The credit shall be granted after savings not before that. Savings are to come first: no credit will be granted by the SHG without savings by the individual members of the SHG. These savings are to serve as partial collateral for their loans.

Self Help Groups should hold regular meetings. It can be weekly, fortnightly, and monthly. In case of failure to do so, a fine may be imposed.

Maintenance of financial and other records should be properly done. The books should give the details of number of meetings held, decision taken in meetings, amount of savings of members, credit availed, repayments.

There should be election or nomination of leaders and they should be rotated periodically.

Rate of interest on which loan will be given to the member will be decided by the group.

Group liability and peer pressure act as collateral.

All the initiatives for the management of finance are undertyaken vy the poor at the micro-level (group ) level itself.

funds are mobilised and credit is extended to members by other members themselves.

Selection of borrowers for availing microcredit is done at micro (group ) level itself.

Repayment of loan is ensured through peer monitoring.

Members have collective accountability of financial transactions in the group.

Promote thrift habit among members for the economic betterment of members.

Some of the principles underlying the project and the guidelines that were issued to the implementing groups are listed below :

• The SHGs are to use part of their funds (almost 60%) for lending to their

members and the rest for depositing in a bank to serve as the basis for

refinancing from the bank.


• The joint and several liability of the members is to serve as a substitute for physical collateral for that part of loans to members in excess of their

savings deposits.

• Credit decisions for onlending to members are to be taken by the group


• Central Bank refinance is to be at an interest rate equal to the interest rate at

which the savings are mobilised.

• All the intermediaries (the Central Bank, banks, NGOs and SHGs) will charge

an interest margin to cover their costs.

• Interest rates on savings and credit for members are to be market rates to be

determined locally by the participating institutions.

• Instead of penalties for arrears, the banks may impose an extra incentive

charge to be refunded in the case of timely repayments.

• The ratio of credit to savings will be contingent upon the creditworthiness of

the group and the viability of the projects to be implemented, and is to

increase over time with repayment performance.

• SHGs may levy an extra charge on the interest rate for internal fund generation

(which would be self-imposed forced savings).

Within the first ten months of the implementation period, by March 1990, 7 private

banks and 11 branches of government banks had made 229 group loans to SHGs,

which had retailed them to about 3500 members. Loans totalling about $0.4 million

had been disbursed , on an average of about $2000 per group and $118 per member.

SHG savings deposits with the bank amounted to about $400 per group, giving a

credit to savings ratio of about 5. NGOs have received loans from the banks at 22 to

24 per cent which is only slightly higher than the refinancing rate of large to small

banks. Rates to end users have been between 30 to 44 per cent after the NGOs and

SHGs have added their margins to cover costs and build funds to cover joint and

several liability. Only one of the participating banks had sought a guarantee under the

scheme from the Central Bank.

SHG can be stated as ‘the plan by the people, of the people and for the people reflecting the real people’s particialption in the process of development at grass root level. The SHG movement hass thus added a new dimention to microfianncing in the country.

Factors behind success of the Grameen Bank are : participatory process in every

aspect of lending mechanism, peer pressure of group members on each other, lending

for activities which generate regular income, weekly collection of loans in small

amount, intense interaction with borrowers through weekly meetings, strong central

management, dedicated field staff, extensive staff training willingness to innovate,

committed pragmatic leadership and decentralised as well as participatory style of


The Grameen Bank experience indicates the vital importance of credit as an entry

point for upliftment programme for rural poor. If a programme is to have an appeal

for people living in abject poverty, it must offer them clear and immediate prospects

for economic improvement. Thereafter, it is easier to sell other interventions of social

development, however unconventional they may appear, once improvements in

standard of living are demonstrated.

The Grameen Bank clearly shows that lack of collateral secuirty should not stand in

the way of providing credit to the poor. The poor can utilise loans and pay them if

effective procedures for bank transactions with them can be established. In case of

the Grameen Bank, formation of groups with a small group of like minded rural poor

has worked well, and group solidarity and peer pressure have substituted for

collateral security.


there is not yet formal official publication on different statistics of SHGs (Dasgupta, 2001).

role and importance of microfinance in growth and development of Indian economy

1.2 Need for Study 2

1.3 Study Objectives 3

1.4 Area of the study 4

1.5 Approach and Methodology 5

1.6 Report format 8

1.7 Limitations 9

However, the gap between demand and supply of financial services still prevails due to shortcomings of institutional credit system as it provides funds only for productive purposes, requirement of collateral and massive paper work leading to inordinate delays. Due to this, there is still exclusion of large number of poor from formal financial systems. Hence, as a response to failure of formal financial system in reaching the poor and destitute masses, the microfinance was innovated and institutionalized in the Indian scenario. The basic objective of microfinance is to provide access to financial services so that poor can come out of vicious circle of poverty.

