Linking of SHGS to Banks

The following six steps are involved in the process of linkage of an SHG to Bank:

• Opening of savings Bank Account

• Internal lending by the SHG

•  Assessment of the SHG

•  Checklist for assessment of SHG

• Sanction of credit to the SHG

• Repayment of loans by the SHG

Step-1- Opening of SB Account for SHG

Check list for opening SB A/c in the name of an SHG-

Official instructions: The Reserve Bank of India has issued instructions permitting banks to open SB A/c of registered or unregistered SHGs. (RBI Circular given as Annexure to this book). SB A/c in the name of an SHG can be opened after obtaining from the group the following documents:

• Resolution from the SHG: The SHG has to pass a resolution in the group meeting, signed by all members, indicating their decision to open SB A/c with the bank. This resolution should be filed with the bank.

• Authorization from the SHG: The SHG should authorize at least three members, any two of whom, to jointly operate upon their account. The resolution along with the filled in application form duly introduced by the promoter may be filed with the bank branch.

• Copy of the rules and regulations of the SHG: This is not a must. If the group has not formulated any such rules or regulations, loans can be sanctioned without them. A savings bank account passbook may be issued to the SHG. This should be in the name of the SHG and not in the name of any individual(s).

Step-2- Conduct of internal lending by SHG

• After saving for a minimum period of 2 to 3 months, the common savings fund should be used by the SHG for lending to its own members.

• The purpose, terms and conditions for lending to its members, rate of interest etc. may be decided by the group through discussions during its meetings (RBI and NABARD have permitted the members to decide on these aspects). The interest is usually kept as 2 0r 3 rupees per hundred rupees per month. Please remember that interest per month is better understood in villages, than annual interest).

• Simple and clear books of account of savings and lending should be kept by the SHG.

Step-3-Assessment of SHG

We need to know whether the SHG has been functioning well. The checklist given herein after will help us to assess each SHG in a simple, but effective manner.

Important:

1. SHGs with 12 to 16 “very good” factors may be granted loans immediately.

2. SHGs with 10 to 12 “very good” factors – may be given 3 to 6 months time to improve, before loan is given.

3. SHGs with rating of less than 10 “very good” factors need not be considered for loan.

Points to be remembered while selecting economic activities:

1. Any income generating programme for SHG, should be based on traditional knowledge/skills and aspirations of the group members.

2. Traditional handloom and handicraft and existing artisan activities in a locality may be more successful than taking up altogether new activities.

3. The groups may be encouraged to adhere to the quality norms and diversify their product range.

4. The raw material required for the selected activity should be available locally or can be transported to the work site at a low cost.

5. Those activities should be chosen which require modest investment to begin with.

6. Simple and labour saving technologies may be introduced to facilitate SHGs work. For instance, if an SHG is engaged in rope making activity, the arduous task of beating the fibre manually may be substituted with some easy to use mechanical devices.

7. Selected activities should be such that these can be pursued at home or at the village. Moreover, existing workload and availability of time must be considered carefully. There is no need to move into factory type production.

8. Persons working in isolation due to certain social and cultural factors should be encouraged to form organizations like SHGs and helped to take up economic activities so as to realize the value of their labour at non-exploitative rates.

9. The selected activities should be as far as possible, be such which are of short gestation period and can provide immediate and perennial income. However, when high wages are available during sowing or harvesting season, the members of the group should be allowed to decide on their priorities.

10. Training and other technical inputs should be easily available for the selected activities. However, if needed, training and skill development for members should be designed to facilitate the work already undertaken by them making it more productive and profitable.

11. When the activity selected is nontraditional in nature, it may be difficult to find a local market for the products. In such circumstances it may be necessary to localize such activities by way of increasing the number of groups carrying out such non-traditional activities in the same area so that the total production in a given area can be increased. This will help in finding the market for the products.

12. Programmes designed for members should be based on the concept of self-help and sustainability. The dependency syndrome i.e. awaiting governmental or other assistance for everything will make all these programmes short-lived and eventually dormant.

13. While planning the activities, care should be taken to meet the infrastructural requirements such as worksheds and godowns etc.

14. Child care should be planned along with group formation. Members of the group can take turns in looking after children. Even child care can be taken up by one member of the group as an activity.

Step-4-Sanction of Credit Facility to SHG

Methods of lending

Direct lending to SHGs: After satisfying about the functioning of the groups, branch may sanction loan directly in the name of the SHG (not in the name of individual members), which in turn will lend internally to its members.

Indirect lending to SHGs through NGOs/SHPIs: If branch is not fully confident of lending to SHG directly, or where the SHG for various reasons, is not interested in taking loans from the Bank, the branch can extend credit facilities to the NGO/SHPI for on lending to SHGs promoted by them. Where bulk financing to NGO is resorted to, the branch should closely observe the working of SHGs by attending to their meetings etc., so that branch may develop necessary confidence in the SHGs for linking them directly at the end of bulk financing arrangement with NGO/SHPI. Branch should also verify the track record and financial position of NGOs/SHPI before extending such bulk finance.

Quantum of loan

The amount of loan to the SHG can be to the tune of 1 to 4 times of its savings. (You can consider higher ratio, if you are satisfied about the SHG’s health).

