small entrepreneurs are estimated to have access to financial services.
 Although there is demand for credit by poor and women at market interest
rates, the volume of financial transaction of microfinance institution must reach a
certain level before their financial operation becomes self sustaining. In other words,
although microfinance offers a promising institutional structure to provide access to
credit to the poor, the scale problem needs to be resolved so that it can reach the
vast majority of potential customers who demand access to credit at market rates.
The question then is how micro enterprise lending geared to providing short term
capital to small businesses in the informal sector can be sustained as an integral part
of the financial sector and how their financial services can be further expanded using
the principles, standards and modalities that have proven to be effective.

To be successful, financial intermediaries that provide services and generate

domestic resources must have the capacity to meet high performance standards.
They must achieve excellent repayments and provide access to clients. And they
must build toward operating and financial self-sufficiency and expanding client reach.
In order to do so, microfinance institutions need to find ways to cut down on their
administrative costs and also to broaden their resource base. Cost reductions can be
achieved through simplified and decentralized loan application, approval and
collection processes, for instance, through group loans which give borrowers
responsibilities for much of the loan application process, allow the loan officers to
handle many more clients and hence reduce costs.

Microfinance institutions can broaden their resource base by mobilizing

savings, accessing capital markets, loan funds and effective institutional
development support. A logical way to tap capital market is securitization through a
corporation that purchases loans made by micro enterprise institutions with the funds
raised through the bonds issuance on the capital market. There is at least one pilot
attempt to securitize microfinance portfolio along these lines in Ecuador. As an
alternative, BancoSol of Bolivia issued a certificate of deposit which is traded in
Bolivian stock exchange. In 1994, it also issued certificates of deposit in the U.S. The
Foundation for Cooperation and Development of Paraguay issued bonds to raise
capital for micro enterprise lending.
 Savings facilities make large scale lending operations possible. On the other
hand, studies also show that the poor operating in the informal sector do save,
although not in financial assets, and hence value access to client-friendly savings
service at least as much access to credit. Savings mobilization also makes financial
institutions accountable to local shareholders. Therefore, adequate savings facilities
both serve the demand for financial services by the customers and fulfil an important
requirement of financial sustainability to the lenders. Microfinance institutions can
either provide savings services directly through deposit taking or make arrangements
with other financial institutions to provide savings facilities to tap small savings in a
flexible manner. Convenience of location, positive real rate of return, liquidity, and
security of savings are essential ingredients of successful savings mobilization.

Once microfinance institutions are engaged in deposit taking in order to

mobilize household savings, they become financial intermediaries. Consequently,
prudential financial regulations become necessary to ensure the solvency and
financial soundness of the institution and to protect the depositors. However,
excessive regulations that do not consider the nature of microfinance institution and
their operation can hamper their viability. In view of small loan size, microfinance
institutions should be subjected to a minimum capital requirement which is lower
than that applicable to commercial banks. On the other hand, a more stringent
capital adequacy rate (the ratio between capital and risk assets) should be
maintained because microfinance institutions provide uncollateralized loans.

Governments should provide an enabling legal and regulatory framework

which encourages the development of a range of institutions and allows them to
operate as recognized financial intermediaries subject to simple supervisory and
reporting requirements. Usury laws should be repelled or relaxed and microfinance
institutions should be given freedom of setting interest rates and fees in order to
cover operating and finance costs from interest revenues within a reasonable
amount of time. Government could also facilitate the process of transition to a
sustainable level of operation by providing support to the lending institutions in their
early stage of development through credit enhancement mechanisms or subsidies.
 One way of expanding the successful operation of microfinance institutions in
the informal sector is through strengthened linkages with their formal sector
counterparts. A mutually beneficial partnership should be based on comparative
strengths of each sector. Informal sector microfinance institutions have comparative
advantage in terms of small transaction costs achieved through adaptability and
flexibility of operations. They are better equipped to deal with credit assessment of
the urban poor and hence to absorb the transaction costs associated with loan
processing. On the other hand, formal sector institutions have access to broader
resource-base and high leverage through deposit mobilization. Therefore, formal
sector finance institutions could form a joint venture with informal sector institutions
in which the former provide funds in the form of equity and the later extends savings
and loan facilities to the urban poor. Another form of partnerships can involve the
formal sector institutions refinancing loans made by the informal sector lenders.
Under these settings, the informal sector institutions are able to tap additional
resources as well as having an incentive to exercise greater financial discipline in
their management.

Microfinance institutions could also serve as intermediaries between

borrowers and the formal financial sector and on-lend funds backed by a public
sector guarantee. Business-like NGOs can offer commercial banks ways of funding
micro entrepreneurs at low cost and risk, for example, through leveraged bank-NGO-
client credit lines. Under this arrangement, banks make one bulk loan to NGOs and
the NGOs packages it into large number of small loans at market rates and recover
them (Women's World Banking 1994). There are many on-going research on this
line but context specific research is needed to identify the most appropriate model.
With this in mind we discuss various possible alternatives of formal- informal sector
linkages in India.

2.5.1 Ten Indicators to Asses Poverty Level:

A member is considered to have moved out of poverty if her family fulfils the
following criteria:

1. The family lives in a house worth at least Rs. 25,000/- or a house with a tin
roof and each member of family is able to sleep on bed instead of on the floor.
 2. Family member drink pure water to tube-wells, boiled water or water purified
by using alum, arsenic free, purifying tablets or pitcher filter.
3. All children in the family over 6 years of age are all going to school or finished
primary school.
4. Minimum weekly loan instalment of the borrower is Rs. 200/- or more.
5. Family uses sanitary latrine.
6. Family members have adequate clothing for everyday use, warm clothing for
winter, such as shawls, sweaters, blankets, etc and mosquito –nets to protect
themselves from mosquitoes.
7. Family has source of additional income such as vegetable garden, fruit
bearing trees, etc, so that they are able to fall back on these sources income
when they need additional money.
8. The borrower maintains an average annual balance of Rs. 5000/- in his
saving accounts.
9. Family experiences no difficulty in having three square meals a day
throughout the year, i.e. no member of the family goes hungry any time of the
year.
10. Family can take care of health. If any member of the family falls ill, family can
afford to take all necessary steps to seek adequate healthcare.

2.6 Microfinance and Empowerment:

A majority of micro finance programs target women with the explicit goal of
empowering them. However, their underlying premises are different. Some argue
that women are amongst the poorest and the most vulnerable of the underprivileged.
Others believe that investing in women’s capabilities empowers them to make
choices, which is valuable in itself and also contributes to greater economic growth
and development. Another motivation is the evidence from literature that shows that
an increase in women’s resources result in higher well-being of the family, especially
children. Finally, an increasing number of micro finance institutions prefer women
members as they believe that they are better and more reliable borrowers thereby
contributing to their financial viability. A more feminist point of view stresses that
access to financial resources presents an opportunity greater empowerment of
women. Though many agree that women empowerment is an important
development objective for micro finance programs.
 In an insightful reflection on the measurement of women’s empowerment,
Kabeer (1999) explains that women’s empowerment refers to the process by which
those who have been denied the ability to make strategic life choices acquire such
ability. This ability to exercise choice incorporates three inter related dimensions:
resources which include access to and future claims to both material and social
resources; agency which includes the process of decision making, negotiation,
deception and manipulation; achievements that are the well-being outcomes. Given
the complexity of defining women empowerment it is not surprising that only a few
empirical studies have tried to examine the impact of microfinance on women
empowerment. Most of these studies suffer from bias due to endogenous nature of
the program participation and unobserved household, individual and area
characteristics. The unavailability of appropriate data that includes comparable
control and treatment group is a further constraint.

The interpretation of women empowerment and its measurement also varies

across different studies. Most researchers construct an index/indicator of women
empowerment. Ackerly (1995) creates an indicator, “Accounting Knowledge”, to
measure the probability that the change associated with empowerment intervene.
Goetz and Sen Gupta (1996) build an index of “Managerial Control” in order to
classify the borrowers into five categories ranging from no control (no knowledge of
the use of the loan or no contribution in terms of labour to the financed activity) to full
control of the use of the loans (full control over the entire productive process,
including marketing). In another study, Schuler and Riley (1996) investigate the
change in women empowerment with the help of an ethnographic study and
quantitative survey. The analysis uses 1,300 women sample data to measure the
effects of Grameen Bank of Bangladesh Rural Advancement committee. They create
an empowerment indicator build on the following eight criterions: mobility, economic
security, ability to make small purchase, large purchases, involvement in major
household decisions and relative freedom from domination by the family, political
and legal awareness, participation in public protest, and political campaigns.

Measuring women empowerment by constructing indices is an inappropriate

technique as it allows the use of arbitrary weights. Most researchers, for instance will
agree that impact of a women’s decision to buy a piece of land. Both these decisions
have different implications and magnitude of impact on her empowerment. As such
giving equal weight age to both these decisions does not make sense. At the same
time suggesting an arbitrary weight for these decisions is also inappropriate, as it is
not for the researchers to decide the factor by which the latter decision contributes
more to women empowerment.

