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~ It operates under these models:
a) Bank Partnership Model:
# MFI as AGENT:
~ In this model, the bank is the lender and MFIs act as an agent.
~ As an agent it takes care of all relationships with the borrower from the first contact to the final
# MFI as Holder of Loans:
~ A NBFC holds the loan of an individual on its book for a while, before securitizing them and selling
them to the bank.
~ Securitization involves gathering of a group of financial assets by an institution and creation of
new securities representing interests on the loans and selling them to invest.
b) Banking Correspondents:
~ Banks are now permitted to use the services of NGOs, MFIs (except NBFCs) and other civil society
~ These organization act as intermediaries in providing banking/finance services to the poor.
~ These intermediaries act as business correspondents and carry out banking functions in a village
or areas where it is not possible to open a branch.
Q2) Discuss the role and performance of microfinance?
~ Microfinance is an important tool of financial inclusion.
~ Through micro-finance, vulnerable sections of the economy can have easy access to financial
services at an affordable rate. It also includes provision of credit facilities.
*ROLE AND IMPORTANCE:
~ POVERTY ALLEVIATION: Microfinance provides funds/employment to poor people thereby
increasing their income level. This reduces poverty to a certain extent.
~ EMPLOYMENT GENERATION: Microfinance results in generation of employment Infect, it
promotes self employment through promotion of micro-credit.
~ ECONOMIC GROWTH: Microfinance increases the production of goods and service which
enhanced the GDP of an economy. This leads to economic growth.
~ SAVING AND INVESTMENT: The members of the SELF HELP GROUP promote saving habits
among the people. These saving along with the micro credit obtained from banks are invested in
setting up small business units or other requirements of existing units.
~ DEVELOPMENT OF SKILLS: Microfinance promotes self-employment which helps them learn and
develop various skills to operate a successful business unit. This eventually leads to development of
~ SOCIAL WELFARE: Microfinance leads to increase in income level. This has a better effect on
their education, health, family welfare. This leads to betterment of society.
~ WOMEN EMPOWERMENT: Microfinance leads to women empowerment as 50% of Self Help
Groups are formed and leaded by women. They are also supported by NGOs. This leads to economic
and social upliftment of women.
~EFFECTIVE USE OF RESOURCES: Microfinance results in optimum use of local resources. This
results in development and enhancement of the local people.
Q3: Discuss the various policies and regulation of microfinance?
Ans: MICROFINANCE POLICIES AND REGULATION:
~ Microfinance is a very important tool of financial inclusion that was initiated by the RBI and the
~ For effective implementation of microfinance, various policies have been developed by the RBI,
the NABARD and the SIDBI.
~ These policies are the guidelines for the functioning of SHGs and MFIs.
*POLOCY BY THE RBI:
1) Savings Bank Account For SHGs:
~ Self Help Groups (registered and unregistered) were allowed by the RBI to open saving banks A/C
with commercial banks.
2) Incentives to Banks:
~ The RBI set up informal groups to conduct research on various issues related to microfinance
institutions. These groups researched on structure and sustainability, funding, regulations and
capacity building of microfinance institutions.
~ Based on their recommendations, the RBI provided attractive incentives to commercial banks that
gave financial services to the SHGs and MFIs.
3) Business Correspondent:
~ Banks provided financial services to the SHGs and MFIs.
~ However, there were certain problems related to rural credit.
~ So banks were allowed to use the services of NGOs, MFIs (except NBFCS) to act as business
correspondents (intermediaries) in providing finance and other banking services to the poor.
4) Interest Rates:
~ The Interest rates on the loans given/taken by banks to/from SHGs or MFIs are mutually decided.
~ The RBI does not intervene with this decision.
*POLICY BY THE NABARD:
1) Micro-Enterprise Development Programme (MEDP)
~ In 2006, Micro-Enterprise Development Programme (MEDP) for the development of skills of SHG
~ This was done through various training programmes.
