Self-help Groups as Financial Intermediaries in India ... - Sa-Dhan

the SHG from banks starts from parity with SHG savings and can increase to 8 times thelevel of SHG savings. There are two interlinked parts of the SHG financial operations: (i) therotation of its own savings and (ii) on-lending of external funds.The rationale and growing enthusiasm for SHGs among bankers is primarily due to thepossibility of externalisation of the transaction costs of small loans and ensured recoveriesthrough the operation of peer pressure among group members.Loans to SHGs are available at 12 % per annum reducing balance from banks 9 . The SHGonlends these funds to its members at 18 to 36% with 24% as the most commonly reportedrate. The savings of the group and the operational profits of financial intermediation areavailable for rotation among the members. The SHGs' own capital or savings fund is usuallydeployed for lending to members for short-term and emergency needs. The savings fundeffectively also acts as the means for servicing the bank loan in the event of insufficientrecoveries from group members.Many NGOs and government programmes also provide a revolving fund grant of Rs. 10,000to Rs. 25,000 to supplement the savings of the SHGs 10 . This is often recorded as an interestfreeloan to the SHG. Though the objective is to provide supplementary resources to kickstartthe group’s internal lending the usual practice among most SHGs is to divide the grantamong members, instead of using it for credit rotation 11 . Opinion among practitioners nowdoes not generally favour such grants as they are not a factor in ensuring sustainability ofSHG operations and can instead raise expectations of further grants and handouts..HCSSC and PRADAN are the two study NGOs committed to bank linkage, the mainstreammodel adopted by over 2000 NGOs. The other five NGOs have developed models involvingSHG federations and MFIs and alternative sources of financial services to the SHGs 12 . Theseare discussed in the following sub-sections. The case made out by HCCSC and PRADAN forcontinued bank linkage is that given the extensive outreach of the Indian banking system, it ismore important and efficient to bring the poor into the fold of the existing mainstreambanking than to promote high cost delivery of financial services through (often) unregulatedintermediaries 13 .3.2 SHGs/Federations of SHGs Linked to Various Types of MFIsDespite the many attractions of the SHG bank linkage model, the considerable reductions intransaction costs both for bankers and borrowers and the further possibilities of “graduation”9 While the interest rate cap on loans to SHGs has been removed since April 1999, banks continue to charge thesame rates as under the earlier regulated regime. With a downward movement in the interest rate regime, noincrease in lending rates of SHGs can be expected in the foreseeable future. Indeed, the NABARD refinance rateof 7.5% to banks is now comparable with rates paid by banks on long-term deposits. It remains to be seen if theunrestricted or “free” interest rates of banks and MFIs lending to SHGs with NABARD and SIDBI refinance areflexible downwards, as indeed the refinance rate.10 For example, DWCRA (now SGSY), SAPAP and CASHE projects and several MF programmes of NGOssupported by bilateral donors.11 See, for example, APMAS SHG study findings for Cuddapah district, December 2001 (www.apmas.org).12 HCSSC and PRADAN (as also MYRADA) have also promoted federations in village clusters but these arenot engaged in financial intermediation.13 These NGOs are working in Bihar and Jharkhand some of the poorest and remote areas of the country wherethe local economy is particularly undeveloped. The demand for credit of SHG members is low as compared tothat of SHGs in other states.14