The History and Spread of

The Self Help Affinity Group (SHG or SAG) Movement In India

The Role Played by IFAD

Paper presented at the Asia Micro Finance Forum

Beijing Workshop March 21-23, 2006

Table of Contents

1.	The Early Years	1
2.	Phase I from 1987 t 1992	2
3.	Phase II from 1992 onwards	2
3.1	The SHG Bank Linkage Programme	3
4.	The SHG Contribution to Agriculture/On-Farm Credit	6
5.	The Major Reasons which Contribute to the Rapid Spread of the SHG Movement	7
6.	Features which Weakened the SHG Movement	10
7.	IFAD’S Role in Promoting the SHG Movement in India	13
8.	What does Myrada understand by Self Help Affinity Groups	16
9.	How does all this Theory Unfold Actually on the Ground	18
10.	Does the SHG strategy support the global efforts to meet the Eight Millenium Development Goals (MDGs)?	21

The History and Spread of

The Self Help Affinity Group (SHG or SAG) Movement In India

The Role Played by IFAD

Paper presented at the Asia Micro Finance Forum

Beijing Workshop March 21-23, 2006

Aloysius P. Fernandez

Myrada, Bangalore, India

March 22, 2006

This paper traces the origin and progress of the SHG movement in India from 1985 till March 2006 and on the role NGOs, NABARD, Banks, IFAD & Government (listed in order of entry) played in promoting the SHG movement in India since 1985. Since this paper has been written on request from IFAD[1], it focuses more extensively on IFAD’s role. It includes official data from the NABARD on the SHG-Bank Linkage Programme which started in 1992 as this is perhaps the only reliable source on the progress of the SHG movement; this data understandably focuses on financial management and loans for livelihoods while the SHG movement is equally an instrument for empowerment of the poor and marginalized sectors. Though many case studies on the role that SHGs of the poor, have played in initiating change in social, political and economic relations are available. Unfortunately, to do justice to this dimension would make this paper too long. In a way the strength of numbers which dominates the financial sector lies in their perceived objectiveness and definitely on their brevity – this partly explains why the financial dimension of the SHG movement gets reported more extensively. This paper does NOT refer to the recent origin and growth of Micro Finance Institutions in India which includes NGO-MFIs, Companies, Trusts, Registered Societies, etc. – this is another story.

1.                              The Early Years: Self-help Affinity Groups first emerged in Myrada in 1985. In 1986-87 there were about 300 SHGs in Myrada’s projects. Many had emerged from the break down of large coo-operatives that Myrada had organised[2]. In areas where the Cooperatives broke down, several members approached Myrada with the request to revive the credit system. They usually came in groups of 15-20. When reminded about the loans they had taken from the Cooperative, they offered to return them to Myrada but not to the Cooperative which, in their experience, was dominated by a few. Myrada staff suggested that they return the money to themselves – in other words to the members who had come in a group to present their case to Myrada. After some hesitation they decided to sit together. Myrada staff realised that they would need training on how to organise a meeting, to set an agenda, to keep minutes etc, efforts were made to train the members in a systematic way. On analysis, it emerged that the members were linked together by a degree of affinity which was based on relations of trust and support; they were also homogeneous in terms of income and often of occupation (like agricultural labourers) but not necessarily. Caste and creed played a role, but in several groups affinity relations and economic homogeneity were stronger; as a result several groups had different caste and creeds.

