A Comparative Study on BankSHG Linkage & MFImodel of Microfinance.Independent Research Paper

2/11/2009

Submitted byBibhasendra Sen

Under the Guidance of

Prof: B. S Misra

A Comparative Study on BankSHG Linkage & MFI- SHGmodel of Microfinance.Independent Research Paper

PGDMRM

A Comparative Study on BankSHG

PGDMRM-II

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ACKNOWLEDGEMENT.

The present project is not the result of individual efforts. It is the combined effort of all the

people who helped me do the study. I take this opportunity to thank all the people who helped

me in making this project a success.

First and foremost, I would like to thank my faculty guide Prof B.S Mishra for giving me an

opportunity to do the research paper and learn how the functions of different microfinance

lending models and how it can still be made to function more efficiently. I would also like to

thank Prof Niraj Kumar for his guidance for constant monitoring my progress regularly. I

would specifically like to thank Mr Tushar Kanti Panda, chairman OCSB who has been my

project guide as well as mentor and not only gave me constant support and guidance but also

help me observe and learn the cooperative structure of PACS..

The report would not have been possible but for the cooperation of all the contributors which

includes some bank executives of the microfinance department of some commercial banks who

shared their experiences and concerns and advices and agreed to answer parts that needed

elaboration.

Bibhasendra SenRoll No-10

PGDMRM-IIXIMB

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Table of Contents

Part 1 Page No

Executive Summary 4Cooperative bank& SHG Linkage 5Objective of the Study 5Abstract 6Lending Models 7Provision of Financial Services through PACS 8Advantages & disadvantages 9Conclusion of Part 1 10

Part 2SHG bank linkage 11Methodology 12Selection Criteria’s 13Major Findings 14SHPIs & Bank Linkage 14Limitations of this Model 16

Part 3Commercial Bank Linkage 19Profile of Sample SHG 20Financial Management Practices by SHG 23Source of External Borrowings by the SHG 24Organization Sustainability of Different Models 25Financial Sustainability of Different Models 26Case Study 28Conclusion 31Exhibit 32References 36

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Executive Summary

The research was conducted to assess the efficacy of present three lending models:

• Cooperative bank linkage

• SHG Bank linkage

The study is based on the primary and secondary data collected to analyze the efficacy of the

various lending models that is being followed to provide microcredit to the poor as a part of the

priority sector lending. Various issues like promotional and maintenance costs of SHPIs per

SHG, types of support received by SHPIs and sources of support have been addressed. As far as

banks are concerned, the assessment included examining the percentage of bank loans to SHGs

across States and non-performing assets as percentage of total loan outstanding to SHGs.

With regards to promotional costs, the study reported that on an average a bank incurred lower

cost for promoting a SHG than that by an NGO. To promote a SHG, SHPIs received financial

aid/grant and other support from different sources. About 60 per cent of SHPIs visualized that

NABARD and other banks were the chief sources of support for financing and promoting SHGs.

About 28 per cent of SHPIs stated that State governments had provided various forms of help to

them. A very low share of SHPIs stated that they had received help from private organisations,

international donors and other sources for supporting their activities. Regarding problems related

to the promotion of SHGs, many of the SHPIs (48 per cent) expressed that people’s illiteracy or

ignorance constituted a major problem for promoting new SHGs. About 28 per cent of SHPIs

stated that shortage of field staff was also another problem for promoting new SHGs. On the

major problems related to bank linkage, 45 per cent of SHPIs revealed that a lack of interest

among the SHG members was responsible for the failure or delay in providing them with bank

linkage.

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COOPERATIVE BANKS & SHG LINKAGE

SummaryThe first draft report consists of the Orissa State Cooperative Bank and SHG linkage (mainly

through PACS). The process of lending to the priority sector, the lending model followed and the

delivery mechanism are described based on the primary data collected through interview of five

SHGs under Sisupalgarh Cooperative bank. The constraints and benefit analysis consist of both

the sides i.e. PACS and SHGs thereby giving much broader picture of the channel. The provision

of the State Cooperative Societies Acts does not allow enrollment of groups as members of the

banks (here cooperative bank). In the mean time the state Government of Orissa has amended

the provision facilitating the enrollment of groups as members of the PACS (Primary

Agricultural Cooperative Societies). These PACS performs lending / on-lending activities for

these SHG groups further

Refer Exhibit

Objective of Study: Comparative assessment of the quality of the groups promoted by different self help

promotion institutions (SHPI) including the changes over time in group members

participation and behaviors, the quantity and quality of financial services and their

sustainability.

Study/assessment of the factors affecting the sustainability of SHGs and identification of

constraints, if any.

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AbstractThe SHG initiative was launched to link poorer people with formal financial services, they

should look to co-operatives to provide them. In India there are over 93,000 primary agricultural

credit societies (PACS), providing an unrivalled rural network. Each society has its own full-

time staff and permanent facilities, and their number exceeds the combined total of all the other

banking outlets in rural areas. The societies are themselves served by 367 District Co-operative

Banks, with 12000 branches, with a further tier of State level apex Banks to support them. These

small local institutions, and their support structure, are the obvious outlets for financial services

to SHGs on the basis of their numbers and outreach alone; their institutional form as co-

operatives makes them an even more obvious choice.

The PACS and the Co-operative Banks have thus far only played a small role in the programme

of linking SHGs to formal financial institutions

Source: secondary data collected from OSCB handout & related websites

It may be noted that that the cooperative banking institutions came to the SHG linkage

programme rather late, in 1996. Although there was nothing to prevent an SHG from opening an

account with a PAC or a co-operative bank branch before that, NABARD did not extend the

linkage promotion programme to cooperative banking institutions. This is in part the result of

NABARD’s own policy, since SHG linkage was first promoted solely the commercial and

regional rural banks in view. Many of these banks, particularly the Regional Rural Banks

(RRBs), were deeply distressed, and SHG linkage has played an important part in their return to

profitability. The problems of the co-operative banks and their associated PACS, however, are

more fundamental. Many are defunct and totally in-operative, others are operating only on a part-

time basis, being ineligible for NABARD refinance and are able to lend only from current

recoveries.

