History of microfinance

The history of micro financing can be traced back as long to the middle of the
1800s when the theorist Lysander Spooner was writing over the benefits from
small credits to entrepreneurs and farmers as a way getting the people out of
poverty. But it was at the end of World War II with the Marshall plan the concept
had a big impact.

The today use of the expression micro financing has it roots in the 1970s when
organizations, such as Grameen Bank of Bangladesh with the microfinance
pioneer Mohammad Yunus, where starting and shaping the modern industry of
micro financing. Another pioneer in this sector is Akhtar Hameed Khan of
Pakistan. At that time a new wave of microfinance initiatives introduced many
new innovations into the sector. Many pioneering enterprises began
experimenting with loaning to the underserved people. Shorebank was the first
microfinance and community development bank founded 1974 in Chicago.

Today the World Bank estimates that more than 16 million people are served by
some 7000 microfinance institutions all over the world. CGAP experts mean that
about 500 million families benefits from these small loans making new business
possible. In a gathering at a Microcredit Summit in Washington DC the goal was
reaching 100 million of the world´s poorest people by credits from the world
leaders and major financial institutions.

The year 2005 was proclaimed as the International year of Microcredit by The
Economic and Social Council of the United Nations in a call for the financial and
building sector to “fuel” the strong entrepreneurial spirit of the poor people
around the world.

The International year of Microcredit consists of five goals:

1) Assess and promote the contribution of microfinance to the MFIs

2) Make microfinance more visible for public awareness und understanding
as a very important part of the development situation.
3) The promotion should be inclusive the financial sector.
4) Make a supporting system for sustainable access to financial services
5) Support strategic partnerships by encouraging new partnerships and
innovation to build and expand the outreach and success of microfinance
for all
The economics professor Mohammad Yunus and the founder of Grameen Bank
were awarded the Nobel Prize 2006 for his efforts.

Grameen Bank At A Glance

1. Owned by the Poor:
Grameen Bank Project was born in the village of Jobra, Bangladesh, in
1976. In 1983 it was transformed into a formal bank under a special law
passed for its creation. It is owned by the poor borrowers of the bank
who are mostly women. It works exclusively for them. Borrowers of
Grameen Bank at present own 95 percent of the total equity of the
bank. Remaining 5 per cent is owned by the government.

2. No Collateral, No Legal Instrument, No Group-Guarantee or Joint

Liability :
Grameen Bank does not require any collateral against its micro-loans.
Although each borrower must belong to a five-member group, the group
is not required to give any guarantee for a loan to its member.
Repayment responsibility solely rests on the individual borrower, while
the group and the centre oversee that everyone behaves in a
responsible way and none gets into repayment problem. There is no
form of joint liability, i.e. group members are not responsible to pay on
behalf of a defaulting member.

3. 97 percent Women :
Total number of borrowers is 8.34 million, 97 per cent of them are
women.

4. Branches:
Grameen Bank has 2,565 branches. It works in 81,376 villages. Total staff
is 22,225.

5. Over Tk 594 billion Disbursed:

Total amount of loan disbursed by Grameen Bank, since inception, is Tk
594.46 billion (US $ 10.12 billion). Out of this, Tk 528.03 billion (US $
8.98 billion) has been repaid. Recovery Rate Over 97 per cent: Loan
recovery rate is 97.37 per cent.
6. 100 per cent Loans Financed From Bank’s Deposits:
Grameen Bank finances 100 per cent of its outstanding loan from its
deposits. Over 54 per cent of its deposits come from bank’s own
borrowers. Deposits amount to 157 per cent of the outstanding loans. If
we combine both deposits and own resources it becomes 172 per cent
of loans outstanding.

7. No Donor Money, No Loans:

In 1995, GB decided not to receive any more donor funds. Since then, it
has not requested any fresh funds from donors. GB does not see any
need to take any donor money or even take loans from local or external
sources in future. GB's growing amount of deposits will be more than
enough to run and expand its credit programme and repay its existing
loans.

8. Earns Profit:
Ever since Grameen Bank came into being, it has made profit every year
except in 1983, 1991, and 1992. It has published its audited balance-
sheet every year, audited by two internationally reputed audit firms of
the country. All these reports are available on CD, and some on our web-
site: www.grameen.com.

9. 30% Dividend for 2009:

Grameen bank has declared 30% cash dividend for the year 2009. This is
the highest cash dividend declared by any bank in Bangladesh in
2009.Highest record of dividend declared by Grameen Bank was in
2006.It was 100%.The bank has also created a Dividend Equalization
Fund to ensure distribution of dividends without much fluctuation in
successive years .Receiving of dividends each year greatly inspires our
shareholders, 97% of whom are our borrowers.

