People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 45

November 06, 2011



Prevent Erosion of SHG Movement, Regulate MFIs


ON October 31, a national level delegation of the All India Democratic Women’s Association (AIDWA) met Dr D Subbarao, governor of the Reserve Bank of India (RBI), in Mumbai and presented a memorandum about the pressing need to strengthen the linkage between women’s self help groups (SHGs) and banks, and stems the erosion of the SHG movement.


AIDWA’s patron Brinda Karat led the delegation that comprised Sudha Sundararaman (general secretary, AIDWA), Kiran Moghe (president, Maharashtra unit), Swaroopa Rani (general secretary, Andhra Pradesh unit), Tapasi Praharaj (vice president, Orissa unit), Rama Biswas (member, West Bengal state secretariat), Aparna Gupta (member, West Bengal state executive committee), K S Lakshmi (general secretary, Karnataka unit), Anju Jha (treasurer, JMS Delhi), Shankari (joint secretary, Tamilnadu unit) and Fathima (member, Tamilnadu state committee).


Dr Subbarao was accompanied by Dr K C Chakrabarty, deputy governor in charge of the Rural Planning and Credit Department (RPCD), V K Sharma, executive director, and Deepali Pant-Joshi, chief of the RPCD.




At the outset, while presenting its memorandum to the RBI governor, the delegation thanked the latter for giving the representatives of the AIDWA, a mass organisation of women with its presence in 20 states and a membership of over one and a half crore women, an opportunity to discuss with him the credit needs of ordinary women and of the SHGs they have formed over the last many years. The delegation appreciated the efforts made by the RBI to promote financial inclusion of poor underprivileged sections, especially by including loans to SHGs, which are comprised largely of women, as a part of priority sector lending. It said the recent decision to permit urban cooperative banks (UCBs) to give loans to SHGs is a welcome initiative. However, the delegation felt that that much more is needed to be done, as the steps taken in the past are being somewhat curtailed by the insistence on bank profitability.


During the discussion, the delegation pointed out that despite the RBIs directives, the SHGs were facing many difficulties in getting loans from commercial banks, with delays extending up to a year or more. In Karnataka, they were being told to get signatures from microfinance institutions (MFIs) in order to get their loans sanctioned. It pointed out that loans to women had a very high rate of repayment, of above 90 per cent, and that this should be the incentive for commercial and cooperative banks to lend to SHGs. In the absence of this linkage, in Andhra Pradesh, Odisha and Tamilnadu, women who were not able to repay the high-interest MFI loans faced harassment and intimidation; some of them had even committed suicide. The delegation pressed that bank lending to MFIs should, under no circumstances, be treated as priority sector lending (PSL). It pointed out that women needed small and easy loans at low rates of interest without delay to meet their credit requirements, and their inclusion as a part of the PSL needs to be enforced, since even the minimum target of 10 per cent of total bank credit to be directed to women was not being met. 


After a patient hearing, the governor assured the delegation that the RBI was committed to financial inclusion of women and to free them from the clutches of moneylenders. This would be reiterated by issuing guidelines to the banks that they should ensure that SHGs do not face delays and other problems of bank linkage. He also expressed concern about the distress caused by the forcible methods of loan recovery by MFIs, and stressed that wrong practices would not be permitted.  He agreed that there was a need to set up a watchdog institution to ensure that MFIs did not indulge in such coercive practices. On the AIDWA’s concern that loans to women should be treated as a part of the PSL, the governor said that the RBI was keen to ensure that banks would themselves take the initiative rather than outsource it to the non-banking finance companies (NBFCs).




The AIDWA memorandum stressed the need to strengthen the flow of credit to women, particularly poor women. Public sector banks have been advised by the government to direct at least 10 per cent of their credit to women. However, bank credit to women formed only 3 per cent of the total bank credit in 2010. Moreover, there needs to be a special category of women within the “weaker sections” that make up the PSL. Further, the memorandum said that there needs to be a monitoring mechanism to ensure that, like the Women’s Component Plan (WCP) in other government programmes, at least 30 per cent of the total bank credit flowing to these categories (which include landless labour, artisans, scheduled castes and tribes, beneficiaries of the Swarna Jayanti Shahari Rozgar Yojana, etc) is directed towards women from these sections.