~ The main objective of MEDP was to enable SHGs to start micro-enterprises through skill up
2) Micro-Enterprise Promotion Agency (MEPA).
~ MEPA project was launched by the NABARD for the promotion of micro-enterprises.
~ The MEPA is headed by NGOs
3) SHG Federations:
~ Various SHG representatives have come together to form Federation.
~ Such federation enhance the bargaining power of SGH members.
~ The role of SHG federations is increasing significantly.
~ The NABARD supports these federations in their functioning.
4) Committee on financial Inclusion:
~ The NABARD appointed a committee on Financial Inclusion under the chairmanship of
~ The committee recommended expansion in the microfinance programme.
~ It suggested the inclusion of NBFCs as Business Correspondents for banks providing only savings
and remittance services.
~ It suggested opening special microfinance branches in urban centers for the poor.
*POLICY BY SIDBI:
1) SIDBI Microfinance Programme
~ SIDBI launched microfinance programme.
~ This programme provided small amount of credit funds to the NGOs through the country.
2) Finance to NGO/MFI
~ SIDBI recognized NGO/MFI channel for lending financial services to the poor.
~ At present SIDBI is one of the largest providers of microfinance through MFIs.
3) Capacity Assessment Rating: (CAR)
~ In absence of collateral securities microfinance lending is risky for banks.
~ To reduce such risks, the concept of CAR foe MFIs has been started by the SIDBI
4) TRANSFORMATION LOANS:
~ Transformation loans are granted to MFIs to transform their informal set up to a more formal
~ These loans have longer repayment periods.
~ Also, a part of the loan can be converted into equity at a future date when the MFI transforms
itself into a corporate entity.
~ There are various regulation for different microfinance entities. This leads to various problems.
~ To overcome these problems, the government passed the Microfinance sector (Development and
Regulation) Bill to safeguard the interest of customers and to ensure development and organized
growth of microfinance in rural and urban areas.
~ The following are the important aspects of the bills:
^ NABARD is to act as microfinance sector regulator.
^ Provision for microfinance registration.
^ Provision for penalties in case of non-compliance.
^ Constitution of Microfinance Development and Equity funds.
~ Thus, microfinance is emerging as an important sector for the development of the economy.
~ A lot of progress can be achieved in the development of vulnerable sections of the society through
Q4: What is a Self Help Group? What are its important features?
Ans: SELF HELP GROUPS
~ A Self Help Group is a voluntary rural association formed to attain the common objective of social
and economic empowerment.
~ The main aim of a Self Help Group (SHG) is generation of employment, thereby solving the
problem of poverty to a certain extent.
~ Members of the SHG make small regular saving for a few months and then transfer the savings
into a common fund called the group corpus fund. This fund is used for employment generation
~ Generally, the fund is also used to set up micro enterprises.
~ SHGs are supported by NGOs / government agencies.
*FEATURES OF SHGs:
~ Number of persons: The SHG normally comprises of 10-20 people. However there is no upper limit
for the number of people who form a SHG for minor irrigation projects.
~ Economic Status of Members: Normally, people who form a SHG are rural and poor. They usually
live below the poverty line.
~ Restriction on membership: Normally, there is only one person from the family in one SHG.
Similarly a person can be a member of one SHG at a time.
~ Management: All the members of the group take active part in the functioning of the group.
Among themselves, they have a Group Leader, Assistant Group Leader and Treasures of the Group.
~ Registration: Registration of a SHG is optional. Any SHG that exceeds 20 members need to be
~ Savings: All the members of the group regularly save a part of their income. These savings are
transferred to a common fund called group corpus fund. This fund is used to lend money to group
members to undertake employment generation activities.
~ Meetings: A SHG helds regular meeting. These meetings are conducted weekly / fortnightly.
~ Records: The SHG maintains simple basic records like minutes book, attendance register, loan
ledger, bank pass book, individual pass book, cash book etc.
Q5: Explain the importance of Self Help Groups (SHGs) in India.
