South Asia Agriculture and Rural Growth Discussion Note Series March 2020 3 SHG-Bank Linkage: A Success Story Context Access to adequate and timely credit at affordable rates is critical for the rural poor to alleviate high cost debt and invest in livelihood opportunities. Despite the Government of India’s (GOI’s) best efforts, financial inclusion of the rural poor has been beset with multiple challenges. Lack of adequate banking infrastructure and human resources in rural areas, unplanned expansion leading to unviable bank branches and low levels of financial literacy institution providing credit) with the ‘informal The pilot project was conceived of as a amongst the rural populace have been sector’(comprising of rural poor with no partnership between SHGs, Banks and some of the key challenges. formal credit history - exclusively women NGOs in which the Reserve Bank of India in case of DAY-NRLM), has emerged as (RBI) allowed banks to lend directly to The most vulnerable communities, who a preferred vehicle for providing financial SHGs and NABARD committed to providing often had no formal credit history or ability services to the hitherto unbanked poor. re-finance and promotional support. to provide collateral, have often been the The studies subsequently conducted worst affected. Inability to access loans The SHG-Bank Linkage by NABARD to assess the impact of from banks meant that the poorest had Programme (SBLP) was initiated the linkage project indicated significant to resort to moneylenders for loans at as an action research by the reduction in the transaction costs for both usurious rates of interest that invariably led National Bank for Agriculture banks and borrowers, besides a gradual them into a toxic debt trap. and Rural Development increase in the income level of the SHG (NABARD) in 1989 and was members. These findings led to the In this context, the SHG-Bank Linkage subsequently crystallized into a formalization of the SBLP in 1995. programme that synthesizes ‘formal pilot project in 1992. financial systems’(in terms of a formal Phase 1 (1990-2005) Phase 2 (2006-2012) Phase 3 (2012-TILL DATE) NABARD acted Strategic shift away from Launch of DAY-NRLM as the catalyst targeting individuals to for the SHG- group oriented lending Dedicated architecture Bank Linkage approach (e.g. Integrated with professional programme Rural Development manpower support Program to Swarnajayanti established from the Gram Swarozgar Yojana) block level up to the RBI circular national level allowing banks Quantum jump in direct Removal of capital subsidy to lend to lending - SHG centric and introduction of SHGs model firmly established in interest subsidy southern states Substantial growth in However, growth was However, disbursement of credit. adversely affected due lending was Poorer States such as to the high rates of NPA primarily Bihar, Chhattisgarh, under SGSY and the subsidy driven Madhya Pradesh etc. have Andhra Pradesh ordinance shown impressive growth RBI Master Circular (1st July 2019) Intervention Since the design of DAY-NRLM made systems, demonstrated social mobilization/ SHGs. The SHGs have successfully major departures from the existing poverty capacity building and provided initial leveraged approximately INR 2,870 billion reduction programs, the Government of capitalization and facilitated credit linkage (USD 41 billion) as loans from banks since India sought to establish a “proof of concept” of community institutions across the country 2013-14. in high poverty areas before scaling it to with the formal banking sector, largely the all States and Union Territories. In this Public Sector Banks. By the end of the NRLM has been able to achieve these context, the GOI sought credit from the project, NRLP had mobilized more than 7.5 results by leveraging the experiences International Development Association (IDA) million rural poor women into 650,000 Self of states such as Andhra Pradesh (AP), to implement the National Rural Livelihood Help Groups, 41000 Village Organizations Telangana, Tamil Nadu (TN) and Bihar Project (NRLP), under DAY-NRLM. and nearly 2500 Cluster Level federations. in promoting SHG-Bank Linkage and instituting critical demand and supply side Between July 2011 and June 2018, the DAY-NRLM has been able to mobilize interventions. Some of these strategies are NRLP helped set up implementation over 60 million women into over 6 million mentioned below. 