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SHGs can be considered financial intermediaries that reduce costs for both borrowers and lenders. It is the SHG which decides on whether a member’s loan application should be accepted and sets the interest rate. Some groups charge lower interest rates for loans aimed to cope with emergencies than for loans for income generation. The purpose of the loan does not need to be specified to the bank. Group liability, peer pressure and group savings are used as substitutes for traditional collateral. In general, interest on loans from SHGs tends to be lower than those of moneylenders, but higher than those of banks19. Members are willing to pay these higher rates because they know that the interest will flow into their common fund. Loan monitoring is also undertaken by the SHG and not by bank staff. If repayment problems arise, SHGs decide how to deal with defaulters and repayment flexibility is therefore granted if necessary. Within SHGs, peer pressure is thus complemented by ‘peer sympathy’ which facilitates rescheduling of loans in case of crisis (NABARD, 2004).
Loans from banks tend to be short- to medium- term, i.e. up to three years. Wellperforming SHGs have the option to receive increased repeat loans. In 2002, average loan sizes per SHG were Rs 22,240 (USD 490) and Rs 1,300 (USD 30) per member (Seibel & Dave, 2002). Some SHGs also give loans to non-members and thus channel the resources obtained through SHG-linkage to the wider community. However, the efficacy of peer pressure may be reduced in these cases.
Some SHGs choose to remain pure thrift groups which do not access credit.
In 2001-2002, NABARD refinanced banks engaged in SHG lending at 7% p.a., interest rates on bank loans to SHGs ranged between 9.75% and 16% p.a. and SHGs on-lent to their members at about 2% per month or 24% p.a.. The SHG-Bank Linkage Programme thus represents one of the microfinance programmes with the lowest interest rates worldwide (Seibel & Dave, 2002). In areas with vibrant SHGs, substantial decreases in the reliance on moneylenders and lower informal interest rates have been reported.
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SYNERGIES BETWEEN CLUSTER DEVELOPMENT AND MICROFINANCE 25Box 2.1 Characteristics of Well-Functioning SHGs
• Be homogeneous in socio-economic terms.
• Have between 10 and 20 members.
• Have members who are residents of the same area and who have an affinity to each other.
• Have written rules, which regulate aspects related to membership, frequency and time of meetings, savings, credit, etc.
• Hold regular meetings (e.g. weekly, fortnightly or monthly) to strengthen intragroup relations.
Dates and times of meetings should be fixed.
• Maintain records including minutes book, attendance register, members savings ledgers, a group passbook, etc. to ensure transparency.
• Take decisions collectively.
• Elect leaders democratically and rotate leadership to give all members the chance to develop leadership skills and to avoid group capture by one or two dominant members.
• Avoid terms such as ‘president’, ‘chairman’ or ‘group leader’ which are associated with positions of power. Use neutral terms such as ‘representative’.
• Ensure that loan requests and loan approval as well as payments (i.e. loan disbursement, repayments and savings) take place during group meetings to ensure transparency.
• Levy fines, e.g. in the event of coming late, failing to attend meetings without an adequate excuse or late payments of savings and/or loan instalments.
• Exclude members who deliberately break the rules.
• Encourage members who want to save more than the required amount to set up an individual savings account at a bank, to avoid complication in bookkeeping and dominance in decisionmaking by some members20.
• Discuss and try to find solutions to family or community problems during meetings.
v) SHG Federations In recent years, SHG Federations have been created to improve access to finance as well as to improve service provision to SHGs. They are formal institutions, typically registered under the Societies Registration Act. SHG Federations allow the resources of individual groups to be pooled and thus to channel resources from surplus groups to resource-deficit SHGs. Some federations also act as financial intermediaries between financial institutions and SHGs. A number of federations perform no direct financial function, but instead provide services such as training, marketing, legal advice, advocacy as well as SHG promotion (Harper, 2002).
However, some banks may be reluctant to open individual savings accounts for SHG members, because the main benefit of SHG-banking for them, i.e. the reduction of transaction costs, is thereby partly diminished.
Box 2.2 SHG Federations in Two Indian Clusters In Sindhudurg, 16 SHGs have formed a network for food processing. The SHGs pooled their savings as a common fund for the network and each SHG contributed an additional Rs 300 (USD 6.60) as an annual fee. The network applied for a common loan and received Rs 50,000 (USD 1100), which was used to purchase the equipment necessary to process kokum and enabled the groups to attend a trade fair. It is particularly remarkable that a bank sanctioned a loan to attend a fair, i.e. for promotional purposes. The loan was repaid and since it was in the form of cash credit, it became available to the network again. One member SHG has now obtained a loan from the network for goat farming and another for the production of traditional products.
In Chanderi, one of the main strategies to improve the income of weavers is to link them directly with buyers, thereby reducing their dependency on intermediaries. To achieve this, seven self-help groups have been formed into an apex organization, registered as an NGO. The need for such an organization arose from the recognition that a group of 10 weavers could not attain the critical mass and variety of products required by buyers. Furthermore, quality control and marketing efforts were believed to be more effective within a larger group.
D. Beyond Financial Intermediation Self-help groups not only facilitate access to financial services for their members, but also serve as a tool for social development. Social effects attributed to SHGs include significant increases in standards of living, women’s literacy, school enrolment, vaccination of children, access to drinking water and sanitation, improved family planning and political empowerment of women (Seibel & Dave, 2002). A number of groups have also set rules pertaining to the prohibition of child marriage or child labour. Some SHGs have developed a common fund to be able to meet emergency situations or to undertake community development activities, such as providing meals or scholarships for school children, water conservation and irrigation projects and construction of village infrastructure. According to Myrada (1997), the well-off in villages respect SHGs, because they have been able to improve their livelihoods as well as to initiate programmes for the public good and to settle long outstanding disputes. SHG members report that they have become more confident and are willing to share their experience with others and to give advice. Women giving advice may be an important indicator of empowerment since this implies sharing one’s knowledge to help others and, above all, having enough self-confidence to do so (Cheston & Kuhn, 2002).
