COMMUNITY BANKING THROUGH SHG LINKAGE

Meenu Sarika Barwa

215461
Introduction

Self Help Groups are a homogenous group of 10-20 individuals who come together for saving and
internally helping each other in times of need. Group members are engaged in livelihood activities such
as running a retail shop, cattle rearing, zari work, tailoring jobs, making candles, artificial jewellery etc.
Each individual saves a fixed amount on a monthly basis.

SHGs get linked to banks via NGOs, for opening savings account and for their credit requirements. Banks
lend to SHGs after assessing their credit worthiness on parameters such as group discipline, regularity of
meetings, savings, rotation of funds, maintenance of books of accounts, group record keeping,
repayment of loans etc.

Members are usually women from similar social and economic backgrounds. They pool their resources
to become financially stable, taking loans from their collective savings in times of emergency or financial
scarcity, important life events or to purchase assets. The group members use collective wisdom and
peer pressure to ensure proper end-use of credit and timely repayment. In India, RBI regulations
mandate that banks offer financial services, including collateral free loans to these groups, on very low
interest rates. This allows poor women to circumvent the challenges of exclusion from institutional
financial services. This system is closely related to that of solidarity lending, widely used by microfinance
institutions.

Beyond their function as savings and credit groups, SHGs offer poor women a platform for building
solidarity. They allow women to come together and act on issues related to their own lives including
health, nutrition, governance and gender justice.

Basic features of sHGs

.1. SizeofthesHG:

SHGs are small informal group of 10-20 individuals, who are homogenous with respect to social and
economic background and come together voluntarily for promoting savings habit among members and
for a common cause to raise and manage resources for the benefit of group members. However, in hilly
tracts / regions and predominantly tribal dominated areas where communities are dispersed, smaller
groups of minimum 5 members are also formed into SHGs. The internal savings mobilised by the group
are then lent by it to its members for emergent needs or such other purposes as decided by the group.

2.. Characteristics of the SHG:

Some of the basic characteristics for provision of credit by the bank to the group area. SHG membersi
should preferably have homogeneous background and common interest.
b. It should have been in active existence for at least a period of six months.

c. It should have successfully undertaken savings and credit operations from its own resources.

d. It should be democratically working, wherein all members feel that they have an equal say.

e. The group is maintaining proper accounts/records.

f. Banker should be convinced that the group has not come into existence only for the availing benefits
and there should be genuine need to help each other and work together among the members

3. Quantum of Loan:

SHGs may be sanctioned savings linked loans by banks (varying from a saving to loan ratio of 1:1 to 1:4 )
However , in case of matured SHGs,loans may be given beyond the limit of four times the savings as per
the discretion of the bank. However, the Banks may make the credit decision on the basis of certain
objective parameters such as proven track record, savings pattern, recovery rates, credit history,
housekeeping, etc.

4.. Documentation:

Keeping in view the nature of lending and status of borrowers, the banks normally prescribe simple
documentation for lending to SHGs. Three basic documents which were prescribed for use of banks are

1) an inter-se agreement to be executed by the members of the SHGs

2) a loan application to be submitted by SHGs and

3) loan agreement between bank and SHG.

5. 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 banks financing SHGs provided the SHG has not defaulted to it. However,
the bank loan may not be utilized by the SHG for financing a defaulter member to the bank.

6. Separate segment under priority sector : In order to enable the banks to report their SHG lending
without difficulty, RBI has issued instructions to banks that they should report their lending to SHGs for
on- 1ending to members of SHGs under the separate category, that is '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.

7. Grading of SHGs for Bank Finance: Banks are expected to finance such SHGs which show certain
minimum level of group dynamics, financial management capabilities and behavioural discipline.
Financing of SHGs by banks has undergone a shift with the spread of the programme, substantial
increase in quantum of credit disbursed, adoption of cash credit system of lending, as also increasing
delinquencies in SHG etc. Banks may use grading formats/ norms .
a. At the time of first credit linkage of SHGs

b. For mature SHGs where higher quantum of credit is required (i.e. credit in excess of four times of the
group corpus could be considered)

8. Rate of lnterest: The SHGs are free to decide the interest rate to be charged to their members
provided the rate of interest is not excessive. The banks have the discretion to decide on the interest
rates applicable to loans given to Self Help Groups/member beneficiaries

9. Margin and security norms: As per the guidelines issued by RBI from time to time.

Voluntary savings/ Thrift

Although SHGs save fixed amounts as compulsory savings in weekly/ fortnightly /monthly meetings,
savings capacity and potential tend to vary across members over the period. Therefore, members of
SHG may be allowed voluntary savings over and above the compulsory savings mandated in the group
and a suitable accounting system may be started in the SHG for this purpose.

Voluntary savings can be reckoned in two ways;

(1) Not forming a part of the group corpus and

(2) As a part of group corpus and utilized for intra group lending.