10. Low Interest Rates :

Government of Bangladesh has fixed interest rate for government-run
microcredit programmes at 11 per cent at flat rate. It amounts to about
22 per cent at declining basis. Grameen Bank's interest rate is lower
than government rate. There are four interest rates for loans from
Grameen Bank : 20% for income generating loans, 8% for housing loans,
5% for student loans, and 0% (interest-free) loans for Struggling
 Members (beggars). All interests are simple interest, calculated on
declining balance method. This means, if a borrower takes an income-
generating loan of say, Tk 1,000, and pays back the entire amount within
a year in weekly instalments, shall pay a total amount of Tk 1,100, i.e. Tk
1,000 as principal, plus Tk 100 as interest for the year, equivalent to 10%
flat rate.

11.Deposit Rates:
Grameen Bank offers very attractive rates for deposits. Minimum
interest offered is 8.5 per cent. Maximum rate is 12 per cent.

12.Beggars as Members:
Grameen Bank has taken up a special programme in 2002, called
Struggling Members Programme exclusively for the beggars. Over
112,615 beggars have joined the programme. Total amount disbursed
stands today at Tk. 154.99 million. Of this amount of Tk. 122.18 million
(78% of the amount disbursed) has already been paid off.19,497 beggars
have left begging and are making a living as door-to-door sales persons.
Among them, 9,599 beggars have joined Grameen Bank groups as main-
stream borrowers. Beggar members have voluntarily opened their
personal savings accounts. Cumulative deposit in these savings accounts
amounts to BDT 22.88 million; present balance stands at BDT 8.33
million.

13. Housing For the Poor:

Grameen Bank introduced housing loan in 1984. It became a very
attractive programme for the borrowers. This programme was awarded
Aga Khan International Award for Architecture in 1989. Maximum
amount given for housing loan is Tk 15,000 (US $ 218) to be repaid over
a period of 5 years in weekly installments. Interest rate is 8 per cent.
687,331 houses have been constructed with the housing loans averaging
Tk 13,062 (US $ 185.57).

14. Micro-enterprise Loans :

Many borrowers are moving ahead in businesses faster than others for
many favorable reasons, such as, proximity to the market, presence of
experienced male members in the family, etc. Grameen Bank provides
larger loans, called micro-enterprise loans, for these fast moving
 members. There is no restriction on the loan size. So far 2,915494
members took micro-enterprise loans.

15.Scholarships: Scholarships are given, every year, to the high performing

children of Grameen borrowers, with priority on girl children, to
encourage them to stay ahead to their classes.

16. Education Loans:

Students who succeed in reaching the tertiary level of education are
given higher education loans, covering tuition, maintenance, and other
school expenses. By December’10, 47,851 students received higher
education loans, of them 45,404 students are studying at various
universities; 503 are studying in medical schools, 822 are studying to
become engineers, 1122 are studying in other professional institutions.

A Brief History of Microfinance in India

The post-nationalization period in the banking sector, circa 1969, witnessed a

substantial amount of resources being earmarked towards meeting the credit
needs of the poor. There were several objectives for the bank nationalization
strategy including expanding the outreach of financial services to neglected
sectors. As a result of this strategy, the banking network underwent an expansion
phase without comparables in the world.

Credit came to be recognized as a remedy for many of the ills of the poverty.
There spawned several pro-poor financial services, support by both the State and
Central governments, which included credit packages and programs customized
to the perceived needs of the poor.

While the objectives were laudable and substantial progress was achieved, credit
flow to the poor, and especially to poor women, remained low. This led to
initiatives that were institution driven that attempted to converge the existing
strengths of rural banking infrastructure and leverage this to better serve the
poor. The pioneering efforts at this were made by National Bank for Agriculture
and Rural Development (NABARD), which was given the tasks of framing
appropriate policy for rural credit, provision of technical assistance backed
liquidity support to banks, supervision of rural credit institutions and other
development initiatives. In the early 1980s, the GoI launched the Integrated Rural
Development Program (IRDP), a large poverty alleviation credit program, which
provided government subsidized credit through banks to the poor. It was aimed
that the poor would be able to use the inexpensive credit to finance themselves
over the poverty line.