What constitutes the savings of the group?

• The group’s balance in the SB A/c.

• Amount held as cash with the authorized persons.

• Amount internally lent amongst the members.

• Amount received as interest on the loans.

• Any other contributions received by the group like grants, donation, etc.

Purpose of loan

Sanction of loans to SHGs by banks is based on the quantum of savings mobilized by the SHGs, but not for any specific purpose unlike in case of other schematic lending. Loan may be granted by the SHG for various purposes to its members. The bank does not decide the purpose for which the SHG gives loans to its members. The purpose can be emergency needs like illness in the family, marriage, etc. or buying of assets for income generation. The group will discuss and decide about the purpose for which loans are to be given to its individual members by the SHG. Loans to SHGs for group enterprises should be discouraged in initial stages.

Assessment of credit

SHG should prepare a credit plan for its members. Aggregate of this credit plan has to be submitted to the branch, on the basis of which, the branch will assess the credit requirement of the group.

Repayment

The SHG makes the repayment to the bank. (The group is collectively responsible for the repayment of the loan).

Security

• RBI/NABARD rules stipulate that no collateral security should be taken from SHGs. Collateral security is not necessary for the loans sanctioned to SHGs because:

• The members of SHGs know that the bank loan is their own money like savings.

• They are aware that they are jointly responsible for the repayment.

• Therefore, they exert moral pressure on the borrowing members for repayment.

• Because of this, the bank gets a much better repayment from the SHG.

Can the bank hold the SB A/c balance of the SHG as a security?

No. this will prevent the SHG from lending from its internal savings.

Rate of interest effective 01.01.2004

The Reserve Bank of India has allowed the banks freedom to decide on the interest rates to be charged to the SHGs.

• Direct loans upto Rs. 2 lac to SHGs                      (i) 8.50% p.a. (i.e. 1.75% below SBAR)

• Direct loans above Rs. 2 lac to SHGs                    (ii) 9.50% p.a. (i.e. 0.75% below SBAR)

• Indirect loans to NGOs/MCOs/Voluntary Agencies/SHGs promoting institutions for on lending to SHGs.

1. Loans upto Rs. 25,000/-                                      7.50% p.a. (i.e. 2.75% below SBAR)

2. Above Rs. 25,000/-                                            8.50% p.a. (i.e. 1.75% below SBAR)

• Maximum rate of interest to be ultimately charged by NGO/SHPI/MCOs for on lending to SHGs.  

1.50% above the rate of interest charged by the bank.

• What is the rate of interest to be charged by the SHGs to its members?

The rate of interest to be charged by the group to its members should be left to the group. This is usually 2 or 3 rupees per hundred rupees of loans per month.

Documentation

Direct finance to SHG

1. Inter-se Agreement to be executed by all the members of the Self Help Group. (This is an agreement by the members with the bank, authorizing a minimum of three members to operate the group’s account with the bank). (To be stamped as General Power of Attorney)

2. Application to be submitted by SHG to bank branch while applying for loan assistance. (This includes details of the purposes for which the SHG gives loan to its members. (To be stamped as Indemnity).

3.  Articles of Agreement for use by the bank while financing SHGs. (This contains the duly stamped agreement between the bank and the SHG wherein both the parties agree to abide the terms and condition set thereon). (To be stamped as an Agreement)

4.  Sponsorship letter from NGO/SHPI if sponsored by them.

The loan amount should not be handed over to the single representative of the group. Credit delivery to a group should always be in the presence of several office bearers of SHG and selected members. At least one of them should be a borrower so as to safeguard/prevent possibility of misappropriation of funds by the office bearers.

Indirect finance to SHGs through NGOs.

1. Application to be submitted by the NGO to branch while applying for loan assistance for on lending to SHGs (purposes for lending to SHGs will be listed in this).

2. Articles of Agreement for use by the bank while financing the NGO. (This contains the duly stamped agreement between the bank and the NGO wherein both the parties agree to abide by the terms and condition set thereon).(All the above formats are given as annexure to this book).

Other conditions of indirect finance to SHgs through NGOs.

1. NGO should be registered under Society/Company/Partnership/Co-operative act.

2. Audited Balance Sheet for 3 years analyzed.

3. Provision in by-law of NGO to borrow for SHG activities.

4. Resolution to borrow from bank.

5. A statement of credit required by SHGs.

Delegation of Financial power

Financial powers for sanction of loans to SHGs are as delegated for “unsecured loans”. The present financial powers under the head “Unsecured Advances” but only for financing of SHGs under normal lending schemes are:

                                                                                             (Rs. In lacs)

However, Branch Managers are not vested with any discretionary power for sanction of loans to NGOs. Such proposals are to be recommended to Controlling Office.

Step-5- Repayment of loan by SHG

• A repayment schedules is drawn up with the SHG, and the loan is to be repaid regularly. Small and frequent installments will be better than large installments covering a long period.

• What about defaults? The group using their collective authority discourages defaults. Every member is made to realize that the money belongs not only to him, but also to the other members of the Group. The group members are collectively responsible for the repayment of loans to the bank. It has been experience of bankers who lend to SHGs that the repayments from SHGs are far better when compared to individual accounts.