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CGAP's new two-part study examines the financial viability of SHGs in India and proposes a methodology for designing SHG programs to ensure their sustainability. Nine strong SHG programs demonstrate the potential of the model when it is well executed.
What are SHGs?
In India, a self help group1 is a group of 10 to 20 poor women who band together for financial services and sometimes social services. SHGs typically begin with periodic, compulsory savings and then move on to making loans. SHGs are managed by their members with varying degrees of external support.
SHGs are formed with the assistance of self-help promotion institutions (SHPIs), which include non-governmental organizations (NGOs), government agencies, banks, cooperatives, and microfinance institutions. SHPIs provide training, monitoring, and other support services. Occasionally, promoters give SHGs initial seed capital to lend, but more typically, groups begin by saving and lending out their members' own resources. Most SHGs eventually borrow from an external source, usually a bank. This bank linkage is the most distinctive characteristic of the Indian SHG model.
The massive outreach of SHGs to over 33 million people has generated interest in the model's sustainability and replicability in India and elsewhere.
CGAP Study: Design and Findings
Although SHGs have been widely studied, relatively little information has been published on their financial performance.2 CGAP's new two-part study (1) examines the financial viability of SHGs in India developed by five different programs, and (2) proposes a methodology for designing SHG programs that ensures their sustainability.
Study Sample
The nine programs that were analyzed (see Table 1) were chosen because they were reputedly stronger than average. These organizations are not a representative sample of Indian SHG programs--knowledgeable observers indicate that many SHG programs are weak and unsustainable. The intent of CGAP's study was to get a picture of the potential of the SHG model when it is well executed. The authors believe that strong programs are most relevant to assessing the potential of the SHG movement since one strong program that thrives and reaches massive outreach is more important than a dozen that remain small or perish.
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Key Findings
Some of the more interesting findings that emerged from these studies are summarized below (see Table 2).
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Savings related issues
External Funding
While most Indian SHGs are funded by banks or promoter organizations who borrow from banks, other successful community finance models are savings based and not externally funded. Banks tend to establish links with SHGs that have at least six months of experience, and the first loans tend to have a loans-to-savings ratio of 1:1 or 2:1 which gradually increases to 4:1 or higher. The prevalence of bank lending to SHGs may be based, in part, on government requirements that banks engage at least 40% of their lending to priority sectors, of which SHGs are included.4 Results to date with bank loans to SHGs in India might be linked to the fact that direct or indirect loans come from commercial banks that are serious about getting their money back. On the other hand, Indian banks have experienced high default rates on other priority-sector lending in the past.
Most members do not use SHGs as savings vehicles
SHGs mobilize modest amounts of voluntary deposits beyond the compulsory deposits required to join and to access loans. Only a limited number of SHGs offer voluntary savings, possibly because groups or promoting institutions do not want to address the complexities that voluntary savings entail, such as liquidity management, more staff or volunteer time to meet member requests for access to their savings, and more record-keeping for SHG managers. Other reasons for low voluntary savings may be that members have other satisfactory options for savings or may not consider savings to be secure or accessible in an SHG.
The SHG movement is still relatively young. One important question for the future is the extent to which SHGs can adapt their savings products to provide an appropriate fit with their members' cashflows and financial preferences.
Related Reading
- SIRC selected resources on self-help groups
- CGAP: Community-Managed Loan Funds: Which Ones Work?
- Self Help Groups in India: A Study of Lights and Shades
- State of Microfinance in India 2006 . The chapter on SHGs shows how these organizations fit in the microfinance constellation in India.
- SIRC Point, Counterpoint: A Dialogue on Member-Owned Financial Institutions and Increasing Access to Savings Facilities
Weblinks:
- Professional Assistance for Development Action
- Oriental Bank of Commerce
- Dhan Foundation
- BASIX
- NABARD
CGAP study authors
Part I. Jennifer Isern, lead microfinance specialist, CGAP; L. B. Prakash, executive director, Akshara; Anuradha Pillai, research assistant, CGAP; and Syed Hashemi, senior microfinance specialist, CGAP.
Part II. Robert Peck Christen, founder, Boulder Institute of Microfinance, and Gautam Ivatury, microfinance specialist, CGAP. Richard Rosenberg, senior policy advisor, CGAP, wrote the Introduction.
Special thanks
The authors are grateful to the SHG programs that provided their time and information. P. Kotaiah and C. S. Reddy of APMAS provided extensive comments on the paper's research and analysis of self-help groups. Vijay Mahajan, Prakash Bakshi, Vijayalakshmi Das, Deep Joshi, Ajit Kanitkar, Narendranath, Vipin Sharma, Matthew Titus, V. Satyamurthi, Sanjay Sinha, and Jayshree Vyas provided intellectual support and guidance.
1 The term self-help group is often loosely defined and, depending on the country, it can describe a variety of financial and non-financial associations. In India, SHGs have a specific model.
2 See bibliography of the study and links provided here for examples.
3 Elite capture occurs when better-off members of the group use their influence to access loans.
4 Indian commercial banks, most of which are government owned, began lending to SHGs because of government-imposed, priority-sector lending quotas. For more information on priority-sector lending quotas see the Guidelines on Lending to Priority Sector-Revised on the Reserve Bank of India website.