SHG Bank Linkage – a tool for reform in Indian cooperatives?

Topic :

India is notable for the self-help group (SHG) bank linkage movement which has helped to bring financial services to large numbers of poor people. SHGs are member-owned and controlled financial service enterprises, providing savings and credit services to their members. They usually distribute their profits to members and they facilitate members’ access to education and training. They are, in effect, micro cooperatives. They are linked to bigger financial institutions to keep their savings and provide additional capital for on-lending to members.

SHGs have increasingly been seen as good business for banks – they are a source of deposits and reliable at repaying loans. The most widespread financial service providers in rural areas of India are cooperatives. There are over 93,000 primary societies, served by 367 district cooperative banks with 12,000 branches and there is a further tier of state level apex cooperative banks. The cooperatives, however, have a relatively small share of SHG business. This paper examines why this is and argues that it would be in the interests of the cooperatives to increase their share of SHG business. Many primary societies have extremely poor loan repayment records, often below 50%, and this could be improved by taking on more reliable business which the SHGs represent.

The primary societies represent the main competitive advantage of cooperative banks because no other banking institution can match this outreach. However, the primary societies are not required by law to take out deposit insurance and they are thus, a less secure place for people to keep their savings. The failure of the cooperative banks to reach out to SHGs seemed largely to be that they did not think they could compete with the service levels of the commercial banks and regional rural banks.

Although the authors of this paper could not quantify the potential financial impact of cooperatives increasing their SHG business, they did consider the results would be beneficial, e.g. in terms of improved loan recovery ratios, improved credit:deposit ratios and improved representation of communities by having more women members. They recommend, therefore, that the staff of primary societies should be exposed to successful SHG linkage experiences and that district banks should actively promote their services to SHGs and SHG promotion institutions. They do note, however, that no SHG should be encouraged to do business with an institution that lacks deposit insurance.

Related Resources