Need for and Activities of Self-Help Groups (SHGs)

(This article elucidates self-help groups, their activities, bank loan facilities, advantages of lending to SHGs, Aajeevika- National Rural Livelihoods Mission (NRLM) for women SHGs in rural areas.)

Self Help Groups (SHGs) are important because they help the poor access financial services, generate employment, and address social issues, especially in rural areas where many people don’t have access to formal banking. The major function of the Self Help Groups (SHG) is to build the functional capacity of the poor along with providing employment and activities by which they can generate income.

Women Self Help Group (SHG) is a group voluntarily formed by 10-20 women involved in livelihood activities like making candles, artificial jewellery, pavement vendors, hawkers, tailoring jobs, retail shops, livestock rearing, etc. Once the group is formed, the group members are encouraged to contribute to a common fund of the group from the amount conveniently saved from their earnings. The funds created by the members are used to lend internally to meet their income generation activities and emergent credit needs at such rate of interest, period of loan, and other terms as the group may decide.

Bank finance:

SHGs that are in active existence for a minimum period of six months may approach banks for financial assistance. Before approaching the banks, for financial assistance, the group must accumulate a reasonable size of own capital from its members. Further, such SHGs have to create a track record of regular repayments from the members who have borrowed from the fund created by the group. Apart from proving, that the group has successfully undertaken savings and credit operations from its resources; it must establish that the group has maintained proper accounts/records for all its transactions since inception.

Bank finance to SHGs usually ranges from 1:1 to 1:4 of proportionate savings made by the group. The banks process the request for a credit facility with their usual method of appraising for any loan or the working capital requests which involves,  an assessment of required capital investments, borrower’s margin, group’s capability of achieving its projected productions/sales, expected cash generation, etc. Normally, loans are sanctioned for a period of 3 to 7 years with a repayment schedule of daily, weekly, monthly, or quarterly installments or as determined at the time of sanctioning the limit depending upon local conditions and the nature of the activities. The security for the advance will be the hypothecation of assets created out of finance. No collateral security is insisted upon.

Advantages of financing to SHGs:

Lending to SHGs is beneficial both to the lenders and the borrowers. In SHG financing the lender bank has to deal with only the group leaders of SHGs instead of pursuing a large number of small borrowers for lending and recovery purposes. Therefore, bank saves transaction costs by way of cutting paperwork, saving traveling time and traveling expenses for canvassing loans as well as for meeting the individual borrowers at various places for recovery. The members of SHGs being small-sized borrowers, mostly poor women in rural areas, get great relief in borrowing through their group. Here, the individual members of the group are not required to spend time and money on bank borrowing as they need not individually visit the bank branch to and from. Their problem of convincing the bank manager individually for their loan requirement will be solved, as their SHG is borrowing from the bank on their behalf. In addition to the above, women SHGs in rural areas are entitled to loans at a cheaper rate if they avail of credit facilities under ‘Aajeevika’ – National Rural Livelihoods Mission (NRLM).

Interest subvention to SHGs under the ‘Aajeevika’ scheme:

The ‘Aajeevika’ scheme is launched by the Government of India to generate gainful employment for women in rural areas, under the National Rural Livelihoods Mission (NRLM). Of now, if the finance is granted under the ‘Aajeevika’ interest subvention scheme of the National Rural Livelihoods Mission (NRLM), the Public sector Banks, RRBs, and Cooperative banks make SHG finance up to Rupees 3 lakhs at 7% per annum in the 150 category I district.  An additional 3% interest subvention has been passed on to their accounts that were repaid on time, reducing the effective rate of interest on their borrowings to 4% for the on-time regular repayments.

All women SHGs, comprising more than 70% BPL or rural poor members, especially the poorest of poor households, identified through a participatory identification process at the level of community and confirmed by the Gram Sabhas are regarded as SHGs under NRLM benefit schemes. Women S.H.Gs from category II districts comprising districts other than the listed 150 districts, will also continue to be eligible for interest subvention to avail of the loan facility at an interest rate of 7% p.a. under NRLM.

The SHGs who are beneficiaries of capital subsidy under SGSY in their existing credit outstanding will not be eligible for benefit under this scheme.

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Interest concession under DAY-NRLM to Women SHGs