Secondly, the linkage between women’s self help groups and banks needs to be vastly strengthened. Data from the National Bank for Agriculture and Rural Development (NABARD) indicate that the annual growth in the bank loans disbursed to SHGs during 2009-10 was only 17.9 per cent, compared to the growth rate of 38.5 per cent in the previous year (2008-09). The memorandum insisted that though women form SHGs in order to avail of small loans and free themselves from the clutches of moneylenders, they still find it extremely difficult to access credit from banks. The AIDWA has also found that the NABARD guidelines regarding the sanction of savings linked loans by banks in the savings to loan ratio of 1:4 (and sometimes even beyond it) is not being followed.


A third crucial factor is the rate of interest that is being charged by banks. At present, the interest rate applicable to loans given by banks to SHGs or member beneficiaries has been left to “their discretion.” With the current base rate of the commercial banks ranging between 9.5 to 10.75 per cent, and the likelihood of it rising further in the wake of persistent inflation, the already high rates charged by banks to SHGs are likely to increase further. This, the memorandum pointed out, would be detrimental to women creditors. It put forward the opinion that the differential interest rate scheme to extend financial assistance at a concessional rate of interest to selected low income groups should be extended to all SHGs, and they should be provided loans at the rate of 4 per cent per annum.


In the absence of adequate and cheap credit from the public sector banks, women are today being forced to participate in joint liability groups that depend on microfinance institutions. The AIDWA’s experience in Andhra Pradesh, Orissa, Delhi, Karnataka, West Bengal, Tamilnadu and other states shows that these organisations are making huge profits at the expense of poor women by charging exorbitant rates of interest and by adopting coercive methods of recovery.


The memorandum pointed out that the MFIs are taking advantage of the provision that bank lending to MFIs for onward lending to the SHGs is also treated as PSL. In fact, it appears that banks are choosing to lend more to MFIs rather than to SHGs. The quantum of bank loans disbursed to MFIs more than doubled to Rs 8062 crore during 2009-10 while, as pointed out earlier, the rate of increase in bank loans to SHGs has comparatively come down.


The rate of interest to be charged by the MFIs has also been left to “their discretion.” While the RBI has used its regulatory powers to set certain conditions for the recognition of NBFCs, such as interest cap, margin cap, and income limit of borrowers, this has been largely undermined by setting an exorbitantly high cap of 26 per cent per annum rate of interest. The memorandum pointed out that experts have demonstrated that a margin of 2 per cent is more than adequate for these institutions to cover their costs. Here the memorandum reiterated the AIDWA’s contention that, in any case, borrowers must not be charged at more than 4 per cent per annum.  


The memorandum also insisted that the priority status accorded to all NBFCs as MFI lending should be withdrawn. Their operations in most parts of the country have shown that they are no less exploitative than moneylenders and lack any development focus. The AIDWA’s point is that only bank lending to SHGs should be retained as a part of PSL, and in fact be encouraged, as has been suggested in the Malegam committee report.


Finally, the memorandum demanded a uniform regulatory framework for all MFIs. At present, they exist for organisations in varied legal forms, both for-profit and not-for-profit, like trusts, societies, cooperatives, non-profit NBFCs registered under section 25 of the Companies Act and for-profit MFIs registered with the RBI as NBFCs. There are no capital adequacy requirements for all of these societies and trusts, nor are they subject to net owned funds requirements or prudential norms. Further, there is no scrutiny of their rates of interest and their methods of recovery. The AIDWA demand is that those resorting to intimidation and other forms of harassment to enforce repayment should be held liable to criminal action. Unethical practices such as collection of deposits before giving loans and mandatory insurance payments must also be stopped.


The delegation expressed the hope that the RBI would give due consideration to these important issues and effect policy changes to the benefit of the vast mass of underprivileged women in our country.


Subsequently, the delegation addressed a press meet, in which Brinda Karat released the AIDWA publication Micro Finance Institutions: The New Moneylenders.