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«Greenwich Academic Literature Archive (GALA) Citation: Adolph, Barbara (2003) The role of self-help groups in rural non-farm employment. [Working ...»

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The role of self-help groups in rural non-farm employment

Greenwich Academic Literature Archive (GALA) Citation:

Adolph, Barbara (2003) The role of self-help groups in rural non-farm employment. [Working Paper]

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NRI Working Paper The Role of Self-Help Groups in Rural Non-Farm Employment Discussion paper produced by

Barbara Adolph for the project:

"Rural Non-Farm Economy: Access Factors" February 2003 This document is an output from a project funded by the UK Department for International Development (DFID) and the Worldbank for the benefit of developing countries.

The views expressed are not necessarily those of DFID or the Worldbank.

World Bank Table of contents Table of contents


1 Introduction and background

2 How self- help groups work

3 Sources of capital and links between SHGs and banks

4 Use of micro-credit by SHGs in RNFE

4.1 Training and capacity building

4.2 Marketing

5 Scaling up: Apex bodies and cluster development

6 Conclusions


–  –  –

1 Introduction and background Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation.

Almost all major donor agencies support SHGs in India in one way or another, and many success stories are available, describing how membership in a SHG changed the life of a particular individual or group for the better. Many NGOs in India are promoting the SHG mechanism and linking it to various other development interventions. Whereas there is ample evidence that the SHG approach is a very effective, efficient and relevant tool for organizing and empowering the poor, problems do arise with design, development and introduction of programmes to promote income generating activities (IGAs) that will generate sufficient, sustainable and regular income. There are few documents available that critically reflect on the role of SHGs in the wider rural economy. This paper attempts to identify the role of SHGs in providing Rural Non-Farm Employment (RNFE) through enterprise development and marketing.

2 2 How self-help groups work In India SHGs are formed for a variety of purposes and by a variety of people. This paper focuses on SHGs formed by rural people (mostly women) with the objective of improving their livelihoods through collective savings and investments in income-generating activities.

NABARD (1997) captures this by defining SHGs as "small, economically homogenous affinity groups of rural poor, voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per the group members' decision".

Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of government and non- governmental agencies, they now make up 90% of all SHGs (http://www.jammuandkashmirbank.com/trust/jul_sep_2002/leadstory.html). Therefore, the majority of the issues discussed in this paper are particularly relevant for women. As Indian women do not generally have the same opportunities to migrate for wage work as men due to social obligations and taboos, it is particularly important for women to improve employment and income earning opportunities in situ, and in a way that is compatible with their role in child care.

The rules and regulations of SHGs vary according to the preferences of the members and those facilitating their formation. A common characteristic of the groups is that they meet regularly (typically once per week or once per fortnight) to collect the savings from members, decide to which member to give a loan, discuss joint activities (such as training, running of a communal business, etc.), and to mitigate any conflicts that might arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and sometimes other office holders.

It appears as though the vast majority of rural SHGs invest the loan amounts in a mix of consumption and productive purposes. As credit needs of the poor are determined in a complex socio-economic milieu, where the dividing line between credit for 'consumption' and 'productive' purposes is rather blurred, it is difficult to adopt the traditional banking approach to lending and to insist that loans are not used for consumption.

Most SHGs therefore start without any external financial capital by saving regular contributions by the members. These contributions can be very small (e.g. 10 Rs per week).

After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small internal loans for micro enterprise activities and consumption. Only those SHGs that have utilised their own funds well are assisted with external funds through linkages with banks and other financial intermediaries (see section 3 for details).

Most development initiatives working through SHGs are specifically targeting the poorest people. For example, the World Bank funded Andhra Pradesh District Poverty Initiatives Project aims, amongst others, at supporting investment in sub-projects proposed by grass-root institutions of the poor to accelerate their entry and expand their involvement in social and economic activities. In order to reach the poor, this project used a three- fold system of targeting: geographic targeting (selection of the poorest districts, and within these the poorest mandals), group targeting (through formation of group-based activities for the poor) and selftargeting (through a focus on small, technologically manageable investments that are attractive primarily to the poor organising themselves into common interest groups). See World Bank 2000 for details.

3 However, it is generally accepted that SHGs often do not include the poorest of the poor, for

reasons such as:

(a) Social factors (the poorest are often those who are socially marginalised because of caste affiliation, and those who are most sceptical of the potential benefits of collective action).

(b) Economic factors (the poorest often do not have the financial resources to contribute to the savings and pay membership fees; they are often the ones who migrate during the lean season, thus making group membership difficult).