Also during this time, NABARD conducted a series of research studies

independently and in association with MYRADA (Mysore Resettlement and
Development Agency), a leading non-governmental organization (NGO) from
Southern India, which showed that despite having a wide network of rural bank
branches servicing the rural poor, a very large number of the poorest of the poor
continued to remain outside the fold of the formal banking system. These studies
also showed that the existing banking policies, systems and procedures, and
deposit and loan products were perhaps not well suited to meet the most
immediate needs of the poor. It also appeared that what the poor really needed
was better access to these services and products, rather than cheap subsidized
credit. Against this background, a need was felt for alternative policies, systems
and procedures, savings and loan products, other complementary services, and
new delivery mechanisms, which would fulfill the requirements of the poorest,
especially of the women members of such households. The emphasis therefore
was on improving the access of the poor to microfinance rather than just micro-
credit.

To answer the need for microfinance from the poor, the past 25 years has seen a
variety of microfinance programs promoted by the government and NGOs. Some
of these programs have failed and the learning experience from them has been
used to develop more effective ways of providing financial services. These
programs vary from regional rural banks with a social mandate to MFIs. In 1999,
the GoI merged various credit programs together, refined them and launched a
new programme called Swaranjayanti Gram Swarazagar Yojana (SGSY). The
mandate of SGSY is to continue to provide subsidized credit to the poor through
the banking sector to generate self-employment through a self-help group
approach and the program has grown to an enormous size.

MFIs have also become popular throughout India as one form of financial
intermediary to the poor. MFIs exist in many forms including co-operatives,
Grameen-like initiatives and private sector MFIs. Thrift co-operatives have formed
organically and have also been promoted by regional state organizations like the
Cooperative Development Foundation (CDF) in Andhra Pradesh. The Grameen-like
initiatives following a business model like the Grameen Bank. Private sector MFIs
include NGOs that act as financial services providers for the poor and include
other support services but are not technically a bank as they do not take deposits.
Recently, microfinance has garnered significant worldwide attention as being a
successful tool in poverty reduction. In 2005, the GoI introduced significant
measures in the annual budget affecting MFIs. Specifically, it mentioned that MFIs
would be eligible for external commercial borrowings which would allow MFIs
and private banks to do business thereby increasing the capacity of MFIs. Also,
the budget talked about plans to introduce a microfinance act that would provide
some regulations on the sector.

It is clear from the previous that the objectives of the bank sector nationalization
strategy have resulted into several offshoots, some of which have succeeded and
some have failed. Today, Self-Help Groups and MFIs are the two dominant form
of microfinance in India. This report focuses on the aspects of the SHG as an
effective means to provide financial services to the poor.

Development of the microfinance environment

Since Indian independence in 1947, successive governments have emphasized the

link between improving access to finance and reducing poverty. The creation of a
nationwide network of rural cooperative banks in the 1950s was an attempt to
improve financial access for India’s poor, 75% of whom are concentrated in rural
areas. This was followed by further measures aimed at increasing financial access
- the nationalisation of commercial banks in the late 1960s, and an aggressive
drive through the 1970s and 1980s to expand rural banking branches nationwide.
The expansion of commercial banking has also led to a more favourable financial
environment for the poor in India. It was following these reforms that the “Self-
Help Groups (SHGs)–Bank Linkage” model grew to become a key part of finance
for India’s poor. Self Help Groups (SHGs) are informal associations of up to 20
women. The groups provide an opportunity for individuals to pool money, and
then use these funds to lend small amounts to each other with interest. Through
the SHG Bank Linkage Program, established groups can apply for loans through
their local bank branch, limited in size to a ratio of the group's own funds. This
limit may be increased over time as previous loans are successfully repaid. This
model of finance – an Indian innovation – has been very successful, increasing
from just 500 SHGs linked to banks in the early 1990s, to over one million at
present. However, outreach of the SHG Bank Linkage Program remains limited.
The program has provided savings account facilities to about 12 million women,
and credit accounts to an estimated two to four million women. The program
remains concentrated in south India, with nearly 75% of funds flowing to SHGs in
the four southern states. The SHG Bank model has also had mixed success in
targeting the poorest. For example, in Andhra Pradesh – one of India’s poorest
states – less than half of SHG members are from the poorest groups (as defined
by size of landholding).There are also limitations in the way the model operates.
SHGs are required to demonstrate an ability to save, learn bookkeeping skills and
act as a cohesive group before they are permitted to borrow and because of this it
can often take a year before groups are allowed to receive their first loans. In
recent years, other institutional structures for microfinance have emerged:
notably, independent specialised microfinance institutions (MFIs). The success of
MFIs in India has also attracted several new private sector banks, notably ICICI
Bank, UTI Bank and HDFC Bank. Some of these newer banks are pursuing
innovative approaches to microfinance. They view microfinance as a potential
business rather than simply a social objective or priority sector lending obligation.
While the SHG Bank model is defined by the links between SHGs and the rural
branches of commercial or cooperative banks, MFIs are typically independent of
the existing rural banking network. This allows MFIs to take a more flexible
approach to lending. However, as with the SHG model, most MFIs provide
financial services to groups of individuals and therefore face many of the same
issues around the cost and time required to promote and manage these groups.
Currently, 75% of the total supply of microfinance credit is via the Self Help
Group-Bank linkage route, largely financed by the National Bank for Agriculture
and Rural Development (NABARD). The rest comes from MFIs, increasingly backed
by commercial banks.

