Significance of Establishing Linkages with Self-Help Groups and Banks
Y.S.Nanda, NBARD, India4. The Linkage of SHGs with Banks
The linkages of SHGs with banks aims at using the intermediation of SHGs between banks and the rural poor for cutting down the transaction costs for both banks and their rural clients. The objective of the linkage programme could be:
a. to evolve supplementary credit strategies for meeting the credit needs of the poor by combining the flexibility, sensitivity and responsiveness of the informal credit system with the strength of technical and administrative capabilities and financial resources of the formal financial institutions.
b. to build mutual trust and confidence between bankers and the rural poor.
c. to encourage banking activity, both on the thrift and credit sides, in a segment of the population that formal financial institutions usually find difficult to reach.
There could be different models of the linkage between SHG and banks:
It is possible that the linkage may follow an evolutionary process and move from model three to model two and to model one and finally to model four where individuals get direct access to the bank. However, the adoption or acceptance of a particular model would depend on the perception of the bank and the strength of the SHGs and the NGO. Where the banker is able to have a first hand information on the working of a SHG which is functioning satisfactorily and has rotated its pooled resources two/three times, he may well start with model two or even model one. However, a more conservative banker may like to start with model three and rely on the NGO or SHGI.
- MODEL 1: The simplest and most direct is a model in which the banks deal directly with the individual SHGs, providing financial assistance for on-lending to the individual members.
- MODEL 2: Another model, a slight variant of the first, is where the bank gives direct assistance to the SHG and the SHG promoting instituion (SHGI), usually an NGO, provides training and guidance to the SHG and generally keeps a watch to ensure its satisfactory functioning.
- MODEL 3: The third model places the NGO or SHGI as a financial intermediary between the bank and a number of SHGs. The linkage between the bank and the SHGs in this case is indirect. The NGO accepts contractural responsibility for repayment to the bank.
- MODEL 4: The fourth model envisages bank loans directly to individual members of SHGs upon recommendations of the SHG and NGO. In this case, the NGO assists the bank in monitoring, supervising and recovery of loans.
The Financial Scheme
The financial scheme under the Linkage Programme could be based on the following broad principles:
- Savings first, no credit without saving.
- Saving as partial collateral
- Bank loans to the group, for onlending to members
- Credit decisions for onlending to members by the group
- Interest rates and other terms and conditions for loans to members to be decided by the group
- Joint liability as a substitute for physical collateral
- Ratio between savings and credit contingent upon credit worthiness of the group; increasing with good repayment record.
- Small loans to begin with.
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