(c) Intrinsic biases of the implementing organisations (as the poorest of the poor are the most difficult to reach and motivate, implementing agencies tend to leave them out, preferring to focus on the next wealth category).

Efforts are made to overcome this bias, e.g. through participatory wealth ranking at the community level, or by using indices to identify the poorest. Simanowitz et al. 1999 argue that active poverty-targeting is required to make sure that the poorest are included in microfinance programs. But including them in SHGs is not enough - programs need to be designed in such a way that realistic investment opportunities for these poorest households exist.

"Micro credit serves best those who have identified an economic opportunity and who are in a position to capitalise on that opportunity if they are provided with a small amount of ready cash. Thus, those poor who work in stable or growing economies, who have demonstrated an ability to undertake the proposed activities in an entrepreneurial manner, and who have demonstrated a commitment to repay their debts (instead of feeling that the credit represents some form of social re-vindication), are the best candidates for micro credit." (Satyamurti & S.

Haokip 2002 (5)) Thus, from a social empowerment point of view, the SHG mechanism seems to be very effective for the very poor and disadvantaged. But from an IGA development point of view, it is necessary to bring in the element of selectivity and eligibility, bearing in mind that not everybody has entrepreneurial potential and capabilities. The question then arises how the SHG mechanism could at the same time be an appropriate mechanism for IGA development.

These issues will be discussed in Section 4.

Once SHGs are established and start saving, they generally attempt after some time to gain access to larger amounts of capital in order to broaden the range of micro-enterprises available to them. The linkages between SHGs and banks are discussed in Section 3.

3 Sources of capital and links between SHGs and banks SHGs can only fulfil a role in the rural economy if group members have access to financial capital and markets for their products and services. While the groups initially generate their own savings through thrift (whereby thrift implies savings created by postponing almost necessary consumption, while savings imply the existence of surplus wealth), their aim is often to link up with financial institutions in order to obtain further loans for investments in rural enterprises. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the loan amount is proportionate to the group's savings) or as fixed amounts, depending on the group's record of repayment, recommendations by group facilitators, collaterals provided, etc.

4 SHGs are increasingly linking up with financial institutions to obtain formal credit. It is estimated that there are now 500,000 SHGs in India, with a membership of 8 million people, who are linked to about 20,000 rural outlets of more than 440 banks, with an advance portfolio of more tha n 240 million $ (Wilson 2002). This has been a tremendous achievement, considering that during the first four years after NABARD first introduced its SHG linkage programme (i.e. between 1992 and 1996), less than 3,000 groups were borrowing from banks. Box 1 explains how linkages between SHGs and banks work in India.

In India, micro-finance has been defined by the task- force on Micro- finance constituted by the National Bank for Agriculture and Rural Development (NABARD) as “provision of thrift, credit and other financial services and products of very small amounts to the poor to enable them to raise their income and improve their living standards”. The upper limit of amount is fixed at Rs.25000 to be categorised as micro- finance. (Satyamurti & S. Haokip 2002 (10)). Table 1 compares the various sources of credit available to the poor in India across a range of criteria.

Box 1 How SHGs save Self-help groups mobilise savings from their members, and may then on-lend these funds to oneanother, usually at apparently high rates of interest which reflect the members’ understanding of the high returns they can earn on the small sums invested in their micro-enterprises, and the even higher cost of funds from money lenders. If they do not wish to use the money, they may deposit it in a bank.

If the members’ need for funds exceeds the group’s accumulated savings, they may borrow from a bank or other organisation, such as a micro-finance non-government or ganisation, to augment their own fund.

The system is very flexible. The group aggregates the small individual saving and borrowing requirements of its members, and the bank needs only to maintain one account for the group as a single entity. The banker must assess the competence and integrity of the group as a micro-bank, but once he has done this he need not concern himself with the individual loans made by the group to its members, or the uses to which these loans are put. He can treat the group as a single customer, whose total business and transactions are probably similar in amount to the average for his normal customers, because they represent the combined banking business of some twenty ‘micro-customers’.

Any bank branch can have a small or a large number of such accounts, without having to change its methods of operation.

Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village women are sometimes better bankers than some with more professional qualifications. They know that rapid access to funds is more important than their cost, and they also know, even though they might not be able to calculate the figures, that the typical micro-enterprise earns well over 500% return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus charge themselves high rates of interest;

they are happy to take advantage of the generous spread that the NABARD subsidised bank lending rate of 12% allows them, but they are also willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from ‘new generation’ institutions such as Basix Finance at 18.5% or 21%.

Source: Harper 1998 NABARD is presently operating three models of linkage of banks with SHGs and NGOs (see

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