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Lending models

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Provision of financial services through PACS

All groups that are linked to the PACS are monitored for first six months before extending the

first loan. The groups need to prepare credit plans for its members on the basis of their individual

need and the same has to be submitted to the PACS. Credit is available in the proportion of their

deposits. Initially loan amount starts with twice the amount deposited and may later go up to 10

times the amount deposited by the group based on the financial discipline of the group. The loan

amount is given in the form of cash and the same is collected from the PACS by the president or

the secretary of the group.

Rate of Interest:

NABARD to OSCB: 7%

OSCB to DCCB: 7.5%

DCCB to PACS: 9.5%

PACS to Groups: 12%

Groups to Members: Groups decide

When the money is unofficially lent by the group to non members the interest rate may go up to

48% PA

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Advantages & Disadvantages of this Structure

Although there are many ways in which both SHG members and co-operative banking

institutions can benefit from doing business together, there are a number of reasons why such

linkages should be pursued with caution, by both parties.

For SHG and its members

For Cooperative Bank (or PACS)

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Conclusion of Part 1Although an increasing number of SHGs are beginning to exercise their customer rights and to

choose their own banks, it must be accepted that for most groups, particularly newer ones and

those in the North of India and other less covered regions, their choice of financial service

provider rests with the self-help group promotion institution (SHPI). Hence, it is important that

NABARD, as the apex institution to which SHPIs look for guidance, should be able to offer

informed advice as to whether DCCB or PACS is the best institution to serve the interests of

SHGs and their members.

Detailed and systematic studies are required to understand the various dimensions of the

interrelationship between SHG linkage programme and revival and strengthening of the

cooperative banking sector. This purpose of this paper was to raise some pertinent issues which

can inform such elaborate exercises

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SHG- BANK LINKAGEThe second part of the project consists of assessment of the comprehensive nature of the SHG-

Bank linkage under NABARD. The study is based on information obtained from a primary

sample survey conducted at three different levels: the SHGs as a group, the individual members

and the various functionaries associated with the programme of bank-linkage.

In this particular section of IRP, some issues related to SHPIs and banks are addressed. With

regard to SHPIs, the issues include promotional and maintenance cost of SHPIs per SHG, types

of support received by SHPIs and the sources of support. Further, the adequacy of various types

of support and problems related to promotion, bank linkage and monitoring of SHGs is

discussed. As far as the banks are concerned, the assessment includes examining the percentage

of SHGs repaying bank loans, non-performing assets as percentage to total loan outstanding of

banks, and percentage of SHG loan recovery and other related issues would be discussed using

the information collected on SHPIs and banks in the field in the final report based on the visit to

the banks concerned by the end of this month.

In Orissa the study is based on data collected from two districts where the bank linkage

programme has been running successfully.

Capital Allocation in SHG LinkageModelSince the SHPI in this case does not play the role of a financial intermediary, it does not have to

allocate capital against the lending under this programme. In most cases, the SHPIs in this

programme are trusts or societies that have no desire to take credit risk. Capital needs to be

allocated only by the bank, which bears the entire credit risk.

Incentive Alignment.In this model, the bank bears 100 per cent of the credit risk. It has no recourse to the SHPI,

which has originated the groups, in the event of default on loans. Therefore, at least in theory, the

incentive of the SHPI to consistently originate high-quality groups and supervise existing

portfolio is weak. One of the reasons why this might not be reflected in repayment rates under

the SHG–bank linkage programme (which are reported to be high) could be that portfolio sizes

per SHPI are small and not quite comparable to that of MFIs.

Region State District No of SHGEastern Orissa Kalahandi 2813

sambalpur 356Data collected from Public sector bank

MethodologyThe methodology of the impact study of the SBLP on SHG members

based on assessment of the detailed information obtained from a primary sample survey of major

model types of SHGs, their household members and the various functionaries associated with the

programme, e.g. banks and other SHPIs in

of the SBLP, the “before and after” approach was primarily followed. A structured questionnaire

targeting SHGs was completed using the focus group discussion method, which facilitated the

collection of qualitative data from the group, as well as quantitative data from the records

maintained by SHGs. Relevant information from the banks and SHPIs was collected on the

performance of the selected SHGs on loans taken and disbursed and repayment performanc

loans. Further, their responses on problems faced by the SHGs and their suggestions on

improvement of the SHGs’ performance were gathered through discussions

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The methodology of the impact study of the SBLP on SHG members at the household level is

based on assessment of the detailed information obtained from a primary sample survey of major

model types of SHGs, their household members and the various functionaries associated with the

programme, e.g. banks and other SHPIs in the rural areas of Orissa. In order to assess the impact

of the SBLP, the “before and after” approach was primarily followed. A structured questionnaire

targeting SHGs was completed using the focus group discussion method, which facilitated the

of qualitative data from the group, as well as quantitative data from the records

maintained by SHGs. Relevant information from the banks and SHPIs was collected on the

performance of the selected SHGs on loans taken and disbursed and repayment performanc

Further, their responses on problems faced by the SHGs and their suggestions on

SHGs’ performance were gathered through discussions

at the household level is

based on assessment of the detailed information obtained from a primary sample survey of major

model types of SHGs, their household members and the various functionaries associated with the

the rural areas of Orissa. In order to assess the impact

of the SBLP, the “before and after” approach was primarily followed. A structured questionnaire

targeting SHGs was completed using the focus group discussion method, which facilitated the

of qualitative data from the group, as well as quantitative data from the records

maintained by SHGs. Relevant information from the banks and SHPIs was collected on the

performance of the selected SHGs on loans taken and disbursed and repayment performanc e of

Further, their responses on problems faced by the SHGs and their suggestions on

SHGs’ performance were gathered through discussions .

