Wednesday, April 2, 2014

SHG Bank Linkage

There is a lot of talk about inclusive growth through financial inclusion. The competition between banks has never brought credit to the poor; it only took new financial products to richer people. RBI policy has forced banks for priority sector lending and opening of branches in rural areas. SHG Bank linkage model was developed by NABARD under the strategy to reach poor in a sustainable way. I have written on this issue in previous post.

SHGs are linked to the formal banking system or microfinance institutions for accessing credit. Self-help groups minimize the bank's transaction costs and generate an attractive volume of deposits. While bankers have to handle only a single SHG account instead of a large number of small-sized individual accounts, borrowers as part of an SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans. There are many practical issues in this scheme faced by all three stakeholders: SHG, Banks and Government.

Bank readily opens account of SHG but treat them as an extra workload on the employees. One major reason cited for this is the staff shortage at the bank level as well as liquidity crunch at rural branches, leading to delays in cash transfers to SHGs. Transaction time and Cheque clearance time at RRB can be very long. Any new and non routine applications of SHG bank account takes a lot of time but the returns in Bank portfolio are abysmally low. There have been cases where the account holder has to run repeatedly to withdraw money from her SHGs bank account!

A SHG decides to seek loan from the bank. SHG submits the application that takes into account the activity proposed, the amount of loan required, duration of loan requirement, purpose of loan and the number of installment in which the loan can be repaid. The procedural issue is that the field officer from the bank needs to check the existence, record books and proper functioning of the SHG. This poses the problem where the field officer is often overburdened with large amount of work. Even interaction of bank officials is limited to President and Secretary of the group hence decision making process often escapes rest of the members.

There is huge rise in NPAs (non-performing assets) to poorer supervision of loans. RRBs are doing worst in all the banks. Task of recovering money from the people is politically volatile. Hence, Banks try to even deny the loan services to the SHGs for the most arbitrary of the reasons. Banks can't randomly choose genuine group among the hundreds of SHGs. Discrepancy in the paperwork is given reason and SHG members have to approach bank repeatedly.

Even lending norms for SHGs are suited to poor members of SHGs. There are many issues even in this arrangement like poor member taking the loan and used by other prosperous members. This practice is equivalent to a ghost loan. This actually prevents credit risk, but the purpose of solving poverty is lost as the actual borrowing member will not be using it. Other member using the loan may not give priority for repayment as the loan is not in their name and the group became defunct.

Political desire triumph over economic reality - That is the summary of my experience in the field of SHG loan recovery. The loan waiver scheme had become major deterrent in repayment of any type of bank loans in Odisha. Loan waiver scheme has dis-incentivized those SHGs who repay on time. Such type of Government intervention changes behaviour of the both rural and urban population. Giving people (APL or BPL) handouts with no strings attached is not a panacea. Such freebies offering destroy the Micro-credit institution especially in rural areas. It can be easily concluded that state aid almost always brings in its wake political favoritism and corruption.

Role of government is not only limited to loan recovery. There are targets of SHG ‘linkage’for each public sector banks by State Level Bankers Committee (SLBC) and Panchayati Raj Department, resulting in the supply driven approach of pushing external loans on SHGs. The amount and timing of such loans must depend on member capacities and merely the fact of repayment of a previous loan (a weak but essential indicator of future credit absorption capacity). The whole SHG Bank scheme of demand driven credit availability becomes converted into credit distribution exercise.

Public sector banks have been able to grow despite offering poorer customer service by simply expanding their reach. When a private bank sees a loan turning doubtful, it is able to quickly exit, even if needed by taking a haircut. Public sector banks needs to engage with either NGOs or any agency who can build capacity of SHGs . The mismatch between the expectations of the poor and capabilities of the formal banking system still today needs to be minimised. Till then, Bankers relation with the Government and SHGs will always be strained.


  1. What about some players who are accustomed to gifts every time they sanction a loan and expect the same in the case of SHGs as well.
    I don't think there is a gap of demand and supply, there is demand but it's a different fact that bank doesn't consider that a bankable proposition.
    Your views accurate!!!!!!!

  2. Thanks Subhsh for the feedback here. bank staffs are taking advantage of the lack of awareness among the people and try to take gifts for sanction of each loan. This practice is not limited for SHGs but for each government scheme. Post offices are also a hub of corupt practice in cash transfers. There is a lot of corruption inside banks that I have not mentioned here. Leave corruption apart, the major problem is highlighted by you in the blunt words- "Bank doesn't consider SHG as the banakable proposition. "....



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This Blog is meant purely as a personal diary of a rural manager in making. It exists to record information, experiences and opinions about various issues encountered in the line of duty. Any person, institution and organization mentioned here doesn't assume any liability for its contents. This is not a deliberate attempt to defame anyone. And if you have actually read all that is written in the blog and aren't mad at me, then thanks for your time and patience !


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