The Self Help Group (SHG) in India is a savings-led, predominantly women-focused model where members first save, then use the funds for loaning among its members, and then after a period of time (typically 6 months) the SHG is linked to a bank for credit. Being a member-owned entity, it is presumed that the design and terms of financial services and recovery procedures are consistent with what the members desire. The SHGs are also seen as an effective check to the growing influence of Microfinance Institutions, and the Governmentt of India is scaling up the SHG model through its National Rural Livelihood Mission.
According to the March 2012 microfinance report by the Indian development bank NABARD, the country’s 7.96 million SHGs have approximately 97 million members and an aggregate bank savings account balance Rs. 65.51 billion ($1.2 billion). Over half of these SHGs have outstanding bank loans totaling Rs. 363.40 billion ($6.8 billion). SHG savings are managed within the group itself, and only unutilized savings are deposited in banks and thus the actual savings deposited by members in the groups will be much more.
While SHGs are a powerful instrument in cost-effective delivery of financial services, the model also suffers from a number of issues concerning responsible financing practices.
As a savings-accumulating model, the SHG requires detailed bookkeeping, accounting and auditing. Neither the group promoter nor the financing bank has the bandwidth to handle the internal accounts of the SHGs. The group members are expected to do this job or, in the best-case scenario, hire someone to do it for them. Due to members’ limited literacy and the complexities of accounting, groups’ management capacities are stretched and books are often inaccurately maintained. The prevalence of illiteracy also creates a strong tendency to depend on better-educated members to lead the group. With low supervision, this dependency can often lead to unscrupulous practices setting in over time.
Some states report incidents of leader capture of groups, where leaders – who are compensated for their duties by the other group members – manipulate the accounts, take larger loans in the names of others, and even control the selection of members for external bank loans. Where leaders and other powerful members corner the loans, and when repayment of internal loans by these powerful members is poor, member savings are put at risk.
The metrics of responsible financing should be applied to SHGs. More purposive leadership rotation and capacity development for new leaders has to be ensured not only by promoting agencies, but more importantly by lending banks who should be more circumspect in assessing the groups before lending. One important step for reducing the scope of malpractice and improving group functioning is to require periodic drawdown of savings through distribution to members. Drawdowns can be designed to occur every five years, for example, or after accumulated savings reaches a substantial amount, say, Rs. 100,000 (USD 2,000). The drawdown’s effect is to reduce the leader’s power over the funds, increase members’ confidence in the safety of their assets, minimize idle funds, and to generally ensure better financial management the of group.
Though the initial thinking was that through SHGs, poor women would create a credit history and become individual clients of the bank, this has proved difficult in practice. Most of the households continue to depend on informal mechanisms such as SHGs for financial services. It should be ensured that SHG members receive the same protections as bank and microfinance customers, who under recent regulations enjoy the following: protection from excessive debt and multiple borrowing, interest and margin caps, transparent communication of loan terms, a grievance redressal mechanism, and systems for tracking customer complaints.
Responsible finance is critically important in this dominant segment of Indian microfinance. SHG members need protection from their groups, leaders, promoters and banks. Reviving good practices in lending and providing a clear exit route for members who want to quit will enable better functioning by SHGs. A framework for the introduction of responsible savings groups is the need of the hour.
Originally published 29th January 2013 by Girija Srinivasan