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 Micro Credit and Self Help Group (SHGs)  

Miscellaneous Informations

1. Self Help Groups and SGSY Scheme

The SGYS scheme has become into operation from 01-04-1999 replacing all other schemes like IRDP, TRYSEM, DWCRA, SITRA, GKJ, MWS etc. The objective of the scheme is to bring poor people above poverty line within 3 years. For this purpose, an emphasis is laid on Group Financing and Group Activities taking into account the natural resources available in the area and the activities suitable to that area. The scheme envisages supplementary doses of credit if necessary to the participants. Preference will be given to well functioning SHGs in the villages both under group finance and individual finance.

2. Best practices in SHGs

Savings Function

  • Thrift collection could commence from first meeting itself.

  • Periodicity and quantum of thrift be decided by members themselves.

  • Minimum compulsory thrift to be made by all members.

  • Withdrawals against thrift not allowed.

  • Groups must insist on on-time contribution from members.

  • Collection of thrift during meetings only.

  • Thrift to be used for internal lending and must not stay idle.

  • Penal provisions like fines and penalties for late payment.

  • Delayed thrift contribution must not be received outside the meetings.

  • Chronic thrift defaulters may be disciplined by penalties.

  • Return thrift to members withdrawing for genuine reasons

  • No discontinuance of thrift due to fund infusion like subsidy/grant.

Credit Function

  • SHGs normally offered small short-term loans.

  • Internal lending must commence from first pooling.

  • Group must have system of priorities based on loan purpose.

  • Best member borrower attends meeting regularly and pay timely.

  • Overall credit need evaluation should be need based.

  • Credit decisions at meetings only.

  • Repayment schedule should be rationale.

  • SHGs may be allowed freedom in fixing collaterals from members.

  •  Concurrent loans may be discouraged.

  • Loans are to be disbursed in the presence of all group members.

  • Group must be taught to monitor end use of loan.

  • Late repayments penalized and timely repayment rewarded.

  • Internal lending to continue even after receipt of grant/subsidy

Fund Management

  • Group fund consists of thrift, interest on internal loans, fines and penalties, loans and grants received, margin and interest payable to bank.

  • Groups are not expected to discriminate between the source of fund for meeting loan requirements.

  • Idle funds are a drag on the group and should be watched carefully at every meeting.

  • Responsibility sharing in Cash Management will ensure (i) Transparency (ii) reduce load on leaders (iii) Enhance fund management (iv) Competence of all members.

  • Periodic reconciliation of bank accounts and group’s records.

  • Members should take turns in depositing collections and also accompany leaders to bank for withdrawals.

  • Initial stages: Encourage short-term loans ranging from 3-12 months. Installments must be weekly to monthly.

  • Above measures will increase Loan velocity and Fund Recycling.

  • Groups must adopt market-linked policy for interest rates.

  • Group must not reduce interest rates in the short run upon receipt of grant or bank loan. Interest charged on loans is a source for raising additional capital to fund the Corpus base.

  • Cash balance to meet emergent situations must be encouraged but too big an amount held for long periods constitutes idle funds.

  • SHGs upon maturity incur higher amounts for book keeping honorarium and bank transactions. Member contributions may be suitably enhanced.

  • Investing entire corpus in a single activity will block internal lending, reduce access of households and enhance risks.

Record Keeping

  • Groups must ensure responsibility and members must share tasks.

  • Training must ensure recognition of accounts structure.

  • Group meetings must necessarily focus on contents of books.

  • In case of non-availability of literate members SHGs must be encouraged to hire services of professional book-keepers/literate boys/girls.

  • SHGs must inculcate the habit of paying for book-keeping.

  • Book writer must read out noting in meetings and updations must be acknowledged by group members.

  • Some SHPIs are concerned about audit. At federation meetings peer-audit by other SHG leaders must be encouraged.

  • The practice of keeping books with SHPI staff or in the NGO office should be discouraged.

  • Cost of books and stationery be met by SHGs.

  • In the long run all members must be encouraged to read and write.