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Selection: 1) DistrictAs mentioned above, the districts of a State were classified in two categories mainly on the basis

of the District Infrastructure Index and district-wise poverty ratio. It was found that the district

infrastructure index and poverty ratio were negatively correlated, indicating that higher the

infrastructure index, lower the poverty ratio.

*Secondary data collected from public sector bank

Selection of SHG district was based on the condition (after consultation with the bank) thatdistrict with more than 100 SHGs as on March 2008 are to be selected. The sample selected thusrepresents the face of bank linkage in the state of Orissa.

2) SHGThe aim of the survey was to assess the impact of the SBLP on the quality and sustainability of SHGs

by the three different Model types:

1. SHGs formed and financed by banks (Model type 1).

2. SHGs formed by formal agencies other than banks, NGOs and others but directly financed by

banks (Model type 2).

3. SHGs financed by banks using NGOs & other agencies as financial intermediaries (Model type 3)

Region State District No of SHG No of bank SHG linkage group

Eastern Orissa Kalahandi 2813 80sambalpur 356 78

*Secondary data collected from public sector bank

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3) SHG members:The SHG members interviewed were from the above mentioned three models i.e. the members

were equally distributed. In case of non-availability of the selected SHG members, other SHG

members were called from the list and the required information was collected.

Major findings:The findings are based on literature review and above mentioned data (the reference of which is

mentioned towards the end).

Apart from high savings in SHGs’ own fund (99.6 per cent), the share of savings of SHG

households were 28.5 per cent in banks followed by 17.6 per cent in Life Insurance

Corporation and 8.6 per cent in post offices. On an average, per household borrowed an

amount of Rs. 14,640 in the post-SHG period compared to Rs. 5,384 in the pre-SHG

situation. The average loan amount per household grew at an annual rate of 20.5 per cent

between the pre-SHG and the post-SHG periods.

On the issue of repayment of loan by SHG members, the findings show 96.4 per cent of

households reported regularity in repayments of loans.

The findings of SHPI suggest that the average cost of promotion and maintenance per SHG

incurred by a bank SHPI is lower than that by non-bank SHPIs.

About 60 per cent of SHPIs visualized NABARD and other banks as the main source of

support for financing and promoting SHGs.

The major problems in promoting new SHGs as reported by SHPIs were mainly illiteracy and

ignorance of people (48 per cent) and shortage of field staffs (28 per cent).

Non-performing assets as a percentage of total loans outstanding to SHGs by all types of

banks were 4.2 per cent in 2002, which declined to 1.2 per cent in 2006.

SHPIs & Bank LinkageMost of the Self-Help Promoting Institutions (SHPIs) in India have come into existence due to

the urge to help the underprivileged people of society. Their key objective is to help small and

marginal farmers, landless agricultural labourers, poor artisans, women and people drawn from

the schedule castes and tribes of the rural areas. Moreover, the goal of many of the SHPIs is to

provide various financial services, empower people socially and support them in accessing

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various government programmes and incentives. In order to solve the economic and social

problems of the poor and particularly that of women in the villages, SHPIs have chosen to

support microfinance programmes as a key instrument of empowerment and alleviation of

poverty. The basic hypothesis is that microfinance programmes, were to form SHGs and link the

groups to the banks, they would provide a vital development mechanism for improving the

standards of living of rural women. Overall, such microfinance programmes are expected to

contribute to an increase in income, consumption and production activities of the SHG members

and facilitate their access to adequate and sustainable financial services.

SHPIs, whether NGOs, banks or State governments, have been playing a vital role in promoting,

nurturing and sustaining the SHG programmes under SBLP. One of the results of the study

reveals that a substantial proportion of SHGs still feel that they are dependent on the services of

SHPIs even after four years of functioning (refer table)

States yes No total (%)Orissa 49 51 100

Cost of Promotion & Maintenance by SHPIs SHPIs include banks, NGOs, and state governments. In SHPI section, bank is considered

as a promoter, but in bank section, it is considered as a financier.

Promotional costs include cost incurred by SHPI on social mobilization, training to

animators and SHG members, documentation and linking up SHGs with bank.

The average cost of promotion per SHG is calculated from total cost incurred on

promoting SHGs divided by total number of SHGs promote.

Sample of SHPIs in Orissa Avg cost of Promotion per SHG bydifferent SHPI (Rs)

Bank 16 3575Ngo 11 8700

Government 7 4000Total sample 34

*Secondary data collected from public sector bank

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The support received by SHPIs from various donors can be observed in graph below. It shows

that about 60 per cent of SHPIs expressed the view that NABARD and banks were the main

sources of support for financing and promoting SHGs. About 28 per cent of SHPIs declared that

State governments had provided various kind of support to them. A very low share of SHPIs

stated that they had received help from private organisations/institutions, international donors

and from other sources for supporting their activities.

LimitationsWhen the problems faced by SHPIs, were examined, it was observed that many of them (48 per

cent) reported that illiteracy and people’s ignorance regarding the benefits of SHGs were the

major problems in promoting new SHGs (see graph). Shortage of field staff was also another

problem faced by SHPIs, and 28 per cent of them reported this constraint. About 24 per cent of

them indicated that lack of financial support was one of the major problems for them to promote

new SHGs.

