The first step towards setting up selfhelp groups (SHGs) was taken by Mysore Resettlement and Development Agency (MYRADA), which built upon rural chit funds and informal lending networks to evolve a credit management group. After a pilot project with this NGO in 1991-92, National Bank for Agriculture and Rural Development (NABARD) worked actively to frame the legal and financial structure for SHGs and induce bankers to develop and adopt a fresh lending strategy. On the basis of the recommendations of the Reserve Bank of India (RBI) working group set up in 1994, procedures for dealing with the informal legal SHG structure were then firmed up in 1996. Several NGOs were also influenced by the success of the Bangladeshi ‘grameen’ bank concept of Mohammed Yunus.

Growth and Progress of SHGs

Since SHGs were formed to sidestep the dangers inherent in politicised and overregulated cooperatives, they are based on informal and non-statutory organisational mechanisms. But, lack of a reliable legal registration and monitoring system has its own shortfalls. For a start, it is not possible to obtain an accurate figure of the number of SHGs since this methodology has been used by various departments and agencies under domestic and externally aided projects to deliver the benefits of government programmes. NABARD reports figures of groups that have been linked to banks under its own schemes. The department of rural development depends on what is reported by District Rural Development Agency (DRDAs) and zilla panchayats but there is no formal registration system for SHGs and there is substantial overlapping among members of groups as well as double counting of groups under programmes of different departments. This even leads to facilitators used to form groups using the same group to claim fund releases under more than one scheme.

Figures usually cited while talking of SHGs are those indicated by NABARD; at present, the figure is 22.39 lakhs of which

10.05 lakhs are reported to be credit-linked with banks. The department of rural development obtains returns from states and the latest figure reported indicates a larger figure of 23.31 lakh groups of which 3.32 lakhs have taken up economic activity. In a paper prepared by Aloysius Fernandes of MYRADA, the estimated figure for SHGs for March 2006 is three million, of which

Economic and Political Weekly February 3, 2007

government functionaries to tell them what they should do or follow their own judgment and take up an activity with no access to external expertise or guidance. As a result, all kinds of training programmes are on offer but the number of poor households which have benefited from them for improving their income on a sustainable basis is limited.

Professional assessment of demand and strategising suitably for the short and long terms by involving trained persons is essential before adopting a cluster approach. There must also be much greater emphasis on guidance and counselling so that families are able to choose the skills they need and the activities they would like to undertake. A menu of multiple activities should be available and flexibility to use group and bank finance to meet perceived needs – for consumption, production, housing and the rest.

provides a currency credit (CC) limit mechanism for small loans.

which do not affect the initiative and flexibility of trained banking personnel.

One solution is to tie up government business with banks to their achieving an overall limit of lending to poorer households leaving selection of projects to internal professional strategies of different banks. The quality of lending done could be assessed through some kind of occasional monitoring which evaluates on a sample basis whether real choices are indeed available to such clients. Distortions and perversities arising out of subsidy based lending can be reduced by phasing out subsidy in the case of viable projects, for which the real issue today is ready access to the required credit level.

At present, subsidy is the mechanism used to make self employment projects for poorer households viable. However, this also leads to promotion of unviable projects which will never be sustainable once the subsidy ceases. A better use of budgetary support is to focus on provision of infrastructure,marketing advice, skill training and the like. The government machinery should also concentrate on supporting group formation and helping to identify viable activities for different areas (using NGOs, professionals, etc). This will obviate the need for the suboptimal strategy of subsidy linked lending, which has developed into a complex web in which front or back ended transfers are made from government accounts to beneficiary accounts, very often with little benefit in terms of access to the required level of finance at a fair price.

Use of NGOs and ‘Facilitators’

Group formation and support are done through facilitators working generally through NGOs and funds are provided in different schemes for different stages of activity. Detection of natural groups which can sustain themselves on a platform of trust and mutual dependence is not something that should be done on a routine basis to fulfil targets. For this reason, no targets were fixed under SGSY in early years of the programme.