In comprehensive study, Pitt et al (2006), use Item Response Theory (IRT),

where the element of analysis is the whole pattern of a set of binary indicators that
proxy for women’s autonomy, decision-making power and participation in household
and societal decision making. They find that credit programs lead to women taking a
greater role in household decision making, having greater access to financial and
economic resources, having social networks, more bargaining power vis-à-vis their
husbands and having greater freedom of mobility. Additional services like training,
awareness raising workshops and other activities over and above the minimalist
(financial services only) micro finance approach are also an important determinant of
the degree of its impact on the empowerment process of women. Holvoet (2005)
finds in her study of women in rural Kenya that in direct bank borrower minimal
credit, women do not gain much in terms of decision making power within the
household. However, when loans are channelled through women’s groups and are
combined with more investment in social intermediation, substantial shifts in decision
making patterns are observed. This involves a remarkable shift in norm-following and
male decision making towards more bargaining and sole female decision making
within the household. She finds that the effects are even more striking when women
have been members of a group for a longer period and especially when greater
emphasis has been laid on genuine social intermediation. Social group
intermediation had further gradually transformed groups into actors of local
institutional change.

Another issue that needs further investigation is whether without change in

the macro environment, does micro finance reinforce women’s traditional roles or
does it promote gender equality? A women’s practically needs are closely linked to
the socially defined gender roles, responsibilities and social structures, which
contribute to a tension between meeting women’s practical needs in the short-term
and promoting long-term strategic change. By helping women meet their practical
needs and increase their efficiency in their traditional roles, micro finance may in fact
help women to gain respect and achieve more in their socially defined roles, which in
turn may lead to increased esteem and self confidence. Therefore as Cheston and
Kuhn (2002) argue increased self confidence does not automatically lead to
empowerment, it may contribute decisively to a women’s ability and willingness to
challenge the social injustices and discriminatory systems that they face. This
implies that as women become financially better of their self confidence and
bargaining power within the household increase and this indirectly leads to their
empowerment. Finally, given that empowerment is a process the impact of the micro
finance program may take a long time before it is significantly reflected on the
observable measures of women empowerment.

2.7 Different Models of Microfinance:

For the year 2006-07, the data has been presented fewer than two models of
microfinance involving credit linkage with banks.

• SHG Bank Linkage Model: This model involves the SHG financed directly by
the banking agencies viz. Commercial Banks (Public Sector and Private
Sector), Regional Rural Banks (RRBs) and Cooperatives Banks.

• MFI Bank Linkage Model: Under this model Micro Finance Institutions (MFIs)
avail bulk loans from banks for on lending to SHGs and other small borrowers.

The overall progress under microfinance is given bellow:

Table No. 2.1- Overall Progress- 2006-07

(Amount Rs. Crore)

Particulars Units 2006-07

Savings Accounts of SHG with banks on 31 March No. 4,160,584
(9,56,317)
Amount 3512.71
(757.50)
Bank Loans disbursed to SHGs during the year No. 11,05,749
(1,88,962)
 Amount 6570.39
(1,411.02)
Bank Loans outstanding with SHGs as on 31 March No. 28,94,505
(6,87,212)
Amount 12,366.49
(3,273.03)
Bank Loan disbursed to MFIs during the year No. 334
Amount 1151.56
Bank Loans outstanding with MFIs as on 31 March No. 550
Amount 1,584.48
(Source: Status of Microfinance in India 2006-07, NABARD)

Note:

1. Figures in brackets indicate the share of SHGs covered under Swarnjayanti

Gram Swarojgar Yojna (SGSY).

2. Actual number of MFIs provided with bank loans would be lower as several
MFIs have availed loans from more than one bank.

2.8 International Year of Microfinance 2005:

The year 2005 was proclaimed as the International year of Micro credit by The
Economic and Social Council of the United Nations in a call for the financial and
building sector to “fuel” the strong entrepreneurial spirit of the poor people around
the world.

The International year of Micro credit consist five goals:

1. Assess and promote the contribution of microfinance to the Microfinance

Institutes.

2. Make microfinance more visible for public awareness and undertaking as a

very important part of the development situation.

3. The promotion should be inclusive the financial sector.

4. Make a supporting system for sustainable access to financial services.

 5. Support strategic partnerships by encouraging new partnerships and
innovation to build and expand the outreach and success of microfinance for
all.

Chapter 3

Self Help Group

3.1 Definition of SHG:

 SHG is a homogeneous affinity group of rural poor, voluntarily formed to save
whatever amount they can conveniently save out of their earnings and mutually
agree to contribute to a common fund of the group to be lent to the members for
meeting their productive and emergent credit needs at such rate of interest, period of
loan and other terms which the group may decide. Since the groups are not normally
registered, the number of members should not exceed 20.

3.1.1 How are groups formed?

When we speak to families in a locality, we will find that some kind of mutual
liking already exists between many of them. Some known reasons for mutual
affinities are:

• Similar experience of poverty.

• Similar condition of living.

• Same kind of livelihood.

• Same community or caste.

• Same place of origin.

3.1.2 How consider the family is poor for forming SHGs?

For this ask the following questions. If ‘Yes’ is answer for three or four of
these questions, consider that the family is poor.

1. Does the family have only one earning member?

2. Does the family bring drinking water from faraway place?

3. Are the women compelled to go far in the open in the absence of latrine?

4. Are there old illiterate member in the family?

5. Are there permanently ill members in the family?

6. Are there children in the family who do not go to school?

7. Is there a drug addict or a drunkard in the family?

 8. Is their house made of kuccha material?

9. Do they regularly borrow from the moneylender?

10. Do they eat less than two meals a day?

11. Do they belong to Scheduled Castes or Scheduled Tribes?

3.2 Features of SHGs:

• Transparency in operations.

• Intimate knowledge of each other’s intrinsic strengths, needs and problems.

• Have a common fund.

• Have simple and responsive rules.

• Collective decision- making.

• Collateral free loans, terms decided by the group.

• External influence kept to the least.

• Conflict solving through collective leadership and mutual discussions.

In the nutshell, the SHGs function on the principles of five “P”s.

• Propagator of voluntarism.

• Practitioner of mutual help.

• Provider of timely emergency loans.

• Promoter of thrift and savings.

• Purveyor of credit.

3.3 Functioning of SHGs:

Simple rules are required for SHGs function. The following are some important rules:

• Common agreement on when to meet.

 • Decision on time and place of meetings.

• Agreed penalties for non attendance.

• Agreement on amount of savings.

• Giving small loans to each other.

• Taking loan from banks.

Training of the members is an important need for proper functioning of SHGs.

These areas for training could do well to the members:

• Basic mathematics.

• Writing of books.

• Scheduling of meetings.

• Social aspect of like women empowerment.

• Basics of lending money, borrowing, repaying.

3.4 Characteristics of SHGs:

• The membership of a group may be generally 10 to 20. However, under

SGSY scheme, a group of 5persons can be formed for the purpose of minor
irrigation and in case of disabled person.

• From one family, only one member.

• The groups may be registered or un-registered.

• The groups should devices a code of conduct bylaws to bind themselves.

• Internal savings mobilized by its members is the core of SHG.

• The group to decide the rate of interest to be paid/ charged on savings/ credit
to members.
 • The group should function in a democratic way allowing free exchange of
views and participation by members.

• The group should maintain simple maintain simple basic records such as
Minute book, membership register, savings and credit registers.

• The group to open a Savings Bank account with the bank.

Philosophy of linkage with bank-

• The poor have capacity to save.

• The poor is bankable.

• The credit flows the thrift.

• The bank’s loan is to the group and not through the group.

• NGOs or other organisation may function as the facilitator.

• Peer pressure as a substitute to the collateral.

• Gradual increase in the flow of credit contingent upon group strength.

3.5 Linking of SHGs with Bank:

Soon after an SHG is formed and one or two meetings held where the savings
are collected, a saving bank account can be opened in the name of SHG.

Step 1- Opening of S/B Account for the SHG:

The Reserve Bank of India has issued instruction to all commercial banks and
Regional Rural Banks, permitting them to open SB A/cs of registered or unregistered
SHGs. SB A/c in the name of SHG could be opened after obtaining from the group
the following documents:

1. Resolution from the SHG: The SHG has to pass a resolution in the group
meeting signed by all members, indicating their decision to open SB A/c with
the bank. This resolution should be field with the bank.
 2. Authorisation from the SHG: The SHG should authorise at least three
members, any two of whom, to jointly operate upon their account. The
resolution along with the filled in application duly introduced by the promoter
may be filed with the bank branch.

3. Copy of the rules and regulations of the SHG: This is not a must. If the group
has not formulated any such rules or regulations, loans can be sanctioned
without them. A savings book account passbook may be issued to the SHG.
This should be in the name of the SHG and not in the name of any individual.

Step 2 – Conduct of internal lending by the SHG:

1. After saving for a minimum period of 2 to 3 months, the common savings fund
should be used by the SHG for lending to its own members.

2. The purpose, terms and conditions for lending to its members, rate of interest
etc., may be decided by the group through discussions during its meeting.
(RBI and NABARD have permitted the members to decide on these aspects.)
The interest is usually kept as 2 or 3 rupees per hundred rupees per month.
The interest per month is better understood in villages, than annual interest.

