The SHG-bank linkage model is ideal for providing credit at the grass-roots level for weaker sections of society and for poor women. However, a few issues need to be addressed to make the model more comprehensive

While the recent year has seen a lot of focus on the MFI (microfinance institution) model of microfinance, let us not forget the other important model-the SHG (self-help group) bank linkage model, originally promoted by NABARD (the National Bank for Agriculture and Rural Development) and other stakeholders. Interestingly, the PIL (Public Interest Litigation) filed in the Madurai bench of the Madras High Court argues that the SHG Bank Linkage model is a better one and I quote:

"I humbly submit that the SHG-Bank Linkage model is ideal for poor women because of its unique characteristics of not a high rate of interest especially on a diminishing scale, individual liability, flexible repayment mode. Therefore, the role of Banks are pivotal in the proper functioning of the SHGs. The State, which should strengthen the Bank-SHG linkage and also ensure proper implementation of poverty alleviation programmes among the poor and vulnerable, has become a silent spectator of the exploitation of SHG women at the hands of the profit making MFIs."ⁱ

I also feel that when and where it works, the SHG model is indeed a very vibrant one. I find it more client-oriented and more capable of practicing responsible microfinance than (perhaps) the hardcore Grameen for-profit commercial MFI model. That said, a number of issues and questions however still remain with regard to the SHG Bank Linkage model and as Dr Thorat, former chairperson of NABARD, used to argue during his tenure, "We need to introspect with integrity". In fact, a former director of the Reserve Bank of India (RBI) argues,

"It would be useful to focus also on the sarkari and the bank-linked SHG programme that was pioneered by NABARD. Their number is very large and so are the amounts involved. The sarkari SHGs are also getting large amount of bank loans under government pressure, and the lines between the two are getting blurred to the disadvantage of the genuine and healthy
non-government SHGs. The state-sponsored SHGs are widely sponsored by local party functionaries, who rake off a part of the loans they broker, and there is a strong widespread impression that these loans don't need to be repaid. How widespread this is, and how it has affected the health of the whole movement remains to be documented."ⁱⁱ

Accordingly, I highlight below some of the key concerns with the SHG (bank linkage) model based on my own experience in the field. I also hope that the concerned stakeholders will look into the issues and initiate the process of change as required.

Agents in the SHG Bank Linkage Model: Very interestingly, I met several microfinance agents in Tamil Nadu who claimed to be working with the SHG-Bank Linkage model, by taking groups to banks for the first linkage. One of them said that they received no commission from the banks, but received between 7%-10% from group members for getting the group a first loan of Rs50,000.

These agents also confirmed that bankers are now actively calling them in to help them meet their various targets, including those pertaining to financial inclusion. To reconfirm some of these aspects, I met several bank managers in the same areas and two managers candidly said that since they lacked sufficient staff and were being pushed on targets, they started relying on the agents for bringing in the groups to meet the various targets.

One of them even had an interesting observation—the groups brought in by agents typically paid off their first loan within one year, whereas the loan term was around three years and then, they took the second loan of four times the savings—many of these groups accumulate as much as between Rs30,000 and Rs40,000 and therefore receive a second loan of between Rs1,20,000 and Rs1,60,000 (Rs46= $1, approximately). Managers also confirmed that several groups do not repay the second loan and that many of the members migrate to other areas and are not traceable. One manager even said that Rs40 lakh (Rs4 million) is likely to be written off in the future as the members are not traceable.

Yet another startling fact was brought up by the managers, who said that the
Rs50,000 first loan taken is not used towards any income-generating activity and that this money, sans the commission paid to the agents, was used as the corpus for a local chit (fund) run by the group members, who divided the interest profit amongst themselves…"ⁱⁱⁱ 

Therefore, we need to understand:
 
a)    How widespread is the agency phenomenon with regard to the SHG bank linkage programme?
b)    What are the reasons for use of agents in the SHG bank linkage model?
c)    What is the role of commercial banks (and their managers) in fostering such agents?
d)    How do these agents operate in the SHG bank linkage and in what ways are they compensated? What is their relationship to the political economy at the local level?
e)    What has been the impact of these agents in terms of the credit risk, delinquency and default in the SHG bank linkage model?
f)    To what extent has policy and the drive for financial inclusion resulted in the use of the agency model in the SHG bank linkage program?
g)    What is the relationship between the above agents in the SHG bank linkage model and the centre leader agents^iv , found in plenty, in the Grameen MFI model? Are they one and the same playing different roles in the different models? Or are they different people?
h)    And last but not the least, has microfinance (all models) led to the emergence of a new class of (organised money-lending) intermediaries at the grass-roots?

Information and Data on SHGs in the Bank Linkage Model: In fact, the correct number of SHGs operational in the country cannot be accurately estimated and no one can say with certainty as to how many SHGs really exist/work in India today. Further, data on the transactions (especially, savings, loans, etc.) and working of SHGs is very weak. Therefore, we know only about SHGs being linked but nothing concrete about their day-to-day working and performance, especially after the bank linkage. This lack of information also relates to the issue of how the linkage loans are actually used by the SHG members.