Ans: IMPORTANCE OF SELF HELP GROUPS IN INDIA.
~ A Self Help Group is a voluntary association of rural people who come together to attain the
common objective of social and economic empowerment through employment generation activities.
~ A SHG motivates its members to set up micro enterprises and thus become self employed.
*NEED OF A SHG:
~ A major part of Indian population still lives in villages.
~ The poor people in these rural areas suffer economically and socially due to low literacy, low
income lend Social backwardness and lack of motivation. They are also unaware of latest
~ However, when they form a group, some of these problems can be easily solved.
~ So SHGs are instrumental in the upliftment of rural population.
~ SHG are the rural population. They are important instruments of microfinance. The following
points bring out the significance of SHGs:
1) IMPROVEMENT IN THE EFFECIENCY OF CREDIT SYSTEM:
~ The Self Help Groups helps the vulnerable section of the society to meet their credit requirements
that cannot be possible through formal banking system.
~ Thus, by providing large scale micro-credit, it reduces the costs of credit delivery and improves
the efficiency of the credit system.
2) CHANNEL OF FINANCIAL INCLUSION:
~ Financial inclusion aims at providing easy credit at affordable costs to the vulnerable sections of
the society. SHGs are an important tool in financial inclusion.
~ Through SHGs funds are provided to socially and economically backward people like Below
Poverty Line Population, Scheduled Castes and Tribes, Minorities, Rural Women, etc.
3) RESOURCE MOBILIZATION:
~ SHGs plays a crucial role in mobilizing the savings of the poor.
~ As on March 2009, SHGs held a total savings of Rs: 5545 crores with the banks.
4) PROMOTION OF SAVINGS small business owners AND BANKING HABITS:
~ A large no of poor, rural population do not have access to banks. SHGs motivate these people to
save by explaining to members the benefits derived from such savings.
~ These savings are pooled together and the fund so created is deposited in the banks.
5) IMPROVEMENT IN LIVING CONDITIONS:
~ One of the main aims of SHGs is reduction of poverty in rural areas.
~ The provision of micro-credit leads to self employment in the rural areas and help reduction in
~ This improves the living conditions of the people.
6) EMPOWERMENT OF WOMEN:
~ SHGs have empowered rural women to a great extent by enhancing their social, economic and
~ There is a direct relation between SHG membership and womens participation in elections.
~ Many women members of SHGs have won panchayati elections.
7) SOCIAL AND ECONOMIC JUSTICE:
~ SHGs promote socio-economic justice in a unique manner.
~ Self-employment through SHGs promotes economic justice whereas empowerment of women,
schedules castes and tribes and other weaker section promotes economic justice.
~ Members of SHGs spread social awareness among people of their locality / village.
~ They make people aware of their social rights and responsibilities like water supply, education,
health care, hygiene, improving / maintaining village rods, protection of natural resources, antialcohol activities etc.
9) DEVELOPING INDIVIDUAL SKILLS OF GROUP MEMBERS:
~ The rural people are not very educated or skilled.
~ While working as members of SHDs, they develop various skills and acquire knowledge on various
subjects like negotiations, accountancy, creativity, effective problem solving, team work, leadership,
10) EMPLOYMENT GENERATION:
~ SHGs provide micro-credit to members and them to take up entrepreneurship and other selfemployment activities.
~ This reduces disguised, seasonal or total unemployment in rural areas.
11) REDUCING INFLUENCE OF UNORGANISED SECTOR:
~ SHGs Provide bank supported credit to its members.
~ This reduces the influence of the unorganized sector of money market that comprises of
moneylenders, chit funds, indigenous bankers who charge exhorbitant rates of interest, on the credit
provided to the people.
12) BENEFICIAL TO THE FINANCIAL SECTOR:
~ The linkage of SHGs with the banks proved beneficial to the financial sectors.
~ It opened up a new, large market i.e low income households whose transaction costs are low and
repayment rates are high.
