Commercial Banks are directly financing Self Help Groups (SHGs) or Financing SHGs, which are organized by NGOs etc. directly (Direct Linkage). Banks also Finance NGOs/MFIs for on-lending to SHGs organized by them (Indirect Linkage).
Role of NGOs in financing SHG:
Non-government organizations (NGOs) are doing a remarkable job in the area of socioeconomic, cultural, and environmental development. Most notable is their work in rural development in India through Self-help groups (SHGs). They help people of SHG procure a loan by assisting them in the loan procedure and the formalities. Given the non-availability of loans when required (most often delayed by banks in releasing the loans), some non-governmental organizations (NGOs) have taken up the role of financial intermediaries to SHGs. Certain autonomous NGOs in the country have formed microfinance institutions (MFIs) and have started financial delivery of products to SHGs. They motivate the rural people to come together and organize themselves into a group for their growth and personal development. Further, they train, guide, and educate the people to function and handle the group properly and teach the people about the importance of savings. Besides, helping in group building activities, they help the people of SHG identify their potential market, the products in demand, raw materials that are required for starting a business, and places to procure them.
NGOs try to reach the benefits of the Government microfinance schemes to such groups. Further, certain NGOs act as banking intermediaries, channeling finance to different SHGs formed and centralizing all the accounts and financial systems at the NGO level. In some cases, NGOs have formed collectives of several SHGs together, forming a federation of SHGs, and linked them up with banks.
Benefits of NGO
NGOs have so far been the main innovators in microfinance promotions. They have many advantages. Their very name, non-governmental, indicates that they are outside the frameworks of the government. In India, where governmental systems are fairly inelastic and bureaucratic, NGOs are characterized by their flexibility and ability to evolve simplified work systems.
The SHGs that are supported and nurtured by NGOs are more successful in functioning with better training and identifying potential markets, the products in demand, raw materials that are required for starting a business, and places to procure them. The NGOs can do better capacity planning and credit management since they are in direct contact with the SHG. A better grading is possible for SHGs under the NGO umbrella since the repayment schedule is faster and more regular.
Over the period, the number of NGOs involved in the formation of microfinance-based SHGs has increased manyfold in the nineties. Contributing factors in this expansion have been the creation of an enabling environment for this kind of work by several national and international organizations, including multilateral, bilateral, and international NGO donors, plus an encouraging policy environment created by the government of India and the Reserve Bank of India. The SHG linkage program of NABARD through its widening network of institutions has also contributed to expanding the microfinance-based SHG movement.
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