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by Rajen Kumar

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Focus

12 Million Rural Poor Women in SHGs Enjoy Doorstep Banking

Nov 2009

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The rural poor, even the poorest by any definition, also have some incomes. But, their income streams are not constant flows - they are often linked to agricultural seasons, and there are also major ups and downs. Whenever there are tiny surpluses, there is usually no place to keep them safe. And we are talking of “surpluses” which may be sometimes as small as less than a Dollar in a month! They also need small loans, for varying periods, to tide over emergencies which are frequent, and also to manage their livelihood needs. And the inability to keep safe the tiny surpluses only accentuates these credit needs. And very often, the women members of these households have lesser say in the use of whatever resources the family has at command, owned or borrowed. And we are now talking of loans which may sometimes be as small as two Dollars!

The important lesson to learn here is that unless there is a mechanism to keep safe THAT one Dollar a month for two months, THIS LOAN of two dollars cannot be repaid!

India had adopted a very focused approach to create a rural financial infrastructure which took formal banking to as near the villages as anyone could imagine. This approach had resulted in a retail outlet of the formal banking system - commercial, regional, and cooperative banks put together - for every one thousand households.

Any banking institution (or any MFI, for that matter), however, has certain minimum sizes of savings or loans, below which they cannot operate due to their transaction costs which would make such tine amounts not bankable. The banks (and mFIs also) often have systems and procedures that are not very illiterate-poor-friendly. And these range from office timings to filling up a number of forms (making the poor lose wages or spend on transport or form filling). These systems result in certain transaction costs on the part of the poor, quite often making the interest on savings almost irrelevant or interest on loans to be a smaller part when compared to the non-interest costs that the poor will have to bear.

This was resulting in a paradox: the banking institutions, even though wanting to do business with the poor were unable to do so because business volumes did not meet their costs, and the poor, wanting to avail of two major financial products, viz., savings and loans, from the banks were also unable to do so, because the non-interest costs were too high. And all this because the traditional savings and credit products that the banks had, along with their delivery mechanism in terms of systems and procedures, did not solve the problem at hand.

There was, therefore, the need for a new delivery mechanism which would reduce transaction costs for both the banks and the poor.

Self-Help Group banking was then the right answer. A Self-Help Group (SHG) is a group of about 20 members, homogeneous in their social and economic characteristics. They are encouraged TO SAVE first, and regularly. Yes, their tiny amounts, which may be as small as 5 Cents a week. While these 5 Cent savings is a non-viable amount for the bank, when pooled together for the 20 members, the one Dollar could be a viable minimum amount for a single savings account operation of the bank! And then, the SHG, and not every member, opens a single bank account with the bank branch and take care of the savings needs of all the members of the SHG at one go. The net result? Doorstep savings service for all the members without any travel and transaction costs!

The SHG is then encouraged to pool such savings and see if any of their members need any small loans - yes, the two Dollar kind of loans - and meet these loan needs from their pooled savings and set their own terms for such loans. The net result? The members get their tiny loans on their doorsteps, once again without any non-interest costs! And the bonus? The SHG members learn to appraise loan requests, set priorities as resources may be smaller than needs, set the terms for loans, monitor loans carefully (as their own hard earned savings are involved), gradually build financial discipline among themselves, and get ready for larger loans.

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