role of self help groups in financial inclusion

7/30/2019 Role of Self Help Groups in Financial Inclusion

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Paper on

ROLE OF SELF HELP GROUPS IN FINANCIAL INCLUSION

By

Arpita Awasthi

MBAII Trimester

Section b

Roll - 1225112204


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INTRODUCTION:

Financial inclusion:

Financial inclusion broadly means the provision of affordable financial services viz. access to

payment and remittances facilities, savings, loans and insurance service by the formal financial

systems to those who are tend to be excluded.

Financial inclusion is defined as as access to financial services for every person for enabling him

enabling him to

1. Manage his money on day to day basis, effectively, securely and confidently.2. Plan for future and cope with financial pressure in short term with the help of long term

funds.

3. Deal effectively with financial distress like long term sickness, unemployment, or familybreakdown by availing money management advice and insurance.

Financial inclusion is not only limited to opening of banks accounts but also the banking

education to make use of banking facilities and product to better manage their money and

capabilities.

Need for financial inclusion:

In India 60% of the population do not have a bank account while about 37% of adults in indiaalso do not use financial services.

The primary reason being illiteracy, irregular income, availability of financial education and non

availability of financial services in close proximity etc.

Financial exclusion results into big loss for the country in terms of growth as big chunk of

population cannot avail benefits of financial services.

Major challenges in financial inclusion:

Absence of reach and coverage due to inaccessible terrain. Lack of infrastructure, power, connectivity. Limited customer base and low income saving makes it unattractive for banks to invest. Non availability of low cost banking solution. Getting money from local money lender is easier. No identity of individuals makes KYC difficult. Non availability of collateral for loans.


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Self help groups: an overview

We know that the branch network and banking education are the most important variables

especially for credits inclusions and further women are least included in terms of even saving

accounts. Therefore bank linked approach like self help groups and microfinance institutions

adds to the existing banking network and can play key role in financial inclusion.

Self- Help Groups approach was introduced as an innovative credit channel in 1992 to link poor

people with bank credit.

SHGs have varied origins, mostly as part of integrated development programmes run by NGOs with

donor support. The major programme involving financial intermediation by SHGs is the SHG-bank

Linkage Programme. This Programme was launched in 1992 by National Bank for Agriculture and

Rural Development (NABARD), the apex bank for rural development in India. By March 2002, the

programme covered 7.8 million families with 90 per cent women members. On-time repayment of

loans was over 95% for banks participating in the programme. It also involved 2,155 non-

government organizationsApart from NABARD, about half a dozen other apex bodies or wholesalers provide loans to financial

intermediaries for on-lending to SHGs. These include the Small Industries Development Bank of

India (SIDBI), Rashtriya Mahila Kosh (RMK), Housing and Urban Development Corporation

(HUDCO), Housing Development Finance Corporation (HDFC) and Friends of Womens WorldBanking (FWWB). Donors and banks, including Rabobank, also provide grants and loans to

microfinance institutions (MFIs) for on-lending to SHGs and federations of SHGs.

Development of self help group:

Linking SHGs directly to banks is the basic model in which an SHG, promoted by an NGO or other

institution, can access a multiple of its savings in the form of loan funds or a cash credit limit fromthe local rural bank. The SHG onlends the funds it accesses from banks to its members. The bank

linkage model a savings-led model, with a minimum savings period of 6 months prior to the

availability of bank credit. The quantum of credit available to SHGs starts from parity with savings

and can increase to eight times the level of SHG savings.

The SHG-bank linkage model provides the cheapest and most direct source of funds. However, this

has to be set against the low volume of funds that available through this channel in view of the

linkage of credit with SHG savings. Further, the SHG is not necessarily the appropriate unit for

organising a host of other community-based financial and non-financial services. Many leading

NGOs have formed federations of SHGs for self-management by members and scaling up ofdevelopment activities and to enable access to increased resources from funding institutions. These

include linkage to the parent NGO-MFI, linkage with external MFIs, community ownership of a

Non-Banking Finance Company (NBFC) and SHGs being reconstituted into mutually aided credit

and thrift cooperatives. Federations of SHGs are now in a position to access funds even from

wholesale MFIs.