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SHPIs are not only facing problems in promoting new SHGs, but also in linking new SHGs with

banks. To understand the problems related to this, the perceptions of sample SHPI are assessed. The

responses on SHPIs’ perception are illustrated in graph below. A high proportion of SHPIs (45 per

cent) revealed that lack of interest among SHG members was responsible for failure or delay of bank

linkage. The banks too had their own problems (lack of cooperation from bank managers, irregular

visits of bank managers to village, frequent postponement of date for providing loans, etc.,) in giving

linkage to SHGs (41 per cent), mostly when NGOs were involved. Another problem of bank linkage

was the lack of guarantee or the inability of the poor to provide marketable collateral for loans.

About 14 per cent of SHPIs expressed this view.

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Though many SHPIs had received financial grants from NABARD/banks for promoting and

financing new SHGs, about 32 per cent of them reported the unavailability of sufficient funds as a

problem to monitor the new. Besides, 30 per cent indicated shortage of field staff and a further 19 per

cent reported that insufficient time were the other problems they had experienced when monitoring

SHGs. Illiteracy and ignorance were worries for 14 per cent of SHPIs for monitoring of new SHGs.

With regard to other problems (6 per cent), the SHPIs reported factors such as: no fixed time of

meeting of SHGs, paltry attendance and improper bookkeeping.

*The above mentioned charts are done on the basis of primary data collected throughinterview of SHG members

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COMMERCIAL BANKS: AN ASSESSMENT OF LOAN SERVICES TO SHGsQuantitative and qualitative responses of banks on various issues are discussed based on the

primary data collected from few banks operating in the state. The banks were asked about the

average number of days required for approving a loan, the average distance of SHGs from credit

linkage banks, loan amount per SHG member, loan amount presently outstanding, and

contribution of bank in total loans to SHGs, non-performing assets, and other related issues.

The analysis of these financial components is reported below:

State OrissaAvg No of days for loan approval 6

% distribution of bank loan in Orissa* 12Major sources of bank loan

Commercial banks 40RRBs 56

Cooperative banks 4Bank loan (% of total loan to SHG) 94

*other states include U.P, AP, MH and Assam

It reveals that banks are the major source of external loan for SHGs and on an average, a bank

takes nine days to approve a loan for setting up a SHG across all the states. But this varies

significantly across states. In Karnataka the loan approval time often goes up to 18 days. The

reason for lower loan disbursements in Orissa could be the higher risks involved for the

repayments of loans.

Information was collected from these banks for the purpose of gauging the performance of SHGs

in terms of loan recovery. With regard to timely recovery of loans from SHGs, the banks were

classified into four categories of groups: 96 to 100 per cent loan recovery; 75 to 95 per cent loan

recovery; 50 to 74 per cent loan recovery; and less than 50 per cent loan recovery.

The grouping is based on the findings from the survey.

Distribution of banks by percentage of loan recovery in 2006

< 50% 450 - 74% 1275-95% 24

96-100 % 60

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Functioning of different lending models under Commercial –Banklinkage

In this section, an attempt has been made to study the functioning of the SHG models under

SBLP and examine their performance since the linkage happened. The study covers

approximately 15 bank-linked SHGs spread over the states.

No of sample SHG models

Model 1 5Model 2 5Model 3 5

Total 15

Profile of the Sample SHGsThe model-wise profile of the sample SHGs is provided in table above and other details of the

same are presented as under:

Model type 1 Model type 2 Model Type 3 AverageAvg no of members 12 13 14 13.00Avg no of yraes of Bank Linkage 6 6 5.5 5.83% distribution of SHG by the No of BankLinkage

3-5 years 60 60 40 53.33>5 years 40 40 60 46.67

total 100 100 100Avg distance from bank (kms) 6 5.5 6 5.83Avg distance from nearest town (kms) 13 12 20 15.00SHG networking with others into afederation

30 25 20 25.00

The distance of the SHGs from banks as well as the nearest towns are important considerations

from the point of view of the development of the SHGs, as the income generating schemes opted

by the SHG and/or its members depend on the availability of the market. In the present sample,

while the average distance of the SHGs from the bank is around 5.5 Km, the same is nearly 13

Km from the nearest town.

SHGs get a number of benefits by networking with other SHGs and becoming part of a

federation. In the present sample, one fourth of the SHGs are members of a federation.

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Distribution of the Sample SHGsModel type 1 Model type 2 Model Type 3

AVG age of members (years) 34 36 33Distribution of SHG as per Sex (%)

All female 80 90 98All male 10 4 1

Both 10 6 1Total 100 100 100

Distribution of SHG by caste of members (%)only SC/ST 20 20 30

only OBC 20 20 30SC/ ST & OBC 0 0 20

SC/ ST ,OBC & General 60 60 20Total 100 100 100

Distribution of SHG by literacy level (%)All Illiterate 7 6 5

Up to 50% Literate 34 45 50> 50% Literate 59 49 45

Total 100 100 100Distribution of SHG by economic status of

members (%)All / Majority BPL 60 62 63All / Majority APL 35 30 36

Equal No of APL & BPL 5 8 1Total 100 100 100

Distribution of members by occupation (%)Farmers 28 28 23Artisans 3 3 6Traders 12 13 16

Agro processors 2 1 2Agricultural labours 28 27 25

Others 27 28 28Total 100 100 100

The members of the sample SHGs were reported to be young, with an average age of about 34

years. The bulk of SHGs, i.e. 80.5 per cent of them, are all female. 5 per cent of the SHGs are all

male, while the remaining is mixed. Though mixed groups are generally not preferred, out of a

fear that women may not be able to effectively participate in group activity, the survey results

show that such SHGs with members from both genders exist.

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In an ideal SHG, the members should have similar social and financial backgrounds. This

contributes not just to easier interaction of members, but also to smoother communication,

facilitating equal opportunity of self-expression for members. As far as the distribution of the

SHG members by caste is concerned, the percentage of SHGs with members from the SC/ST

category and OBCs was 6.67 per cent. The percentage of SHGs with only SC/ST members was

higher (23.3 per cent).