3. Simple and clear books of account of savings and lending should be kept by
the SHG.

Step 3 – Assessment of SHGs:

It needs to know whether the SHG has been functioning well. The check list
given bellow will help us to assess each SHG in a sample, but effective manner.

Table No. 3.1- Check list to assess the performance of an SHG

Sr. Factor to be Very good Good Unsatisfactory

No. Checked

1. Group size 15 to 20 10 to 15 Less than 10

2. Type of members Only very poor 2 or 3 not very Many not poor
Members poor members members

3. Number of Four meetings in Two meetings Less than two

meetings in
a month meetings in a
a month
month

4. Timing of meetings Night or after Morning Other timings

between
6 p.m.
7 and 9 a.m.

5. Attendance of More than 90% 70 to 90% Less than 70%

members

6. Participation of Very high level Medium level of Low level of

Members of participation participation Participation

7. Savings collection Four times in a Three times in a Less than three

month
within the group Month times in a
month

8. Amount to be saved Fixed amount Varying amount _

9. Interest on internal Depending upon 24 to 36% More than 36%

loan
the purpose

10. Utilisation of Fully used for Partly used for Poor utilisation
savings by SHG
loaning to Loaning
members

11. Loan recoveries More than 90% 70 to 90% Less than 90%

12. Maintenance of All books are Most important Irregular in

books
regularly registers maintaining
maintained and
and updated updating books

13. Accumulated More than Rs. Rs. 3000-5000/- Less than Rs.
savings 5000/- 3000/-

14. Knowledge of the Known to all _ Not known to

 Rules of the SHG all

15. Education level More than 20% _ Less than 20%

16. Knowledge of Govt. All are aware of Most of the No one knows
Govt. rules
Programs members know
(Source: A Handbook on Forming Self Help Groups.)

Important:

1. SHGs with 12 to 16 “very good” factors can get loans immediately.

2. SHGs with 10 to 12 “very good” factors needs 3 to 6 months time to improve,

before loan is given.

3. SHGs with rating of less than 10 “very good” factors will not be considered for
loan.

3.6 What is the collateral security for the Bank?

RBI/NABARD rules stipulate that no collateral security should be taken from

SHGs by the banks. Collateral security is not necessary for the loans sanctioned to
SHGs because:

• The members of SHGs know that the bank loan is their own money like
savings.

• They are aware that they are jointly responsible for the repayment.

• Therefore they exert moral pressure on the borrowing members for

repayment.

• Because of this, bank gets a much better repayment from the SHG.

List of documents required by banks for lending to SHGs:

1. Inter-se Agreements to be executed by all the members of the SHG. (This is

an agreement by the members with the bank, authorising a minimum of three
members to operate the group’s account with the bank.
 2. Application to be submitted by the SHG to bank branch while applying for loan
assistance. (This includes details of the purpose for which the SHG gives loan
to its members.)

3. Articles of agreement for use by the bank while financing SHGs.

This contains the duly stamped agreement between the bank and the SHG
wherein both the parties agree to abide by the terms and condition set thereon. The
group members are collectively responsible for the repayment of loans to the bank.
Under no circumstances, the SHG should allow any of its members to default to the
bank.

3.7 The Social Role of SHGs:

3.7.1 SHGs and Politics:

There are apparent synergies between SHGs and local politics since through
membership of SHGs, or SHG clusters and federations, village women can gain
experience of relevant processes (regular meetings, taking decisions, allocating
money). They also become more ‘visible’ in the village, which is important for
campaigning. In one out of every four SHGs in the study sample, there is a woman
member who ran for local political office (in the panchayat or village council), and in
one out of every five SHGs, there is a woman member who has been elected. Of the
44 elected women representatives, most (34) were elected as a ‘ward member’
(representing a village area), nine as Sarpanch (the head of the panchayat) and one
was elected to the block level. The elected representatives included ordinary
members as well as group leaders. SHG membership can contribute to women’s
election to panchayati raj, but does not appear to influence what they can achieve if
elected. Probably more important than SHG support is the fact that the members (or
their families) often have political leanings and activities even before they were
members of SHGs. We found the most active PR women representatives were those
(from families) with political connections, and/or with a background of employment in
government programmes. Caste, wealth rank and literacy did not emerge as key
factors.
 Over half the elected women representatives (25 out of 44) were active in the
panchayat, attending meetings regularly, carrying out responsibilities; only seven
(16%) turned out to be proxies meaning that their husbands took their place. Another
12 had low engagement in situations where, although a woman representative might
attend a panchayat meeting, her presence is largely ignored by others (men) and
she does not get the opportunity to build the awareness or experience to carry out an
active role. The proportion of active representatives was, perhaps surprisingly,
higher in the north than in the south. Local women recruited as SHPA field workers
are more likely to become effective community leaders, and we found these mainly
in the northern sample. The sample for this study reflects situations mostly without
any specific strategic input for women’s political empowerment by a Self Help
Promoting Agencies (SHPA). (This is intended as a factual – not an evaluative –
statement). Local elections when they take place represent an opportunity for
building women’s awareness and involvement, which NGOs may seek to respond to.
Where there were SHPA interventions, by NGOs, they were related to – and limited
to – preparation for election: informing SHGs about the election rules, how to register
a nomination, and encouraging group members to campaign and to vote. The case
studies suggest that some degree of follow up through post-election guidance and
networking could also make a difference in supporting effective action by the elected
representatives – though this may be seen as part of a wider task of strengthening
panchayati raj institutions, including the men representatives.

3.7.2 Social Harmony:

Indian society is split by a hierarchical caste system that has traditionally
discriminated against those at the bottom – the Scheduled Castes – as well as those
outside it, for example the Scheduled Tribes. Within broad caste categories too there
are divisions. The fact that the majority of SHGs (two-thirds in the sample) are
single-caste groups is based on the principle of ‘affinity groups’ and neighbourhood
proximity (members living nearby can more easily get together, and village
neighbourhoods are usually caste based). It also stems from government policies.
Government benefits for SCs/STs, BCs and Swarna Jayanti Grameen Swarojgar
Yojana (SGSY) subsidies are easier to channel to the target population, if all
members of a group belong to the same caste category. Otherwise, some benefits
will go only to some members.
 Nevertheless, one-third of SHGs have some members from different castes.
20% of groups in fact cross the main hierarchies (between SC/ST and the other
castes). This is more likely in NGO promoted SHGs (24% of groups), lower in
Government promoted groups and in AP (12% of groups).

NGO SHPAs which have village wide development focus make participation
across castes a condition of their programme. As part of a deliberate strategy, we
find that this takes persistence, time and a lot of convincing by the field staff. But it
does lead to some degree of interaction across castes, including SCs and different
sub-castes. Over time, the experience of women from different castes and sub-
castes coming together from their separate hamlets and being part of village
meetings can help to build the confidence of the usually marginalized and begin to
break down some prejudices. The findings underline the persistence of traditional
attitudes and divisions, but show that in some areas, and with SHPA initiative and
persistence, SHGs are beginning to bridge such divisions, through mixed caste
membership in some cases, and in others through joint actions across groups of
different castes.

3.7.3 Social Justice:

SHGs seem uniquely placed to support their members on issues of social
justice affecting women. Nevertheless, we did not find that SHGs are dealing
regularly with issues of social justice. Nor did many groups report such actions: 12%
of sample SHGs (with some groups mobilising together on single issues) had taken
up issues such as domestic and sexual violence, bigamy, and a few cases of dowry
death, prevention of child marriage, support for separated women to remarry.

The highest incidence in AP (25% of sample SHGs) reflects awareness

campaigns under government and NGO programmes in the State, and numbers of
SHGs mobilizing together. In the other sample states too, these were features that
made a difference, but the incidence is lower. Groups whose members already enjoy
some ‘socio-economic’ status are able to assist their own members or extend
support to other vulnerable women in the village, while more disadvantaged SC and
ST groups, and the poorest groups provided correspondingly fewer instances of
such action. Issues that can be dealt with through a specific action (preventing
bigamy, obtaining compensation, marriage of an orphan girl or a separated woman)
appear more successful with the action having an immediate result. Private
behavioural problems (domestic violence or sexual abuse) are far more difficult to
address successfully. The very fact that such issues are brought out in public
appears to be a significant action, but an effective result - ending such violence – is
more difficult to achieve, and requires more sustained action and follow up.
Guidance and support from a SHPA seems essential when many instances of social
injustice are perhaps not recognised as such since people are so used to them, both
women and men, and accept them as the norm.

Case studies illustrate the combination of personal determination (especially

from the women concerned), mutual support (SHG members) and effective guidance
(SHPA field worker) that can make the difference against conservative, male-
supporting, social structures. They also reveal some of the dilemmas – the
compromises that women may have to make since their social and economic status
is seen to depend on staying with a husband, and his family, however difficult the
situation. SHPAs (five in the sample, NGO and government) seemed most effective
in building awareness, and guiding SHG members on strategies and options,
including contacting the police and local authorities. SHPAs are less likely to get
involved at the panchayat community level – though it is perhaps through influencing
traditional structures that there could be more effective long-term action for social
justice.

