The International

With UN organizations pushing to eradicate extreme poverty and hunger, a project comprised of numerous self-help groups (SHGs) in India is also scaling up its efforts. The Andhra Pradesh Rural Poverty Reduction Project, a micro-financing initiative, aims to enable the rural poor in the province of Andhra Pradesh, India, to improve their livelihoods and quality of life. On December 23, 2009, the World Bank approved an additional $100 million for the project, which is attributed to have raised incomes for around 10 million rural women since it first began.

The Andhra Pradesh Rural Poverty Program was launched in 2003 after receiving approval from the World Bank. The project has organized nearly 90 percent of its participants – about 10 million women, as previously mentioned – into approximately 850,000 SHGs. The additional $100 million investment, a credit through the World Bank’s International Development Association (IDA) – which aims to reduce poverty by providing interest-free loans and grants for programs that boost economic growth, reduce inequality, and improve people’s living conditions – will be going towards improving community institutions so that they are able to deal more effectively with external partners. These partners include commercial banks, market institutions, public sector departments, and private sector partnerships.

SHGs and the UN Millennium Development Goals

In recent years, SHGs have become a significant movement in India. Generally based in villages, an SHG serves as a financial intermediary between 10-15 women. SHGs can be registered or unregistered, and generally consist of voluntary micro-entrepreneurs from similar social and economic backgrounds. SHG members meet up to save small amounts of money regularly, and make mutual agreements when contributing to a common fund or meeting a member’s emergency needs. According to the Reserve Bank of India, peer pressure is an indispensable element in SHGs because it ensures the proper use of credit as well as the timely repayment of loans; the bank recognizes peer-pressure as an effective substitute for collaterals.

Many SHGs are attached to banks for micro-credit transference, in what are called SHG-bank linkage programs. This practice originated in 1992 when the National Bank for Agriculture and Rural Development (NABARD) began a pilot project linking 500 SHGs to state banks. The project maintained these linkages between SHGs and banks to provide credit and keep group savings. SHG members were encouraged to regularly save what they could, and the banks provided for the financial needs that were beyond their savings. Eventually, these SHG-bank linkages became a part of mainstream activity in India’s rural finance system.

India, the world’s largest democracy, is one of the most populous countries in the world. Because of its large population, sustainable development in the country’s poverty-stricken regions is vital for achieving the UN Millennium Development Goals (MDGs). SHGs are relevant to the first MDG, which aims to eradicate extreme poverty and hunger. According to NABARD, by the end of March 2006 there were 3.37 million SHGs in India covering 40.95 million poor households. This amounts to roughly 200 million people, or 20 percent of India’s total population. Moreover, as of March 2007, 2.92 million SHGs have been receiving loans of Rs 180,410 million.

SHGs receive praise, but are also charged with problems

With SHGs becoming a major tool for bringing economic development to India’s poor while also contributing to community empowerment, the movement has drawn international praise. The Andhra Pradesh Rural Poverty Reduction Project in particular, one of the largest Indian SHG initiatives, is also critically lauded. Mr. Roberto Zagha, World Bank Country Director for India, believes the project is “having a remarkable impact on the lives of the rural poor in Andhra Pradesh.” Mr. Shoaib Sultan Khan, a Pakistani social activist and Chairman of the Rural Support Program Network in Pakistan, called the project an exemplary model that should be used to form future poverty reduction programs: “India has become a home grown model for elimination of poverty. It would be a tragedy and injustice to the rural poor of India, if the rest of India does not take advantage of the Andhra demonstration.”

However, SHGs are accused of having flaws within their system as well. Dr. Biruda, a citizen journalist at merinews.com who holds a doctorate in anthropology and is currently working with an international child development agency, believes that some SHGs may not provide women with enough training to effectively pursue economic development for their households. He also charges the SHG movement of discounting the differences between various tribes of rural India. SHGs have a general framework, but Dr. Biruda believes that this general framework will not always accompany the variation in gender roles of different tribes. In his article Self Help Groups: Problems and Solutions, he says: “Sixty years have gone but our planners have not yet realized the fact that we are having a diverse culture all over and one thing accepted in any part, among a particular community, may not be accepted in the other part or among the other community. … We never take into account, which gender among different community is the working force and who can be entrepreneur and decision makers.”

On the other hand, many women in India strongly believe in the movement and hold it responsible for improving their livelihoods. In a report entitled Wonderful Women: Working towards a sustainable future, several women living in different parts of India provide personal perspectives on SHGs. Ms. Anguri Laskhmi Siva Kumari, a wife and mother living in the village of Mallavaram in northeastern Andhra Pradesh, says in her testimony: “I got married when I was just 12 years old. … We struggled for livelihood. We used to go half-starved. … I was persuaded to constitute a Self-help Group in 2004. … I borrowed Rs 12,000 loans. I started the business of leaf plates. I am earning Rs 1500 a month now. … Thus, we are now living comfortably. I am able to educate my three children, too, now. I have already repaid Rs 7000 out of Rs 12000 borrowed.”