The need for a new microfinance initiative

In spite of the success of the SHG model in the 1990s and continued growth of
MFIs, the vast majority of India’s rural poor still do not have access to formal
finance. The rural poor face severe difficulties accessing savings and credit from
the formal sector. Even where finance is available, it takes, on average, 33 weeks
for a loan to be approved by a commercial bank.12 This makes formal credit an
unrealistic option for poor people, particularly for the purpose of meeting
unforeseen expenses or emergencies. Difficulty in accessing formal finance has
resulted in a heavy reliance on informal finance. Access to other financial services,
such as insurance, also remains limited among the poor. A 2003 survey showed
that 82% of households surveyed had no insurance, with access particularly
limited for the poorest households. Significant obstacles to expanding the
commercial sector are likely to persist in the short to medium term. These
obstacles arise from government imposed restrictions, and from the commercial
sector’s own policies, such as limited numbers of rural branches and employing
few staff with local knowledge. As a result of such obstacles, most microfinance
institutions have been very region-specific, small in size and their collective
outreach has been limited. By 2004, the microfinance sector, as a whole, had
outstanding portfolios of around A$150 million, reaching less than two million
people. In comparison, MFIs in Bangladesh are reported to reach more than 60%
of the poor in the country, with the larger programs - such as Grameen Bank,
BRAC, Proshika and ASA - all reaching well over one million clients each. Though
India has experienced strong economic growth at the national level in recent
years, that growth has been uneven in its geographical distribution. Despite
recent progress, India’s lower-income regions have not seen growth accelerate.
Bihar (a state in north India) averaged 2.2% growth between 1980 and 2004,
compared to 7.2% in Karnataka (a southern India state). This skewed distribution
of growth is mirrored in the extent and availability of microfinance across regions.
India’s lesser developed and low-income eastern, central, and north-eastern
regions account for 54% of the population, but only 20% of outstanding credit and
29% of deposits. Slower economic growth in the central, eastern, and north-
eastern states has also resulted in little demand for credit among subsistence
poor people. This has been matched by an absence (for historical reasons) of
good quality NGOs willing to initiate microfinance programs in these states. Some
60% of the increase in India's population between now and 2050 is expected to
come from four of India’s most populous and poorest states where financial
access for the poorest people is less prevalent.18 Extending the scope and
availability of microfinance is therefore particularly important given the
population growth expected in India’s poorest states over the medium to long
term.

An opportunity for a new microfinance initiative

India’s recent economic history is one of sustained and rapid growth. India's real
GDP grew by 9.2% in 2006 and by just over 8% in the three years before that. This
compares with a figure of around 6% in the 1980s and 1990s, and 3.5% in the
three decades before 1980. Though the economy remains mostly agricultural,
business processing, information technology, telecoms and manufacturing have
boomed in recent years. Looking forward, the government's five-year plan to
2011/12 is based on a target of 9% average annual growth. The consensus of
economic forecasters in India is for growth of at least 8% over the next five years.
However, there is also a broad consensus that weak infrastructure investment
and bureaucratic red-tape present risks to India’s economy. The government
must address these issues to ensure sustained future growth. In the short term,
growth is forecast to moderate slightly in 2007/08 and 2008/09 but domestic
demand is expected to remain buoyant. This will provide a positive environment
for business start-ups, as 97% of retail sales are made from micro businesses.
Accordingly, retail sales from these small businesses are expected to grow by
A$77 billion in the next three to four years (from A$370 billion to A$447
billion).India’s fiscal budget for 2007 has been depicted by the government as a
budget for relieving poverty through ‘inclusive growth, equity and social justice’.
Boosting farm output and rising spending on education and health are two of the
key measures in the budget. The Indian government has also given approval for
enactment of legislation on the microfinance sector in India. The Micro Financial
Sector (Development and Regulation) Bill, 2006 will provide a legal framework for
entities engaged in microfinance. The intention of the Bill is to facilitate greater
transparency, more effective management and better governance of the
microfinance sector. The entrepreneurial environment for poor families in India
has also improved in recent years. For example, the availability of telephone and
internet services has improved significantly in rural areas in the past five years.
These services give instant, low-cost information on the relative prices of
products and services in different market towns greatly improving an individual’s
bargaining power relative to more powerful/ wealthier traders. The internet has
also made crucial information available to individuals that would previously have
taken time and expense to access – for example, land records and passport
application forms.