3.7.4 SHGs and Community Action:

Women in SHGs can work together to address issues that affect not only their
own members, but others in the larger community. Again, the number of SHGs in the
sample undertaking such action is less than hoped for, particularly given the
sampling focus.

Thirty percent of SHGs in the sample have been involved in community

actions. These involved: improving community services (43% of the total actions,
including water supply, education, health care, veterinary care, village road), trying to
stop alcohol sale and consumption (31%), contributing finance and labour for new
infrastructure, (12%), protecting natural resources and acts of charity (to non-
members). These were all actions by SHG women which represented some degree
of agency by women, in terms of decision-making and enhancing women’s
contribution to community in a way that goes beyond traditional gender roles. Not
included, therefore, are activities such as cleaning the village before village functions
– which community leaders increasingly find SHGs useful for. Nor have we included
general participation in campaigns or rallies - pulse polio, literacy, anti-dowry, for
example – for which SHGs are becoming a means of mobilising women, especially
in the southern states. Community actions have mostly been one-off, and were
usually effective – or at least partially so.

The most common single type of action taken up by SHGs is the attempt to
close down local liquor outlets. Alcoholism – and the accompanying problems of
domestic violence from men, the drain on household finances, impaired health – is
an aspect which in so many villages we found prompts perhaps the most anger
amongst women, but also despairs. Dealing with this issue is a major struggle which
pits women not only against a behavioural syndrome, but also against institutional
and business elements which have a vested interest in continuing to sell alcohol –
and make money out of it.

The stories show how women in SHGs have mobilized across communities to
act forcefully to close liquor vendors in their village. Some of these actions (7 out of
18 in this study) have been effective in at least closing the local supply. However in
as many cases (8 out of the 18) women say they had only partial success in that
they have managed to close down the local liquor outlet, reducing the immediate
opportunity for men to buy alcohol; but supply continues – from a nearby village or
another outlet in the same village. And some of these outlets do after all have the
‘official’ sanction of a lease from the local panchayat or the State government, which
derive substantial revenues from the availability of alcohol.

The mobilisation of numbers of women through village or cluster networks, or

federations, was a significant feature of effective community action. SHPA guidance
was important, either NGOs or Government agencies – advising on the options
within existing structures. The stories show that such community actions involve a
new boldness and confidence for women; often involving putting pressure on the
authorities (panchayat, district officers, police) to do their job, whether through
petitions or by staging rallies and blockades; and varying degrees of skill in
negotiation by SHG leaders. Forty-six groups (21% of the sample) had been involved
in a group based enterprise or enterprise contract. These included:
(i) Collective organisation of marketing for the produce of individual
enterprises established using micro-credit, particularly milk collection
centres/dairy cooperatives at village level (12 groups).
(ii) Collective activities by SHGs using group credit to access larger natural
assets for production, e.g., leasing land and ponds for cultivation and
pisciculture (7 groups).
(iii) Other collective economic activities based on group credit that combined
labour and management: stone-cutting, processing rice, managing a tent
house (11 groups).
(iv) Management of government contracts, such as running ration shops (as
part of the Public Distribution System or PDS), cooking the mid-day meal
(MDM) for school children, or managing a subsidised fodder depot (16
groups).

SHPA support seems critical in providing or facilitating ideas for group based
enterprise. Though this does not in itself guarantee viability or effective returns,
especially given the inherent difficulties of group based enterprises. Roughly half of
the group enterprises appeared to be viable, though with relatively low earnings for
SHG members. Where successful, such enterprises have enabled women
collectively to access and manage assets or contracts which they lack the capacity
as individuals (or as separate households) to do.

Chapter 4

Bank Linkage Programme

4.1 SHG – Bank Linkage Programme:

 Despite vast expansion of the banking services in the country, a substantial
part of the rural population is yet to be covered under the banking fold. Both the
Government and the RBI have time again expressed concern over the non-inclusion
of the poor, especially in rural areas, by the banking sector. With a view to linking
more and more number of rural poor, especially women with the banks NABARD
launched a Pilot Project for Linking SHGs in 1992. What started as a Pilot Project
has now become a thrust area for NABARD. By the end of the year 2005-06, 22.38
lakh SHGs had been credit linked, giving 335.70 lakh poor families and access to the
banking sector (assuming an average membership of 15 per SHG). The
Maharashtra state witnessed a steady growth in SHG-Bank Linkage Programme
over the years and the micro finance activities in the MS state have taken a shape of
movement. During the year 2005-06 as many as 60,324 new SHGs were credit
linked in the state, involving a bank loan of Rs. 13,083.56 lakh. So far, more than
1.30 lakh SHGs have been credit linked in the state involving a loan disbursement of
Rs. 39,516.73 lakh. An important feature of the SHG-Bank Linkage Programme in
the state has been the disbursement of Rs. 4,092.07 lakh as repeat finance more
than 10,000 SHGs.

4.1.1 An Overview of 2006-07:

NABARD launched a Pilot Project for linking Self Help Groups with banks in
1991-92 as an alternative mechanism for providing hassle free banking services to
rural poor and reduce their dependence on exploitative informal credit delivery
system consisting of money lenders, land lords, traders, etc. simultaneously, it
helped the banks in reducing their transaction costs and risk costs in delivering small
loans. The programme is called as SHG Bank Linkage Programme and is unique
and most cost effective micro finance initiative in the world. Over a period of a
decade and half, the programme has emerged as the largest micro finance outreach
programme in the world. Continuing the fast expansion trend of the previous two
years, the SHG Bank Linkage Programme reached new height in the year 2006-07
in Maharashtra with credit linkage of 94,386 new SHGs to banking system (56%
growth over previous year). This achievement was possible through sustained efforts
and positive approach by all the partners in the programme which include banks,
Governments agencies and NGOs and excellent coordination among them.
Cumulatively, 2,25,856 SHGs have been credit linked in the state covering 3.38
million families and 16.94 million rural poor. A redeeming feature of the programme
was providing repeat finance to the existing SHG which were credit linked already.
As many as 19,382 such SHGs were provided repeat finance by the banks during
the year in the state. Highlights of the programme in Maharashtra are given bellow:

Highlights- SHG Bank Linkage 2006-07

Physical achievements

• Number of new SHGs financed by banks during 2006-07 : 94,386

• Number of existing SHGs financed by banks during 2006-07 : 19,382

• Number of poor families covered during 2006-07 : 1.4 million

• Estimated number of poor people covered during 2006-07 : 7 million

• Cumulative number of SHGs financed by banks up to : 2,25,856

March 2007

• Number of poor families who have accessed bank credit : 3.4 million

• Estimated number of poor people assisted up to : 16.9 million

March 2007

• Share of women SHGs : 90%

Financial achievement

• Bank loan disbursed to new SHGs during 2006-07 : Rs. 2,143 million

• Repeat loan disbursed by banks to existing SHGs : Rs. 841 million

During 2006-07

• Increase in credit flow to SHGs over previous year : 74%

• Cumulative bank loan disbursed to SHGs up : Rs. 6,935 million

to March 2007

• Average loan per SHG from banks : Rs. 30,707 million

 Partnership

• Number of participating banks : 69

• Number of branches of banks lending to S : 6601

• Commercial banks : 19

• Regional Rural Banks :7

• District Central Cooperative Banks : 30

• Urban Cooperative Banks : 13

• Number of NGOs : 160

4.1.2 Share of Maharashtra vis-a-vis All India:

The share of Maharashtra in SHG Bank Linkage Programme has been

steadily increased as compared to all India position which can be seen from
following table:

Table No. 4.1- No. of SHG credit-linked

(Lakh)

Particulars 2003-04 2004-05 2005-06 2006-07 Cumulative

All India 3.62 5.39 6.20 6.86 29.24

Maharashtra 0.10 0.32 0.60 0.94 2.25

Share of Maharashtra % 2.89 6.04 9.72 13.72 7.69

(Source: SHG- Bank Linkage Programme Maharashtra 2006-07)

4.1.3 Savings of SHGs with Banks:

As on 31st March 2007, 41,60,584 SHGs were maintaining savings bank

accounts with the banking sector with outstanding savings of Rs. 3512.71 crore,
thereby covering more than 5.8 crore poor households under SHG Bank Linkage
Program. The Commercial Banks had the maximum share of savings from 22,
93,771 SHGs (55.1%) with savings amount of Rs. 1892.42 crore (53.9%) followed by
Regional Rural Banks with savings bank accounts of 11,83,065 SHGs (28.4%) and
savings amount of Rs. 1158.29 crore (32.9%) and Cooperative Banks having
savings bank accounts of 6,83,748 SHGs (16.4%) with savings amount of Rs.
462.00 crore (13.2%).

The share of SHG in the total was 9, 56,317 forming 22.9% of the total SHGs
having saving accounts in the banks.