The justification of bank linkage is to provide financial services, especially to poor people who

are unable to get bank credit on their own and therefore, dependant on informal sources

including moneylenders to meet their urgent needs. In the present sample, a little more than 60

per cent of the sample SHGs had their entire, or at least the majority of membership from below

the poverty line. About 34 per cent of such SHGs have the bulk of their membership drawn from

non-poor families.

The data reflects that slightly more than 50 per cent of SHG members were farmers (27 per cent)

and agricultural labourers and about 22 per cent were non-agricultural labourers. About 13 per

cent of the SHG members were traders. A very small share of the sample was made up of

artisans and agricultural processors. This distribution of members by occupation was similar

across all three types of models with only slight variations.

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Financial Management practices by SHGsModel type 1 Model type 2 Model Type 3

(%)Maintenance of book of accounts of SHG

byA literate member 76 58 70

Representative of NGO 5 13 23Any other 15 20 17

None 4 9 0Maintenance of SHG passbook

A literate member 73 57 70Representative of NGO 5 10 23

Any other 20 32 17None 2 1 0

Frequency of updating of book of accountsRegular 82 86 91

Occasionally 7 6 6Rarely 11 8 3

Frequency of updating SHG passbookRegular 77 82 94

Occasionally 12 9 5Rarely 11 9 1

As the SHGs are involved in monetary transactions, they have to maintain and update a number

of documents. This is an integral part of the successful running of a SHG. Apart from

maintaining books of accounts, SHGs also maintain passbooks showing SHG transactions as

well as separate passbooks for all members. The table above summarizes the observation made

from the sample of SHGs interviewed under three models.

The books of accounts of SHGs were, to a considerable extent, maintained by literate members

in the group. This percentage was highest for Model type 1 SHGs (76 percent), and was

generally high for SHGs in Model type 2 (58 per cent). The same is true with regard to

maintenance of the SHG passbooks as well as passbooks of individual members of the SHGs. It

is also seen that in about 23 per cent or more of Model type 3 SHGs, a representative of the NGO

was responsible for maintenance of accounts and passbooks. As Model type 3 SHGs are formed

and financed through NGOs, it follows that frequently a representative is appointed to look after

financial management. A small percentage of SHGs did not maintain the SHG passbook (1 per

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cent). Generally a high percentage of the SHGs (>80 per cent) were seen to update the book of

accounts, SHG passbooks and the passbooks of members regularly.

Maintenance of the financial books under consideration followed the same pattern as the minutes

register. While it was common to see a literate member maintained the book of accounts and

members’ passbooks in some model and others tend to leave this work to a representative of the

NGO which is guided by the virtue of the foundation structure. In Orissa, nearly 2.5 per cent of

SHGs did not maintain the SHG passbooks, and another 7 per cent of SHGs did not maintain the

members’ passbooks. This indicates that the financial management of these SHGs needs

attention.

Source of funds & external borrowings for the SHGs

Percentage distribution of extborrowings& own funds of SHGs

Model type 1 Model type 2 Model Type 3(%)

SHG own fund 4 2 6Commercial bank 37 45 51

Regional Rural Bank 50 43 36Cooperative banks 7 6 2

Money lenders 1 2 1Others 1 2 4

SHGs facing problem in raising externalfunds

65 70 65

The SHGs use their own funds for internal lending among their members and generally charge

interest at the rate of 2 - 3 per cent per month on these lending. These rates are still lower than

that charged by moneylenders. Apart from this, some SHGs (e.g. SHGs consisting of members

only from SC/ST families, with all members from BPL families) also get subsidies from the

government depending on their loan repayment pattern, and these additional amounts of money

due to the subsidies also get added to the SHG funds. The three Model types of bank-linked

SHGs get additional loans from commercial banks, Regional Rural Banks (RRBs), NGOs etc.

It is seen that nearly 93 per cent of the loans disbursed to members by these SHGs came from

loans taken by SHGs from banks and only 5 per cent came from SHGs own funds while the rest

were from miscellaneous sources. The increased amount of credit available to the members has

25

helped them take concrete steps in investing for income generating schemes. This has had a

cascading effect where, the returns from investments may then be saved and help in the timely

repayment of loans, which in turn helps in getting more loans from the banks.

However, 69 per cent of the SHGs have reported problems in raising external funds. These were

seen most in Uttar Pradesh, Maharashtra and Orissa. The type of problems faced by the SHGs

includes lack of faith in SHGs among the lending agencies, lengthy procedures, requirements of

a number of documents for the granting of loans and the like.

Organizational Sustainability of SHG

Model type 1 Model type 2 Model Type 3(%)

SHGs reporting dropout of members 42 41 55Dropout rate 9 8 8Reasons for members dropping out

Migration 22 33 27Illness 6 8 11

Defaulter 20 15 17others 52 44 45

Members withdrawing due to nonavailability of loan amount demanded

20 10 20

Joining of new members 20 20 60

For a SHG to run successfully on a continuous basis, it should be stable and financially viable. It

is for this reason that SHGs generally should have members from similar socio- economic status

so that there is no one-upmanship. They should also agree about savings and repayments. A

number of SHGs are seen to break up because of lack of trust among members and want of co-

ordination. The very fact that the sample SHGs, despite the diversity in their composition and

poverty levels, continue to operate and provide financial services for an average of 5.3 years

after getting bank-linked, goes a long way to prove their organizational sustainability. In the

above chart organizational sustainability has been examined by observing the drop-out rates of

the members and the reasons for such dropouts.

Approximately 40 per cent & above of the sample SHGs have reported drop out by members

since establishment. This percentage is slightly higher in Model type 3 SHGs in comparison to

Models 1 and 2 where the percentages are almost similar. The dropout rate has worked out to be

26

8.2 per cent or an average of about one person per group. There were only slight variations

among the three Model types of bank-linked SHGs.

