Significance of Establishing Linkages with Self-Help Groups and Banks


Y.S.Nanda, NBARD, India

5. The Linkage Project in India

Despite the vast expansion of the formal credit system in India (*), the dependence of the rural poor on money lenders continues especially for meeting emergent credit requirements. Such dependence is more pronounced in resource poor areas and in the case of marginal farmers, landless labourers, petty traders and artisans belonging to the socially and economically backward classes and the tribal population. With a view to developing a supplementary credit delivery mechanism to reach the poor in a cost effective and sustainable manner, the National Bank for Agriculture and Rural Development (NABARD) introduced a pilot project for linking 500 SHGs with banks in 1992 after thorough discussion with the Reserve Bank of India (the central banking authority for India), commercial banks and NGOs.

The operational guidelines from NABARD were deliberately kept flexible to enable the prticipating banks and field level bankers to innovate and contribute to building and strengthening the project concept. Stating the advantages of linkages to the bank, the guidelines observed:

"A recognition by the formal credit structure of self-management capabilities of the poor through SHGs and a link up between the two is expected to result in specific advantages to both systems. Under the linkage project, the main advantage to banks would be externalisation of a part of the work items of the credit cycle - assessment of credit needs, appraisal, disbursal, supervision and repayment, reduction in the formal paperwork involved and a consequent reduction in transaction costs. Improvement in recoveries and also in the margins would lead to a wider coverage of the target group. A larger mobilization of small savings would be equally advantageous. For the groups, advantages lie in the access to a larger quantum of resources as compared to their corpus generated through thrift, access to better technology and skill upgradation through different schemes of banking sector and a general improvement in the nature and scale of operations that would accelerate economic development"
Besides providing policy input, coordination and 100% refinance facility at 6.5% interest p.a. to the banks, NABARD has been organizing exposure and dialogue programmes in the linkage project for banks and NGO officials. These exposure programmes, which invariably include field visits, have helped in disseminating the concept and convincing bank officials to participate in the project. So far, 17 such programmes, covering around 350 officials have been organized in collaboration with NGOs and reputed bankers training institutes like the College of Agricultural Banking (CAB) and the National Institute of Banking Management (NIBM).

The pilot project has made progress during the last two years. As of 30 June 1994, 637 groups have established credit links with 16 commercial banks and 12 RRBs; the total loan sanctioned by banks amounting to Rs.7.9 million and refinance released by NABARD amounted to Rs.7.6 million. Progress has been good in the states of Karnataka, Andra Predesh and Orissa. The project has been picking up in other states too. The list of state-wise number of SHGs linked with banks and loan sanctioned is given below:


Pilot Project on SHG - Summary Progress Report
Figures in thousand ruppees

State No. of No.of Bank Loan NABARD SHGs Women Sanctioned Refinance SHGs
Gujarat 19 - 398 310 Karnataka 172 97 1232 1232 Madhya Pradesh 14 14 168 148 Orissa 180 180 1906 1906 Assam 2 - 75 - Andhra Pradesh 139 131 2660 2553 Rajasthan 16 5 224 222 Tamil Nadu 74 63 881 864 Bihar 2 2 20 - Maharastra 17 15 376 376 Kerala 2 2 32 32
Total 637 509 7971 7643

In order to assess the results of the linkage project, quick studies were taken up by NABARD in three states viz. Karnataka, Andhra Pradesh and Tamil Nadu and certain trends in the implementation of this innovative concept have emerged. They are:
  1. Larger participation in the project is of women savings and credit management groups, particularly in resource poor regions.
  2. Membership of SHGs has come mostly from the poorest sections of the society.
  3. Demand for credit is frequent and for small amounts, at unpredictable times and sometimes not necessariy for purchase of income generating assets.
  4. Even the very poor are able to save and their savings increased with addition to their incomes.

    Further, some good features have come to light such as shift in credit from consumption purposes to acquisition of income generating assests, use of credit for non-traditional economic activities, increase in income levels of group members, development of thrift and self-help among members, reduction in transaction cost for both banks and SHG members and an almost 100% recovery of loans.

Transaction Costs

The high transaction cost for rural credit is a core problem and viability of the system is critically affected by it. NABARD has recently conducted a study to quantify the effect of intermediation by NGOs/SHGs on transaction cost. The initial findings are:

  1. The intermediation of SHG led to reduction in time spent by bank staff on identification of borrowers, documentation, follow-up and recoveries. This resulted in 40% reduction in transaction cost which could increase further with increase in loan sizes.
  2. The intermediation also significantly reduced transaction costs for the borrower due to elimination of cumbersome documentation procedure and time spent and cost incured on repeated visits to banks etc. The reduction was place at 85%.

* There are nearly 150,000 credit outlets of the formal banking sector in rural areas, including cooperatives. The total outstanding bank loans for agricultural purposes in 1993 amounted to nearly Rs. 340 billion (USD 11.3 billion)
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