From the time the first SHGs emerged in 1985 in some of Myrada’s[3] projects to the inclusion of the SHG strategy in the Annual Plan Document of the Government of India in 2001 (and subsequently in every annual Plan thereafter) as an important component in the overall thrust to mitigate poverty, several important steps were taken by NABARD, RBI and leading NGOs. This period of 25 years, can broadly be divided into two phases:

2.      Phase 1 from 1987 to 1992: This phase is largely left out from all studies made in the recent past. The year 1987 is important since it was the year when NABARD (in response to a proposal from Myrada submitted in 1986) first put funds into the SHG (SAG) movement. In 1987 NABARD (based on Myrada’s experience in promoting SHGs since 1985), and thanks to the initiative of the then Chairman, Shri P.R. Nayak, provided Myrada with a grant of Rs.1 million to enable it to invest resources to identify affinity groups, to build their capacity and to match their savings after a period of 3-6 months. Subsequently, similar grants were provided to other NGOs. Based on an analysis of this trial, and due to the efforts of NABARD Chairmen and Senior management, the Reserve bank of India accepted (in 1990) the SHG/SAG strategy as an alternate credit model and NABARD came out with guidelines (in 1991) to support and give a framework to the programme. Ever since then NABARD on the basis of its extensive network of officers has promoted and monitored the SHG programme, provided funds for capacity building and innovations and helped to change policy to create an enabling environment for it to grow.

This paper will not focus on Phase l since IFAD was not involved in the SHG strategy at that time. However, when the Women’s Empowerment Project, an IFAD supported Project, implemented through the Tamil Nadu Women’s Development Corporation was grounded around 1990, Myrada was asked to play a lead role in Dharmapuri District. This project introduced the SHG model in a State sponsored programme. The Indian bank also took the decision to extend credit to the groups. As a result, this project was the first to incorporate the SHG strategy in a major State supported project. This experience also contributed to the initiatives taken by NABARD to shape policy related to micro finance models which resulted in the SHG-Bank Linkage Programme that was launched with a pilot project in 1992.

3.      Phase II from 1992 onwards: In 1992 NABARD launched the SHG-Bank Linkage programme (starting with a Pilot project to link 500 SHGs) which took some years to take off, but which has galloped along during the past 3-4 years thanks to unstinting support from the Reserve Bank of India, Governments of India and of several States, notably Tamil Nadu, Andhra Pradesh, Maharashtra and Karnataka and supported strongly by thousands of NGOs and the banking sector, as well as by Multilateral Agencies notably IFAD. This paper focuses on the progress of the SHG movement as reported by official documents which, understandably highlight the SHG-Bank Linkage programme.

Though it is difficult to verify, reports indicate that (in March 2006) they are about three million SHGs in India. Of these, about 1.6 million are linked to Banks. Since the NABARD (National Bank for Agriculture and Rural development) report which provides data on the SHG Bank Linkage programme is an official publication into which NABARD has invested much work and care, it will be used as a reliable source of information with the following clarifications. The NABARD report provides information only on the 1.6. million SHGs/SAGs linked to banks. Its data covers cases only where this re-finance is asked for by the Banks. In many cases where Banks are flush with funds or can mobilise funds at lower rates of interest, this refinance may not be asked for. Understandably it focuses on financial management of SHGs.

However the SHGs are also an instrument of empowerment of the poor and marginalized sectors. They have proved to be an effective instrument to change oppressive relationships in the home (gender and tradition related) and in society - especially to change those relations arising from caste, class and political power which have made it difficult for the poor to build a sustainable base for their livelihoods and to grow in a holistic manner. It is because of this social impact, that Myrada has pointed out that the SHG movement does not focus on the provision of credit; rather it focuses on the management of savings and credit It is the experience of managing finance (savings and credit) which gives the poor the confidence and skills to initiate and manage change in society. The SHG movement arises from the belief that it is not enough to teach people to fish when they cannot reach the river; there are hurdles (class, caste and political) in their way which the SHGs have proved capable of overcoming. NABARD has also financed case studies which focus on these social issues and the change that SHGs have been able to initiate.

3.1        The SHG-Bank Linkage Programme: This Programme which is the major component of the SHG movement on which official data is available started in 1992; it gives a reliable overview of the progress of the SHG movement in India. One can assume that the majority of the well functioning SHGs have been advanced loans by the banks; however, this may not be the case in parts of the country where the Banks have been slow to initiate this linkage.

