Micro Credit has been defined as
the provision of thrift, credit and other financial services and products of
very small amount to the poor in rural, semi-urban and urban areas for enabling
them to raise their income levels and improve their living standards. Micro
Credit Institutions are those, which provide these facilities.
2. The Self Help Group (SHG)- Bank
Linkage Programme
Despite the vast expansion of the
formal credit system in the country, the dependence of the rural poor on moneylenders
continues in many areas, especially for meeting emergent requirements. Such
dependence is pronounced in the case of marginal farmers, landless labourers,
petty traders and rural artisans belonging to socially and economically backward
classes and tribes whose propensity to save is limited or too small to be mopped
up by the banks. For various reasons, credit to these sections of the population
has not been institutionalized. The studies conducted by NABARD, APRACA and
ILO on the informal groups promoted by non governmental organizations (NGOs)
brought out that Self-Help Savings and Credit Groups have the potential to bring
together the formal banking structure and the rural poor for mutual benefit
and that their working has been encouraging.
The NABARD accordingly launched
a pilot project for the purpose and supported it by way of refinance. It also
provided technical support and guidance to the agencies participating in the
programme. The following criteria would broadly be adopted by NABARD for selecting
SHGs:
a) The Group should
be in existence for at least six months.
b) The Group should
have actively promoted the savings habit.
c) Groups could be formal
(registered) or informal (unregistered).
d) Membership of the
group could be between 10 to 25 persons.
The advances given by the banks
to the groups were treated as advances to 'weaker sections' under the priority
sector. While the norms relating to margin, security as also scales of finance
and unit cost would broadly guide the banks for lending to the SHGs, deviations
therefrom could be made by banks, where deemed necessary. These relaxations
in margin, security norms, etc. were only in respect of SHGs to be financed
under the pilot project.
NABARD, vide its circular letter
No.NB.DPD.FS.4631/92-A/91-92, dated 26 February, 1992, issued detailed operational
guidelines to banks for implementation of the project. Quick studies conducted
by NABARD in a few states to assess the impact of the linkage project brought
out encouraging and positive features like increase in loan volume of the SHGS,
definite shift in the loaning pattern of the members from non-income generating
activities to production activities, nearly 100% recovery performance, significant
reduction in the transaction costs for both the banks and the borrowers, etc.,
besides leading to gradual increase in the income level of the SHG members.
Another significant feature observed in the linkage project was that about 85%
of the groups linked with the banks are formed exclusively by women.
With a view to studying the functioning
of SHGs and NGOs for expanding their activities and deepening their role in
the rural sector, in November 1994, RBI constituted a Working Group comprising
eminent NGO functionaries, academicians, consultants and bankers under the Chairmanship
of Shri S.K. Kalia, the then Managing Director, NABARD.
As a follow up of the recommendations
of the Working Group, banks were advised in April 1996 as under:
a) SHG Lending as Normal Lending
Activity
The SHGs linkage programme would
be treated as a normal business activity of banks. Accordingly, the banks were
advised that they may consider lending to SHGs as part of their mainstream credit
operations both at policy and implementation level. They may include SHG linkage
in their corporate strategy/plan, training curriculum of their officers and
staff and implement it as a regular business activity and monitor and review
it periodically.
b) Separate Segment under priority
sector
In order to enable the banks to
report their SHG lending without difficulty, it was decided that the banks should
report their lending to SHGs and/or to NGOs for on-lending to SHGs/members of
SHGs/discrete individuals or small groups which are in the process of forming
into SHGs under the new segment, viz. 'Advances to SHGs' irrespective of the
purposes for which the members of SHGs have been disbursed loans. Lending to
SHGs should be included by the banks as part of their lending to the weaker
sections.
c) Inclusion in Service Area Approach
Banks may identify branches having
potential for linkage and provide necessary support services to such branches
and include SHG lending within their Service Area Plan. Keeping in view the
potential realisability, the Service Area Branches may fix their own programme
for lending to SHGs as in the case of other activities under the priority sector.
With a view to enabling the bank
branches to get the benefit of catalytic services of NGOS, the names of NGOs
dealing with the SHGs would be indicated on a block-wise basis in the 'Background
Paper for Service Area Credit Plans'. The Service Area branch managers may have
constant dialogue and rapport with the NGOs and SHGs of the area for effecting
linkage. If a NGO/SHG feels more confident and assured to deal with a particular
branch other than Service Area branch and the particular branch is willing to
finance, such a NGO/SHG may, at its discretion, deal with a branch other than
the Service Area branch. The lending to SHGs by banks should be included in
the LBR reporting system and reviewed, to start with at SLBC Level. However,
it has to be borne in mind that the SHG linkage is a credit innovation and not
a targeted credit programme.
d) Opening of Savings Bank A/c.
The SHGs registered or unregistered
which are engaged in promoting savings habits among their members would be eligible
to open savings bank accounts with banks. These SHGs need not necessarily have
already availed of credit facilities from banks before opening savings bank
accounts.
e) Margin and Security Norms
As per operational guidelines of
NABARD, SHGs are sanctioned savings linked loans by banks (varying from a saving
to loan ratio of 1:1 to 1:4). Experience showed that group dynamics and peer
pressure brought in excellent recovery from members of the SHGS. Banks were
advised that the flexibility allowed to the banks in respect of margin, security
norms, etc. under the pilot project would continue to be operational under the
linkage programme even beyond the pilot phase.
f) Documentation
Keeping in view the nature of lending
and status of borrowers, the banks may prescribe simple documentation for lending
to SHGs.
g) Presence of defaulters in SHGs
The defaults by a few members of
SHGs and/or their family members to the financing bank should not ordinarily
come in the way of financing SHGs per se by banks provided the SHG is not in
default to it. However, the bank loan may not be utilized by the SHG for financing
a defaulter member to the bank.
