Rather than lending to individuals, MFIs usually lend to small groups of people who come together to borrow money and ensure timely repayment of the loan. This group-based approach has many advantages - more people tend to come forward and take a loan when they are part of a group. Also, peer pressure ensures that every member of the group repays. From the lending institution's point of view, lending to groups usually proves more cost-effective, since the cost associated with each loan is reduced by lending to groups.
Also, usually there is no need for collateral if the loan is made to groups. A Self-Help Group refers to a group of people who come from similar socio-economic backgrounds for various development programs or to solve common problems.
Such groups are recognized by the governments and banks and can open bank accounts in the name of the SHG. These groups tend to be autonomous and tend to involve themselves in various activities, including social causes.
So if a group of fifteen women in a village would like to apply for a loan start a small enterprise selling bags and cushions, they would be considered an SHG. Through self-help groups the bank can serve small rural depositors while paying them a market rate of interest. This does not include SHGs that have not borrowed. SHG is primarily an Saving oriented groups in which borrowing power is determined based on its saving. A bank can finance a JLG in two ways either financing to group directly or individual in the groups.
In both of the cases all members of JLG is responsible for repaying the loan amount. Structure A SHG may be registered or unregistered. Goals Self-help groups are started by -governmental organizations GO that generally have broad anti-poverty agendas.
Advantages of financing through SHGs An economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers. While lenders have to handle only a triple SHG account instead of a large number of small-sized individual accounts, borrowers as part of an SHG cut down expenses on travel to and from the branch and other places for completing paper work and on the loss of workdays in canvassing for loans.
Where successful, SHGs have significantly empowered poor people, especially women, in rural areas. SHGs have helped immensely in reducing the influence of informal lenders in rural areas. Many big corporate houses are also promoting SHGs at many places in India. The quantum of loan depends upon the nature of activity. However, at times it is possible that under this model, the unit cost of activity is only part financed, while the rest is managed by the borrower.
It is envisaged that the loan amount will be less in the first cycle and the quantum of loan will gradually go up with each subsequent cycle of loan depending upon the requirement of the activity. The bank may fix a suitable loan limit for first cycle of loan per member with increments in each subsequent cycle. To enable operation of joint liability mechanism, each member of JLG would ideally be provided equal amount of loan in each cycle so that each member of the group has equal liability.
As against the project based lending where the repayment period is linked to projected cash flows, under the suggested model it is proposed not to follow the typical project lending model but to ensure that small amounts are repaid by JLG members on monthly basis. It is suggested that the repayment period may not exceed 18 months in the first credit cycle, however, in the subsequent cycles the repayment period may go up to 36 months. NABARD will provide refinance assistance under investment credit to the banks against their lending to JLGs as per refinance policy for the schematic lending for the year In order to address the regional disparity in the flow of priority sector credit and to increase credit flow in the underserved and unserved areas, preference will be given to the Pilot Project submitted in the districts falling under LWE districts, aspirational districts and districts identified by the RBI as districts with comparatively low PSL credit.
For quick and timely disposal of credit, the branches may be delegated with the sanctioning power so that all JLG loans are sanctioned by the Branch Manager.
Financing of individuals in the JLG is proposed to be adopted under this framework. The loans may be disbursed preferably in cashless mode by credit to the savings bank account of the JLG member. The terms and conditions of sanction would be communicated highlighting the importance of on time repayment, by the branch manager. The passbook will have all necessary details viz. Loan amount sanctioned and disbursed, EMI fixed, No. The JLGs through peer pressure will ensure loan utilization and timely repayment.
All members will be collectively liable for any default. In case of default by one member, joint liability concept will operate and all the other members will contribute to make good the shortfall.
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