While there are numerous positive testimonials regarding SHG benefits, a pitfall of the movement could be its reliance on external financing. At the inauguration of Saras Mela, a handicraft fair with 20 Indian participant states, Kolkata Chief Minister Buddhadeb Bhattacharjee discussed how deeply non-cooperation from banks could affect SHGs. He also accused the lack of bank offices in gram panchayats – local or village governments that are common throughout rural India – of impeding the SHG movement. The Indian Express reported him as saying: “We know the people in villages are suffering due to the procedural lapses in getting money from the banks. … There are over 700,000 self-help groups in the state, of which around 250,000 do not receive assistance from the banks. Moreover, the absence of bank offices in gram panchayats has only hampered the development of self help groups in various districts of the state.”

Alternatives to simple SHG-bank linkage programs: the three models

According to the Reserve Bank of India, there are three SHG models. The first, an Intermediate model, works on banking principles with a focus on both savings and credit activities. This model revolves around banking services that are provided to clients, either directly or through SHGs. In this model, it is the banks that take initiative to form the groups, rather than individuals, government agencies, or non-governmental organizations (NGOs).

The second model is called the Wholesale banking model, in which NGOs and microfinance institutions are additional actors that are involved. This model is based upon providing both loans as well as capacity building support to its partners. The presence of NGOs creates a new dimension. In the Intermediate model, the involvement of NGOs is limited to promoting and nurturing SHGs. Here, NGOs play a more dominant role as they work as financial intermediaries in obtaining credit from banks and passing it on to the SHGs, thus inserting a third party into the original SHG-bank linkage. This model is becoming increasingly popular throughout rural India. However, Mr. Navin Bhatia and Mr. Anju Bhatia, the latter an Assistant Professor at the University of Rajasthan at Jaipur, believe that as “the ability and the credibility of NGOs have not been fully tested, it would be difficult to trust them with this onerous task.”

Finally, there is an Individual Banking-based model that has individuals or joint liability groups as clients. Because program management and client appraisal in this model may be challenging in scope, it is considered best suited for lending to enterprises. NGOs are also an actor in this model; banks lend to them as intermediaries for onward financing to SHGs or their individual members.

The potential of SHG federations

While the three models allow more room for leeway in the SHG-bank linkage format, they still do not address the problems stemming from SHG reliance on banks as external financiers. This is where the concept of federation can be applied, as it allows individual SHGs to build up a network of support.

According to Mr. Ajai Nair, a consultant at the World Bank, SHG federations are promoted primarily as an exit strategy. Federations can allow organizations promoting SHGs, like banks or NGOs, to withdraw their support while also ensuring SHG sustainability. The Professional Assistance for Development Action (PRADAN) and the Mysore Resettlement and Development Agency (MYRADA) are the NGOs who pioneered the movement, and subsequently, other Indian NGOs began championing the cause.

In his paper, Sustainability of Microfinance Self Help Groups in India: Would Federating Help?, Mr.Nair argues that SHG federations have unexplored potential that can contribute to SHG sustainability: “The primary purpose of federating SHGs is to ensure the sustainability of SHGs. SHG federations help SHGs internalize all operational costs and reduce the cost of promoting new SHGs. Federations also build solidarity among SHG members by helping them see SHGs as part of a larger organization. This helps build member state in the SHGs.” Mr. Nair believes that building ownership is important in SHGs especially because the groups are not typically self-promoted, and their small size makes it difficult for members to visualize them as sustainable organizations.

The path ahead

The SHG movement has come a long way. What began as an experiment has now been established as widely accepted practice of rural and developmental financing in India.
Mr. Rajesh Chakrabarti – Assistant Professor of Finance at Dupree College of Management, at the Georgia Institute of Technology – praises these achievements, but he also argues that the movement has a long way to go. In his paper The Indian Microfinance Experience: Accomplishments and Challenges, he argues that, with regards to outreach, a lot still needs to be accomplished to make a serious change in India’s poverty. “The path ahead is obviously strewn with challenges. Scaling up of projects and bringing millions of people within the fold of microfinance is no mean task.”

Mr. Chakrabarti believes that what the movement needs most is an equitable balance between micro-credit practitioners and the quality of loans. He also calls the increasing government involvement in the SHG movement a welcome development, but warns that it will produce its own problems: “Government aid almost always brings in its wake political favoritism and corruption. It is important to ensure the government microfinance initiatives do not go the way of their several well-intentioned predecessors.”

However, Mr. Chakrabarti calls out the biggest challenge in India’s rural economic development to be the simultaneous development of investment potential and improvement of skill level of the borrowers. He believes the answer to this lies in micro-consulting, business planning, and marketing services that are designed to suit individual SHG needs. Mr. Chaktabarti says that micro-credit and micro-financing initiatives, like SHGs, need to invest in these types of methods to be truly successful, and that these investments can yield great results: “The principles of self-help and micro-credit thus hold the key to economic and socio-cultural freedom for India’s millions of poor, opening the gates of a hitherto untapped reservoir of human enterprise.”