SHGs can contribute to the development of social capital within a community and can promote a democratic culture. Bargaining power both towards local authorities and elites may be increased through group membership. Government schemes are easier to access through SHGs, political parties are known to have visited SHGs and some members have even entered politics. Due to their stable membership, SHGs offer a unique forum to development practitioners to spread information and to conduct sequenced activities in areas such as health education, agricultural development or skills training.In Sindhudurg,
SHG members perceived the main benefits of belonging to an SHG to be:
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SYNERGIES BETWEEN CLUSTER DEVELOPMENT AND MICROFINANCE 27Box 2.3 Benefits of SHG membership in Sindhudurg
• Access to loans;
• Increases in income;
• Joint income-generation activities;
• Learning and gaining experience, e.g. in marketing;
• Satisfaction of working together;
• Security, especially for widowed members;
• Husbands are happy;
• Increased influence over household decisions, i.e. members are discussing decisions with husbands that before were taken only by the husband;
• Increased status in the community. People in the village are turning to the SHG for help and SHG members feel they can now even influence local decisions, e.g. where a road should be built;
• Exposure visits.
Female SHG members in Sindhudurg report that their husbands’ attitude towards SHG membership has significantly changed. Whereas husbands initially opposed the fact that their wives attended group meetings, they have come to see the economic benefits of group membership. They now encourage their wives and let them go on exposure visits to far-away places. Husbands sometimes even participate in group meetings since these take place at all members’ houses on a rotational basis. However, some women also noted that their husbands become angry if they do not receive a loan.
E. Limits of SHG Banking Despite the benefits associated with SHG-banking, there are some problems involved.
SHGs may find it difficult to access the credit amounts needed, particularly in the initial growth stages. In the early stages of bank-linkage, loan amounts are restricted to four times the group fund. However, this amount is often insufficient to cover the rapidly growing capital needs of the groups. So far, SHGs linked to banks do not appear to be able to easily graduate to (larger) individual loans under banks’ normal lending programmes.
Although outreach of the SHG-Bank Linkage Programme is significant, there is a strong geographical concentration of SHG-banking in Southern India. In 2002, just two states, Andhra Pradesh and Tamil Nadu, accounted for more than 66% of SHGs linked to banks (Tankha, 2002). The non-availability of NGOs capable of promoting SHG formation has hindered the spread of the SHG-Bank Linkage Programme into states such as Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh and Orissa (Kropp & Suran, 2002). Many bank branches and cooperative societies continue to be unwilling to adopt the SHG-linkage model or lack financial soundness and/or adequate infrastructure.
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28 SME TECHNICAL WORKING PAPERS SERIESQuality and stability of SHGs may pose a problem for the long-term sustainability of the SHG model. Little seems to be known about the sustainability of SHGs, in particular how long they last and how they change over time (Harper, 2002)21. Tankha (2002) notes that even best practice NGOs generally place only about 50% of groups in the highest category of performance, with 10-20% failing to take off. Although many initiatives exist to form SHGs, there are few to strengthen them. For example, group leaders often do not receive specific training, which could then be disseminated to the entire group.
As with other models of microfinance, it is unclear to which extent the poorest benefit from SHG-bank linkage. Although SHG members tend to be poor, they are typically not as poor as those benefiting from Grameen-type microfinance. The distribution of benefits within SHGs is also an area of contention. Some SHG members have never taken out loans, either because they had no profitable investment opportunities or were anxious about obtaining credit. These members thus mainly provide their savings as free collateral to back the loans of other, possibly less poor, members (Harper, 2002).
A bank manager in Sindhudurg remarked that women-only SHGs tend to stay together longer than mixed or male SHGs, in which political or other conflicts arise more easily.
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UNIDO’s Cluster Development Programme and Microfinance A. UNIDO’s Approach to Cluster Development Micro-, small and medium enterprises (MSMEs) are increasingly recognised as important players in the fight against poverty. They are a key source of productive employment and income for the poorest segments of the population and are major suppliers of basic goods consumed by poor people. However, due to their small size and isolation, MSMEs’ growth and employment-creation potential can be significantly curtailed. MSMEs have difficulties in achieving economies of scale and thus face higher unit costs than their larger competitors. They are often unable to capture market opportunities because their production quantities are insufficient and they cannot guarantee regular supply. Their small size can hinder MSMEs from internalising functions such as training, market intelligence and logistics and can prevent an internal division of labour that fosters improvements in productive capabilities and innovation. By operating in clusters, MSMEs can overcome these obstacles.
Clusters are geographical agglomerations of enterprises which are engaged in similar or highly related economic activities and therefore face common challenges and opportunities. In the best performing clusters, MSMEs derive a clear competitive advantage from the proximity to sources of raw material inputs, the availability of suitably customised business development services, the abundance of clients attracted by the cluster tradition in that industry, the presence of a skilled labour force and the vibrant competition among the cluster entrepreneurs, which spurs innovation and increases efficiency. In addition, clustering can potentially help firms, especially smaller ones, overcome constraints associated with size, promote technological development and productivity increases, and enhance their ability to compete in local and global markets.