Conclusion
There is an enormous continued need for microfinance for the poorest people in
India. India has been, for many years, a ‘global laboratory’ for anti-poverty
programs. The political, regulatory and economic environment for microfinance
has been steadily improving for many years now.

Recent strong growth in microfinance – albeit from a low base – suggests that the
environment is favourable and demand for financial services is strong. However,
coverage continues to be partial, with a huge number of poor households in India
still unable to access finance. Recent rapid growth in the east, continued
deregulation and the current strong economic environment all suggest that there
has probably never been a more favourable time for an initiative to increase the
availability of microfinance across India.

Emergence of the SHG Movement

While no definitive date has been determined for the actual conception and
propagation of SHGs, the practice of small groups of rural and urban people
banding together to form a savings and credit organization is well established in
India. In the early stages, NGOs played a pivotal role in innovating the SHG model
and in implementing the model to develop the process fully. In the 1980s, policy
makers took notice and worked with development organizations and bankers to
discuss the possibility of promoting these savings and credit groups. Their efforts
and the simplicity of SHGs helped to spread the movement across the country.
State governments established revolving loan funds which were used to fund
SHGs.

By the 1990s, SHGs were viewed by state governments and NGOs to be more
than just a financial intermediation but as a common interest group, working on
other concerns as well. The agenda of SHGs included social and political issues as
well. The spread of SHGs led also to the formation of SHG Federations which are a
more sophisticated form of organization that involve several SHGs forming into
Village Organizations (VO) / Cluster Federations and then ultimately into higher
level federations (called as Mandal Samakhya (MS) in AP or SHG Federation
generally). SHG Federations are formal institutions while the SHGs are informal.
Many of these SHG federations are registered as societies, mutual benefit trusts
and mutually aided cooperative societies.

SHG Federations resulted in several key benefits including:

• Stronger political and advocacy capabilities
• Sharing of knowledge and experiences
• Economies of scale
• Access to greater capital

The SHG Model

Structure of SHG

A SHG is a group of about 10 to 20 people, usually women, from a similar class

and region,who come together to form savings and credit organization. They
pooled financial resources to make small interest bearing loans to their members.
This process creates an ethic that focuses on savings first. The setting of terms
and conditions and accounting of the loan are done in the group by designated
members.

SHG Federation
As mentioned previously, SHGs have also federated into larger organizations.
Typically, about 15 to 50 SHGs make up a Cluster / VO with either one or two
representatives from each SHG. Depending on geography, several clusters or VOs
come together to form an apex body or an SHG Federation. In Andhra Pradesh,
the Village Organizations, SHG Clusters and SHG Federations are registered under
the Mutually Aided Co-operative Society (MACS) Act 1995. At the cluster and
federation level, there are inter-group borrowings, exchange of ideas, sharing of
costs and discussion of common interests. There are typically various
subcommittees that deal with a variety of issues including loan collections,
accounting and social issues.

SHG Bank Linkage

A most notable milestone in the SHG movement was when NABARD launched the
pilot phase of the SHG Bank Linkage programme in February 1992. This was the
first instance of mature SHGs that were directly financed by a commercial bank.
The informal thrift and credit groups of poor were recognised as bankable clients.
Soon after, the RBI advised commercial banks to consider lending to SHGs as part
of their rural credit operations thus creating SHG Bank Linkage.

The linking of SHGs with the financial sector was good for both sides. The banks
were able to tap into a large market, namely the low-income households,
transactions costs were low and repayment rates were high. The SHGs were able
to scale up their operations with more financing and they had access to more
credit products. During 2003, APMAS conducted a study on SHG – bank linkage in
Andhra Pradesh covering a sample of 400 bank linked SHGs. The study clearly
indicated that the repayment rates were high and that the bank linkage made
difference in the lives of the SHG members. However, the study also pointed out
certain issues that require attention. These include adequacy of loan size,
timeliness of credit and also the need for branch manager or the promoter
undertaking a rating before the SHG is bank linked. The following were the major
findings of the study:

