Micro Financing - II

FIN354
https://blog.habiletechnologies.com/blog/a-complete-guide-to-shgs/
#chapter6
Acronym
RBI: Reserve Bank of India
NFS: Non-financial services
SHG: Self Help Group
JLG: joint Liability Group
Microfinance institutions’ mission is to provide financial services (loans, savings or insurance)
to people who are excluded from the financial system because they are poor and do not have any
credit history and are thus considered as risky and costly for the banks.
Mohamad Yunus, founder of the first microcredit bank, poverty does not lie in the lack of skills but in the
lack of financial means to exploit them. Consequently, providing poor people with liquidities is the most
efficient way to fight against poverty, and microfinance then appears as the solution to the World’s misery.
 Financial vs Non Financial services
• Microfinance institutions’ mission is to provide financial services (loans,
savings or insurance) to people who are excluded from the financial
system because they are poor and do not have any credit history and
are thus considered as risky and costly for the banks.
• Non-financial services (NFS) are “any services added to the microfinance
package, which seek to enhance the poverty alleviation impact of the
financial services”.
• Financial education is a key non-financial service. 
• Non-financial services can also be business–related such as legal
advice, technical or business development trainings etc., or more
socially-orientated services, which include health-related services,
general education, green programmes, etc.
Impact of non-financial services
Impact on people’s life is dual:
• On the one hand, they are supposed to increase their
productivity and thus income through business training, market
linkages, etc.
• On the other hand, financial education, health trainings, activities
linked to sustainable agriculture or education, will increase their
resilience to shocks, whether climatic or economic.
Credit Delivery Methodologies
used by Microfinance
Institutions
Group Method
• This is one of the most common methodologies for providing micro-
finance.
• The group method primarily involves a group of individuals, which
becomes the basic unit of operation for the MFIs.
• MFIs have to provide collateral-free loans, group methodologies help
in creating social collateral (peer pressure) that can effectively
substitute physical collateral.
• A group becomes a basic unit with which MFIs deal.
Benefits of Group Model
• Groups are trained to own joint responsibility for loans that are taken
by individuals in the group.
• Groups ensure repayments from all individuals in that group and in
case of a default
• Groups functions as the forum where the credit discipline and other
related issues are discussed.
• Group may have to jointly own the responsibility of defaults and pay
on behalf of defaulting clients.
• Group also helps credit appraisal and provide opinion on the
creditworthiness of each individual in the group.
• Groups methodology also helps in controlling cost
Self –Help Groups (SHGs)
• Self-help Group concept has its origin in India.
• SHGs are now considered to be very important bodies in rural development and are
therefore found in almost all parts of the country and their number is still rapidly
growing.
• SHGs are formed by Non-Government Organisations as well as Government agencies
and are used as channels for various development programs.
• A Self-Help Group is an association of generally up to 20 members (not exceeding 20
members), preferably from the same socio-economic background.
• SHGs are facilitated by Government agencies or NGOs for members to come together
for discussing and solving their common problems either financial or social through
mutual help.
• An SHG can be an all-women group, all-men group, or even a mixed Group. 
Joint Liability Group – Grameen Model
The Grameen model is based on the concept of joint liability.

It is the brainchild of Prof. Muhammad Yunus, founder of Grameen

Bank in Bangladesh. 
Grameen model is the most accepted and prevalent micro-finance
delivery model in the world today.

Many MFIs have accepted the model as it has a high focus on

standardization and discipline
Contd….
• Grameen model, as mentioned, is a joint liability group model. Here
five-member groups are formed and eight such groups form a Center.
Hence, in a full-capacity Center, there are 40 members (8 x 5).
• However, over the years people have experimented with Centers of
different sizes and now there are variations of 5-8 groups within a
Center.
• Center is the operational unit for the MFI, which means that MFI
deals with a Center as a whole.
 Differentiate b/w SHG and JLG
SHG is primarily a saving oriented JLG is a credit oriented group
group in which borrowing power which is primarily formed to avail
is determined based on its saving. loan from banks or formal credit
institutions.
Individual Method
• MFIs provide loans to an individual based on his / her own personal
creditworthiness. Individual lending is more prevalent with clients who generally
need bigger size loans and have the capacity to produce guarantee and generate
enough comfort to the MFI.