  • System of confirming entries in member pass-book by 2 other members must be encouraged.

Banking Relationship

  • As far as possible try to open SB A/c in service Area Branch.

  • Regular operation in Savings Account will help build healthy relationship.

  • Although banks must not insist on stating loan purpose, where large loans are concerned, preparation of micro-credit plan will enthuse banker. Discussion at appraisal stage with banker is a must to earn confidence.

  • Terms and conditions of credit including concept of joint and several liability must be taught to members by SHPI.

  • Group must assimilate bank loans with Corpus and meet needs of members who could not avail loans earlier. Hence there should be no deviation from norms viz; quantum, repayment, interest rate etc.

  • Banks must be reminded to go for higher and repeat finance where timely repayments are observed.

  • Groups must square up default amount of any borrower and meet repayment obligations with bank.

  • Insurance of assets etc. have to be verified by groups.

  • Banks must be encouraged to open SB A/c even if photographs etc are not available. It is required for credit linkage only.

3. Opening of Saving Bank Accounts

  • The savings bank A/c should be preferably opened immediately after the first meeting of the SHG. If the SHG is perceived to be loosely knit by the banker, then a period of 1-2 months maximum may be allowed to lapse. The bank may count the stipulated period of maturity i.e. 6 months from the date of opening of SB A/c. however, maturity may be counted from the first meeting and the activity profile of the SHG also.

  • SB A/c can be opened in the name of the Self Help Group only.

  • The group should submit a resolution authorizing the functionaries to open/operate the Saving Bank Account on behalf of the SHG. Banks may generally not insist for photograph of office bearers of SHGs. The copy of the first meeting of the SHG as written in the register is also to be given to the Banks. If a photograph is required a combined photograph of the office bearers may be obtained.

  • The SHGs may meet at the Local Panchayat Office, the Mahila Mandal, any house convenient to all members or the house of any member as per consensus.

  • Office bearers shall normally work only on honorary basis. Any payment for their services has to be SHGs consensus decision, but to be discouraged. However, they should be trained for their work (by the NGO). If the group decides collectively then the prescribed amount may be held in cash for emergency requirement.

  • The inter-se agreement should be taken at the time of credit linkage only (i.e. grant of loan/c.c. limit).

  • Minimum installment for savings can be as low as Rs. 10/- a month and may go up to Rs. 50/- or Rs. 80/- a month, in general.

Linkage of Group

  • Linkage indicates only credit linkage i.e. where SHGs have been financed by banks.

  • Instead of depositing entire savings in the bank, the group should use the amount for inter loaning among members from beginning itself so that the group understands credit management before linkage.

  • No, the period of six months should be counted from the date of regular savings by the group. However, the group may open the account with the bank as soon as the group has stabilized.

  • The amount received on account of savings made by an erstwhile group should be taken into account for linkage of newly formed groups.

  • The groups have the freedom to decide the purpose of loan (consumption and productive).

  • RBI circular dated 02 April 1996 permits SHG to be linked by branches other than service area branch. Group may be linked to bank branch other than service are also.

  • The amount of subsidy/grant/donation money etc. which is not saving of the group should be excluded for the purpose of considering savings.

  • Savings of SHG include amount used for inter-loaning, cash balance with group and balance in bank account. In other words, entire savings mobilized by SHG members should be taken into account. Expenses made by group for purchase of register etc. should not be excluded from savings.

  • The defaults by a member of SHGs and their family members to the financing bank should not come in the way of financing the ‘SHG’. However, finance from the bank should not be mobilized by the SHG to finance a member who is defaulter to the bank.

  • No maximum limit of loan for the SHG has been prescribed. Savings to credit ratio may be from 1:2 to 1:4 depending upon the maturity level and absorption capacity of the SHG as assessed by the bank.

  • A member of SHG may take a direct loan from the bank or under any sponsored scheme with the consent of group.

  • The SHGs before approaching the bank for credit may assess the credit requirement of individual members, keeping in view the purpose for which the loan is needed and submit to the bank the consolidated proposal. The bank, therefore, should not apprise the individual borrower member of a SHG.