The agency wise outstanding savings of SHGs with banks as on 31 March

2007 are given bellow:
 Table No. 4.2 - Savings of SHGs with Banks-Agency wise

(Amount Rs. Crores)

Agency SHGs Savings in Banks Out of total: Out of total –

as on 31 March 2007 Savings of SHGs Exclusive Women

under AGSY SHGs

No of % Amount % No. of Amount No. of Amount

SHGs shar share SHGs SHGs
e

Commercial Banks 22,06,335 53 1,815 51.7 5,55,264 499.54 17,18,637 1,582.86

(Public Sector)

Commercial Banks 87,436 2.1 77.42 2.2 15,798 24.95 76,083 68.61
(Private Sector)

Sub Total 22,93,771 55.1 1,892.42 53.9 5,71,062 524.49 17,94,720 1651.47

Commercial Banks

Regional Rural 11,83,065 28.4 1,158.29 32.9 3,00,427 188.66 9,74,811 1042.99
Banks

Cooperative Banks 6,83,748 16.4 462 13.2 84,828 44.35 5,01,708 330.52

TOTAL 41,60,584 100 3,512.71 100 9,56,317 757.50 32,71,239 3024.98

(Source: Staus of Microfinance in India 2006-07, NABARD)

As on 31 March 2007, the average savings of SHGs with banks was Rs.
8,469 which varied from Rs. 9,791 per SHG with RRB to Rs. 6,914 per SHG with
cooperative banks. The share of women SHGs in the total SHGs with saving bank
accounts in the banks was 78.63%.
4.2 Microfinance Institutions Bank Linkage:

Microfinance Institutions (MFIs) are playing important role as a financial

intermediaries in micro finance sector. The MFIs operate under various legal forms.
 1. NGOs MFIs – Registered under Societies Registration Act 1960and / or
Indian Trust Act 1980.

2. Cooperative MFIs

3. NBFC MFIs under Section 25 of Companies Act 1956 (not for profit)

4. NBFC MFIs incorporated under Companies Act 1956 and registered with RBI.

Following RBI guidelines in its circular dated 18 February 2000, (all scheduled
commercial banks including RRBs) MFIs availing bulk loans from banks for on
lending to groups and other small borrowers. On the basis of returns received from
banks for the year 2006-07, 12 Public Sector Commercial Banks, 12 Private Sector
Commercial Banks and 2 Regional Rural Banks, and 1 State Cooperative Bank have
financed MFIs for on lending.

As on 31 March 2007, the progress under MFI- Bank Linkage is given in table-

Table No. 4.3 - Bank Loans provided to MFIs – 2006-07

(Rs. Lakh)

Agency Amount of loan Loan outstanding %

disbursed to NGOs/ against NGOs/MFIs recovery
MFIs during 2006-07 as on 31 March of loans
2007
No. Of Amount No. of Amount
Banks Banks
Commercial Banks 12 33,074.27 12 45,080.26 92
(Public)
Commercial Banks 12 73,933.34 12 97,144.80 100
(Private)
RRBs 2 22.5 2 19.79 90
Cooperative Banks - - 1 0.60 100
Total 26 1,07,030.1 27 1.42,245.45 96
6
(Source: Staus of Microfinance in India 2006-07, NABARD)
4.3 Milestones in SHG-Bank Linkage Programme:

Year Launching a pilot project of linking 500 SHGs with the banking system.
1992

1993 Introduction of Bulk Lending Scheme to NGOs by NABARD.

Studies on Transaction Cost conduct by external experts.

1994 Extension of policy supported by RBI- beyond the pilot phase.

Unleashing the concepts of banking with poor.

Extension support for capacity building of NGOs by NABARD.

1995 Setting up Credit and Financial Services Fund (CFSF) within NABARD-
to support expansion of the programme.

Setting up working group on NGOs and SHGs – to assess ground

realities and identify operational issues in implementation of the
programme.

Extension of Revolving Fund assistance to federations of SHGs by

NABARD.

1996 Mainstreaming SHG-Bank Linkage by banks- RBI and NABARD

notifications.

Tackling operational issues

• Documentation
• Defaulters
• Size of group
• Service area etc.
1997 Organizing National Level Training Consultation Meet - thrust trainers
training.

First experiment of RRB as Self Help Promoting Institution (SHPI).

Up scaling training and awareness programmes by NABARD and

banking system.
 Emphasis on interventions winning in cooperative banks.

1998 Recognition of potential of government intervention.

Extension RRB as SHPI to 10 RRBs.

Documentation of rating/grading practices for SHGs appraisal.

1999 Recognition of potential of SHGs by GOI.

Setting up task force on supportive regulatory and policy framework.

Refinance requirements out grow CFSF use of NABARD’s normal

resources.

Extension of RRB-SHPI experiment to 2 more RRBs.

Crystallization of NABARD’s vision and mission.

Building partnerships with governments.

Deregulation of interest rates in SHG lending.

Emphasis on studies documentation and dissemination.

Provision of promotional grants to NGOs for SHG – promotion

development NGO appraisal tools.

2000 Thrust on widening the range of SHPIs.

SHGs credit linked crosses 1,00,000.

RBI advices banks to finance micro credit organisations.

Emphasis on flooding market with quality SHGs by NABARD.

Thrust on expansion of the programme in Union Budget.

Recognition of potential of Farmers Clubs as SHPI.

II National Consultation Meet on training to redesign training modules,

contents and methodologies.

Collaboration with Indira Gandhi National Open University – for

commencing a Distance Education Programme on women’s
 empowerment and SHGs.

Introduction of state level awards for best performance.

Evaluation studies on impact on SHGs.

Setting up a separate fund for scaling up the programme – Micro

Finance Development Fund.

Technical collaboration with GTZ Germany commenced.

4.4 Future Strategy:

Long term objective of SHG Bank Linkage Programme will be to ensure that
one woman from every household in rural areas in SHG an all the SHGs are credit
linked. This is proposed to be achieved within a period of 4 years. Strategy will be
devised for credit linking new SHGs based on number of rural household in the state.
In addition, other aspects like presence of NGOs working for promotion of SHGs,
bank working as SHPI, presence of IRVs, farmers clubs, response of government
agencies, likelihood of new SHGs being promoted etc., also need to be taken in
consideration. A rough estimation indicates that 5.80 lakh SHGs need to be
promoted and credit linked during the next 4 years to achieve th objective of covering
all households in rural area.

The broad strategy would focus on following:

• Focus on Repeat Finance of SHGs in districts like Chandrapur, Kolhapur,

Pune, etc., where promotion and credit linkage of new SHGs have good
momentum.

• Ensure credit linkage of all eligible SHGs.

• Accelerate pace of linkage in poor performing divisions like Nashik and

districts like Ratnagiri, Sindhudurg, Hingoli, etc.

• Involvement of more NGOs for promotion of quality SHGs.

• Encouraging Individual Rural Volunteers (IRVs) and Farmers’ Clubs for
promotion of SHGs.

• Inducting more DCCBs and sanction of supplementary projects to RRBs

for promotion of SHGs.

• Capacity building of SHGs for quality maintenance of books of accounts.

• Graduating SHGs from micro credit to micro enterprises, through

implementation of pilot project in Chandrapur district and also through
Micro Enterprise Development Project (MEDP).

• Encouraging banks to adopt Jointly Liability Group (JLG) approach as a

rural lending strategy.

• Encouraging banks to sanction crop loans and investment credit to

matured SHGs.

• Special focus on promotion of farmers SHGs in Vidarbha region,

monitoring formation of farmers SHG through separate reporting system.

• Encouraging micro finance institutions for financial intermediation.

• Initiating micro finance operation operations at field level on establishment

of the proposed micro finance institution by NABARD.

Chapter 5

National Bank for Agriculture and Rural Development

(NABARD)
 National Bank for Agriculture and Rural Development (NABARD) came into
existence on July 12, 1982 as an apex institution in agriculture and rural
development by merging together Agriculture Credit Department of Reserve Bank of
India (RBI) and the Agriculture Rural Development Co-operatives (ARDV), which
was set up in 1963 to meet the long term credit needs of the rural areas. The RRBs
and co-operative sector came under NABARD and it provides finance to commercial
banks.

5.1 Role of NABARD:

• Linkage programme on pilot basis was started by NABARD in 1992.

• NABARD involves bankers, formal and informal entities to promote and

nurture groups.

• Provides 100% refinance to banks, considers as priority sector lending,

provides bulk lending & Revolving Fund Assistance(RFA) to NGOs.

• Conducts training & workshops for NGOs, Bank Staff & SHGs.

• Policy advocacy and publicity.

• Operates Micro Finance Equity and Development Fund (MEDF).