Q6) Discuss the progress of SHGs in India?
Ans: PROGRESS OF SELF HELP GROUPS IN INDIA
~ Self Help Group (SHG) is a voluntary rural association formed with the objective of social and
economic upliftment of its members.
~ SHGs are agents that bring about a transformation in the lives of the rural people through micro
~ Over the years, SHGs have achieved remarkable progress in bringing about social and economic
enhancement in the life of rural people.
*PROGRESS OF SHGs:
~ SHGs have made a significant on the microfinance get the right bank for your small biz sector as
well as on the lives of the rural people.
~ Their origin, structure, composition and current status are discussed as follows:
1) LINKAGE MODEL:
~ Traditionally SHGs in India were run by NGOs.
~ The self Help Group Bank linkage Programme (SBLP) initiated by the NABARD proved to be a
crucial phase in the SHG movement. This was the first time that SHGs were directly financed by
~ The SBLP has been important in connecting the poor people with the banks through NGOs.
~ According to the NABARD, approximately 5.8 crores poor households have been linked with the
banking system through SBLP.
2) FINANCIAL SUPPORT:
~ Apart from NABARD, various other institutions provide financial support to SHGs.
~ These include the SIDBI, Rashtriya Mahila Koshak (RMK), Housing and Urban Development
Corporation (HUDCO), Housing Development Finance Corporation (HDFC), Friends of Womens
World Banking (FWWB), Regional Rural Banks (RRBs) and Co-operative banks.
~ The RBI motivates commercial banks to lend to SHGs as a part of their rural credit operations.
3) SWARNAJAYANTI GRAM SWARIOGAR YOJANA (SGSY).
~ In 1999, the Government launched the SWARNAJAYANTI GRAM SWAROJGAR YOJNA by
restructuring various self-employment programmes and financing them by banks at various stages.
~ This scheme covers aspects like organizing the poor into SHGs, training, credit, infrastructure,
technology, marketing, etc.
~ It thus aims to reduce poverty by providing SHGs with income generating assets through bank
credit and government subsidy.
~ As on 31st March 2009, among the SHGs having saving bank account, SGSYs SB A/C formed 25%
of total saving.
4) SHG FEDERATIONS:
~ Various SHG represent atitues have come together to form SHG federations to enhance the
bargaining power of SHG members.
~ It provides such facilities to members that individual SHGs cannot provide.
~ Such SHG federations are supported by the NABARD.
5) COMPOSITION OF SHGs:
~ A SHG normally comprises of 10-20 members.
~ Generally all members live below the poverty line.
~ One SHG can have only one member of the family. Similarly, a person can be the member of only
one SHG at a time.
~ A recent study shows the following general composition of a SHG in India:
^ 51% of SHG members are below poverty line and 32% are marginally above the poverty line.
^ 55% of SHG members are from SC and ST.
^ 10% of SHG members are widows.
^ 38% of SHG members works as casual labourers, 29% work on their own land and 17% are in
a non-farm enterprise.
^ School education levels of SHG members are very low 74% had no schooling.
6) CURRENT STATUS:
~ As on March 31, 2009, SHGs held total savings of Rs 5,545 crores.
~ During 2008-09, banks financed 16, 09,586 SHGs (31% increase from the previous year).
~ Pattern of SHG savings in banks:- Commercial banks (50%)
Co-operative banks (14.1%)
Q7: What are the various problems related to SHGs?
Ans: PROBLEMS RELATED TO SHGs
~ SHGs are important tools of micro financing. Over the years SHGs have achieved tremendous
progress in bringing about social and economic upliftment in the life of its members.
~ However, despite the spread and success of SHGs, they suffer from various drawbacks that need
to be overcome.
~ The following are some of the problems related to SHGs:i) MANAGEMENT AND CONTROL:
~ Many SHGs suffer from poor management and poor internal control systems.
~ Roles and responsibilities of members and office bearers are not clearly defined.
