Sustainability of Microfinance Self Help Groups in India: Would Federating Help?

Topic :

This study from the World Bank, looks at Indian Self-Help Groups (SHGs), unregistered groups of 10 to 20 members involved principally in savings and credit activities. Members save periodically in the group and the savings are lent out to members who require loans at a fixed rate of interest. SHGs differ from other Accumulated Savings and Credit Associations (ASCAs) in that they are usually small, promoted among the poor by external agencies, and can obtain loans from banks. 90 percent of these groups in India are composed of only women members. This study looks at the success of SHGs in India, and considers the challenges they face, focusing particularly on the idea of federating groups to make larger units capable of providing more services to members. It is a useful theoretical study which will be of interest to policy-makers. It should be borne in mind that the three federations looked at in this study are not representative of all federations, but are best cases. The overall objective is to explore the potential of SHG federations in making SHGs financially and organisationally sustainable, and to recommend strategies to strengthen them.

From 1995 to 2005, more than 700,000 SHGs obtained approximately 20 billion rupees in loans from banks under a program of the National Bank of Agriculture and Rural Development (NABARD). In cumulative terms this means that perhaps over 10 million people have benefited from such loans. The on-time repayment rate has been over 95 percent, and a conservative estimate sets savings in SHGs at at least Rs.8 billion. Despite this success story, the sustainability of SHGs is not clear. The small size of such groups means they tend to be dependent on the promoter agencies for several essential services, and in response to this weakness, SHG federations came into being, to take over those services. Such services, provided by federations (including financial services, but also publicity and literacy training of staff), help the SHGs gain economies of scale, obtain value-added services, reduce transaction costs and enhance empowerment, thus contributing to the overall sustainability of the SHGs. Thus the federations may serve to assist SHGs on the way to independence from promoter agencies.

The author argues, using examples of SHG federations, that financial sustainability for such federations is easier to achieve than is organisational sustainability, i.e. effective governance, staffing, and information systems. A system of mutual accountability between member SHGs and their federations is suggested as a solution. The paper is open about its limitations and about its pro-federation argument, and suggests further reading.

  • Resource type
  • Author Nair, A.
  • Organisation
  • Year of Publication2005
  • Region
  • LanguageEnglish
  • Number of pages46 pp.
  • EditionPolicy Research Working Paper

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