5.2 Promotional efforts by NABARD:

5.2.1 Promotional Support – SHG Bank Linkage:

1. Training and Capacity building:

NABARD continued to organize training programmes and exposure visits for

the benefit of officials of banks, NGOs, SHGs and government agencies to enhance
their effectiveness in the field of micro finance. Training supplements and material
were supplied to banks and other agencies. Best practices and innovations of
partner agencies were widely circulated among government agencies, banks and
NGOs. During the year 2006-07, fund support of Rs. 5.80 crores was provided for
capacity building, exposure and awareness building. During the year, 5,173 training/
capacity building programmes were conducted covering 2, 68,078 participants as per
details furnished bellow:
 No. of No. of
Sr. Program Programs Participants
No. conducted

1 Awareness creation and capacity building 3,494 2,01,588

programmes organised for SHG members in
association with identified resource NGOs
2 Awareness-cum-refresher programmes 146 4,901
conducted
for NGOs, including their CEOs
3 Training programmes conducted for bankers 536 19,063
covering officials of commercial banks, RRBs
and co-operative Banks
4 Exposure visits for bank officials/ NGOs to 70 1,864
Agencies pioneering in Microfinance initiatives
5 Field visits of Block Level Bankers Committee 200 9,766
(BLBC) members to nearby SHGs
6 Programmes for the elected members of 18 661
Panchayati Raj Institutions (PRIs) to create
awareness among Them about the MFI nitiatives
7 Exposure programmes for government officials 137 5,734
8 Other training programmes for microfinance 447 18,884
sector
9 Meetings and Seminars (Bankers, NGO officials) 125 5,617
Total 5,173 2,68,078
(Source: Staus of Microfinance in India 2006-07, NABARD)

2. Micro Enterprise Development Programme (MEDP) for skill Development:

The programme was launched in March 2006 with the basic objective the
enhance the capacities of the members of matured SHGs to take up micro enterprise
through appropriate skill up gradation/ development in existing or new livelihood
activities both in farm and non-farm sectors by way of enriching knowledge of
participants on enterprise management, business dynamics and rural markets
 programme. The duration of training programme can vary between 3 to 13 days
depending upon the objective and nature of training.

During 2006-07 a total 297 Micro Enterprise Development Programmes

(MEDPs), both under Farm and Non-farm activities, were conducted covering 7,579
members of the matured SHGs. The micro enterprise for which training which
trainings were imparted to SHG members included diverse activities like goat
rearing, mushroom cultivation, preparation of papad, agarbatti, candles and jute
products etc.

3. Grant Support to Partner Agencies for Promotion and Nurturing of SHGs:

NABARD has been instrumental in the formation and nurturing of quality

SHGs by means of promotional grant support of NGOs, RRBs, DCCBs, Farmers’
Clubs and individual volunteers and developing capacity building of various partners,
which has brought about excellent results in the promotion and credit linkage of
SHGs. Further increasing number of partner institutions functioning as Self-Help
Promoting Institutions (SHPIs) over the years resulted in the expansion of the
programme throughout the country. During the year 2006-07, the grant support
provided by NABARD to its partner institutions and their progress in SHG promotion
and linkage is indicated in table:

Table 5.2.1.3 - Grant Assistance Extended to various Partners in SHG-Bank

Linkage Programme

(Rs. Lakh)

Agency Sanction during the Cumulative Sanctions Cumulative Progress

Year 2006-07

No. Amount No. of No. Amount No. of Amount SHG SHGs

 SHGs SHGs Released formed Linked

Co- 8 64.10 6,200 78 380.51 41,010 125.25 28,881 16,546

operatives

RRBs 1 12.30 850 110 346.25 42,040 159.28 49,475 32,112

NGOs 352 1,110.66 40,562 1,656 3,675.65 2,05,112 1,619.78 1,49,464 95,856

Farmers’ -- -- -- -- -- -- 57.77 13,002 6,825

Clubs

IRVs 23 216.90 12,050 46 347.54 21,110 18.69 3,934 1,589

Total 384 1,403.96 59,662 1,890 4,749.96 3,09,272 1,980.77 2,44,686 1,52,928

(Source: Staus of Microfinance in India 2006-07, NABARD)

5.2.2 Promotional Support- MFI Bank Linkage:

NABARD has taken various initiatives to support Micro Finance Institutes

(MFIs) to strengthen them as given bellow:

1. Rating of Micro Finance Institutions (MFIs):

In order to identify, classify and rate Micro Finance Institutions (MFIs) and
empower them to intermediate between the lending banks and the clients, NABARD
had introduced a scheme for providing financial assistance by way of grant to
Commercial Banks, Regional Rural Banks and Co-operative Banks to avail of the
services of accredited rating agencies for rating of MFIs.

Banks can avail the services of credit rating agencies viz. CRISIL, M-CRIL,
ICRA, CARE and Planet Finance for rating of MFIs and avail financial assistance by
way of grant to the extent of 100% of the total professional fees of the credit rating
agency subject to a maximum of Rs. 1.00 lakh. The facility is available for the first
rating of a MFI with a minimum loan outstanding of Rs. 50.00 lakh annum and
maximum loan outstanding Rs. 500.00 lakh. The scheme will be operational up to 31
March 2010. So far, on commercial bank has availed the assistance for rating of MFI
i.e. Bharat Integrated Social Welfare Agency in Orissa State.

2. Capital / Equity Support to Micro Finance Institutions (MFIs):

 In pursuance of the announcement made in the Union Budget 2005-06, a
scheme called “Capital/ Equity Support to MFIs from Micro Finance Development
and Equity Fund (MFDEF)” was announced under which capital/ equity support to
various types of MFIs would be provided to enable them to leverage capital/ equity
for accessing commercial funds from banks. During 2006-07, three MFIs viz.
Rashtriya Grameen Vikas Nidhi (RGVN), Guwahati (Assam), Sangamitra Rural
Financial Services have been sanctioned capital/ equity supports of Rs. 100 lakh
each.

3. Revolving Fund Assistance (RFA) to MFIs:

NABARD provides loan funds in the form of Revolving Fund Assistance (RFA)
on a very selective basis to MFIs. The RFA provided to these agencies is necessarily
to be used for on- lending to SHGs or individuals and the amount is to be repaid
along with the service charge within a stipulated period of 5 to 6 years. This enables
them to build a ‘credit history’, which would help them to access credit facilities
through the regular banking channels. During 2006-07, RFA of Rs. 1 crore was
sanctioned to Rashtriya Gramin Vikas Nidhi, Guwahati (Assam). Cumulatively, RFA
of Rs. 2832.00 lakh was sanctioned to 32 agencies and Rs. 2163.8 lakh has been
released against which Rs. 615.2 lakh stands outstanding against 9 agencies.

Chapter 6

SWARNA JAYANTI GRAM SWAROZGAR YOJANA

SGSY, which was launched in April 1999, is a holistic program of the Central
Government covering all aspects of poverty alleviation, providing employment/ self
employment, organising poor into Self Help Groups, etc. The basic objective of the
program was to bring 30% of the BPL families above the poverty line. All earlier
programs like Integrated Development program (IRDP), Development of Women and
Children in Rural Areas (DWCRA), Gram Kalyan Yojana (GKY) and Million Well
Scheme (MWS) were merged with SGSY. Under this program, families (not the
individuals) are the focal point of the development initiatives.

The BPL families are organised into SHGs and assistance package includes
loan, subsidy, training, capacity building, infrastructure and development of linkage
subsidy @ 50% and 30% of the project cost, with ceiling of Rs. 10,000/- and Rs.
7500/-, is provided to the beneficiaries to belonging to SC/ST category and others,
respectively. There is no ceiling on amount of subsidy for minor irrigation purposes.
For group activity of the SHGs, subsidy is provided to the extent of 50% of the
project cost, subject to a maximum of Rs. 1.25 lakh per group. SHGs are also
provided a revolving fund of Rs. 25,000/- for their internal lending for which subsidy
of Rs. 10,000/- is provided by the District Rural Development Agency (DRDA), out of
the total funds allocated for SGSY in district, 20% is to be utilized for infrastructure
development and 10% for training of beneficiaries.

This program is being implanted by DRDA in the district, which has identified
block-wise key activities, that can be taken up under the program. DRDA, Pune has
also set up a marketing outlet “SAVITRI” for sale of the products of SHGs, assisted
under SGSY and other programs. The performance of Pune district in the
implementation of this program has been noteworthy and the targets fixed under the
program are being achieved regularly. The district has also won state level awards
for best performance in the implantation of this program.

Chapter 7

About Mulshi
 Taluka Mulshi is an administrative division of the Pune district of Maharashtra
state. Taluka Mulshi lies west of Pune, in the Western Ghats mountain ridge. To the
north of Talq. Mulshi lies Talq. Maval, to the east Talq. Haveli, to the south Talq.
Velve, all part of the Pune district and to the west lies the Raigarh district. The river
Mula crosses the Talq. from west to east, starting at the artificial lake at Mulshi Dam
in the west, running near the village Paud in the centre of the Talq. and then leaving
the Talq. and continuing to Pune.

Mulshi Dam is the major source Hydroelectric Plant, water from the
river Mula is also used to irrigate Paddy. Paddy is major crop of this area, which
cover much area in the valley around the river. Rice named Kamod is grown here on
a large scale.

This area receives heavy rainfall. It is hilly region. Most of the area especially around
the dam is covered with forest. Teak, Oak, Mango are found in the forest. This forest
is the home to diverse wildlife including Leopards.

