SELF-HELP GROUPS FOR REACHING THE POOR – EARLY EXPERIENCES

It is late evening in a small village of Southern India, when a group of 15 poor villagers, after the day's labour and some rest, has gathered at a place. One by one, each of them hands over two Rupees to a co-member, who is comparatively more literate and jots down the names and the amount received as he collects the money. Then, the group discusses about their problems of their vocation, health, education, etc. Thereafter they discuss certain proposals for loan from a few members. One woman member requests the group for a loan of Rs. 800 for the treatment of her sick child. Another person wants Rs. 1500 for paying to mulberry planter for purchase of mulberry leaves to feed the silkworms. The third one wants about Rs. 2000 for repairing his house. The fourth demand its for Rs. 4000 for doing some small business. The fifth request is for Rs. 1000 for purchase of seeds, manure, etc.

Then follows some lively and probing discussion among the members about the credit-worthiness need and requirement of the exact amount, the possibility of income and repayment, priorities, etc., to arrive at some practical and at the same time humane decisions. The process seems easier as they are aware of each other's problems, needs and capabilities. The first preference is given to the lady for treatment of her child. The loan is granted at an interest rate of 1% per month. The second preference is for purchase of mulberry leaves so that the silkworms would not die. However, the loan amount is reduced to Rs. 750/- and the rate of interest is 2% per month, and the group members decide to persuade the supplier of mulberry to accept the money in two installments.  Third is for purchase of seeds and manure agreeing for Rs. 600 at 2.5% interest rate. For the fourth demand, immediately an amount of Rs. 1000 is agreed to be given for urgent repairs at 3% interest rate and for the remaining amount he is asked to wait for a few weeks. And for the fifth request for business purposes, the decision is deferred to the next meeting when more funds will be available.

A similar meeting of another group comprising all women launder members is in progress at another village. The group members have been immediately benefited by the establishment of the group. They have created certain convenient common washing places, arranged for bulk purchase of soaps, detergents, etc., at discounted rates. Further, earlier they were washing uniform clothes of a factory through an intermediary, who was paying them Rs. 0.80 per piece. When the Group was formed, the members with the help of the promoting Non-Governmental Organisation (NGO) negotiated with the factory and got a rate of Rs. 1.30 per piece. Now, the women members are discussing about their interests in taking up certain other economic activities in addition to their traditional washing business. They are also enthused about the education of their children.

In yet another meeting of a women group at the same village, a member complains that her husband has sold away the asset, i.e., a goat procured with the loan assistance from the group, to a local butcher. The members immediately go to the butcher's place and pressurize him to release the goat as it belongs to the group.

Another heart rending episode is going on at a remote village in Rajasthan, in northern India. A women member is pleading for a loan so that she could use it to get her son released from the clutches of the moneylender, from whom an amount Rs. 5000/- was borrowed for the marriage of her very son, who had to become a bonded labourer to the moneylender in consideration of the interest towards the loan. Moved by her pathetic situation, the group agrees to give her a loan in two instalments for terminating the bondage. The woman expresses her gratitude by assuring that she would make the repayment within a period of two years with the help of her small income from agriculture and also casual labour work to be put in by her, her son and her daughter-in- law. The other members could see the sense of relief and smile on her face after a long time.

Though a little lengthy, these actual scenes have been narrated to make the readers understand and appreciate the system of mutual help known as Self-Help Group (SHG) approach, a concept which is gaining momentum in many parts of the world for helping the poor.  The groups, comprise very poor people, who by themselves rarely get any loan from the banks or subsidy from the governments. The SHGs have generally been promoted by the NGOs/ Voluntary Agencies. In a few cases, the groups have been formed by the villagers themselves.