 By March 2005, the SHG-Bank Linkage programme has provided credit to 1,618,456 SHGs with a membership of over 24 million poor families or about 120 million poor people making it the largest micro finance initiative in the world. There are, however, many more SHGs in India than those to which banks have advanced loans. Many Banks have lent to SHGs but not asked for NABARD’s refinance; hence these linkages are not reflected in NABARD’s data. Many of the SHGs which are functioning well, have not approached Banks for their own reasons – some for example have adequate savings and grants provided by NGOs to meet their requirements. In some areas Banks are located too far away from the SHGs. A number of SHGs are still too young to access Bank loans while others are functioning poorly and are not eligible. Hence the number of SHGs is greater than that reported in the NABARD document; Reports indicate that they number around 3 million including the good, average and the bad.

The following tables provide data on the SHG-Bank Linkage Programme, Source: NABARD’s Annual Report on the “Progress of SHG-Bank Linkage in India (2004-2005)”

Table 1. SHG Coverage-All India

v	Cumulative number of SHGs financed by banks upto March 2005 (since 1992-93)	1,618,456
v	Number of poor families who have accessed bank credit upto March 2005 (since 1992-93)	24.3 million
v	Estimated Number of poor people assisted upto March 2005 (since 1992-93)	121.5 million

Table 2: Bank Loans-Amount in IRs

v	Cumulative bank loans disbursed to SHGs upto March 2005 since 1992	More than Rs.68 billion
v	On-time repayment reported by participating banks	Over 95 percent

Table 3: Outreach during the year 2004-2005: This helps to provide a clearer picture of what level of outreach (in terms of forming new SHGs and financing them) can be achieved in a year.

v	Number of new SHGs formed by formal agencies during 2004-05	352,575
v	Number of new SHGs formed by NGOs during 2004-05	716,122
v	Number of new SHGs financed by banks during 2004-05	539,365
v	Number of existing SHGs provided repeat finance by banks during 2004-05	258,092
v	Number of poor families accessing bank credit Including repeat finance during 2004-05	11.2 million
v	Estimated number of poor people covered during 2004-05	56 million

90 percent SHGs comprised only women members

Table 4:

Amount of Loans disbursed by Banks to SHGs during 2004-2005

v	Bank loans disbursed to new SHGs during 2004-05	Rs. 17,266 million
v	Repeat loans disbursed by banks to existing SHGs during 2004-05	Rs. 12,676 million
v	Increase in credit flow to SHGs over the previous year	61%

Table 5: The following Table however shows that the Linkage Programme really gained momentum during the past five years. From 1992 to 2001 the progress was slow

Table: 6

Note: The above table does not project a true picture of the total credit that has been loaned by SHGs to its members for two reasons: a) The common fund of each SHG from which loans are given to members includes not only loans given by Banks but also the savings, interest earned etc. To illustrate: A break down of the total common fund (as on Dec 31,2005) - of the 9715 SHGs in Myrada’s projects -- gives the following picture: total common fund- Rs 1126 million, of which Rs 513 million is savings and Rs 485 million is the interest earned by the SHGs on lending, the remaining Rs 128 million consists of Bank loans, fines and contributions and b) many Banks which have extended loans to SHGs have not claimed refinance from NABARD; many Banks were flush with funds and could access funds at cheaper rates. Therefore the total credit from SHGs to its members will be far higher than the total amount lent by Banks to SHGs.

4. The SHG Contribution to Agriculture/On-Farm Credit: The largest number of loans given by SHGs to its members is for agriculture and on farm related activities[4]. A survey of IFAD’s projects where the SHG strategy is adopted indicates that these loans for agriculture do not find a place in the reports on these projects which IFAD produces. These reports provide data only on the amount budgeted for agriculture in the annual plans and budgets. In fact an analysis of the purposes of loans given by SHGs in several IFAD supported projects in India indicates that the number (and amount) of loans given by SHGs for agriculture is several times higher than what is budgeted in the annual Plans.