Total villages : 144 (Mahsuli)

 96 (Gram Panchayat)

Total population (2001) : Villages- 1,19,330

Town - 20,233

Total - 1,39,563 Male - 71,260

Female - 68,303

BPL families : 4246

Literacy % :12.35%

About SHG in Mulshi (Up to 31/03/2008)

Total SHGs : 1750 BPL - 322

APL - 1482

A grade : 168

B grade : 44

[A grade- means giving Revolving Fund (RF) to them and

B grade- they have Income Generating Activities (IGA) they does not require RF]

Credit linked : 1372 Ist time - 1382

IInd time - 424

Age of SHGs : from 6 months to 7 years

Closed groups (2008) : 12 BPL- 3

APL- 9

Enterprises of SHGs:

• Dairy
• Bakery
• Goat rearing
• Agro Service Centre
 • Fishery
• Making paper files
• Super market, etc.

7.1 Problems behind closing/formation of the SHGs:

• Disbursement of loan- After completion of 5 to 7 years they disbursed their

groups and from new groups.
• Repayment of loan- Some groups has no capacity to repay bank loan.
• Internal matters- Internal matters like misunderstanding between the
members. The levels of thinking of the members among the group are not
same.
• Literacy- Members of some groups are illiterate so does not know how to
work and how to link with the bank.
• Lack of trust of the members among the groups.
• Misunderstanding between NGOs workers- In the Mulshi Block 2-3 NGOs
are working simultaneously so, there is misunderstanding between the
workers of NGOs.

7.2 Linking of SHGs with Banks:

Table No. 7.1 – Linkage of SHGs with Banks

(Up to 20/06/2008)
 Bank Name BPL APL Total

Bank of Maharashtra 102 282 384

Union Bank of India 65 249 314

Panjab National Bank 12 36 48

Pune District Co-operative Credit Bank 130 739 869

Canara Bank 13 69 82

Total 322 1375 1697

Chapter 8

Grameen Mahila Va Balak Vikas Mandal

 It is one of the NGO working in the Mulshi Block. Its Head Office is located at
Hadpasar in the Pune city. Volunteers of this NGO are scattered all over the Mulshi
Block. Volunteers of this organisation help to the rural people in formation of Self
Help Groups. They motivate to the rural people to start any small business, for that
the volunteers guide them. In some cases like members are illiterates so, volunteers
help them in maintaining of their record books. Sometimes volunteers negotiate with
the Panchayat Institution for getting help of different schemes of Central and State
Government. Also they help them for linking with banks and getting loan from the
bank.

This NGO give training of different business to the SHGs, for that NGO
require a strong support and this work is successfully done by the Mahabank Self
Employment Training Institute time to time. This institute is located at Hadapsar in
Pune city. The NGO gave training of different business like making of powder of
Ayuredic Plant, Beauty Parlour, Tailoring, etc. special they focus on empowerment of
women’s.

8.1 Working:

• Firstly develop them financially.

• Train them means gives training of small enterprise.
• Then focus on health, literature and other factor related to rural people special
women.
• Prohibit the rural people form migration.
• Try to migrate their product.
• Aware them about social relationship.

Chapter 9

Findings

9.1 Constraints at SHG level:

 • Illiteracy.
• Inadequate understanding of the goal of the programme.
• Lack of basic account skills.
• Presence of heterogeneity among groups leading to social conflicts.
• High promotional cost, who will bear cost?
• Limited capability of SHG promoters.
• Absence of standardized systems and procedures.
• Lack of confidence between them.
• Lack of guidance.
• Lack of knowledge about doing any business.

9.2 Constraints at Bank level:

• Lack of concentrated efforts by the banks.

• Improper maintenance of information about SHGs.
• Inability of bank to identify NGOs with saving and credit accounts.
• Lack of motivation.
• Limited number of large sized NGOs with previous background of working
with SHGs.
• Insistence on NGOs and SHGs ratings.
• Inadequate training for staff for promoting and nurturing SHGs.
• Slow reform process.
• Lack of improper infrastructure like training centres.
• Lack of specialized staff to pursue microfinance.

Chapter 10

Suggestions
10.1 Suggestion to the Bank:

• Take the meeting of all SHGs quarterly.

• Organise an exhibition of SHGs products once in a year.
• Give guidance and training about different enterprises to the members of
SHGs.
• Avail the market to SHGs products.
• Start the Village Research Centre.
• Organise monthly meeting with the NGOs working in that area and Panchayat
Institution.
• Start a separate section of SHG in the bank.
• Give the ranking to the SHGs.
• Announce the annual prize to the best working SHG in this area.
• Give proper training to the staff about the micro finance and working of SHGs.
• Start to give the micro finance individually.

10.2 Partnership model of SHG-Bank Linkage:

1. Predominant model of microfinance:

Loan to group
Bank SHG/ Individuals

Repayment

Commission

NGO

(Group formation and linkage)

• Bank finance individuals or clients directly.

• Branches assess credibility of SHGs and monitor repayment process.
• Origination and supervision by NGO.
 • Entire credit risk borne by the bank.
• No incentive for NGO to monitor portfolio.
• NGO has to raise to raise its own funds to cover costs.
• Low rates of growth resulting from –
- NGO reliance on grant funds to meet costs.
- Bank wary of large portfolios in the absence of risk sharing structure.

2. Recently emerging model: financial intermediation by MFIs:

Loan Loan
Bank MFI SHG/Individual

(Banks lends to MFI

based on their capital) (MFI on lends)

On lending of same funds

• Bank finance to intermediary (NGO/MFI).

• The intermediary on lends to groups or individual.
• MFI set risk absorption capacity.
• Artificial increase in transaction costs.

These models could not resolve the paradox of limited supply.

• A burgeoning segment with very large demand for finance.

• Banking system capable for providing large quantum of wholesale finance.
• Grass root agencies capable of providing origination and supervision support
in a cost effective manner.
Partnership model:

Laon 9% - 11%

Repayment Monitor

SHG/
Bank MFI
Individual

Originator

Repayment
collection

NGO

Working of model:

• Bank gives the loan directly to the SHGs or individual, so that bank can know
the each group and keep information about groups and group members.
• Bank gives the loan as per the RBI norms.
• SHGs link with the bank with the help of NGO.
• The NGO work as a originator.
• The main role of this model will play by MFI.
• MFI and NGO collectively monitor on the SHGs.
• Also they both focus on their health, literacy and other problems.
• Repayment collection will in two step-
- Collection from SHGs by NGO and transfer to MFI.
- Collection from NGO by MFI and transfer to Bank.
• Give a specific day to the MFI for repay the loan.
Advantages:

• Less expenditure on monitoring SHGs.

• No risk to the bank, risk will absorb by the MFI and NGO.
• Bank will get large amount of money at a one time.
• It reduces the capital needs.
• It saves the sources.

Limitations:

• Some time it will take much time for repayment of loan.

• Large expenditure at the time of application of this model.
 Annexure 1
F. No. E- 20 (2)/ 2003
GOVERNMENT OF INDIA
 MINISTRY OF SSI
OFFICE OF THE DEVELOPMENT COMMISSIONAR
(SMALL SCALE INDUSTRY)

Nirman Bhavan, New Delhi

Dated: 17th March 2004
OFFICE MEMORANDUM
Subject: - Scheme of Microfinance Programme

Background:

Creating self employment opportunities is one way of attacking poverty and

solving the problems of unemployment. There are over 24 crore people bellow the
poverty lines in the country. The scheme of Micro-Credit has been found as an
effective instrument for lifting the poor above the level of poverty by providing them
increased self employment opportunities and making them credit worthy. Total
requirement of micro credit in the country has been assessed at Rs. 50,000 crore.
Micro credit programme works through NGOs/SHGS and the merit lies in weekly
monitoring and refund of instalments. The rate of recovery under SIDBI’s micro credit
programme is as high as 98%. Though there are various departments and
organisations implementing micro finance schemes in the areas of activity falling
under their purview but their total reach is very low i.e. not more than Rs. 5,000
crore. Thus the existing programmes cater to only 5 to 10% of total requirements and
there is considerable scope for expansion of such programmes.

In India Microfinance programmes are run primarily by NABARD in the field of

agriculture and SIDBI in the field of Industry, Service and Business (ISB). The
success of microfinance programmes lies in diversification of services. Microfinance
scheme of SIDBI is under operations since January, 1999 with a corpus of Rs. 100
crore and a network of about 190 capacity assessed rated MFIs/NGOs. Under the
programme total amount of Rs. 191 crore have been sanctioned up to 31st
December, 2003, benefiting over 9 lakh beneficiaries. Under the programme,
MFIs/NGOs are supposed to provide equity support in order to avail SIDBI finance.
But they find it difficult to manage the needed equity support because of their poor
financial condition. The problem has got aggravated due to declining interest rate on
deposits. The office of the Development Commissioner (Small Scale Industries)
under Ministry of SSI is launching a new scheme of Microfinance Programme to
overcome the constraints in the existing scheme of SIDBI, whose reach is currently
low. It is felt that Government’s role can be critical in expanding reach of the scheme,
ensuring long term sustainability of MFIs/NGOs and development of intermediaries
for identification of viable projects.

Salient features of Microfinance Programme:

Under the scheme of Microfinance Programme the following activities would

be undertaken.