Several stakeholders have also raised questions on whether all linked SHGs are physically (still) present. According to them, in many cases, apparently, data on old SHGs is being provided even while the original members (may) have migrated elsewhere! Much less is known about what happens to older SHGs that have been linked multiple times—some stakeholders argue that fresh SHGs are formed using members from older SHGs. Therefore, we would need to know whether all the fresh SHGs are really new or whether they have been created using members belonging to older SHGs. The KYC (Know Your Customers) implications of this aspect are indeed huge and make this a critical issue. It would also be interesting to know the actual overlap of members between the SHG bank linkage programme and the Grameen type MFI model—while it should be huge, given that many MFIs are said to have cannibalised SHGs, knowing the actual extent of overlap in clients across these models is very necessary to understanding the level of indebtedness. Therefore, official participation by the SHG bank linkage program in the ongoing credit bureau efforts would be very useful and critical.

That said, to ascertain the level of data/information available, I made a post in two microfinance e-groups a few days ago and barring one response (to my mail) that highlighted a couple of (dated) small sample studies, I received no other input from practitioners on the following. I also looked at various sources including NABARD state focus papers, NABARD annual status of microfinance in India reports (for a few years) and many other sources of data. I am yet to get a good sense of the following:

1.    Number of SHGs formed until date since the inception of the SHG bank linkage programme
2.    Number of SHGs physically operational as on date, based on some reliable verification mechanism
3.    Number and names of members in various SHGs and their KYC coordinates
4.    Status of all loans (loans disbursed, loans repaid, unpaid principal balance, principal overdue etc) made by SHGs to its members using external funds (cumulative position as well as recent period/year loans)
5.    Status of all loans (as per parameters above) made from member savings by SHGs to their members (cumulative position as well as recent period/year loans)
6.    Total savings of SHGs in the financial system versus total loans to SHGs by the financial system
7.    Disaggregation of all above data by year, region, state, SHG age, loan cycle and the like

Apart from the sources mentioned above, I have looked at the RBI website, NABARD website and other traditional sources including bank data but am not able to find most of the above. Therefore, I have to conclude that authentic sources of data on the above are certainly not available (at least in the public domain) and this needs to be addressed immediately!

Other Issues with SHGs: There are many other issues such as SHGs either disintegrating (this may not be a bad thing by itself) or being taken over by the elite among the poor. Prof Malcolm Harper notes three other aspects with regard to using SHGs:

"1) Groups take time, lots of it, and we have always said that poor women are very busy.
2) Groups tend to exclude individualists (sometimes they are called 'entrepreneurs') who dare to be different, to do 'mad' things like starting new types of businesses, which may even create jobs for others.
3) Men are generally bad at working in groups, and they take bigger risks and are less reliable than women, but when they do succeed they tend to create more jobs than women do, for the vast majority, who prefer to be employed than to be self-employed."^v 

Also, in today's fast-paced rural economy, the number of low-income clients who are likely to be actively involved in the kind of social intermediation that so-called 'good' SHGs have to practise appears rather far-fetched. Given the (fast) changing nature of our society, the choices available and the information explosion that is going on, the long-winding meetings of SHGs would be very difficult to sustain in the medium/long-term. And without such preparation, the quality of SHGs will surely dip, and the moment we forcefully push for targets with regard to quick establishment of (such) SHGs, then, the process will start getting corrupted as evident from numerous available examples (including the one given above).

So, what then are the non-negotiables to take the SHG bank linkage program forward? To start with, I see three basic aspects:

1)    Eliminate/Regularise Broker Agents: Either weed out the broker agents (if they are found to be widespread and used extensively by branch managers of commercial banks) in the SHG bank linkage model or legalise them under a regulatory framework so that their ill-effects are minimised,
2)    Create A Transparent Nationwide Information System on SHG Bank Linkage: An appropriate information system on SHGs available in the country and their financial transactions is a must to understand and measure the success achieved by the SHG bank linkage programme on various parameters. Such a system, it is hoped, should also facilitate transparent understanding of the actual (operational) health of the various SHGs-in terms of their loaning, savings and other activity. In fact, this system can become the backbone for providing financial transaction data to a credit bureau, and  
3)    Re-Engineer the SHG Bank Linkage Programme: Re-engineering the process of formation of SHGs, their linkage to banks and also their regular operations becomes very critical to ensure that SHGs stay as lean and transparent social institutions at the grass-roots.

And for a microfinance industry that is already under the scanner because of disillusionment with the Grameen MFI model, the SHG bank linkage model, because of its mainstreaming and several other advantages, certainly offers a ray of hope. This however requires that all the concerned stakeholders introspect seriously and bring in the necessary changes required to make the SHG bank linkage programme a truly vibrant and responsible model for low-income clients at the grass-roots.

  ⁱQuoted from PIL by Ms Vasuki at Madurai Bench of the Honourable Madras High Court.
  ⁱⁱSource is e mail sent to writer of this article
  ⁱⁱⁱ http://www.moneylife.in/article/national-rural-livelihood-mission-understanding-the-vulnerability-of-low-income-groups/19452.html
  ^iv(a) http://www.moneylife.in/article/implementation-safeguards-against-notorious-agents-are-an-imperative-for-the-proposed-microfinance-bill/19017.html); (b)  http://www.moneylife.in/article/how-and-why-did-microfinance-agents-become-a-part-of-the-indian-microfinance-business/19301.html; (c) http://www.moneylife.in/article/implementation-safeguards-against-notorious-agents-are-an-imperative-for-the-proposed-microfinance-bill/19017.html
  ^vQuoted from e mail sent in Micro-finance Practice Yahoo E Groups

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).