Selection of NGOs and facilitators with aptitude for group formation and support is a difficult task. A detailed process has been laid down for this and there is scope for certification and rating of NGOs through Council for Advancement of People’s Action and Rural Technology (CAPART) or a similar organisation. The original intention was to use already existing voluntary organisations formed for philanthrophic

Economic and Political Weekly February 3, 2007 purposes and engaged in different areas of social work to mobilise SHGs, train and support them. But, large-scale recourse to NGOs for group formation under various departmental schemes has generated perverse effects; it has itself led to the formation of several voluntary organisations whose credentials and commitment are not always satisfactory. Facilitators selected by such bodies go through the process of group formation in a mechanical and routine fashion purely to claim government handouts and meet targets. It has become difficult to distinguish self-motivated and professionally sound NGOs from those which have come into existence purely to respond to government programmes. There is a need to use NGOs who have a purpose of their own and largely rely on activities outside government programmes for group formation.

Towards Sustainable SHGs

A major handicap of the informal structure of SHGs is the absence of a good auditing and maintenance mechanism. The entire thrust is on formation and bank linkage. Unfortunately, several groups, particularly those which are formed hastily and artificially, receive little attention for continued activity once government handouts for group formation and training are drawn by facilitators. Hence, they tend to stop functioning after some time, which implies that hard earned savings of group members fall into the hands of the last set of borrowers and are then not recovered. The need for inspection and audit cannot be denied even where groups have only mobilised their own savings and have not yet accessed bank finance. SHG federations could do the audit or facilitators themselves could be trained and supervised for the purpose.

The central issue of exclusion of poor households from the formal credit network lies within the banking community, in attitudes which have given rise to procedures that do not fit the needs of poorer borrowers. To modify them, training is essential all down the chain, from policy-makers who lay down formal and informal performance appraisal networks and create the institutional ethos of a bank to rural branch managers who deal directly with smaller clients. Skills for assessing the viability of small rural projects and adopting the appropriate perspective for handling poor households must be imparted and incentivised for bankers in mainstream training programmes not merely in programmes run for “priority sector” or “rural” lending. This could cover mandatory visits and attachments to professionally run microfinance institutions (the Bangladesh Grameen Bank) and NGOs with wide experience of microcredit, Rural Development and Self Employment Training Institute (RUDSETTI, MYRADA, etc), village stays and hands on experience of exclusion from the formal banking structure, projects and seminars focused on looking at rural user perspectives about bankers, etc. The experience of bankers who have worked within a different perspective as in the case of RUDSETTI in Karnataka proves that it is possible for the same banking fraternity to promote and fund poor households successfully.

Finally, there is the all-important question of cost of credit. The argument that availability, not cost of credit, is the issue is only partially true. Widespread acceptance of this belief has resulted in a situation in which credit availability has been substantially improved through SHGs but little effort has been made to tackle the issue of interest rates taken by the final user. An unfortunate outcome of the campaign to promote large-scale lending through SHGs without essential modification in attitudes of bankers to lending to small borrowers is the multiplication of intermediary levels in the lending process with each tier adding its mark up to the credit cost.

SHGs themselves are rarely the final borrowers; this happens only when a group activity is taken up and profits shared by all members. A more common situation is that of a SHG on lending to members. Groups are rarely trained in the art of modulating the onlending rate to cater to different requirements of members; there is for example hardly any rate differentiation between production and consumption loans. Bankers are now also taking the easy route of lending not just to SHGs but also to micro credit institutions which then lend to SHGs, not to their members. As a consequence, the final rate at which the poor household borrows is often between 24 per cent and 30 per cent, which is only slightly lower than the prevailing informal lending rate. Such high cost lending can hardly be expected to promote sustainable productive activity.

The pity is that multi-tiered lending is both inefficient and unnecessary. It is easily possible to structure methods which provide for direct lending from banks to individual borrowers using the SHGs to which they belong as guarantors and facilitators charging a much lower guarantee or transaction commission for maintaining records and organising repayment. NGOs of various kinds should operate as facilitators, trainers and the like at a fixed cost without contributing their mite to increasing the onlending rate for the ultimate borrower. Much more would be done in this area if increasing the coverage of formal sector lending becomes a mainstream objective of the banking sector.

EPW

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