In India, the Task Force on Supportive Policy and Regulatory Framework for Microfinance has defined MF (Microfinance) as the “Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”.
Major characteristics of Microfinance are:
- Small amounts of saving and credit
- Collateral free credit through collateral substitute like peer pressure
- Group formation to create peer pressure and bring discipline
- Easy access
- Less and simplified procedures and documentations
- Credit for both investment and consumption needs
- Poor are bankable
- Affordable interest rates
There are different methodologies for delivering microfinance like Grameen bank model of Prof. Yunus, SHG-Bank linkage model, Micro finance institutions (for profit and non profit),NBFC model, NGO model etc. In India SHG-Bank linkage model is the most popular model.
Self Help Groups (SHG) Model
Linking SHGs directly to banks is the basic model in which an SHG, promoted by an NGO or other institution, can access a multiple of its savings in the form of loan funds or a cash credit limit from the local rural bank.
- Self Help Groups are small groups of 10- 20 people staying in the same area(village),coming from the same economic background and facing the same type of problems.
- The members of the group decide to come together for helping each other.
- They also decide to save a small amount regularly and use the same as common kitty for helping the more needy members of the group by giving loans of very small amount on the terms and conditions mutually agreed upon by the group.
- Democratic functioning and consensus building are the main characteristics of the group.
- Homogenous, affinity Groups of less than 20 at the village (local) level.
- Groups meet regularly, weekly, fortnightly, monthly
- Group meetings are attended by NGO/SHPI promoting and supporting the SHGs regularly at least in the initial period
- Members choose their own leaders/office bearers
- Group makes a set of rules for the functions of Group:(i) financial and (ii) non-financial
- Group opens a bank account in the name of the Group (Not in the joint name of the office bearers)
- Members save a definite amount (thrift) regularly. The savings is collected in the Group meeting
- Generally for first six months savings is deposited in the bank account of the Group
- Individual accounts are maintained at the Group level
- Group lends to the member from the thrift Capital at a pre-determined rate of interest
- Members together take the lending decision in Group meetings
- The Group approaches FFIs or NGOs for additional resource ,which is not met by the thrift capital
- FFIs sanction the loan to the Group on the basis of merit of the Group: (i) financial discipline, (ii) requirement and (iii) collateral substitute
- Resource is made available to the Group either as (i) Term Loan or (ii) Cash Credit depending upon the professional relationship
- Both individual loan accounts and bank transactions are maintained at Group level
- Accounts of the Group are ‘audited’ annually
- Profit and Loss of the Group is calculated
- Decision is taken regarding the distribution of the surplus/profit/income
- Surplus is distributed fully or partially to the members by means of direct payment in cash/kind by crediting to member’s account in the Group
- Sometimes a group of SHGs federated to form their own federation for access to higher own thrift resource/ for taking care of Group’s functioning/for taking care of non-financial needs of the Groups and their members
Tasks of SHGs :
- Organizing Meeting
- Conducting Financial Transactions
- Recording Financial Transactions
- Preparing Financial Reports
- Discussion and Decision Making
- Writing Minutes
Activities of SHGs :
- Collection of Savings
- On lending to members
- Earning interest
- Developing base funds
- Identification of Eco Activities
- Deposits to NGO/Bank
- Loans from NGO/Bank
- Recovery of Loans
- Social pressure groups
- Impose fine to defaulters
- Undertake joint ventures
- Arranging training for members
- Arranging collateral
- Arranging raw materials
- Arranging for marketing produce
- Conducting regular meetings
- Social/Educational & Cultural Activities
Basic Rules for functioning of SHGs:
- Common Agreement on When and Where to Meet
- Agreement on Amount and Frequency of Savings
- Giving Small Loans to Members
- Agreement on Rate of Interest
- Agreed Penalties for default in Attendance and Payment
Though SHG-Bank linkage is the most popular model of micro finance and tool for financial inclusion, still most part of the country has very low coverage. We can say that Banks has huge opportunities lying in the country in micro-finance business. We can also say that the state governments and local political parties should also be playing major role in spread and sustainability of this model.