It may be useful to compare the SHG contribution in this sector with the over-all performance of Government programmes promoting agricultural credit through the formal sector (Banks and Cooperatives) other than through the SHGs. The 59th round of the NSS Survey reveals that only 27% of the total number of farming households took credit from the Formal Sector (Banks and Cooperatives)-this does not include the SHG route. The NABARD reports (Table 6) indicate that between 2000 and 2005, Bank loans to SHGs increased from Rs.2,879 million to Rs.29,942 million. The table indicates an increase of around 90% year on year for the first three years, 82% in 2003-2004 over the previous year and 61% in 2004-2005. This compares very favourably with the annual increase of credit from the formal sector to the agricultural sector which is around 15% year on year (with the exception of 2004-2005 where it jumped to 32% due to Government pressure). The macro picture also creates cause for concern. For example recent surveys have shown that the capital formation in agriculture as a proportion of total growth in capital formation has fallen from 9.4% in 2003-2004 to 8% in 2004-2005. Both the public sector (which contributes around 30%)and the private sector (which contributes around 70%) seem to be reluctant to invest in agriculture.

As for the latest National Annual Plan, (2006-07) there is a budgeted increase of Rs.9000 million for the Ministry of Agriculture and Rs 210 million for the Ministry of Agro and Rural Industries About 90% of these budgeted amounts go towards revenue expenditure (running costs). The Annual Plan seems to continue to place its bets on reducing interest rates as a major contribution to the farmers. (Short term rural credit up to Rs.300,000 will now be provided at 7%). This is more a political statement than an answer to the real situation on the ground. It has long been proved that farmers are willing to pay up to 15% interest instead of the high interest rates levied by moneylenders (over 50%). What they need however is ready access to credit and to quality inputs; they need assurance that the prices that they will get for produce will cover costs and give them a reasonable profit (in fact the opposite has happened, for example - the price of cotton has fallen by over 30% during the past 5 years in Maharashtra while cost of inputs has doubled) and an effective procurement/marketing system and working Cooperatives and financial institutions. In fact it may be a better strategy to do away with short term credit for agriculture especially in dry land areas where there are two good crops in five years; all agricultural credit should be repayable over 3-5 years; the pressure on farmers to repay both interest and capital within a year is what causes distress; paying interest alone would not be a problem.

 

This clearly shows that the SHG channel records the highest growth rate among all initiatives that seek to make credit available to farmers for agriculture and related livelihood activities. Given that the SHG members are all poor (may not be the poorest …but that is another story), it is clear that the contribution of the SHG model to the poor farming community for agriculture and related livelihood activities has been the highest among all such vehicles which comprise the strategy to reduce poverty.

5. The Major Reasons Which Contributed to the Rapid Spread of the SHG Movement are the following:

· There are thousands of promoting institutions involved – Government, Banks and NGOs – not just one or two institutions with ambitions to grow large. For example in 2004-05 there were 573 Banks (Commercial Banks, Regional Rural Banks and Cooperative Banks) lending to SHGs through 41,323 Bank Branches. Many of them are also promoting SHGs. Further there were 4323 NGOs and other agencies involved in training and mentoring SHGs. This massive network of institutions supports the SHG movement each in its own way. (This large number of diverse institutions also had its weakness which will be mentioned below).

· ii) There is large investment in the capacity building of SHGs. This investment comes from Private NGO Donors, Multilateral like IFAD and some Bilateral Agencies, from NABARD, SIDBI and State Governments. Capacity building is largely done through NGOs. The main role of the NGOs is to identify affinity groups and build their institutional capacity. Identifying affinity groups requires close rapport with the village. It is normally done by first using participatory methods through which people identify the poor, conducting a short session to explain the meaning and need for affinity as the basis for group formation and then leaving the poor who are identified to form their own groups. Affinity exists before the NGO enters; it is the NGOs role to identify it and to build on it, not to destroy it as is being done by some Government programmes which provide subsidies at different rates to Scheduled Castes and Scheduled tribes even though they may be in one SHG and by some MFIs which break up good SHGs into Joint Liability Groups or extend loans to individual members in a SHG.