The mainstream financial institutions are not genuinely interested in microfinance services because of higher transaction cost, greater risk, lower return and unsophisticated clients. Dasgupta R. (2006)

the formal sector Banking Institutions in India have been serving only

the needs of the commercial sector and providing loans for middle and upper income

groups.(Tiwari and fahad,_)


Lack of understanding and cooperation among the members.

inability to reach the market (Kumari and MALATHI, 2009 ” Microcredit and Rural Development” IN book anil kumar thakur and Praveen Sharma, deep and deep publications pvt Ltd

The first chapter is developed to the introduction of the Micro finance and Micro financial institutions and the need for this study and the specification of the objectives.

The second chapter presents a review of literature of the important existing studies on the micro finance.

The third chapter details the description of the study area, nature and source of data, the tools and techniques of analysis adopted for evaluating the objectives.

The forth chapter gives us a brief insight into the results under appropriate heads in consistence with the objectives of the study.

The fifth chapter seeks to interpret the results of the study and also discusses a frame of inference for drawing policy measures.

The sixth chapter summarizes, concludes the results and suggests polices to improve the micro financial activities.

Urban Microfinance

7.56 There are no clear estimates of the number of people in urban areas with no

access to organized financial services. This may be attributed, in part at least, to the

migratory nature of the urban poor, comprising mostly of migrants from the rural

areas. Even money lenders often shy away from lending to urban poor.

7.57 There have been a few instances of MFIs venturing into this area of lending to

urban poor who are undertaking micro-enterprises and small business activities.

Urban branches of banks, even though having manpower and technology support, are

not attuned to SHG lending or microfinance. They are busy with multiple and

diversified activities and generally find no time to cater to the microfinance market

segment. Lending opportunities in other sectors dissuade them from attempting the

laborious task of microlending. The migratory nature of parts of the low income urban

population is also contributing that urban bankers are not venturing into this field.

7.58 Opening of specialised microfinance branches / cells in potential urban centers

exclusively catering for microfinance and SHG – bank linkages could be thought of, to

address the requirements of the urban poor. BFs / BCs could be the mechanism to

reach the target clientele in these areas. However, banks need to implement proper

risk management practices, develop suitable models and products tailor-made to this

segment. Banks can also consider associating with MFIs undertaking urban

microlending as a viable option.

By then Microfinancing by ‘non-formal institutions’ financial organisations had already started. Self Employed Women’s Association (SEWA) owned by women of petty trade groups was established in 1974 in Gujarat. It involved providing banking services to the poor and self-employed.

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At this stage, it was realised that the poor really needed better access to these services and products, rather than cheap subsidized credit. Keeping in view the economic scenario, a strong need was felt for alternative policies, procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfil the requirements of the poorest, especially of the women members of such households. The emphasis, therefore, was on improving the access of the poor to microfinance.

In India,

Data analsis


Banks provide the group a loan amounting to four times the groups’ savings but, as the group matures, based on the groups’ track record, banks are ready to lend more.

SHG funds may be distributed either to one or more of the members of the group who are then personally responsible to the group for repayment. The group is free to decide the interest rate charged to its members, but typically a member borrows from the group at the rate of 24 percent per annum (Barman et al., 2009). After a loan from bank is fully repaid, the group qualifies for further receipt of the loan.

Process of Group Formation

Self Help Groups Model

Self help as a concept involves the promotion and enhancement of indigenous ways of becoming socially, economically and politically empowered. ll must lead to su.,winahle development processes at the community level. The self help group ts envisaged as a vibrant, democratic and viable entity at grassroots level. People, men and women, who have never been involved earlier would plan, implement and monitor their own development. They would mobilize internal and external resources, create effective grassroots institutional modalities at the local level and ensure redistributive justice, with respect to access and control over vital natural and other common property resources.

The notion of self help is not new. The movement for independence of India was a testimony to the struggle for self-reliance against colonial powers. “Gram Swara_j”, meaning village self-rule was the process of creating a national vision of development by initiating rural construction with emphasis on village level autonomy. The concept of self-reliance in India is within the history. Unfortunately. the path of planned industrial development resulted in a gradual lo” of control by the poor over local community resources – land. forests. water. seeds, native technology, decision making. and thereby accentuating poverty, particularly in the rural and tribal belts. Women were particularly afkctcd, as development paradigms did not include their realities. TherL’ has also been a sharpening of religious and ethnic identities, engineered by vested political interests, which has resulted in conflicts and schisms in the community. There are some micro-initiatives in the country, where people have taken control over their lives either through struggles orreclaiming their rights over resources (self. community. and intellectual). They have demonstrated alternatives in

environment, agriculture and management of forests, savings and credit programs, population and development i”ues etc., through advocating self help principles.