35.00 AP ORDINANCE COMPLETE SGSY 30.00 TANSITION TO NRLM 25.00 20.00 15.00 SHGs ACCESSED 10.00 BANK CREDIT (IN LAKHS) 5.00 0.00 19 -93 19 93 19 93 19 -93 19 93 19 93 19 -93 19 93 19 93 19 -93 19 93 19 -93 19 -93 19 93 19 93 19 -93 19 93 19 93 19 -93 19 93 19 93 19 -93 19 93 19 93 19 -93 19 93 3 -9 - - - - - - - - - - - - - - - - 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 19 SOURCE: TILL 2012-13 - RESERVE BANK OF INDIA. (ON848) &(ON1579) FROM 2013-14 ONWARDS - DAY-NRLM BANK LINKAGE PORTAL (https://daynrlmbl.aajeevika.gov.in Generating resources in perpetuity as loans to be repaid with interest by the These grants include a Revolving Fund members. This on-lending – repayment (RF) of up to INR 15,000 per SHG as DAY-NRLM has made a departure from the – on-lending cycle ultimately leads to an corpus that serves the members’ credit erstwhile Swarnajayanti Gram Swarozgar increase in the corpus of these institutions, needs as well as acts as catalytic capital to Yojana (SGSY) by abolishing the concept creating“ resources in perpetuity” for the leverage repeat bank finance. The project of capital subsidy to both groups and village community. This strengthens their also provides a Community Investment individuals. Instead, DAY-NRLM provides institutional and financial management Fund (CIF) of up to INR 25,000 per SHG at capitalization support to institutions of the capacity, creating a culture of timely the Cluster Level Federation (CLF) to meet poor (SHGs and CLFs) as grants, which repayments and help build a track record to the credit needs of the members through are then passed on to the SHG member attract mainstream bank finance. SHGs and Village Organizations (VOs), and to serve as working capital for Capitalization Strategy collective activities at various levels. Cumulatively, the community institutions 1st Meeting: Internal Lending under DAY-NRLM have been provided Month 2: S/B Account Opening about INR 102 billion as capitalization Month 3: Revolving Fund (RF) support (approx. USD 1.5 billion). Month 6: Community Investment Fund (CIF) Month 6-12: Bank Credit (1st Dose) The Reserve Bank of India issues annual “master circulars” that lays down the ground Month 24: Bank Credit (2nd Dose) rules for the Banks to extend credit to the Month 36-40: Bank Credit (3rd Dose) women SHGs under DAY-NRLM. The extant Master Circular, requires the banks to extend Reserve Bank of India (RBI), Indian Banks NRLM has placed a trained Community credit of at least Rs.1,00,000 (~1400USD) Association (IBA), NABARD and scheduled Resource Person (CRP), called Bank or 6-8 times their corpus amount to SHGs commercial banks to resolve these Mitra, within bank branches to facilitate as their first bank-linkage. This amount is discrepancies. This led to the RBI issuing non-cash transactions such as filling increased for subsequent linkages. a detailed master circular with specific application forms, following up on directions on procedures, loan eligibility and repayments etc. This strategy helps in Simplification of procedures and terms for credit to SHGs by banks, and the reducing the workload on the bank branch application formats IBA standardizing the saving bank account officials and inspires confidence in SHG and loan application forms across banks. members who are unfamiliar with the The sheer number of banks involved formal banking system. As of March 2020, in lending to SHGs meant that there Supporting banks in conducting their about 21,000 Bank Sakhis support SHGs were enormous variations in application business to engage with their lending partners procedures and forms for opening a while also ensuring that the bank portfolio savings account or a loan account. DAY- Leveraging the experience of states remains healthy. NRLM consistently engaged with the like Andhra Pradesh and Bihar, DAY- SUCCESS STORIES Her impressive qualifications led to her being selected as a bank mitra in a UCO Bank branch in 2014. With her support, the Bank Branch managed to disburse bank credit to the tune of INR 22.4 million (USD 320,000) to 210 SHGs in FY 18-19. As part of her responsibilities, she educates SHG members on various financial products ‘A journey of thousand miles begins with a and follows up with the groups to ensure timely single step’, says Ragini, a resident of Tajpur repayment. The fact that the block of Samastipur District in Bihar about her NRLM-Bank Linkage portal journey as an SHG member. It was Ragini’s indicates zero NPAs for her unwavering determination that saw her bank branch is a testament become a graduate as well as earn a diploma in to her commitment and a computer course. competence. In addition, she has worked towards financial inclusion of the rural poor by opening members’ savings account and facilitating insurance. “Since the time I have been working as bank mitra at UCO bank, I have helped more than 1000 women open personal accounts and facilitated enrolment of more than 500 women in the Atal Pension Yojana (APY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)” says Ragini. She has also helped Uttar Bihar Gramin Bank (UBGB) in setting up a Customer Service Point (CSP). Today, her dual role of being a bank mitra and managing a CSP has enabled her to