· Once an affinity group has been identified, a major training programme is scheduled which includes at least 23 modules spread over 1-1/2 years. The modules are given in footnote[5]. Training also includes the capacity to assess SHGs as institutions; self-assessment as well as assessment of one SHG b y another is promoted; it requires new skills. Hitherto Bankers were accustomed to assess proposals submitted by individuals under anti poverty schemes like the Integrated Rural development Programme (which incidentally could claim to be the first micro finance programme since it started in 1980; it was preceded by a pilot programme called the Small Farmers Development Programme which started in the late 1970s); this was relatively easy since the unit costs and project profiles for each activity or asset were standardised. Some larger NGOs were also involved in training Bankers to assess SHGs as institutions

· The official system accepted an alternate model (namely the rules and regulations adopted by each SHG related to size and purpose of loans, interest and repayment schedule). The official system provided guidelines and a framework but did not attempt to standardise SHG functions (for example that loans should only be for assets) or impose its own norms and procedures related to interest rates and repayments schedules. This acceptance of an alternate model is a crucial feature of the SHG model. For example a) RBI changed policy to allow the Banks to lend to SHGs even though they were not registered, provided they functioned well. (Incidentally, SHGs refused to be registered since they claimed that they would be vulnerable to the machinations of a petty government official); b) Banks were allowed to lend to SHGs without asking for the purpose for which the SHG would on lend to its members. This data had to be collected later, after the SHG had met and taken these decisions. This is a distinguishing feature of the SHG model and cuts down on the transaction costs of Banks which are largely incurred on writing up each individual loan proposal, carrying it to a Bank, assessing it etc. Other group based micro finance models lend to individuals in groups; they adopt the joint liability model with local variations, but all loans applications are in the name of individual members which are finally approved by the Bank branch. In the SHG model all decisions regarding purpose and size of loans, interest and duration of loan are taken within the SHG. This requires that SHGs function well and that they are assessed as institutions before loans are given[6].

· Regular feedback was obtained by NABARD; based on this feedback new procedures and policies were introduced by RBI and NABARD; similarly, several in depth analyses and process documentation studies were made by these institutions. The SHG programme is perhaps the only one which has been fortunate to have the sustained support of a government financial Institution namely NABARD over a period of 20 years. NABARD made every effort at National, State and District levels to collect feedback, analyse progress, remove hurdles, provide funds for training, and persuade Banks to increase their coverage. It also made efforts to extend the programme to the more neglected and remote parts of the country. NABARD achieved this through its wide network of offices and field level officials who took up the challenge.

· Several state governments over the past 19 years and the Central Government since 2001 have initiated programmes from their own funds in which SHGs were promoted, trained and mentored. IFAD’s contribution played a major role in many of these projects which will be described in greater detail later in this paper. Tamil Nadu, Maharashtra and Andhra Pradesh are good examples.

· Resources were invested by NGOs, private donors (primarily NGOs from the Netherlands, Germany, Switzerland and Canada) and NABARD (and recently SIDBI) in institutional capacity building of the SHGs and in training bankers to adapt to the new approach. The Central Government sponsored SGSY Programme which was well designed but poorly implemented provided about Rs 10,000 for capacity building of each SHG. Myrada’s experience indicates that it costs between Rs.8,000 to Rs.12,000 to train and mentor each SHG depending on the location of the SHG and experience of the NGO. This includes training and mentoring for at least 2 years. Mentoring involves visits of NGO staff to SHG meetings and regular guidance.

