Reserve Bank of India
Circular on Micro Credit
(Updated upto 30.06.04)
(RBI Letter RPCD. No.
Plan, BC 21/04.09.22/2004-05 Dt. 21.08.04)
Lending as Normal Lending Activity:
The SHG linkage programme
would be treated as a normal business activity of banks.
b) Separate Segment under priority Sector:
In order to enable the banks to report their SHG lending without difficulty,
the banks should report their lending to SHGs and /or to NGOs for on-lending
to SHGs/members of SHGs/discrete individuals or small groups which are in
the process of forming into SHGs under the new segment, viz. ‘Advances to
SHGs’ irrespective of the purposes for which the members of SHGs have been
disbursed loans. Lending to SHGs should be included by the banks as part of
their lending to the weaker sections.
c) Inclusion in Service Area Approach:
The service Area branch managers may have constant dialogue and rapport with
the NGOs and SHGs of the area for effecting linkage. If a NGO/SHG feels more
confident and assured to deal with a particular branch other than Service
Area branch and the particular branch is willing to finance, such a NGO/SHG
may, at its discretion, deal with a branch other than the Service Area
branch. It has to be borne in mind that the SHG linkage is a credit
innovation and not a targeted credit programme.
d) Opening of Savings Bank A/c:
The SHGs registered or unregistered which are engaged in promoting savings
habits among their members would be eligible to open savings bank accounts
with banks. These SHGs need not necessarily have already availed of credit
facilities from banks before opening savings bank accounts.
e) Margin and Security Norms:
As per operational guidelines of NABARD, SHGs are sanctioned savings linked
loans by banks (varying from a saving to loan ratio of 1:1 to 1:4).
Experience showed that group dynamics and peer pressure brought in excellent
recovery from members of the SHGs. Banks were advised that the flexibility
allowed to the banks in respect of margin, security norms, etc. under the
pilot project would continue to be operational under the linkage programme
even beyond the pilot phase.
Keeping in view the nature of lending and status of borrowers, the banks may
prescribe simple documentation for leading to SHGs.
of Defaulters in SHGs:
The defaults by a few members of SHGs and/or their family members to the
financing bank should not ordinarily come in the way of financing SHGs per
se by banks provided the SHG is not in default to it. However, the bank loan
may not be utilized by the SHG for financing a defaulter member to the bank.
h) Interest Rates:
The interest rate applicable to loans given by banks to micro-credit
organizations or by the micro-credit organizations to Self Help
Groups/member beneficiaries would be left to their discretion.
i) Mainstreaming and Enhancing Outreach:
The banks may formulate
their own model(s) or choose any conduit/intermediary for extending micro
credit. Micro Credit extended by banks to individual borrowers directly or
through any intermediary would be reckoned as part of their priority
The criteria for
selection of micro credit organizations are not prescribed. It may,
however, be desirable for banks to deal with micro credit organizations
having proper credentials, track record, system of maintaining accounts
and records with regular audits in place and manpower for closer
supervision and follow-up.
Banks may prescribe
their own lending norms keeping in view the ground realities. They may
devise appropriate loan and savings products and the related terms and
conditions including the size of the loan, unit cost, unit size, maturity
period, grace period, margins, etc. the intention is to provide maximum
flexibility in regard to micro lending, keeping in view the prevalent
local conditions and the need for provision of finance to the poor. Such
credit should, therefore, cover not only consumption and production loans
for various farm and non-farm activities of the poor but also include
their other credit needs such as housing and shelter improvements.
Micro credit should
form an integral part of the bank’s corporate credit plan and should be
reviewed at the highest level on a quarterly basis.
A simple system
requiring minimum procedures and documentation is a precondition for
augmenting flow of micro credit. Hence, banks should strive to remove all
operational irritants and make arrangements to expeditiously sanction and
disburse micro credit by delegating adequate sanctioning powers to branch
j) Delivery Issues:
The Reserve Bank
constituted four informal groups in October 2002 to examine various issues
concerning micro-finance delivery. On the basis of the recommendations of
the groups and as announced in the Governor’s Statement on mid-term Review
of the Monetary and Credit Policy for the year 2003-04, banks have been
advised as under:
Banks should provide
adequate incentives to their branches in financing the Self Help Groups (SHGs)
and establish linkages with them, making the procedures absolutely simple
and easy while providing for total flexibility in such procedures to suit
The group dynamics of
working of the SHGs may be left to themselves and need neither be
regulated nor formal structures imposed or insisted upon.
The approach to
micro-financing of SHGs should be totally hassle-free and may include