• Average Savings per SHG – Rs. 23,000, average loan size Rs. 31,000.
• 50% of SHGs practice equal distribution of bank loan.
• Only 50% SHGs felt that the loan size was adequate and 54% studied SHGs were
first time linked.
• 69% of SHGs got RLF, some got from multiple sources.
• It takes more than four months for an SHG to get a bank loan.
• No post linkage follow up by banker and others.
• 66% of bank linked SHGs are A grade as per CRI
• Only 22% of bank linked groups are appraised by banker, etc.
• Idle fund of bank linked SHGs average – Rs. 5,300
• Leaders dominate and have 30% loan on them.
• 12% SHG default to banks – repayment problem.
• 10% SHGs reported that they were forced to take loan.
• High percentage of SHGs participate in Government Programs.
• Bankers attitude is still an issue.

Financial Management

The financial management of SHGs has been found to be ranging from weak to
average. Specifically, internal controls at SHGs and SHG Federations are lacking.
Internal controls represents the systems and processes that manage the day to
day transaction flow and ensure that roles and responsibilities are defined and
executed to safeguard assets. Field studies have indicated that these systems and
processes have been ill-defined and poorly executed by members.

In addition to internal controls, how SHGs are managing their cash flows is
especially important. Since SHGs are accessing external borrowings through SHG
Bank Linkage and then lends these funds to its members, there has been cases of
poor cash flow management to repay debts not just externally but also internally.
The risk of overleveraging SHGs is high.

Governance

Since SHGs are an informal organization and a SHG Federation is a composition of

informal groups, there is poor governance and the capacity of the members to
enact good governance is weak. The members of SHGs do not have much
experience with establishing formalized monitoring and review functions or
complying with legal regulations. With the growing size of the loans being made
to SHGs, a strong governance system is needed to ensure that there is
accountability.

Human Resources
While the achievements of the women members to form common interest groups
to help themselves is remarkable, there is a long way to go to build the capacities
of the staff of SHGs. The role of NGOs to provide support is essential to many
SHGs success stories. The support needed ranges from bookkeeping and
accounting, organizational structure, governance and other areas.

Impact of SHGs
With the structure and model of SHGs and SHG Bank Linkage firmly established,
the nature of the impacts of SHGs can be more closely examined and evaluated.
The latest published estimates from NABARD state that, to date of March 31,
2005, 1.6 million SHGs have benefited from approximately Rs 69 billion in
financing (NABARD, 2005). There is no doubt that there has been greater
outreach of financial services to the poor through SHGs. Of course the outreach
has been good in South India. However, there outreach has been limited in the
rest of the country.

In addition to the financial analysis of SHGs, the non-financial areas such as social
security and gender dynamics are also effected by the SHG Movement. Indeed,
poverty reduction is much less an issue of numbers but rather ideas and concepts.
The following is an analysis of the non-financial impact of SHGs.

Political

Political engagement includes active involvement by SHGs in government

including local assemblies, Lok Sabha or Panchayati Rai Institutions (PRIs) (APMAS,
2005). One of the key benefits of SHGs is women’s empowerment and this can be
seen with the number of women involved in public affairs. While the number of
women actually involved in politics is still very low, research has indicated that of
those women that stand for election, over 70% had won their seat (APMAS,
2005). And, the female contribution to civil issues ranges from issue of ration
cards, laying of pucca roads, building of school, ensuring appointments in vacant
positions in schools and health centres, recovery of river bank lands from
encroachers and laying of drinking water pipes (APMAS, 2005).
As mentioned, the number of women involved in politics is low. But, the trend is
definitely moving up. A mere 5 years ago, the likelihood of women contesting
panchayat election was extremely low. Their presence today is affecting the
perception of women and their role in the political arena. They are being
recognized as an important group with serious concerns.

The role of SHGs is both as an inspiration and as a financer. Impoverished women

develop greater language and financial skills through the SHG which provides the
building blocks for higher levels of confidence to engage the world. Also, the SHG
sometimes finances the campaign of its members that stand for election.

SHGs not only empower its members but also wield a powerful political role as a
group as well. At local village meetings, the leaders of SHGs are often invited to
attend and speak (APMAS, 2005).