Emergence of Self-Help Groups for banking with the poor

It has been recognized that the SHGs are a traditional response to the economic marginalization all over the world. In many third world countries, including India, despite the commendable efforts put in by the credit institutions, a large section of the poor population has still not got access to the credit from the formal banking system and depends upon conventional private sources like money lenders, village shopkeepers, etc., for their credit needs. Even though the governments have also undertaken various poverty alleviation programmes, as revealed by various studies, as substantial portion of the very poor and the most vulnerable sections of the society has continued to remain out of the realms of such programmes. They have remained poor and backward, economically as well as socially. They consist of marginal farmers, petty rural artisans, agricultural labourers, etc., mostly belonging to socially and economically backward strata of the village population and are vulnerable to personal as well as natural calamities. The illiteracy of these poor people further compound their problems.

Besides, there is also a problem of magnitude of the borrowers, particularly in South-East Asian countries where the demand for credit both for farm and non-farm activities from the small farmers has increased substantially. For example, by the turn of the century India may have around 200 million rural/ semi-urban small borrowers. It may not be possible for any formal banking system to effectively and directly cater to do so many small borrowers. Further, in many countries, including India, the recycling of funds has suffered on account of the generally poor recoveries of rural loans. Actually, the recoveries from the poor are generally regarded as much better than from the better off borrowers. The non-repayment by the poor has been primarily on account of wrong government policies, populist, political decisions vitiating the general atmosphere of recovery, etc. Besides, there could be several other factors which appear to have restricted the access of the rural poor to formal institutional credit. Some of these are:

(A)       From the angle of the poor

1. Due to their social, economic and educational backwardness and being unorganized they are unaware of various programmes of and facilities available from the Government and banks and are generally deprived of access to such benefits.
2. They have an apprehension that the banks are not meant for poor people like them and they would not be able to get loans from the banks.
3. Lack of security to avail bank loan.
4. Documentation procedures, rigid lending policies and norms of the banks generally make the poor ineligible for bank credit.
5. Funds requirement for consumption, social and even production purposes, though small, are generally emergent.  The uncertainty and long delays in obtaining such loans from the banks discourage them to approach the banks.
6. In some cases, past unpleasant experience of the poor with the banks and government agencies is also a discouraging factor.

(B)       From the angle of banks

1. General mental reservation about financing such poor borrowers mainly due to the fear of bad debts.
2. Lack of security to back such loans.
3. Non-compliance of documentation and other formalities by the borrowers.
4. Non-conformity with the usual banking norms.
5. Low returns to the bank on account of lower rate of interest to be charged on such small loans in accordance with the regulations of the central bank/ government.
6. Servicing large number of small loans with frequent transactions spread over a vast area is unwieldy besides involving high cost, making it inconvenient and apparently uneconomic for the banks.  One would not be surprised if in the name of the market orientation and total freedom to lend, such small poor borrowers are the likely casualty and left high and dry.

The result of all this is that the vast section of poor population continues to be outside the fold of banking system despite the best efforts by all.

The concept of SHGs helps resolving this situation. Through the basic philosophy behind cooperatives is also more or less the same as that of SHGs, in many countries a large number of cooperatives have not been performing their role effectively, particularly in helping the poor due to several factors. The size of the agricultural credit cooperative societies is generally too unwieldy; the membership composition of them being mostly heterogeneous the richer and dominant sections try to corner all the benefits depriving the backward and the poor; and cooperatives are too much politicized and they do not have freedom to function because of various regulations and stipulations from the central banks and the Governments.

Characteristics of SHGs

The SHGs have been found as an effective and economic means of ensuring access of credit to the poor and vulnerable sections of the society, as the transaction cost is much less and because of the constant and effective supervision the loan is properly utilized and the repayments are prompt. SHGs are however, not regarded as a substitute for the existing banking arrangements where the banks are giving loans directly to the people.  They are to be regarded as a support system to the existing banking operations.

The objectives of the SHGs, to reiterate in brief, include inculcating the habit of thrift, savings, banking culture, i.e., availing loan and repaying the same over a given period of time and in the process gain economic prosperity through credit.

The SHGs also provide scope for collective management of funds and develop, inter alia, the entrepreneurial ability, which is difficult if undertaken by individual member, more particularly in case of a common activity undertaken jointly by many.

The membership composition shall have homogeneity in terms of socio-economic status or common economic activity and people having almost similar problems and needs, to have cohesiveness and collective approach.