In case of (2), it will also be reckoned for assessing the quantum of loan to the group from bank.
However, it is desirable that the additional savings by group members does not entitle the concerned
members to seek proportionately higher dosage of credit for themselves. The SHGs should have
freedom to decide as to whether the voluntary savings by members of the group are eligible for
proportionate share in the interest income or dividend from the group.

Purpose of bank loan

Loan granted by the bank to the SHG is purpose neutral as the group decides the purpose for which loan
can be given to its members. As indicated by RBI 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 (c) debt swapping, etc.

Cash Credit / overdraft for SHGs

There are instances of non-sanction of repeat loans to SHGs, as also cases of limiting need based credit.
Sanction of a cash credit / overdraft system of lending for SHGs for a longer operational tenure may
therefore be adopted to overcome these issues and to permit SHGs to have larger loans in tune with
increasing pooled savings. This approach will provide considerable flexibility to SHGs in meeting their
frequent needs my as well as help them in reducing their cost of borrowings.

The loan limit may be sanctioned for a period of three to five years based on the projected savings of
the SHGs upto the end of 3 to 5 years, thus avoiding repeated documentation. Drawable limits for each
year can, however, be fixed within this aggregate ceiling as a multiple of actual pooled savings reached.
The following measures may therefore be adopted:

a. Though the cash credit facility is to be sanctioned by the bank to SHG, the sanction of credit by SHG to
its individual members will be guided as per their terms and duration as decided by the groups. This is
expected to remain unchanged and thus ensure continuance of financial discipline at the member level.

b. In order to ensure that the financial discipline is maintained between the SHG and the banks, banks
may insist for servicing of interest at monthly rests.

c. Banks may use prudent mechanism for continuance and review of limit by ensuring that all or part of
drawals is repaid in an operational year. Similar to approaches applicable in KCC, the bank could insist
that every drawal be repaid within twelve months from the date of drawal or insist for turnover of
atleast 25-3o% of the principal drawn in the first half of the year while reviewing the operations of the
credit limit

d. Banks approving repeat cycles of cash credit to SHGs may sanction larger credit limits beyond a
multiple of foul times of SHG's corpus. These approvals may be done based on the performance review
of existing operations, actual growth in SHG's own corpus and the debt servicing history and capacity of
SHG.

e. In mature SHGs that have been supported with a few cycles of credit, the requirement of credit for
purchase of capital assets, etc would increase. This would necessitate that the bank approves a different
type of credit accommodation like term loans to these groups in addition to the cash credit limit.

Importance of SHG-Bank Linkage

Linking the SHG with the bank is an essential pre-requisite for promoting financial inclusion. Unless SHGs
access repeat doses of bank credit, the members will not be able to meet their consumption and
production credit requirements at affordable interest rates. Apart from providing access to credit, bank
linkage enables SHGs to utilize other services such as remittances of Mission and other government
funds such as interest subvention and insurance services. Bank linkage also promotes the financial
literacy of the members and contributes to prudent utilization of funds. The two key steps in promoting
SHG-bank linkage are:
Opening of SHG Saving Bank Account; and

Facilitating Credit Linkage of SHG.

Opening of savings bank account is the first step towards financial inclusion of SHG. The saving bank
account provides the following advantages to the SHGs and its members:

Savings bank account gives recognition to the SHG as a customer of the banking system and provides
potential access to different financial services;

SHG can keep surplus cash with the bank for safe custody, which in turn contributes to trust building
among members;

An account provides an opportunity for the SHG to undertake financial transactions with the bank and
contributes to the financial literacy of the members; and

It facilitates introduction of all individual members of the SHG to the bank who could eventually become
individual customers of the bank.

SHG should open a SB A/c with the nearest Bank branch, ideally within two months of formation of the
Group.

The followings steps should be observed in opening of the Savings Bank Account:

Step-1: SHG Resolution

The first step is to facilitate passing of a resolution by SHG to open a bank account in the service area
bank branch/nearest bank branch. All members should subscribe their signatures to the resolution .

Step-2: Office Bearers

As part of the resolution, the SHG should authorize three Office Bearers to operate the saving bank
account with a condition that any two Office Bearers can transact with the bank.

Step-3: Application for Opening of Bank Account

The next step is to guide the SHG in preparing an application to the branch manager with a request to
open a savings bank a/c at the branch. The application should be signed by office bearers of the SHG.

Step-4: SHG Seal and Photographs of OBs

It is important to ensure that each SHG gets a stamp (seal) made. Also the SHG needs to be guided to
arrange for color photographs of 3 Office Bearers (passport size-3 copies each). Photocopies of the
supporting identity and address proof documents of office bearers should also be prepared as part of
the KYC norms .

The following documents are required for the SHG to comply with the KYC norms

Proof of Identity of Office bearers: Any one of the documents to be submitted

Voter IDCard

Aadhar Card

MGNREGS Job Card

Artisan Card

Any other ID card with photograph, issued by A Government Department as ID card is accepted by the
banks

Proof of Address of office bearers : Any one of the documents to be submitted

Voter IDCard

Aadhar Card

MGNREGS Card

Electricity Bills

Artisan Card

SINGLE DOCUMENT FOR PROOF OF IDENTITY AND ADDRESS

Earlier, as part of the KYC process, one had to submit separate proofs for address and identity. The RBI
has done away with this. Now, a single document with photograph and address of the applicant will
suffice. Among the documents approved for KYC include passport, driving license, voter ID card,, Aadhar
and job card.

