Financing To Self-Help Groups (SHGs) : Micro-Credit

Purpose of the Bank Loan: Loan granted by the Bank to the SHGs is purpose neutral as the group decides the purpose for which loan can be given to its members. As per RBI guidelines, the Banks are expected to meet the entire credit requirements of SHG members for (a) Income generation activities, (b) social needs like housing, education, marriage, etc. and debt swapping etc.

Self Help Group (SHG): SHGs are registered or unregistered small economically homogeneous and affinity groups of rural poor, voluntarily coming together for mutual benefits.

Size of the Group: The group size should preferably be between 10 to 20 members.

Model of Linkage: There are mainly four different models of linkage between banks and SHGs as follows:

  1. Banks deals directly with SHGs without any intervention of NGOs/SHPI
  2. Banks gives direct loan to SHGs and the NGOs/SHPI promoting the SHGs provide training and guidance to the SHGs
  3. Banks give direct lending to NGOs/SHPI for on lending to SHGs
  4. Banks lend directly to SHGs on the recommendation of NGO/SHPI.

Stages in SHG Running: The SHG completion involves three stages namely

  1. group formation
  2. capacity creation and availability of revolving fund and (c) income generation through economic activity.

Revolving Fund to SHG: SHGs can be sanctioned Revolving Fund (where they are in existence for 6 months and meet the essential criteria) in the form of overdraft or cash credit up to Rs. 25,000/-, which includes Rs. 10,000/- as subsidy from DRDA. The amount has no linkage with the amount of savings or number of members in a group. It is used to lend the funds to members or any other purpose, for which it is meant and as the group decides. Interest is charges on the amount above Rs. 10,000/-.

Direct Assistance

Eligibility Criteria for Selection of group for Lending: Rating Criteria

For easy scrutiny and appraisal, a group shall be selected for credit depending on the fulfillment of credit rating criteria as detailed below:

Points Scored Selection Criteria
More than 90 points Selection without any reservation
Score between 60 - 89 points Eligible for selection
Less than 60 points Not suitable for linkage

Assessment of Bank loan: Cash Credit/Overdraft for SHGs

Limit: No Minimum or Maximum limit

Assessment Procedure: Where the group is active for at least 6 months and meets the above criteria, bank allows advances to SHG. The quantum of loan to be given to the group is based on the quantum of savings mobilized by the group in the ratio of 1: 1 (accumulated savings: bank loan) to 1: 4.
The loan limit may be sanctioned for a period of three to five years based on the Projected Savings of the SHGs up to the end of 3 to 5 years, thus avoiding repeated documentation. The Drawing Limits for each year can, however, be fixed within this aggregate ceiling as a multiple of actual pooled savings reached. Though the Drawing Power is fixed for full year, it may be enhanced on six monthly basis depending upon the requirement of SHG, their actual savings and experience of the Bank.

Margin: There is no margin requirement. The group corpus /savings are treated as Margin.

Operation of the Account: The operation on prescribed limit should not exceed the Drawing Power during the year and monthly interest should be serviced in time. At least all or part of the principal drawals should be repaid within 12 months from the date of drawals.

Operation Mode of the Account: Account will by jointly operated by any two or three of office bearers as decided by the group.

Repayment Period: Normally 3 to 5 years. However, depending on the negotiations with the group the branch shall prescribe an appropriate repayment period for the loan to SHG/NGO. The SHGs are free to prescribe repayment period for loans to its members.

Moratorium Period: The repayment may include a nominal grace period to be decided by the bank at the time of sanction and as per needs of SHGs.

Rate of Interest: Rate of interest shall be charged as per Bank’s prevailing rate of interest at the time of sanction.

Security:

  • For loans up to Rs.100,000/- : Hypothecation of assets created out of bank loan.
  • For loan above Rs. 100,000/- : In addition to Hypothecation of assets other collateral security in the form of lien on deposits/mortgage of land and building, third party guarantee having adequate means and repute acceptable to bank. Processing Fees No processing fee on loans to SHGs. Prepayment Charges No Pre-Closure/Prepayment penalty on loans to SHGs.