Social Harmony

Broadly defined, social harmony encompasses the equality and integrity of

relationships between different social groups. To frame the following analysis,
SHGs typically consists of the following social groups:

• Schedule Caste (SC)

• Scheduled Tribe (ST)
• Minorities (MN)
• Backward Caste (BC)
• Other Caste (OC)

The composition of SHGs is sometimes exclusively one particular social group or a

mix. The impact of SHGs on social harmony has also been mixed. While it has
been observed that in groups with mixed membership had group leaders that
came from a variety of the social groups. In the vast majority of instances, groups
leaders were almost exclusively from the dominant social groups’ category. This
demonstrates a lack of equality and unity across caste divisions. Given the
relatively young history of SHGs, it is to be expected that their impact on bridging
centuries old divisions would be slow.
Social Justice

Social justice is the presence of moral and ethical conduct in areas that are
historically typified with backward and abusive customs. There have been several
occurrences of SHGs resolving disputes between members and the community at
large. These instances include initiating legal action, arbitration, divorce and
others. While there has long been dispute resolution mechanisms in villages, in
the past it was controlled by men. Now, there are instances of women, SHG
members, being involved in resolving disputes. Whether or not the women are
working for their own interests or in the case for justice varies, regardless SHGs’
impact on the political arena is certainly being seen also in social justice, albeit in
a slow and evolutionary process.

Community

Being a group based organization of members of similar caste and geography, the
community resources that are shared by are affected by the SHG. Recent analysis
has shown that the impact that SHGs have on the community at large have been
minor. There have been few instances of significant contributions from SHGs to
education, family planning, eradication of child labour and hygiene.

To interpret these findings further it should be noted that such community

problems are often large financial commitments which SHGs simply do not have
the capacity to afford. Also, of the few instances where there have been
significant contributions from the SHGs to the community, the SHG demonstrated
a clear leadership role and rallied the support of the entire village. This
demonstrates that given the opportunity, SHGs, assuming they have the
capacity, can act as a director of community development. The perception of
taking of a women’s based organization taking a leading role for the betterment
of the greater good has monumental impacts on the local community. Gender
dynamics begin to balance in instances such as these.

Livelihoods

Livelihoods, meaning a persons’ economic activity, is an area that is vitally

important to SHGs. The loans that SHG members receive are intended to improve
their livelihoods so that they can receive greater and more steadier cash flows. In
rural areas, livelihoods range from agriculture farming, animal husbandry, dairy
and various other goods and services activities.

Experience has shown that SHGs have had improved livelihoods to the extent of
providing the leveraging needed to start an enterprise. However, the
interventions to introduce new livelihoods or refine existing ones that could yield
better economic results were done by external agencies.

Supporting the SHG Movement

The impact of the SHG movement on various aspects of civil society have been
varied. As mentioned, the development of SHGs has varied from state to state
but, regardless of the phase of evolution, SHGs require external help to continue
to grow and have greater outreach and impact to civil society. It is clear from
research that some of the obstacles to evolution are beyond the control of the
SHGs. The following is a pointed analysis of where government, NGOs, Banks and
others, including the private sector, can work together to help answer the needs
to SHGs in a measured and effective manner in hopes of not overloading
them leading to failure.

Political: Training on Governance

The impact of SHGs on women in the politics is clear; they have helped women
enter the political area as they are being elected to various public offices and
SHGs themselves are engaged in discussion with governing bodies. SHPIs need to
be at least a few steps ahead of the SHGs, in order to be useful to them in their
role in politics (APMAS, 2005). Specifically, there is a need to train women on
good governance because the history of poor governance has been long
established. If there is to be lasting change, women need to occupy the offices
of where strategic planning is done.

Social Harmony: Creating a Mixed Caste Model SHG

SHGs do not appear to be managing social tensions well. The reason for this lack
of unity is difficult to identify but it could very well be the deep rooted beliefs of
the caste system which tends to exclude social disadvantaged groups. These are
problems have are ingrained in the ethos of the villages and it will take a very long
time to change.
For SHGs to better manage social tensions, there needs to be a perception among
members of equity, or ownership, in a enterprise that exists for mutual benefit.
Fostering this cohesiveness is very difficult in a given the environment. SHPIs can
encourage the formation of mixed groups of SHGs and make these “model”
organizations for others to follow.

Social Justice: Awareness of Legal Rights and Entitlements

SHGs have played an important role in the lives of distressed members. Given the
years of suppression of women in India, it is to be expected that SHGs take up the
cause of their members. However, they are also responding from a desire to see
justice done. Therefore, if helped to process the pros and cons of various
situations and arriving at just and sustainable situations, women could be chosen
by local communities as arbitrators. Arbitration in most villages is currently a male
domain, but the experiences of women in negotiating for women’s rights could be
taken to the next logical step of involvement of women in local justice issues,
whether or not a member is involved, and whether or not a member is “right”
(APMAS, 2005). Similar to the political arena, SHPIs need to be able to provide the
technical support to help SHGs equip themselves as arbitrators.