Lending procedures adopted by the Groups are very simple and loans are provided on the basis of the combined wisdom and mutual trust. The joint participative appraisal as well as the decisions of the Group have not only been found to be practical but also humane and beneficial to the members and banks. The utilization and repayments of the loans are generally excellent. The interest rates charged many vary from purpose to purpose as also depending upon the joint decision of the group and are higher as compared to the formal credit system. The borrowers are willing to bear the same as this is still fare less than the moneylender's interest rate and the interest collected goes to augmenting the resources of the group itself and at the same time the loan is available at short notice. The lending norms like unit cost, repayment period, etc., are in no way comparable with those generally stipulated by the banks. Initially, the credit provided to the members is mainly for consumption purpose like food, health, social functions, etc. With the passage of time and increase in resources, there could be shift towards the production needs such as crop loan, purchase of milch animals, sheep, goat, silkworm rearing, etc. The SHGs, however, find it difficult to meet the increased requirements of the members for economic activities for want of adequate funds. At this state, it is felt that banks could come forward to give loan to the SHGs to augment their funds.

The SHGs are also helping in inculcating good habits and ethics among the members.  The drinking/smoking habits amongst the members are discouraged. Even the behaviors of the members may come up for discussion during the meeting of the groups, thus introducing a moral vigil on the members. Propagating literacy is also indirectly being taken care of by some groups, who insist on their members to at least learn to sign instead of putting thumb impressions to be eligible for a loan. A sense of discipline is also inculcated by imposing fines on late coming/absenting members.

Formation of SHGs and linking them with banks

Having found SHGs as an effective and economical approach for disbursement of credit to the poor and recovering loans at a reduced transaction cost, there is need to link the SHGs with the willing banks. This will be in addition to the direct lending to the individual borrowers of the target group as also through the existing vast network of cooperatives.  It is often suggested that the banks can deal directly with the SHGs instead of dealing through/taking the help of NGOs in the process of formations of groups and linkages with the banks. While it may be ideal and theoretically feasible also, in practice, however, it is difficult to assume the commercial banks' large scale involvement in organizing the groups and sustaining them on a long term basis. Moreover, it would depend upon particular person who is posted in a particular branch and with the change in the incumbency, the interest in the groups may also get affected. The entire process may get a serious set bank thereafter. Besides, the commercial banks are generally not oriented to such a type of social banking and do not possess the expertise for organizing the groups which requires lot of insight into the socio-economic and demographic study of the people. NGOs are much better equipped for such purposes. However, once the groups have established their credibility and work as some sort of a voluntary agency for the members in the area, the NGOs can shift to other areas, leaving a direct linkage between the banks and SHGs.

The Four-in-one role of SHGs

1. A money lender : Providing quickly small emergent loans, but without charging exploitative rate of interest;
2. A development bank : Providing small production and investment credit to the poor for their economic upliftment, but without going through the long procedures, documentation, security requirements, etc., and at lesser transaction cost;
3. A cooperative : Following participative approach of mutual cooperation and joint pressure, without the ills of selfish interest, interference of the big brothers/Government department officials, etc., and with a lot of flexibility; and
4.  A voluntary agency : Helping each other through their common efforts for bringing economic and social upliftment amount the poor people.

The following stages are suggested for formation of the SHGs and linking them with the banks/activity.          