• MFIs also ask for individual guarantors or take post-dated cheques from clients.

• Individual guarantors come from friends or relatives well known to the borrower
and who are ready to take the liability of repaying the loan, should the borrower
fail to do so.

• If the loan is significantly larger, then MFIs may also take some collateral security
Minimalist versus Integrated Financial
Services
• Minimalist microfinance institutions (MFIs), like Grameen Bank,
focused on providing financial resources alone based on the
assumption that doing so would allow MFIs to expand outreach by
becoming self-sustaining and cost-effective (Biggs et al. 1991;Otero
1994).
 Indian Context of SHG

1984-1985 MYRADA
• MYRADA, an NGO started the first SHG in the period 1984-1985. This
Karnataka based NGO encouraged the rural women to form local groups to
secure collective credit and educated them on how to use their savings
towards achieving economically profitable employment.

1986-1987 Research Project by NABARD

• NABARD funded a research project on “Savings and Credit Management of
Self Help Groups” of Mysore Resettlement and Development Agency
(MYRADA) during the year of 1986-87. This aspect caused a spike of
interest in the Group lending prospect.
 1988-1989 Survey
• Following the research project, NABARD took an official survey of 43
NGOs spread over 11 states in India to investigate the possibilities of
collaborating SHGs with Banks to raise the rural savings and extend a
line of credit to the poor.

1991-1992 Pilot Project

• Enlightened by the results obtained from the survey, NABARD
recommended RBI to advise the Banks to extend credit to the list of
500 SHGs which were under NABARD's pilot project in 1991-92.
NABARD started encouraging self-help groups on a large scale from
the period 1991-92.
 1993 RBI Circular
• RBI permitted SHGs to have a savings account in banks from the year of
1993. This action gave a considerable boost to the SHG movement and
paved the way for the SHG-Bank linkage program.

1994 Working Group

• After getting to know the hidden potential of SHGs RBI constituted a group
in Nov 1994 to review the functionalities of NGOs & SHGs and make
appropriate recommendations to expand their activities further and
deepen their role in rural development.

1996 Policy Change

• SHGs became a regular component of the Indian Financial System this year. 
Exemption from the RBI Act,
1934
Exemption from Sections 45-IA, 45-IB and 45-IC of the RBI Act, 1934
Exemption from Sections 45-IA, 45-IB and 45-IC of the RBI Act, 1934

Available to a micro finance company which is-

• engaged in financing activities i.e. providing collateral-free loans to
households with annual household income of ₹1,25,000 and ₹2,00,000
for rural and urban/semi urban areas respectively,
• provided the payment of interest and repayment of principal for all
outstanding loans of the household at any point of time does not exceed
50 per cent of the household income;
• registered under Section 8 of the Companies Act, 2013;
• not accepting public deposits; and
• having asset size of less than ₹100 crore.
Reference: https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=9714
Sustainable Interest rates
• Sustainable interest rates are set as a function of five elements, each
expressed as a percentage of average outstanding loan portfolio.

• They are administrative expenses, loan losses, cost of funds, desired

capitalization rate, and investment income.
Methods to raise the effective interest rates
include:
• Computing interest on the original face value of the loan, rather than
on the declining balance, as successive installments of principal are
repaid;
• Requiring payment of interest at the beginning of the loan, rather
than spreading interest payments throughout the life of the loan;
• Charging a commission or fee in addition to the interest;
• Quoting a monthly interest rate, but collecting principal and interest
weekly, counting four weeks as a month;
• Requiring that a portion of the loan amount be deposited with the
lender as compulsory savings or a compensating balance.
 Priority Sector Loans
Priority Sector means those sectors which the Government of India and
Reserve Bank of India consider as important for the development of the
basic needs of the country and are to be given priority over other sectors.
The banks are mandated to encourage the growth of such sectors with
adequate and timely credit.
What are the categories of Priority Sector Lending?

Priority Sector refers to those sectors of the

economy which may not get timely and
adequate credit in the absence of this special
dispensation.