1. Arranging fixed deposits for MFIs/NGOs:

The SIDBI is already running a Microfinance Programme with a network of

capacity assessed rated MFIs/NGOs. The scheme of Microfinance Programme has
been tied up with SIDBI by way of contributing towards security deposits required
from the MFIs/NGOs to get loans from SIDBI as per details given under:

a. The GOI will provide funds for Microfinance Programme to SIDBI, which shall
be called ‘Portfolio Risk Fund’ (PRF). This fund would be used for security
deposit requirement of the loan amount from the MFIs/NGOs and to meet the
cost of interest loss. At present, SIDBI takes fixed deposits equal to 10% of
the loan amount. The share of MFIs/NGOs would be 2.5% of the loan amount
(i.e. 25% of the security deposit) and balance 7.5% (i.e. 75% of the security
deposit) would be adjusted from the funds provided by the GOI. The
MFIs/NGOs may avail the loan from the SIDBI for further on lending on the
support of the security deposit.

b. The Government would provide the needed fund in four years of the Xth Plan
and release the fund on half yearly basis based on demands for security
deposit. By contributing an amount of Rs. 6 crore during the Xth Plan under
Microfinance Programme, SIDBI can provide loan of Rs. 80 crore to
 MFIs/NGOs. This would benefit approximately 1.60 lakhs beneficiaries,
assuming an average loan of Rs. 5,000/- beneficiary.

c. The SIDBI will pay interest to the Government on the fixed deposit made
available by the Government at the same rate as followed to NGOs. Other
terms and conditions will be fixed mutually by SIDBI and GOI.

d. The recovery of loan/interests will be the sole responsibility of the SIDBI. In

case of non recovery of loan, SIDBI would first adjust fixed deposit and
interests accrued thereon for 2.5% security deposit of the loan pledged by the
MFIs/NGOs and thereafter adjust 7.5% security deposit of the loan amount
provided by the GOI and the interest accrued thereon with the approval of
committee of the GOI.

e. After full recovery of loan from the MFIs/NGOs, the 7.5% security deposit of
the loan amount provided by the GOI and the interest accrued thereon would
be rotated further as a security deposit for MFIs/NGOs with the approval of
committee of the GOI or the same will be returned to the GOI.

f. As SIDBI is already running the Microfinance Programme, they will monitor

the scheme. They would also provide the monthly/ quarterly progress report
along with details of beneficiaries, utilization of funds provided by GOI and
loan sanctioned/ utilized by the beneficiaries.

g. The activities covered under the scheme are manufacturing, service sector
and non-farming activities.

2. Training and studies on Microfinance Programme:

The GOI would help SIDBI in meeting the training needs of NGOs, SHGs,
intermediaries and entrepreneurs and also in enhancing awareness about the
programme. This task would be performed through National Level Entrepreneurship
Development Institutes (EDIs) and Small Industries Service Institutes (SISIs). The
Research Studies would also be arranged through reputed agencies.

3. Institute building for ‘Intermediaries’ for identification of viable projects:

 The GOI would help in institution building through identification and
development of intermediary organisation, which would help the NGOs/SHGs in
identification of product, preparation of project, working out forward and backward
linkages and infixing marketing/ technology ties-ups. The SISIs would help in the
identification of such intermediaries in different areas.

Budgetary provision for the scheme during 10th Plan:

The budgetary provision for the scheme in the 10th Five Year Plan is Rs. 7
crore and the provision in the current financial year 2003-04 is Rs. 0.25 crore. The
entire amount of Rs. 0.25 crore is to be provided to SIDBI as ‘Portfolio Risk Fund’
(PRF) during the year 2003-04. Under the scheme, allocation of an amount of Rs. 1
crore is for studies, training, awareness, etc. and amount of Rs. 6 crore is for
contribution to SIDBI as PRF. Savings if any, under any activity would be utilized on
other activity of the scheme so that budget allocated may be fully utilized.

Administrative arrangement:

A committee under the Chairmanship of Additional Secretary and

Development Commissioner (SSI) is to be constituted. Other members of the
Committee would be Additional Development Commissioner and EA, Director (IFW),
Chairman-cum-Managing Director (SIDBI) and Director (EA). Any other member can
be co-opted by the Committee if required. The Committee would review the progress
made under the scheme, approve the adjustment of security provided by the GOI
and interest accrued thereon in case of non-recovery of loan by SIDBI, approve
further rotation of funds provided by the GOI and other related matters.

These issues with the concurrence of Integrated Finance Wing of the Ministry,
vide their Dy. NO. 387/Fin I/04 dated: 01-03-2004.

(Praveen Mahato)
Director (EA)

Annexure 2
 World’s Top 50 Microfinance Institutions

Rank Name Country Scale Efficienc Ris Returns

y k

1 ASA Bangladesh 14 83 56 40

2 Bandhan (Society India 108 49 42 1

and NBFC)

3 Banco do Nordeste Brazil 46 27 213 25

4 Fundación Mundial de Colombia 58 72 193 1

la Mujer Bucaramanga

5 FONDEP Micro-Crédit Morocco 119 26 196 1

6 Amhara Credit and Ethiopia 56 126 118 42

Savings Institution

7 Banco Compartamos, Mexico 15 24 295 11

S.A., Institución de
Banca Múltiple

8 Association Al Amana Morocco 17 212 133 1

for the Promotion of
Micro-Enterprises
Morocco

9 Fundación Mundo Colombia 53 181 141 1

Mujer Popayán

10 Fundación WWB Colombia 27 206 155 4

Colombia – Cali

11 Consumer Credit Russia 82 300 19 1

Union 'Economic
Partnership'

12 Fondation Banque Morocco 59 126 219 1

Populaire pour le
Micro-Credit

13 Microcredit India 75 142 7 185

Foundation of India

Rank Name Country Scale Efficienc Ris Returns

y k
 14 EKI Bosnia and 66 102 242 1
Herzegovina

15 Saadhana Microfin India 263 79 73 1

Society

16 Jagorani Chakra Bangladesh 136 176 128 1

Foundation

17 Grameen Bank Bangladesh 8 280 100 62

18 Partner Bosnia and 64 169 230 1

Herzegovina

19 Grameen Koota India 209 106 156 1

20 Caja Municipal de Peru 48 99 222 119

Ahorro y Crédito de
Cusco

21 Bangladesh Rural Bangladesh 10 159 126 205

Advancement
Committee

22 AgroInvest Serbia 84 195 222 1

23 Caja Municipal de Peru 20 163 220 101

Ahorro y Crédito de
Trujillo

23 Sharada's Women's India 229 207 55 13

Association for
Weaker Section

24 MIKROFIN Banja Luka Bosnia and 60 240 205 1

Herzegovina

25 Khan Bank Mongolia 19 149 280 59

(Agricultural Bank of
Mongolia LLP)

26 INECO Bank Armenia 96 173 202 39

27 Fondation Zakoura Morocco 51 268 194 1

28 Dakahlya Businessme Egypt 200 215 102 1

Rank Name Country Scale Efficienc Ris Returns

y k

29 Asmitha Microfin Ltd. India 80 254 73 111

 30 Credi Fe Desarrollo Ecuador 28 252 206 34
Microempresarial S.A.

31 Dedebit Credit and Ethiopia 50 246 80 154

Savings Institution

32 MI-BOSPO Tuzla Bosnia and 128 120 283 1

Herzegovina

33 Fundacion Para La Nicaragua 173 89 171 100

Promocion y el
Desarrollo

34 Kashf Foundation Pakistan 123 194 219 1

35 Shakti Foundation for Bangladesh 170 221 151 1

Disadvantaged
Women

36 enda inter-arabe Tunisia 198 90 257 1

37 Kazakhstan Loan Fund Kazakhstan 120 118 320 1

38 Integrated evelopment Bangladesh 300 134 140 1

Foundation

39 Microcredit Bosnia and 114 103 341 17

Organization Sunrise Herzegovina

40 FINCA – ECU Ecuador 125 138 264 54

41 Caja Municipal de Peru 23 126 220 215

Ahorro y Crédito de
Arequipa

42 Crédito con Educación Bolivia 135 152 298 1

Rural

43 BESA Fund Albania 109 135 345 1

44 SKS Microfinance India 61 395 141 1

Private Limited

45 Development and Jordan 83 388 135 1

Employment Fund

Rank Name Country Scale Efficienc Ris Returns

y k

46 Programas para la Peru 292 82 242 1

Mujer – Peru
47 Kreditimi Rural i Kosovo 213 158 247 1
Kosoves LLC (formerly
Rural Finance Project
of Kosovo)

48 BURO, formerly BURO Bangladesh 137 207 186 91

Tangail

49 Opportunity Bank A.D. Serbia 49 234 319 23

Podgorica

50 Sanasa Development Sri Lanka 86 206 93 241

Bank

Bibliography

 NABARD – Self Help Group Bank Linkage Programme 2006-07

 NABARD – Status of Microfinance in India 2006-07

 NABARD – Potential Linked Credit Plan- Pune District 2007-08

 NABARD – A Handbook on Forming Self Help Groups

 Panchayat Samiti, Paud, Pune District

 Grameen Mahila Va Balak Vikas Mandal, Pune