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Self help group promotions:

Estimates of costs of SHG promotion have been undertaken for 10 NGOs/projects along with a

discussion of the factors involved. A distinction is made between four major types of SHG models:(i) the minimalist approach of banks and NBFCs promoting microfinance SHGs;(ii) large project initiatives related to savings and credit, capacity building an womensempowerment.

(iii) Leading NGOs adopting a microfinance plus approach focusing on livelihoods development;

and

(iv) a mixed category of SHGs formed through local initiatives, including SHGs promoted by the

district development agency.

Though inputs and contexts differ across the country, rough benchmarks for cost of promotion of

SHGs have been proposed in the study. The available data suggests a convergence of cost ofpromotion per SHG at around Rs. 4,000 for the minimalist model of pure bank linkage and Rs.

10,000 to Rs. 12,000 within a more comprehensive empowerment framework. The cost of promotion

of SHGs appears generally to be in line with the scale of support provided by various government

agencies. Necessary adjustments would, however, have to be made for particular regional, social and

poverty contexts.

Some other benchmarks that can be suggested:

(i) period of support3 to 5 years;(ii) clients per field worker400 or 20 to 25 groups;(iii) minimum scale of intervention to justify costs incurred150 to 200 groups, or 2,500 to

3,000 members, in a geographically compact area.

Sustainability of self help groups:

SHG income, though small, is matched by an extremely low cost of operations thus financial

viability at the level of the SHGs is currently not an issue.

Even best practice NGOs generally place only about 50% of groups in the highest category of

performance, with 10-20% failing to take off. SHGs linked to banks do not appear thus far to be able

to easily graduate to (larger) individual loans under the banks normal lending programme hence thequality and institutional sustainability of the SHGs promoted is more open to question

Nevertheless, SHGs linked to banks are emerging as a low cost option to mainstream delivery

systems of financial services for the poor. At the same time the evidence suggests MFIs lending to

SHGs realize a poor return on their portfolio.Where SHGs have been formed into federations, the operational self-sufficiency of the intermediary

institutions has yet to be demonstrated. The type of emerging institutions and their development is

constrained by the existing regulatory framework for MF and the legal forms available in each state.

The phase-out of NGOs from areas where SHGs have been federated has proved to be difficult in

practice. The leadership and management of most SHG federations and cooperatives continue to be

in the hands of NGO staff. The development of the capacity of these institutions for self-management

remains an important issue.


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Impact of SHG based microfinance programmes:

A major NABARD impact evaluation covering 560 members of 223 SHGs linked to banks in 11

states showed that SHG members realized major increases in assets, income and employment. Also,

women members were found to have become more assertive in confronting social evils and problem

situations. Nearly half the poor member households had crossed the poverty line.

Various other reviews and evaluations of SHG programmes suggest that SHGs have

provided access to credit to their members;

helped to promote savings and yielded moderate economic benefits reduced the dependence on moneylenders; and Resulted in empowerment benefits to women.

On the other hand reports suggest that:

Contrary to the vision for development, SHG are generally not composed of mainly thepoorest of families.

There is greater evidence of social empowerment rather than significant and consistenteconomic impacts.

Financial skills of group members have not developed as planned.

CONCLUSION:

Preliminary findings from an in-depth impact evaluation of a non-SHG MF model show that half the

families covered were found to be no longer poor. A significant discovery was that the clients used as

many as 17 different paths out of poverty as represented by different combinations of activities. I t

appears that proving impact using state of the art techniques has been found necessary for MFIs

directly involved in lending operations in order to access funds for their MF operations. The same

pressure is not felt by SHG facilitators.

It is clear that substantial capacity building is necessary at NGO and SHG level to undertake the

study of program effectiveness. As additional layers of primary and secondary federation are created,roles and responsibilities of various agents, MIS requirements and training inputs have to be planned

and provided for these organizations as well.


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References:http://www.business-standard.com/india/news/financial-inclusion-india-scores-poorlyglobal-

stage/484232/

www.edarural.com/documents/SHG-Study/Executive-Summary.pdf

www.nabard.org/dept_mcid/shgs.asp

selfhelpgroups.in/

role of self help groups in financial inclusion

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