SHGs in India: Questions to Niraj Verma from the World Bank

Community-based Financial Organizations: A Solution to Access in Remote Rural Areas? Anne Ritchie Improving access to financial services has become an important part of many World Bank development initiatives that seek to reduce poverty and improve the social and economic security of the poor. Characteristics of demand. The characteristics of demand for financial services, as well as the costs of providing those services, influence the types of financial services providers that can operate profitably in a given area. At one end of the spectrum, effective demand for financial services is low, with smallholder households mainly producing crops for consumption and with few opportunities for off-farm economic activities. This creates a need for low-cost organizations that can cover the costs of intermediating small pools of capital for large numbers of customers with small transactions in order to satisfy their household cash management needs. In response to these realities, many development agencies, including the World Bank, have sought to develop Community-Based Financial Organizations (CBFOs). Bad track record of loan funds. Many projects provide grants to CBFOs to establish revolving loan funds to support the development of rural livelihoods, but the experience has been that such funds usually decapitalize, benefiting few people and encouraging a culture of default. A new way forward with savings-based methodologies. In recent years, however, several models of savings-led community finance have emerged that seem to offer better prospects for the long-term. The main findings of the paper are summarized below. Success Factors for Effective and Sustainable Financial Services through CBFOs Mobilization and intermediation of member savings before accessing external loan funds. Vision for the development of a financial organization that is autonomous, financially independent, and able to provide financial services to its members over the long term. Clear ownership of donor loan funds, if they are provided. An organizational structure that facilitates management by members. Appropriate loan policies and processes. Simplified systems, including financial management systems. Appropriate and high-quality capacity building. Continuity of technical support. Accountability through appropriately designed internal regulations and controls. Development of sustainable links to banks or MFIs. Recommendations for Project Design and Implementation Determine the most suitable type of financial intermediary. Develop a plan at the outset for the sustainability of the CBFOs. Empower members through a participatory process to develop their own set of rules within a defined institutional model and set of recognized best practices. Have a pilot phase in which a model suitable for the local context can be developed and fine-tuned with high levels of participation. Develop an effective monitoring and evaluation system. Ensure that appropriate technical assistance is available from qualified service providers. Above all, facilitate mobilization of savings and intermediation by members of these savings at project inception.

Read this interview with Niraj Verma to learn how SHGs have become an important model of microfinance in India. The views expressed in this interview are personal and do not necessarily represent those of the World Bank.

1. What role do Self Help Groups (SHGs) play in India's financial sector?

A 2004 World Bank-NCAER survey on access to financial services showed that 87% of the rural poor households in India had no access to credit services, and 70% had no access to savings services from the formal financial sector.

In recent years SHGs have played an important role in expanding access to financial services from the formal banking system to poor and underserved clients. This is significant given that a growing body of literature shows that well-developed and inclusive financial systems are associated with higher growth and better income distribution.

Access to credit, savings, insurance, and other financial services provide opportunities for poor families to catch up with the rest of the economy; and SHGs channel these kinds of financial services to the poor.

SHGs have extended their reach by linking with the formal financial sector (see graph below). Linkages are an important strategy for improving financial access, by building on existing financial infrastructure. Linkages seek to increase the efficiency and outreach of the formal banking system in dealing with large numbers of small sized accounts.

SHGs have expanded their presence dramatically. As of end-March 2007, 2.9 million SHGs have been linked to formal banks. According to NABARD's estimates, approximately 35 to 40 million people are associated with SHGs. Cumulatively over $4.5 billion has been disbursed to SHGs from the banking system--most of it in the last 4-5 years. Overall, the growth of SHGs has been an important contributor to addressing financial inclusion concerns in India.

Last but not least, SHGs have contributed significantly to women's empowerment. The vast majority of SHGs are women's groups, and they often perform services that go beyond the scope of microfinance.

2. What are plans for the future with SHGs?

The Government of India has recognized the importance of SHGs. In his annual budget speeches, the Finance Minister has included scaling up SHGs as a means of empowering women and helping them access financial services.1 However, this will require a multi-pronged approach. All institutions involved with SHGs will be critical to their future effectiveness. At the apex level, NABARD has helped facilitate and guide the growth of SHGs, and this would need to continue. Likewise, SHGs will require help in the form of promotion, support, and funding. The help of commercial and rural banks, cooperatives, notable NGOs (such as MYRADA, Pradan, and Dhan Foundation), microfinance institutions, and others will also be crucial. Future initiatives will need to focus on scaling up SHGs as well as ensuring long-term growth and sustainability. (see Graph 1 below)

3. Do you believe there is a potential for using SHGs to improve poor peoples' access to savings services in India? At what conditions?

SHGs provide access to savings services. With the SHG bank linkage model, most groups have access to a saving account that is placed with a well-regulated, formal sector banking institution. Giving people a safe place to save is a great achievement in itself.

In addition, the Reserve Bank of India (India's central bank) has permitted SHGs to act as correspondents for other banking institutions, thereby enabling the vast outreach of SHGs to be used as a channel to extend the reach of formal financial services. Beyond these, there is the room (and the need) to develop a greater variety of deposit products that enable banks to minimize transactions costs, handle relatively small accounts, address depositor protection issues, and still provide the much-needed convenient access to deposit services.

4. What are the benefits of SHGs for funders and governments?

Well-organized SHGs can be a low-cost and effective vehicle for expanding financial access and social empowerment. As such, they are a priority for both funders and governments. SHGs are decentralized and member-directed, enabling them to make better immediate and local impact. And the CGAP study on SHGs has shown that well-organized SHGs can be sustainable. Because SHGs are in direct contact with their members, they help the formal sector overcome the lack of credit information and high transaction costs of delivering credit to underserved clients. And because SHGs exist amongst the poorest members of society, they help extend formal financial services to the frontiers. Some SHGs (or their federations) are also involved in channeling insurance services.

SHGs are increasingly organizing themselves and taking responsibility for development at the village or district level, proving that they can also serve as an important instrument of social development and civil society reinforcement. A number of the World Bank's livelihoods promotion projects are illustrative of this.

5. What are the challenges to overcome?

While SHGs are a great success story, there are crucial challenges that must be addressed. These include:

Related documents

• World Bank. Community-based Financial Organizations: A Solution to Access in Remote Rural Areas? Anne Ritchie
• World Bank. Sustainability of microfinance self help groups in India: would federating help?
• World Bank. Improving Access to Finance for India's Rural Poor
• EDA Rural Systems. SHGs in India: A case study of the lights and shades

Related links

• APMAS. www.apmas.org
• National Bank for Agriculture and Rural Development
• Reserve Bank of India - India's Central Bank

Niraj Verma is Senior Financial Sector Specialist with the South Asia PREM, Finance and Private Sector Development Unit at the World Bank. He is based in New Delhi, India. A significant part of his work is focused on providing access to financial services to underserved segments (rural cooperatives and microfinance clients in India and Afghanistan, SMEs, farmers accessing agriculture and weather indexed insurance, low income households wanting housing finance). Prior to joining the World Bank, he worked extensively on microfinance at Micro-Credit Rating International Limited (M-CRIL) and EDA Rural Systems

1 Read the budget speech http://indiabudget.nic.in/ub2007-08/bs/speecha.htm or watch the web cast http://webcast.gov.in/indiabudget/2006/2006.htm