The SHG Sector in India: Toward Self-reliance and Sustainability

Building the capacity of selected SHG members to manage and govern village organizations as well as higher-level federations is feasible as demonstrated by the Sector Own Control pilot in Andhra Pradesh.

The Evolution of SHG Banking

A There are three sectors of financial institutions (FIs) in India that provide services to lower-income people: regulated banks, unregulated microfinance institutions (MFIs) and informal self-help groups (SHGs). India has one of the most diversified networks of banks in the developing world, comprising commercial banks, regional rural banks and co-operative banks; these, in turn, are linked to some 1,00,000 agricultural co-operatives (PACS) with credit as their principal service to farmer members. Yet, according to the All-India Debt and Investment Survey of 1981, some 250 million of the rural poor still had no access to formal finance, despite years of massive branch expansion, priority credit programmes for the rural areas and numerous donor credit lines. The National Bank for Agriculture and Rural Development (NABARD), carved out of Central Bank in 1982, analyzed the reasons behind the failure of banking services to reach the rural poor. The main causes were found to be: a singular emphasis on production loans, prohibitive transaction costs for lenders and borrowers, a failure to mobilize savings and the overly complicated procedures.

During the second half of the 1980s, NABARD changed its policy from the old world of supply-driven to a new world of demand-driven finance, stipulating that programmes with the poor have to be savings-led and not credit-driven; and that the poor have to have a say in their design. Inspired by a new regional programme—Linking Banks and Self-help Groups (SHGs) — of APRACA (Asia Pacific Rural and Agricultural Association) and GTZ/GIZ in Asia, NABARD initiated a study of SHGs in 1987, led by MYRADA, based on a new paradigm: Savings first. Three options were explored, all hinging on prior savings by the groups: matching grants, matching interest-free loans or bank loans with interest. In a parliamentary debate, NABARD argued against the introduction of the Grameen Bank model of Bangladesh on a national scale, opting instead for a linkage banking approach, that is, using the existing infrastructure of banks and social organizations; being savings driven rather than credit-led; and using bank rather than donor resources in the provision of credit.