h) Training
An important step in the Linkage
Programme would be the training of the field level officials and sensitization
of the controlling and other senior officials of the bank. Considering the need
and magnitude of training requirements of bank officers/staff both at field
level and controlling office level, the banks may initiate suitable steps to
internalize the SHGs linkage project and organize exclusive short duration programmes
for the field level functionaries. In addition, suitable awareness/sensitization
programmes may be conducted for their middle level controlling officers as well
as senior officers.
i) Monitoring and Review of SHG
Lending
Having regard to the emerging potential
of the SHGs and the relative non-familiarity of the bank branches with lending
to SHGS, banks may have to closely monitor the progress regularly at various
levels. Further the progress of the programme may be reviewed by the banks at
regular intervals. A progress report may be sent to both RBI (RPCD) and NABARD
(MCID), Mumbai, in the format as per Annexure, on a half-yearly basis, as on
30 September and 31 March each year so as to reach within 30 days of the half-year
to which the report relates.
In order to give a boost to the
on going SHG bank linkage programme for credit flow to the unorganised sector,
banks were advised in January 2004 that monitoring of SHG bank linkage programme
may be made a regular item on the agenda for discussion at the SLBC and DCC
meetings.
3. NBFCs engaged in micro-financing
activities
The Task Force on Supportive Policy
and Regulatory Framework for Microfinance set up by NABARD in 1999 recommended
that the policy and regulatory framework should give a fillip to the Self Help
Groups (SHGs) or Non-Governmental Organisations (NGOs) engaged in micro-financing
activities. Accordingly, it was decided to exempt such NBFCs which are engaged
in (i) micro financing activities, (ii) licensed under Section 25 of the Companies
Act, 1956 and (iii) which are not accepting public deposits from the purview
of Sections 45-IA (registration), 45-IB (maintenance of liquid assets) and 45-IC
(transfer of profits to Reserve Fund) of the RBI Act, 1934. Based on the recommendations
of the Advisory Committee on Flow of Credit to Agriculture and Related Activities
from the Banking System (Vyas Committee), in the Annual Policy Statement for
the year 2004-05, it has been announced that, in view of the need to protect
the interests of depositors, microfinance institutions (MFIs) would not be permitted
to accept public deposits unless they comply with the extant regulatory framework
of the Reserve Bank.
4. Interest rates
The interest rate applicable to
loans given by banks to micro-credit organisations or by the micro-credit organisations
to Self Help Groups/member beneficiaries would be left to their discretion.
5. Mainstreaming and enhancing
outreach
A Micro Credit Special Cell was
set up in RBI to suggest measures for augmenting flow of micro credit as announced
in Governor’s Monetary and Credit Policy for the year 1999-2000. In the meantime,
a Task Force on Supportive Policy and Regulatory Framework for Micro Credit
was also set up by NABARD. On the basis of their recommendations, banks were
advised to follow the under noted guidelines for mainstreaming micro credit
and enhancing the outreach of micro credit providers:
i. The banks may formulate
their own model(s) or choose any conduit/ intermediary for extending micro
credit. They may choose suitable branches/pockets/areas where micro credit
programmes can be implemented. It will be useful to start with a selected
small area and concentrate fully on the poor in that area and thereafter
with the experience gained replicate the arrangement in other selected areas.
Micro Credit extended by banks to individual borrowers directly or through
any intermediary would be reckoned as part of their priority sector lending.
ii. The criteria for selection
of micro credit organisations are not prescribed. It may, however, be desirable
for banks to deal with micro credit organisations having proper credentials,
track record, system of maintaining accounts and records with regular audits
in place and manpower for closer supervision and follow-up.
iii. Banks may prescribe their
own lending norms keeping in view the ground realities. They may devise
appropriate loan and savings products and the related terms and conditions
including the size of the loan, unit cost, unit size, maturity period, grace
period, margins, etc. The intention is to provide maximum flexibility in
regard to micro lending, keeping in view the prevalent local conditions
and the need for provision of finance to the poor. Such credit should, therefore,
cover not only consumption and production loans for various farm and non-farm
activities of the poor but also include their other credit needs such as
housing and shelter improvements.
iv. Micro credit should be
included in branch credit plan, block credit plan and state credit plan
of each bank. While no target is being prescribed for micro credit, utmost
priority is to be accorded to the micro credit sector in preparation of
these plans. Micro credit should also form an integral part of the bank's
corporate credit plan and should be reviewed at the highest level on a quarterly
basis.
v. A simple system requiring
minimum procedures and documentation is a pre-condition for augmenting flow
of micro credit. Hence, banks should strive to remove all operational irritants
and make arrangements to expeditiously sanction and disburse micro credit
by delegating adequate sanctioning powers to branch managers. The loan application
forms, procedures and documents should be made simple which would help in
providing prompt and hassle-free micro credit.
6. Delivery Issues
The Reserve Bank constituted four
informal groups in October 2002 to examine various issues concerning micro-finance
delivery. On the basis of the recommendations of the groups and as announced
in Paragraph 55 of the Governor’s Statement on mid-term Review of the Monetary
and Credit Policy for the year 2003-04, banks have been advised as under:
i. Banks should provide adequate
incentives to their branches in financing the Self Help Groups (SHGs) and
establish linkages with them, making the procedures absolutely simple and
easy while providing for total flexibility in such procedures to suit local
conditions.
ii. The group dynamics of working
of the SHGs may be left to themselves and need neither be regulated nor
formal structures imposed or insisted upon.
iii. The approach to micro-financing
of SHGs should be totally hassle-free and may include consumption expenditures.