It include those sectors which may not get

adequate institutional credit due to social,
cultural and economic reasons.
Objective of Priority Sector Lendings
• The overall objective of priority sector lending program is to ensure
that adequate institutional credit flows into some of the vulnerable
sectors of the economy, which may not be attractive for the banks
from the point of view of profitability.

https://kalyan-city.blogspot.com/2012/08/what-is-priority-sector-lending-meaning.html
Constituents of Weaker Section
a) Small and marginal farmers;
b) Artisans, village and cottage industries where individual credit limits do not exceed
`50,000;
c) Beneficiaries of Swarnajayanti Gram Swarozgar Yojana (SGSY), now 
National Rural Livelihood Mission (NRLM);
d) Scheduled Castes and Scheduled Tribes;
e) Beneficiaries of Differential Rate of Interest (DRI) scheme;
f) Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY);
g) Beneficiaries under the Scheme for Rehabilitation of Manual Scavengers (SRMS);
h) Loans to Self Help Groups;
i) Joint Liability Groups (JLGs);
i) Loans to distressed farmers indebted to non-institutional lenders;
j) Loans to distressed persons;
k) Loans to individual women
 Categories
Domestic commercial banks / Foreign Foreign banks with less than 20
banks with 20 and above branches branches
(As percent of ANBC or Credit (As percent of ANBC or Credit
Equivalent of Off-Balance Sheet Equivalent of Off-Balance Sheet
Exposure, whichever is higher) Exposure, whichever is higher)

Local Banks 40% Foreign Banks 32%

Sub Targets:
• Small and Marginal Farmers: A target of 8 percent of Adjusted Net Bank
Credit (ANBC) or Credit Equivalent Amount to be achieved in a phased
manner 
( Farmers with landholding of up to 1 hectare are considered as Marginal
Farmers. Farmers with a landholding of more than 1 hectare and upto 2
hectares are considered as Small Farmers).
• Micro Enterprises: A target of 7.5 percent of ANBC or Credit Equivalent
Amount to be achieved in a phased manner
• Foreign banks with less than 20 branches will move to Total Priority
Sector Target of 40 percent of ANBC or Credit Equivalent Amount of Off-
Balance Sheet Exposure, whichever is higher, on par with other banks by
2019-20.
Sub Targets:
• Social infrastructure: loans up to a limit of ₹ 5 crore per borrower for
building social infrastructure for activities namely schools, health care
facilities, drinking water facilities and sanitation facilities in Tier II to
Tier VI centres.

• Renewable Energy: loans up to a limit of ₹ 15 crore to borrowers for

purposes like solar based power generators, biomass based power
generators, wind mills, micro-hydel plants and for non-conventional
energy based public utilities viz. street lighting systems, and remote
village electrification.
Sub Targets:
• For individual households, the loan limit will be ₹ 10 lakh per borrower.
• Individual women beneficiaries up to ₹ 1 lakh per borrower
• Artisans, village and cottage industries where individual credit limits do
not exceed ₹ 1 lakh
• Distressed persons other than farmers, with loan amount not exceeding
₹ 1 lakh per borrower to prepay their debt to non-institutional lenders
• Overdrafts upto ₹ 5,000/- under Pradhan Mantri Jan-DhanYojana
(PMJDY) accounts
What is the rate of interest for loans under
priority sector?
• The rate of interest on various priority sector loans will be as per RBI’s
directives issued from time to time, which is linked to Base Rate of
banks at present.
• The rates of interest on bank loans will be as per directives issued by
our Department of Banking Regulation from time to time.
• No loan related and ad hoc service charges/inspection charges should
be levied on priority sector loans up to ₹ 25,000.
Non-achievement of Priority Sector
targets:
• Scheduled Commercial Banks having any shortfall in lending to
priority sector shall be allocated amounts for contribution to the Rural
Infrastructure Development Fund (RIDF) established with NABARD
and other Funds with NABARD/NHB/SIDBI, as decided by the Reserve
Bank from time to time.

• The interest rates on banks’ contribution to RIDF or any other Funds,

tenure of deposits, etc. shall be fixed by Reserve Bank of India from
time to time.
 State-sponsored corporations for SC/ST