Nearly 27 per cent of the drop outs were caused by migration and about 8 per cent by illnesses,

the reasons that were unavoidable. The other main reason appeared to be members defaulting to

make savings/repayments and this made up for about 15 per cent. Many persons become

members of SHGs because of the lure of bank loans available at a lower interest rate than loans

from moneylenders. It is seen that about 17 per cent of SHGs have reported withdrawal of

members due to reasons of non-availability of loan. However, this problem of members dropping

out has not assumed great importance, since 33 per cent of the SHGs have also reported new

members joining up.

Financial Sustainability of SHG

Model type 1 Model type 2 Model Type3

Average

(%)SHGs as per % of loan recovery

90-100% 83 73 50 68.6666750 - 90% 24 24 46 31.33333

<50% 3 13 4 6.666667Causes of Non- repayment by members 0

Natural calamity 40 20 20 26.66667Inadequate peer pressure 15 21 9 15

Health / Illness problem 12 20 45 25.66667Others 23 39 26 29.33333

The financial sustainability of the SHGs depends mainly on the repayment patterns of SHGs. It is

only when SHGs make timely repayment to banks that they get access to bigger loans. This, in

turn, depends on the repayment pattern of the individual members. It has already been seen that

some SHGs have even felt the need to impose penal interest from defaulting members fearing

that peer pressure alone is not enough for members to make timely repayment. The chart above

summarizes the survey results on financial sustainability of the SHGs and the causes for non-

repayment of loans by members.

The percentage distribution of SHGs by percentage of loan recovery reveals that 69 per cent of

the sample SHGs has reported 100 per cent repayment by members. Among the various models

27

in Model type 1, 83 per cent of SHGs have reported 100 per cent repayment by members, Model

type 2-73 per cent, but Model type 3 only 50 per cent have reported full recovery.

About 27 per cent of the sample SHGs (especially high with 40 per cent in Model type 1 SHGs)

have reported natural calamity as the reason for non-repayment of loans. This is understandable

since many of the members do take loans for agricultural purposes. The case studies conducted

in Orissa revealed that utilizing the loan amount for cotton farming turned out to be a bad

investment due to drought conditions and the members were unable to return the loan promptly.

[*All the data collected using the above mentioned parameters are done through

interview with the SHG members under different models]

SHG – SHPI BondageGenerally, SHGs are promoted by banks, NGOs, government departments, other institutions and

these are called the Self Help Promoting Institutions (SHPIs). These SHPIs get the members

together, explain and advise about formation and functioning of the groups, help them to form

rules and regulations and in the training of group leaders, teach them simple accounting

procedures and generally see to it that after a time the members would be able to manage the

SHGs themselves. Often, NGOs train the members in some income generating activity.

More than half the sample SHGs were satisfied with the information provided to them by SHPIs

on the various aspects important for group establishment. “Especially positive” was generally the

assessment of Model type 2 groups, whereas Model type 1 groups were generally expressed

“below average” levels of satisfaction about the support received from the SHPI. Over the past

year, SHPI staff had visited SHGs around four times. Model type 2 SHGs were visited more

often (6) and the other two Model types at lower intervals (2 and 4). About 60 per cent of the

SHGs (60 per cent of Model type 2 SHGs) were satisfied with this. On an average,

representatives of SHGs had visited their respective SHPIs around 8 times in a year.

The SHGs also came up with some suggestions for useful changes in the activities of SHPIs.

Most often, it was mentioned that SHPIs should devote more time for training and discussions at

the group formation stage, followed by the allocation of more time for group discussions and

addressing questions. The presence of qualified staff for extended lengths of time at the group

formation stage goes a long way to improve the competence of group facilitators in the relevant

subjects.

28

Case StudyThe main objective of the study is to assess the impact of SBLP on the welfare of the

sustainability SHG as a group and of members due to their participation in the programme. It

also analyses the sustainability of SHGs and impediments they face, if any, in their development.

The experience with some SHGs showed that when a group of like-minded individuals come

together, they could venture into group activities, as unity and common purpose provide strength.

As a group they could access larger loans, divide the work, share training facilities, pool their

expertise and avail of other facilities like the village property.

Tent House SHGThis is a SHG, which has ventured into various group activities. Although it has also been

successful in taking up the dealership of kerosene distribution, it is known more for its tent house

business. By getting into the tent house business, these women from Orissa have ventured into an

activity that was hitherto a male domain.

Budharajan SHG, popularly known as “Tent House SHG”, is located in Pandaloi village in

Rengali block of Sambalpur district of Orissa. This SHG was formed in 2001 by 10 women who

were motivated by Anganwadi workers attached to the Integrated Child Development Services

(ICDS) scheme. All of them belonged to OBC communities and were from BPL families. Like

many others, of the SHGs, the Budharajan SHG was also formed by the women with the

intention of setting up some micro enterprise for supplementing their income in order to reduce

their dependence on moneylenders.

After the formation of the SHG, an account was opened in the Rengali branch of the State Bank

of India. Each member started saving Rs 40 per month and met once a month. Any member who

failed to pay the amount within a month could pay up in the following month, albeit with a fine

of Rs 2. They also had the facility to avail of personal loans from the group fund at 3 per cent per

month interest. After six months of deposit account, the bank sanctioned the first loan of Rs

25,000 in 2002. This amount was shared equally by all the members for starting some business

activities. Of the 10 members, six of them utilized the money for vegetable cultivation and the

29

rest used the amount to trade in moori (puffed rice), chana, groundnuts, etc. All the members

were prompt in repaying their loans to the SHG.