All communities have self help groups in some form or the other. They could be in the forrn of sanghas, mahila mandals, cooperatives, informal savings groups, literary groups and so on. There are informal systems of knowledge transmission, borrowing, lending. governance, legal redress, monitoring social norms, addressing issues of crisis in the community and the like.

Self help groups (SHGs) arc informal in the initial stages. They are either formed out of existing grours in the community (I he feature of each group formed are distinctive, based on objectives, membership, strategy of development and group processes), or are nuclei of larger processes to be initiated in the community. However, there comes a time when they need to institutionalize themselves for wider outreach. This research focuses on the SHG model and its impact on women’s empowerment. Hence, the model will be dealt elaborately in the following pages.

Given the years of alienation and sub-ordination thai community groups have experienced, SIJGs as a mechanism, are fragile and vulnerable in the initial stage. There is a tendency to become beneficiaries and leave decision making to others. NCiOs and other intermediaries arc needed to support and facilitate their early functioning and growth. Over a period of time. the nature of support and facilitation change depending on the profile and the culture of the group up to a point thai the SHG is in a position to function independently and build institutions which have the

capacity to continue processes well beyond the project period and negotiate power relations.

Such a process will take time and cannot he completed in a priority time slots. Communities go through various stages before they hecome capahle of managing their own affairs, given that they have to acquire literacy, economic security, advocacy, group maintenance, collective leadership and other skills. The informal SHGs also need to develop into a strong organization and federate/coalesce on regional or national basis.

Members of the SHG have impulse toward collective action for a common cause. The common need is meeting their emergent economic needs without being dependent on the outside help. The members form a group of 12-20. The group formation process may be facilitated by an NGO or hy the MFI or bank itself, or it may evolve from a traditional rotating savings and credit group (ROSCA) or other locally initiated group. Some of the features that describe SHG best arc given he low:

I. SHGs are a democratic group for a development purpose and they arc increasingly used for micro credit. The size of the SHGs is neither too large nor too small as it is a development group dealing with credit and other socio­ economic issues. SHG has it own leaders and holds regular meetings.

2. The SHG members decide to make regular savings contributions. These may he kept by their elected head, in cash. or in kind, or they may be banked.

3. The facilitation NGOs and banks provide capacity building inputs so that they hecome effective and accountahk seeing the needs of its members.


4. After a period of consi,tcnt savings (6 month’ to one year) the SHGs start to give loam; from savings in the form of small internal loans for micro enterprise activities including consumption. Only those SHGs that have utilized their own funds well are assisted with external funds through linkages with hanks and other financial intermediaries.

5. The SHG opens a savings account, in the group’s name, with the bank or MFI, for such funds as are no needed by members, or in order to qualify for a bulk loan.

6. The bank or MFI makes a loan to the SHG, in the name of the Group, which is then used by the Group to supplement its own funds for on-lending to it members.

The SHG need not always go through all these stages; it may satisfy its members’ needs quite effectively if it only goes to the second or even to the first stage, saving money and possibly not even withdrawing it (Harper M 2000, pp. 39-42). The SHG carries out all the same functions as required by the Grameen system, but they do this on their own behalf, since the SHG is a micro-hank, carrying out all the intermediation tasks ot’ saving’ mobilization and lending. The MFI or bank may assist the SHG in record keeping. and they may al’o demand to know who arc the members and impose conditions as to the uses of the loan which they make to the SHG, but the SHG is an autonomous financial institution in its own right. The mcmhcrs have their accounts with the SHG. not with the MFJ or bank, and the MF! or hank does not have any direct dealings with the members.


Table I: Basic Principles and Functions of SHGs

11le basic principles on whiCh the I Functions of the SHGs

SHGs function

I. SHG IS a network of members who fulfill location criteria. They arc resident m the area and arc homogeneous (Homogeneity can be in terms of caste/occupation/farm size/sex or income level).

2. They have rules/norms regarding their functioning.

·’· Savings first, credit thcrcal’tcr.

Personalized services suiting the requiretnents of the members are ensured.

4. SHGs hold regular meetings to

I. Identification of poor families and awareness building.

2. Forming of groups.

3. Guiding groups in developing procedures and systems in savings and credit operations.

4. Helping the groups m

maintenance of books and accounts.

5. Training the members m group functioning and management.

6. Liaison with the banks for linkage of groups and selectively acting as

financial intermediary.

ensure participation of memhers in

7. Addressing social


the activities of the group.

5. SHGs maintain accounts.

6. Group leaders are elected by members and rotated periodically.

7. Transparency in operations of the group and participatory decision making ensure that the benefits to members are evenly distributed.

X. Market rates of interest on savings and credit are charged.

9. Group liahility and peer pressure

act as substitutes for traditional collateral for loans.


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