Step-5: Visit to the Bank

The SHG office bearers should visit the bank branch along with following items for opening of Saving
Bank account
A copy of the resolution to open bank account for the SHG;

Application to the Branch Manager with a request to open a savings bank A/c;

Photocopies of identity and address proof documents of office bearers Original documents also should
be carried for verification,

Colour photographs passport size-3 copies each of 3 office bearers, and

Seal of the group.

Step-6: Opening Form

The SHGs should be guided to filling in the requisite SB account opening form and attach all supporting
documents correctly.

Step-7: Basic Saving Bank Deposit Account

The SHGs may also open ‘Basic Saving Bank Deposit Account’ or may deposit some amount if they
choose to. Preference should be given to open account with some amount to avoid any confusion/
misunderstanding at later stage.

Step-8: Regular Banking

SHG should be encouraged to regularly transact with the bank to maintain good rapport with bank
branch manager.

Enabling Joint Liability Groups (JLGs) within SHGs

A few members of an SHG may graduate faster to start or expand economic activities requiring much
higher levels of loans than required by other SHG members. In suchcases, all other members may not
like to stand mutual guarantee for a few large sized loans. In such cases, a smaller "Joint Liability Group
(JLG)" from members of an SHG may be created. The members of JLG will continue to remain members
of the SHGs and continue to participate in the activities of SHGs are earlier. Banks may encourage
creation of such enterprise / livelihood based JLGs as a separate entity. Banks may use financial and
other support extended by NABARD for this purpose. These JLGs may be created and financed by the
bank on the lines of NABARD guidelines on JLGs already in vogue and such financing would be in
addition to the loan / credit limit to the SHG.
Improving Risk Mitigation Systems

ln order to further strengthen the banker's comfort and confidence in financing of SHGs, a few risk
mitigation mechanisms, viz; self-rating tools by SHGs, conduct of audits at SHG level, etc. are
recommended, Audit of SHGs is a third party assessment of SHGs' operations while keeping SHGs' own
functioning free and flexible. Audit, should cover aspects like regularity in meetings, savings, internal
lending process, correctness of interest application, accounting for all receipts and payments, drawing
out final accounts of SHGs, etc. The audit may be informal in nature, but be made compulsory for credit
expansion beyond the normal limit of four times of the savings of SHGs. Banks could source SHG-level
Business Facilitators (Auditors) from amongst active SHG members or NGOs or other agencies, which
promote SHGs, or existing BCs of the bank to enable the audit process in SHGs.

Building second tier institultions

Experience gathered over the years in promotion and nurturing of SHGs suggests the need for a much
longer and sustained hand holding by SHG Promoting Institutions(SHpls) to ensure SHG's sustainability.
Members of well-functioning SHGs or active members of SHGs and NGOs or other entities engaged in
promotion of SHGs best provide these support services to SHGs. Such entities may be engaged by banks
to serve as Business Facilitators for helping the bank monitor the functioning of SHGs and take
corrective action.Besides nurturing SHGs and conducting their audits, they could also facilitate financial
literacy, help SHG members' to open individual savings accounts, guide and improve existing livelihoods.

Training and Capacity Building

An important aspect in the Linkage Programme is the training of field level officials and sensitisation of
the senior officers. 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.

Monitoring and Review of SHG Lending

Bank should closely monitor the progress of the programme and may be reviewed at regular intervals. A
progress report in regard to the linkage programme should be reported to NABARD on a quarterly basis
in the NABARD's on-line portal -ENSURE within 15 days of end of each quarter. In order to give a boost
to the SHG - Bank Linkage programme for credit flow to the unorganised sector, monitoring of SHG bank
linkage programme may be made a regular item in the agenda for discussion in the SLBC, DCC and BLBC
meetings.
Refinance support to banks for financing SHGs

NABARD provides 100% refinance to banks for their direct lending to SHGs. Rate of interest on refinance
will be determined by NABARD from time to time. Refinance provided by NABARD should normally be
covered by banks' outstanding with SHGs at any point of time.

Precautionary Measures for Promoting Transparency

The following precautionary measures should be taken to promote transparency in the transactions and
downward accountability of the members

The SB A/c shall be opened in name of the group and not in the name of any office bearer or member;

Only members of the group should become the signatories to the bank A/c. No one other than a
member should become a joint signatory of the group A/c;

The SHG should collect the saving A/c pass book and cheque Book from the bank on the same day of
opening of bank account or within the time period specified by the bank,

The SHG should get the pass book updated regularly,

While operating the bank account, the group members should depute at least one member along with
the office bearers for ensuring transparency and development of trust among the office bearers and
other members, and

The pass book along with the cheque book, if any, should be kept in safe custody in a manner decided by
the SHG.