The first group activity of this SHG was kerosene dealership, which the SHG managed to get

with the active initiative of the CDPO (Child Development Project Officer), under the ICDS

scheme. Since the earlier loan was promptly repaid, the SHG did not have any difficulty in

getting a loan of Rs 10,000 from the bank for making the initial deposit for the dealership. The

SHG is running this business successfully and the villagers are quite satisfied with the SHG. The

villagers were unhappy with the previous dealer since they were not getting their quota of

kerosene due to irregularities in the operation. The SHG is getting a monthly commission of Rs

500 for the dealership and out of a Rs 10,000 loan that the group had taken from the bank for the

purpose, Rs 6,000 has already been paid back.

Thanks to the success of the kerosene dealership and the promptness with which the SHG has

been repaying loans, Budharajan SHG has recently been sanctioned a loan of Rs 5,00,000 by the

bank. From this amount, these highly enterprising women have utilised Rs 2,98,000 and have

started a tent house business. There was no competition for them in the area. The business was

started on the advice of one of the villagers who had earlier worked in a tent house. The women

collectively considered the proposal and decided to take up the activity. Along with the tent

business, the SHG members decided to take up cooking activities for further augmenting their

earnings. The loan was utilised for purchasing utensils, chairs, durris, mats, mike set, sound box,

stage and altar decorative items, mattress, pillows, roof top tent, water drum, pots and pans and

aluminium discs that are required for the business.

In order to attract customers, the SHG distributed leaflets and pasted posters at different places

within and around their village. It did brisk business during the marriage season and till now they

have earned a profit of about Rs 13,000. It is very rare for women to take up such activities and

register success too. Now, they have acquired fame in the area as the “Tent House SHG”.

This highly motivated group of 10 women does not seem to be content with these activities.

They plan to undertake some more projects in the near future. They are planning to take up

pisciculture activity as the next venture. There are three large ponds in their village and with the

consent of the villagers, one of the ponds is proposed to be utilized for this purpose. However, to

take up this activity, they would need some training. Another, even more ambitious plan of the

SHG is to take to road construction. The village has been sanctioned with Rs 5,00,000 by the

30

Block for road construction and allied activities. Since there were complaints regarding the

quality of the work of the contractor who was engaged for this work, the concerned authorities

have cancelled his contract. As a result, the work has been stopped and now the Budhrajan SHG

is contemplating taking up construction activity, which could be a very interesting experiment.

The members also want to manufacture machine-made leaf plates, but due to the paucity of

supply of the required quantity of leaves in the area, due to deforestation, this activity may not be

forthcoming. Some members are engaged in rolling beedis. In a day they roll about 1,000 beedis,

earning Rs 40.

The group has also taken up the social responsibility of creating awareness about health issues.

Due to the efforts of the SHG, the leprosy and TB patients have been identified and sent for

medical tests and treatment. Members have motivated people not to treat these patients as social

outcastes but help them get treatment. The SHG members are also taking interest in the

immunization programmes and want to ensure that all the children in the village are immunized.

The members of the Budharajan SHG feel that because of their group, they have been

empowered and have gained the self-confidence to interact also with government authorities.

The SHG has helped in uniting the members to take up thrift and credit activities and in starting

various business ventures. For all these activities the women now are getting support from their

husbands and other family members. They are now more respected in their households and get

involved in the household decision making process.

It may be concluded here that this SHG has been very successful not only due to the ability and

motivation of the women, but also due to the fact that they carefully chose their activities.

Firstly, they got into kerosene dealership, which did not require much marketing skill, but

assured them of a steady commission. The second venture, i.e. the tent house business was

chosen because there was no other tent house in the nearby vicinity and there was a demand for

it. This group belongs to Model type 3 of the SHG Bank Linkage Programme where the NGO is

also acting as a financial intermediary. It is understood from the discussion with the SHG that the

NGO has also been providing adequate support since inception in various matters relating to the

running of the SHG.

31

Conclusion of Case studyGenerally, it was noticed that by joining a SHG, the members had not only improved their

financial status, but also gained a lot in terms of financial skills, communication abilities etc.

Moreover, joining SHGs has also helped in all-round personality development of the members.

The main strength of SBLP observed through the case studies is that membership and

participation in the group is socially and to a reasonable extent economically empowering. There

are success stories of group enterprises as well, but those are not very remarkable. Economic

empowerment, together with higher level of confidence, is the more visible impact of SBLP inter

alia.

Conclusion of the StudyThe results of the analysis suggest that SHGs have been performing better not only as providers

of financial services in terms of augmenting savings, lending and ensuring loan recovery, but

also in terms of awareness creation and empowerment. They also lead to the development of

human resources and management skills, leadership and motivation.

SHGs reported better performance both in financial as well as in empowerment aspects. One of

the most significant goals of SBLP is reduction of poverty viz., through outreaching financial

resources in the rural areas. In this regard, the study found that in the pre-SHG situation, 58.3 per

cent households were below the poverty line.

The findings on social empowerment indicate that more than 90 per cent of households in bank-

linked groups reported that social empowerment of women has increased over time since joining

the SHG movement. It indicates that SBLP has helped the rural poor, particularly women, to

achieve social rights. Further, we found that more than 70 per cent of women respondents

reported improvements or even significant improvements in their ability to face problems on

health and financial crisis aspects and about 63 per cent reported the aspect of similar

improvement in terms of family disputes. The study also found that the participation of women

members in household decision making processes has considerably improved.