~ In some cases, cash flows also have been managed inappropriately.
ii) IMPACT ON POVERTY:
~ The main objective of SHGs is reduction of poverty.
~ Inspite of provision of credit to a large no of poor people, not many have successfully come above
the poverty line.
~ Infact, SHGs and micro-credit cannot bring about solution to the complex problem of poverty.
iii) UNEQUAL REGIONAL IMPACT:
~ The SHG program has been predominant in the states of Andhra Pradesh, Tamil Nadu, West
Bengal, Karnataka, and Uttar Pradesh.
~ 40% of credit linkages were established only in the state of Andhra Pradesh.
~ The North Eastern states need to be focused upon.
iv) LEADERSHIP PROBLEMS:
~ Most SHGs are dominated by few well-off, educated members who get re-elected several times.
~ Over dependence on leaders is a problem associated with all successful SHGs.
~ SHGs are informal organizations and hence there is governance system.
~ This may be due to lack of experience or lack of experience or lack of capacity to review functions
or comply with legal regulations.
~ Several incidents of dropouts from groups are observed.
~ The drop-out rates of very poor is about 11% and that of others is about 7%.
~ Inability to make regular saving deposits is the major cause of dropouts.
vii) POOR RECORD KEEPING:
~ Many SHGs have inadequate and poor record keeping practices.
~ Lack of education and skills among members is the root cause of the problem.
~ SHGs are governed by various regulations of different entities.
~ This makes formation and functioning of SHGs difficult.
Q8) Write a note on COMPOSITE LOANS.
~ Micro and small business enterprises need loan for working capital as well as for fixed asset
investments. Such loans given to serve both the purposes are called COMPOSITE LOANS.
~ Small amounts of composite loans are required by micro-entrepreneurs like weavers, service
providers, fishermen, rickshaw owners, etc.
~ In order to make such credit available to the needy, the government motivates financial
institutions to provide Single window composite loans without collateral security or third party
~ This initiative of the Government is implemented through the following two schemes.
1) CREDIT GUARANTEE FUND SCHEME FOR MICRO AND SMALL ENTERPRISES (CGFSMSE):
~ This scheme was launched by the Government Of India to make available security free credit to
small and micro enterprises and also to SHGs having the potential to start their own enterprises.
~ The SIDBI (Small Industries Development Bank Of India) and the Ministry of Micro, Small and
Medium Enterprises formed the Credit Guarantee Fund Trust For Micro And Small Enterprises
(CGTMSE) for effective implementation of CGFSMSE.
~ The loans provided by financial institutions are guaranteed by CGFSMSE.
~ The guarantee provide by the scheme motivates the financial institution to lend credit to micro
~ Main features of the CGFSMSE:^ The Government and SIDBI contribute in the ratio of 4:1.
^ The institutions eligible to lend composite loans are commercial banks ( Public Sector / Private
Sector / Foreign Banks) some Regional Rural Banks, National Small Industries Corporation LTD
(NSIC), SIDBI and North Eastern Development Finance Corporation LTD.
^ Credit facilities (term loans as well as working capital) upto Rs 50 lakhs are extended without
collateral security on third party guarantee.
^ Guarantee is given upto 75% of the sanctioned credit facility amount.
^ Guarantee cover is extended upto 50% for:
i) Micro enterprises for loans upto Rs 5 lakhs.
ii) Micro enterprises by women.
iii) All loans in the North-East Region.
2)SWAROZGAR CREDIT CARD SCHEME (SCC):
~ This scheme was launched in September 2003.
~ It aimed at providing adequate and timely composite credit small artisans, handloom weavers,
fishermen, rickshaw owners, self employed people and other micro entrepreneurs and SHGs.
The following categories are covered under the SCC scheme:i) Borrowers / small business owners in urban areas and priority sectors.
ii) Any scheme / project generating income / employment.
iii) Farm sector activities.
~ Both CGFSMSE and SSC scheme are supported by NABARD.