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The bank-SHG model of microfinance in India

By R V Bhavani

As of 2010, the total number of SHGs directly linked to banks stood at 69.53 lakh, with a savings amount of Rs 6,199 crore and loan outstanding of Rs 28,038 crore, according to the recently released ‘Status of Microfinance in India’ report by NABARD

The recently released ‘Status of Microfinance in India’ report by NABARD examines the reach of the bank-self-help-group (SHG) linkage model across the country. The initiative is the largest microcredit and microsavings programme of its kind in the world, and uniquely Indian. As on March 31, 2010, the total number of SHGs directly linked to banks (public and private sector commercial banks, regional rural banks, and cooperative banks) stood at 69.53 lakh, with a savings amount of Rs 6,199 crore and loan outstanding of Rs 28,038 crore.

Recent years have, however, seen a fall in numbers. The report states that while the number of SHGs grew by 22.2% in 2008-09 over 2007-08, it fell by 13.6% in 2009-10 over 2008-09. The savings amount with SHGs grew at 46.5% in 2008-09 over 2007-08, but it came down to 11.8% in 2009-10 over 2008-09 (Table 1).

Table 1 Progress of SHG-Bank Linkage Model                                     (Amounts in Rs crore)

No. of Amt
SHGs (lakhs)
No. of  Amt
SHGs (lakhs)
% Growth (2008- 09)
No Amt of SHGs
No of Amt SHGs (lakhs)
% Growth (2009-10)
No Amt  of SHGs     
SHG Savings 50.1 3785.39 61.21 5545.62 22.2 46.5 69.53 6198.71 13.6 11.8
Loan Disbursed to SHGs 12.28 8849.26 16.1 12253.51 31.1 38.5 15.87 14453.20 1.4 17.9
SHGs' Loan O/s 36.26 16999.91 42.24 22679.84 16.5 33.4 48.52 28038.28 14.8 23.6

Source: Status of Microfinance in India 2009-10, NABARD

Nevertheless, the overall growth in numbers and coverage over the years, from a small initiative in the early-1990s, is remarkable and also signifies the potential for more effective outreach with proper support.

For instance, the distribution of SHGs under the linkage shows regional imbalance. This has to be understood against the backdrop of banking density being significantly higher in the southern, northern and western regions as compared with the northeastern, central and eastern regions. In March 2010, the southern region comprising the states of Kerala, Tamil Nadu, Karnataka, Andhra Pradesh and Pondicherry accounted for 46% of SHGs under the bank-SHG model, and 51% of savings as against 5% of SHGs and 5.5% of savings accounted for by the northern region comprising the states of Haryana, Himachal Pradesh, Punjab, Jammu and Kashmir and Rajasthan, and 11% of SHGs and 8.3% of savings in the central region comprising the states of Uttar Pradesh, Madhya Pradesh, Uttarakhand and Chhattisgarh. The eastern region comprising West Bengal, Assam, Bihar, Jharkhand, Orissa and the Andaman and Nicobar Islands came after the southern region, accounting for just 20% of SHGs and 18% of savings.

The southern region, likewise, remained ahead in terms of loans disbursed to SHGs as of March 2010, with a 66% share, while the northeastern, eastern, northern, western and central regions together accounted for just 34%.       

Studies have shown a positive correlation between SHG spread (measured as the number of SHGs per lakh population) and banking network (measured as the number of scheduled commercial bank branches per lakh population). But banking network does not automatically translate to better SHG spread, as seen by the contrast between the southern and northern regions of the country. Besides banking infrastructure, the presence of strong NGOs that nurture and build the capacity of SHGs may also be seen as a factor.

Another feature that has been noted right from the start of the bank-SHG linkage concept has been the predominance of women’s self-help groups, or the ‘feminisation of linkage banking’. Women’s groups accounted for 75% of the total number of SHGs and 71% of the total savings of SHGs as of March 2010. The dominance of women in SHG credit is, however, understandably a miniscule part of the larger macro scenario where women’s access to formal banking services is abysmally low. While the thrust on women’s groups and credit access to women has to be appreciated, it should not be at the cost of neglecting the formation of men’s SHGs. At another level, the ‘women focus’ of SHGs has led to questions being raised about increasing the burden on women; their being targeted as vote banks by political parties, marketing agents for the products of multinational corporations, and agents for the delivery of government programmes.

The neglect of men’s SHGs at the other end calls for critical reflection from a women’s perspective. The relatively high rates of interest charged on internal lending by SHGs, and translation of the benefits of SHG membership into significant increases in income levels are some of the other issues.       

A matter of great concern is the higher rate of growth of credit disbursement to microfinance institutions (MFIs) under the bank-MFI linkage model, at 89.4% in 2008-09 and 116% in 2009-10 compared to the rate of growth of loans to SHGs which fell during the same period, as can be seen in Table 1. Notwithstanding the fact that bank credit to MFIs, at Rs 8,062.74 crore in March 2010, was only 56% of bank credit to SHGs, it was an increase from Rs 3,732.33 crore in March 2009 that was 30% of bank credit to SHGs the same year. There is cause for concern that banks find lending to MFIs an easier way of fulfilling priority sector lending targets. This also has to be viewed in the larger perspective of a fall in the number of rural bank branches and a fall in loans of smaller amounts from the formal sector with the onset of financial liberalisation. 

As already stated, with some direction to address the imbalances there is substantial potential and scope for expansion of the bank-SHG model for greater coverage and outreach in order to make significant impact. Recent news of suicides by MFI borrowers under pressure in some regions makes it imperative that we re-focus with renewed thrust on the bank-SHG model as the way forward. The existing formal credit infrastructure will have to be effectively harnessed towards this. For instance, the Eleventh Five-Year Plan Sub-Group on Microfinance had suggested the need to evolve a policy framework that would encourage regional rural banks (RRBs) to graduate as MFIs. RRBs also have a greater presence in poorer regions of the country and can promote the bank-SHG linkage in these areas. Microfinance can be an effective means of financial inclusion only if dependence on informal credit at high rates of interest is reduced. Banks are better placed than MFIs to do this.  

(R V Bhavani is a researcher based in Chennai)

Infochange News & Features, May 2011