32

33

Exhibit-1Interview conducted at Sisupalgarh Cooperative bankNo of Sample SHGs 5Avg age of SHG 4 yrsSHG Promoted by NGO/GOVT SelfAvg members per SHG 15Avg dist from PACS 5 - 10 kmsSHGs in federation or cluster All

OUTREACHVillage household covered underSHG

20%

Functionally literate SHGs 80-90%% of SHG members

women 100%SC nilST nil

Rate of dropouts per SHG 5-AprFINANCIAL SUSTAINABILITY

Record keeping by secretary/presidentothers members

Passbook updation in every 5 monthsAvg monthly savings per member 50-100/- per monthSHGs with external loan 5SHGs with outstanding loan 1External loan

cumulative 75000outstanding 15000

Interest rate per annum 48%Avg per month interest 3-4 /-SHG lending to nonmembers 1

rate charged per annum 48%

FINANCIAL VALUESHGs with current profit 4Current return on asset nilOverdues at group level nilDefunct groups nil

34

Exhibit-2

Format for profiling SHG

Modeltype 1

Modeltype 2

Model Type3

Avg no of membersAvg no of yraes of Bank Linkage% distribution of SHG by the Noof Bank Linkage

3-5 years>5 years

totalAvg distance from bank (kms)Avg distance from nearest town (kms)SHG networking with othersinto a federation

Format for External borrowings

Percentage distribution of extborrowings& own funds of SHGs

Model type 1 Model type 2 Model Type 3(%)

SHG own fundCommercial bank

Regional Rural BankCooperative banks

Money lendersOthers

SHGs facing problem in raising externalfunds

35

Exhibit-3

Format for distribution of sample SHGModel type 1 Model type 2 Model Type 3

AVG age of members (years)Distribution of SHG as per Sex (%)

All femaleAll male

BothTotal

Distribution of SHG by caste of members (%)only SC/ST

only OBCSC/ ST & OBC

SC/ ST ,OBC & GeneralTotal

Distribution of SHG by literacy level (%)All Illiterate

Up to 50% Literate> 50% Literate

TotalDistribution of SHG by economic status of

members (%)All / Majority BPLAll / Majority APL

Equal No of APL & BPLTotal

Distribution of members by occupation (%)FarmersArtisansTraders

Agro processorsAgricultural labours

OthersTotal

36

References1. Berkhof, A. (2003), Microfinance in Rural India: Linking Self-Help Groups to

Cooperative Banks

2. Primary data collected

3. http://www.oscb.coop/network

4. Hannover, W. (2005), “Impact of Microfinance Linkage Banking in India on the

Millenium Development goals (MDG): Summary of Major results from existing studies”,

GTZ, and NABARD.

5. Adhikar an MFI, Khandagiri Bhubaneswar

6. http://www.mixmarket.org/

7. NABARD 2007-08: Progress of SHG-Bank Linkage in India

8. HDFC and SBI Bank [Blank Performa measuring progress under SHG linkage attached

as Annexure ]

9. Ghate, Prabhu (2006), “Micro Finance in India: A State of the Sector Report’, Ford

Foundation.Delhi.

10. Ghate, Prabhu (2006): ‘Microfinance in India: A State of the Sector Report’ Ford

Foundation. Delhi

11. SHG check list/ parameters based on details obtained from commercial banks

37

Microfinance Models – An Overview

1. Cooperative Model [model 1]:The very term ‘cooperative’ suggests the coming together of individuals who exhibit a sense ofcooperation towards fulfilling a common goal. A Cooperative or a Cooperative Society,therefore, is nothing but an association of persons united voluntarily to meet their commoneconomic, social and cultural needs through jointly owned and democratically controlledenterprise.It is by now a known fact that SHG linkage has been of great benefit to commercial and regionalrural banks as well as to SHG members. Many of these banks, particularly the Regional Rural Banks(RRBs), were deeply distressed, and SHG linkage has played an important part in their return toprofitability. The problems of the co-operative banks and their associated PACS, however, are morefundamental. Many are defunct and totally in-operative, others are operating only on a part-timebasis, being ineligible for NABARD refinance and are able to lend only from current recoveries.

2. SHG Bank linkage Model [Model 2]The predominant model in the Indian microfinance context continues to be the SHG–banklinkage model that accounts for nearly 20 million clients. Under this model, the self-helppromoting institution (SHPI), usually a non-governmental organization (NGO), helps groups of15–20 individuals through an incubation period after which time they are linked to banks. Thebank lends to the groups after the incubation period, and this linkage may be single- or multi-period. The SHPI typically receives no, or below cost, consideration either from the bank or theclients for the function of group promotion. They meet this expense out of external grant sources.The cost estimates for this vary from $35–250 per group. Once the groups have been linked tothe bank, the SHPI often supervises the loan portfolio.Since the SHPI in this case does not play the role of a financial intermediary, it does not have toallocate capital against the lending under this programme. In most cases, the SHPIs in thisprogramme are trusts or societies that have no desire to take credit risk. Capital needs to beallocated only by the bank, which bears the entire credit risk.

3. Financial Intermediation Model [Model 3]In this model, the MFI borrows from commercial sources and on-lends to clients(groups/individuals). This is a recent shift that has been facilitated in part by the participation ofcommercial banks in the microfinance sector and in part by the lack of resource options forgrowing MFIs, given that they cannot take deposits and face limited availability of grant funds.Most MFIs in India started operations with grants and concessional loans and gradually made thetransition to commercial funding. Here, capital allocation happens at two stages for the sameportfolio that is financed. An illustration will make this clearer.If an MFI estimates a loanrequirement of, say, $250 000 for its clients, it approaches a bank for that amount. The bankviews it as a lending ‘to the MFI’ (organization-based lending), not finance for the underlyingpool of borrowers (asset-based lending). Accordingly, pricing is a function of the rating of theMFI.

38

List of Abbreviations

DCCB ------------------------------- District Central Cooperative Bank

LAMPS------------------------------ Large Area Multipurpose Societies

MFI ---------------------------------- Microfinance Institute.

OSCB ------------------------------- Orissa State Cooperative Bank

PACS -------------------------------- Primary Agriculture Cooperative Societies

SHG ---------------------------------- Self Help Group

SHPI --------------------------------- Self Help Group Promoting Institutions

SBLP--------------------------------- SHG bank Linkage Programme.