  • It is suggested that SHGs may be persuaded to charge interest ranging from 18% to 24% p.a. from members on their borrowings from SHG as an unduly high interest rate discourages members from borrowing and retards the growth of SHG.

  • A person who has already availed loan can become member of a SHG.

  • RBI/NABARD has not prescribed any sets of register to be maintained by SHGs. The groups may maintain simple and basic registers to maintain records of membership, proceedings of meetings, deposits, internal loaning, accounting etc.

  • There are many examples of successful group productive activities. As such bank should not insist while financing that the SHG should take up group productive activities. Let the initiative come from the SHG. Further the bank should not deny loans to an eligible SHG simply because the stated purposes of loans of SHG members are consumption and non productive. The idea is that meeting the urgent needs by SHGs of members builds confidence among all the members.

  • SHG concept is based on the principle of flexibility and there is no hard and fast rule to fix monthly/quarterly/half yearly installments of principal or interest. However, a bank may fix the repayment schedule in consultation with the SHG.

  • Bank branches may take steps to speed up process of extending loan to SHGs. Usually; it should not take more than 15 days in the scrutiny and disbursement of loan to SHGs.

  • Credit linkage is allowed normally after 6 months.The period builds group cohesiveness, develops confidence amongst one another and in the use of credit.

Other Related Issues

  • All members of the SHG are jointly responsible to the bank for any group default. If the default is genuine the member may be accommodated by allowing to pay interest on the loan installment subsequently. Peer pressure has proved a potent force in ensuring the repayment to the SHGs.

  • SHG should not finance individuals outside the group. All lending should be within the SHGs.

Bankers Related Issues (Frequently asked questions)

  • The credit is extended by a bank branch to a SHG and not to the individual. Hence, this may be allowed at branch level.

  • It is clarified that bank may not deprive a SHG of credit just because of the presence of a defaulter. If the SHG passes a resolution that the defaulter shall not be extended credit through bank funds, the branch shall extend the credit.

  • This is to be avoided. The minimum balance, say Rs.500/- may be kept in the S B A/c and the amount collected by monthly contribution shall be circulated among members as internal loaning so as to facilitate the learning process in the use of credit and its repayment.

  • Continuous touch with NGO/SHPI apprises the banker about functioning of SHGs and their maturity regularly thus building confidence between NGO/Bankers/SHPIs. Further, the NGO facilitates the documentation process and guides SHGs for up scaling. So it is a mutual confidence building exercise and coordination is a facilitating tool.

Security Norms

Advances granted to SHGs for the purpose of on lending to group members are collateral free clean advances and quantum of loan limit is linked to group savings, subject to maximum credit limit of 1:4 under SHG-Bank linkage programme. These advances are treated as unsecured clean advances irrespective of the credit limit.

Advances are granted to groups formed under the SGSY for the whole group to pursue selected economic key activity(ies). Loans under SGSY are granted for taking up income generating activities. As tangible assets are created out of funds lent to the groups under SGSY, these loans will be governed by the security norms as below mentioned:

  • For group loans upto Rs. 5 lacs, the assets created out of the bank loan would be hypothecated to the bank as primary security. In case where movable assets are not created, mortgage of land may be obtained. Where mortgage of land is not possible, suitable third party guarantee may be obtained at the discretion of sanctioning authority.

  • For group loans above Rs. 5 lacs, in addition to primary security such as hypothecation/mortgage of land or third party guarantee as the case may be, suitable margin money/other collateral security in the form of “insurance policy, marketable security/deeds of other property etc. may be obtained. The upper ceiling of Rs. 5 lacs is irrespective of the size of the group or pro-rata per capita loan to the group”.

Thus, while advances granted to groups under SHG-Bank linkage programme will be clean loans, advances granted to groups under SGSY will be treated as secured loans.

Reserve Bank of India Circular on Micro Credit  | SGHs under PMRY| SBI Life ‘Shakti’