· In spite of pressure from international financing institutions (both private and multilateral) to adopt micro finance models in vogue in other countries which replicated the banking system and focused on credit provision, Indian Financial Institutions and most NGOs persevered with the SHG model which gave the SHGs a broader role than management of credit. This perseverance, in spite of criticism from major Institutes with experience in South America and elsewhere, is one reason why the SHG model spread. There are several reasons why the SHG model has not been accepted by most multilateral organisations including the World Bank. The reasons for this lack of acceptance included the following: The SHG model did not conform to the Grameen Bank Model which the World Bank supported strongly; it does not draw a clear line between social and economic matters; it is not managed professionally by NGOs; it is not sustainable as a financial model, it mixes up subsidies and loans, financial analysts did not feel comfortable with unregistered groups managing credit, SHGs only provide loans for consumption smoothing not for income generation etc. It must also be pointed out that it started in India without any support from major Financial institutions based abroad who therefore could not take ownership; The Micro Credit Summit consistently refused to recognise the SHG programme in India and to in- corporate the SHG members in its portfolio of achievements. Interestingly, last year when the Micro Credit Summit realised that it would not be able to achieve its target of 100 million beneficiaries, it decided to add the Indian SHG membership to its portfolio. It then wrote to several Indian institutions asking them to be partners. It is the thrust of Indian NGOs supported by NABARD and the RBI that helped to promote this Indian model. Many, especially among the NGOs and the Banks, took it up as a challenge to promote the SHG model and resisted the pressure to accept models and systems which would have to be imposed on all the SHGs, thus restricting their freedom and their potential to become instruments of change. Apart from IFAD which has a policy to recognise local initiatives and to build on them, the only other institution based abroad which supported the SHG Bank Linkage Model in the early years was the Foundation for Development Cooperation based in Brisbane Australia. This Foundation devoted a large part of its limited resources to persuade India Banks and other institutions to realise the significance of this model.

In a brief response to the criticisms of the SHG model listed above, it must be stated that Myrada, (which has over the past 25 years recorded its experience with SHGs periodically) has never claimed that the SHGs were financial institutions. In fact, as said earlier, it was the management of finance and not its provision which was stressed. However, this did not reduce Myrada’s investment in training SHGs in organisation and financial management, in regular auditing even by Chartered Accountants as in the case of SHGs in several Myrada projects. However, the SHGs are not financial institutions as commonly understood. MFIs are a different institution in terms of size, scope and supporting systems. NABARD supports this position as well.

As regards financial sustainability, Myrada has projected the following position for several years. The process of SHG formation requires activities that can be broadly divided into three groups: I) identification of an affinity group. This exercise is described above (refer…) It requires experienced NGO staff and does not pay for itself; it is part of in vestment in capacity building. ii),institutional capacity building; this requires several training models; 23 have been listed which can be done in 14 sessions,. This training has to be subsidised; it costs between Rs 5000-Rs 10,000 per group Myrada sees no reason why this investment in capacity building (training in management and livelihood skills, basic numeracy) cannot be made. Non-formal education must go beyond just literacy if it is to provide a basis for livelihoods. And iii) –the “loaning activity” which includes visits to the SHG, assessment, etc. The cost of this activity can be covered within 3-4 years. In Sanghamithra’s case (the MFI set up by Myrada), it took three years. The first two sets of activities must be handled by an NGO; the third by the MFI. Aster breaking even, the MFI should invest its surpluses in the first and second set of activities. A MFI which is Not- For Profit is more easily able to make this investment.

Myrada also insists that SHGs should be formed only in the context of over all development which could be spearheaded by Government investment in the area or by an NGO. Starting SHGs in areas where the economy is stagnant or based on barter will not achieve much. In fact Myrada which is now well know for its major investment in watershed management covering over 150,000 has of drylands, went into watershed management in a major way, only when it realised that the SHG members were borrowing for dryland agriculture. Therefore it was Myrada’s responsibility is to lessen the risk of their investment through its projects in watershed management. The same holds true for Myrada’s thrust to establish marketing and communication links. It is to the credit of IFAD that it includes in its project design a major investment in natural resource management including watershed management as well as marketing and input linkages. As regards the SHGs inability to go beyond consumption loans, data indicates otherwise; this is treated in detail later in this paper.