Communities: Provide Strategic Support

SHGs have helped their members and their communities. By taking a leadership
role in community development, SHGs are perceived to be a guiding force for the
village. Though the instances of SHGs engaging in community development is low,
given the capacity, there has been proven results. SHPIs could help facilitate
processes whereby women made long-term plans for their villages as a whole,
and worked steadily towards the transformation of their villages into modern and
equitable hubs of creative and sustainable actions (APMAS, 2005). They might
choose to focus on some core issues in each set of plans that they make, and
work towards the fulfillment of these. Having persons trained to work on a larger
canvas can contribute to a new cadre of political activists. Women may choose to
engage directly in party politics, or to play a watchdog role from the environs of
civil society – either way, they will usher in a new era of more responsible politics
and public life.
Livelihoods: Technical Livelihood Support

The support of livelihoods is increasingly being seen as an important area related

to microfinance. Indeed, the term of livelihood finance has been coined and is en
vogue at leading NGOs. The need for livelihood support is critical to SHGs
development as livelihoods are typically financed by the loans that members
receive from the SHG. The needs of SHGs varies from the introduction of new
livelihoods to providing support such as market linkages or procurement
techniques to refine existing livelihoods. State government programs such as
Indira Kranthi Patham (IKP) in Andhra Pradesh have successful executed
livelihood interventions on various non-timber forest products that have brought
about increased cash flows to SHG members as they have been able to bypass
middlemen and sell their goods at market and cut costs. Experience has indicated
that these benefits would not have possible without external intervention. Thus,
SHPIs can provide the technical livelihood support as needed to help develop
SHGs.

Policy Considerations

In addition to actual technical support, government policy can help support the
SHG movement in the previously mentioned areas. Poverty is invariably
characterized by lack of public investment in infrastructure or dysfunctional public
systems including education and health care and underdeveloped markets. Large
scale investment is required to build infrastructure like roads and bridges so that
there can be access to markets. These sorts of investment will have to be
completed by the state government. The payoff such costs though is infinite. An
improved infrastructure will help to increase investment and mobility of staff.

Further, livelihoods can be enriched through greater access to markets. In some

areas, there is a reasonable amount of infrastructure that state-owned rural
banks operate. As some SHGs have grown and matured to a sizeable scale, they
need access to more financial services. Governments can address this need
through their state-owned banks by introducing flexible and easily accessible
products. Specifically, products such as innovative savings products, micro-
insurance, larger loans and enterprise financing can be introduced. Banks lending
to SHG federations could also facilitate access to livelihood finance by the women
SHG members. Not only will programs such as these address the service gap but it
will also change perceptions among bankers. If the state-owned banks take
the lead, other bankers will likely follow and make an investment to work with the
poor and expand their services to them.

The Other Side of the Coin

This paper has outlined several areas of working with SHGs to further their impact
on civil society. It should be noted though that the sustainability of SHGs to effect
such change is directly linked to their financial sustainability. While this latter
issue was not the intended focus on the report, any external intervention to SHGs
should bear this issue in mind. Research has shown that SHGs financial
management is average or weak (APMAS, 2005). Thus, it is vitally important that
both government and NGOs work to bear all the costs in mind of interventions to
make them sustainable otherwise the SHGs will be overburdened and destined to
failure. Government regulations could help manage this risk and increase the
emphasis on sustainability of SHGs. There are key areas of SHG financial
management that need to be improved such as internal controls, accounting,
management stewardship, organizational efficiency and others. If the government
were to enact policy that would regulate the quality of SHGs and tied this to their
eligibility for SHG Bank Linkage, then this would help bring about a more
measured and responsible growth to the movement.

Both for SHGs and SHG federations there is a need to aspire to attain standards
following the best practices. As the SHG federations are emerging as community
owned microfinance institutions, there is a need for significant investment in
providing institution building support. These SHG federations being bodies like
corporations as they are registered under an appropriate legal form must comply
with the prudential and legal norms. There is a need for a well developed third
party rating system for SHG federations before they are linked with financial
institutions to act as an intermediary as they handle large volume of funds from
the bank linkage and also undertake savings from their members.

There is a need for establishing a computerized MIS for SHGs and SHG federations
to monitor their performance on a regular basis. SHG Federations must be able to
publish their annual reports and share those with all their members.

Governance of SHG federations is a major challenge. For the SHG members to

manage their own institutions with professional staff and large volumes of
transactions will be difficult.
SHPIs must provide the needed support for the SHG federations to develop into
sustainable institutions of the poor. Considerable investments would be needed
to facilitate and sustain SHG federations across the nation.