• NGOs/ voluntary agencies to organize small groups of 10 to 20 poor people, based on homogeneous socio-economic factors.
• Through regular savings of the members, SHGs should build up their fund, to be supplemented by some contributions from the NGOs wherever possible, as also out of the income of interest of loans and common activities.
• NGO should train the SHG members for maintaining the accounts on savings, lending and repayments as also for finding solution to their common problems.
• SHG should start lending operations out of the group funds to their members.  Initially it will be mainly for emergent consumption, health and social needs.  Subsequently small production needs can also be met depending upon the position of resources.
• At this stage, when the groups require more funds for meeting the needs of the members for undertaking economic activities the banks should enter the field, interact with the group, assess its fund requirement, decide about the credibility of the group and its members and give loans to the SHGs, for adding to the corpus funds. The amounts, which are generally small in the beginning, may be increased as the confidence and trust develops between the bank and the group.  While the bank will charge the usual rate of interest, the group will in turn be free to charge to the members and rate of interest it thinks reasonable based on the joint decision of the members. It generally varies from 12% to 36%. The margin in the interest rates adds to the income of the group and goes to its corpus fund.  The repayment will be made by the group to the bank as per as the agreed terms.  From members to the group, the repayments will generally be faster. There will be no collateral security. The main documents of loan will be signed by authorized group leaders. However, if required by the bank, a jointly signed document may also be obtained from all group members, if necessary, indicating some sort of mutual guarantee and responsibility for repayments.
• Under special circumstances, in case of difficult areas where banks branch network is poor and/or the banks branch network is poor and/or the banks do not have confidence in lending to SHGs or for some reasons. SHGs are reluctant to borrow from the banks, the banks may consider providing bulk finance to the NGO who in turn may pass on to SHG, retaining some margin, if necessary.
• After some time for larger investment and production needs of the individual members, the banks may consider giving loans directly to the members on the specific recommendation of the group. The loan amount as well as the repayments may be routed through the groups in this case also.

RECOVERY PERFORMANCE

Rs. in 000

Sr.No.	Particulars	Demand (Current)	Collection	Balance	% of recovery
1.	Case level Direct Lending Lending through SHGs	3280 902	1395 783	1885 119	42.53 86.80
2.	Selected case SHG village level Non-group beneficiaries SHG beneficiaries	66 26	25 24	41 2	37.88 92.30

In course of time when the credibility of the group and its members is established and banks are satisfied, and also the members develop confidence to manage their affairs, the NGO can slowly withdraw and move to other uncovered pockets. The banks in that case will deal directly with the SHGs and their members.

In the process of financing SHGs banks and NGOs should take care that (a) money/ credit should not be made available in abundance – it should be scarce and flow should increase gradually; (b) savings by members should be a must before credit flows; and (c) group to be eligible for loan should have existed for sometimes, say six months to one year, by which time it should have learnt the process of saving, loaning repayments, accounts maintenance, mutual help and group pressure, etc.

Experience of loaning through SHGs

The author has conducted a case study on Indian experience in financing SHGs by banks.  On selective basis, banks have given loans either through SHGs or to the SHGs for poor beneficiaries.  The experience has shown that recovery in the case of bank loans through SHGs were above 90% as compared to the direct lending where recovery was about 50%.

Further, it was also observed that the transaction cost of the bank was reduced by about one third when the lending was done through the SHGs.

COST OF LENDING PER ACCOUNT

(In rupees)

Sr.No.	Particulars	SHG members	Non Self Help Group members
1.	Salary and Allowance and travel expenses	83	135
2.	Establishment expenses	8	8
3.	Other expenses	14	14
	Total	105	157

The transaction cost may further reduce if the loans are disbursed to the SHGs as indicated about as it will required maintaining and servicing a single account. The reduction in the transaction cost is mainly on account of reduced visits for appraisal, follow up and recoveries. The reasons for better repayments in case of loan to or through SHGs are :

1. Quick, easy and realistic appraisal of the loan activity and the borrower by the groups;
2. flexibility of lending procedures and norms and quick availability of loans;
3. effective follow up on the part of group members leading to proper utilization of loan;
4. group pressure and social stigma as also fear of expulsion from the group and deprivation of future benefits; etc.

Sum-up

Based on the conditions prevailing in many less developed countries in regard to the credit availability to the poor it is apparent that the banks can play a crucial role in the process of economic upliftment of the poor by accepting concept of SHGs for providing credit to the poor and vulnerable

This handout has been preserved as it furnishes an account of the early days of the SHG-Bank Linkage Programme. The author, who was a senior officer of NABARD, was closely associated with the programme.

 

S. C. Wadhwa

Managing Director

Agril. Finance Corporation, Mumbai