earn INR 10,000/- month. Instituting Community Based Recovery monitor and ensure timely repayment of are largely illiterate or semi-literate, it is Management (CBRM) System loans by SHGs. As on June 2019, CBRMs critical that capacity building steps are taken are functional as of March 2020, 28,000 to prepare them for financial inclusion. In Initially, the Mission faced immense rural branches. This strategy has been this context, DAY NRLM has initiated a challenges in convincing banks to lend largely successful in cleaning up the existing comprehensive financial literacy program to the SHGs, particularly in the poorer loan portfolio in addition to facilitating in partnerships with Rural Self Employment Northern States. One of the main reasons regular repayments of new loans. Training Institutes (RSETI) and banks. behind the Banks’ reluctance to sanction fresh loans to SHGs was due to the high Promoting financial literacy As of March 2020, more than 18,000 rates of NPAs in the SHG-loan portfolio. Financial Literacy Community Resource The success of any financial inclusion Persons (FL-CRPs) have been trained In order to address this issue, DAY- program relies heavily on the beneficiaries to conduct village level financial literacy NRLM institutionalized Community Based understanding the nuances of the products camps. Over 960,000 SHGs and nearly Repayment Mechanisms (CBRMs) at and services offered to them. Since DAY- 7 million SHG members have received branches involved in financing SHGs to NRLM works with rural poor women who financial literacy training. In the remote village of Gadchiroli, a naxal-affected She has provided financial literacy training to district in Maharashtra, Ms. Lineshwari Devendra 96 SHGs in 11 villages Mandhwa, is yet another community hero working under the aegis of DAY-NRLM. 26 year-old In her training sessions, she educates these Lineshwari has been working as a FL-CRP for one groups on transactions through individual year with the aim of creating demand and facilitating savings accounts, term and CC bank loans, access of financial services in rural areas. insurance, pensions and digital finance. Thanks to her efforts 109 households are being 70 households registered 30 SHGs gained access covered under accidental in the PMSYM pension to bank credit insurance scheme. Instituting transparency and private sector banks share data on the bank based MIS format, some states like Andhra accountability linkage portal, a wealth of data (down to Pradesh, Rajasthan and Jharkhand have the bank branch level) is being captured on established their own digital, tablet-based The multiplicity of banks and bank branches critical indicators such as loans disbursed, MIS systems to improve accountability and involved in financing SHGs invariably meant loan amount overdue, loans outstanding, encourage better monitoring. Leveraging that there was a lack of coordination in portfolio at risk and NPAs. Access to the experiences of these SRLMs, DAY- reporting the progress by individual districts/ this data has ensured transparency and NRLM has designed and deployed a blocks etc. In order to mitigate this problem, facilitated decision-making. National transaction-based MIS. the DAY-NRLM, on the recommendations of the Usha Thorat committee, has developed Details of 26.1 million SHG members’ As of March 2020, 26 states implemented the NRLM-Bank Linkage portal, which individual-bank accounts and 20.3 million the SHG-transaction module in 2084 captures the information directly from the Aadhar-seeded accounts have been intensive blocks. Nearly 6.79 lakh SHGs banks’ Core Banking System (CBS). captured by the DAY-NRLM database. across these blocks have been brought on While SRLMs have been tracking board the transaction system. Since all the Public Sector Banks (PSB), households and member-level SHG Regional Rural Banks (RRBs) and leading transactions for many years using a paper- Implementation/Achievements Advocacy with the RBI, DFS and IBA and linkage portfolio. The number of SHGs with of bank credit. The amount of loans interventions at the field level have resulted outstanding bank loans stands at nearly disbursed by banks has almost doubled in in exemplary growth in the SHG-Bank 5 million today, implying that the SHG- the last five years. Importantly, this growth linkage credit portfolio. The key outcomes Bank Linkage program has brought formal has been driven by states that hitherto are summarized below. banking services to over 50 million women. lagged behind in financial inclusion. The eleven poorest states1, which had a share Placing poor, rural women at the centre Massive growth in the SHG-loan of just 10.3% of total loan disbursed in of a financial inclusion strategy portfolio FY 2013-14, account for about 24% in FY 2018-19 (Mar’19). The implementation of DAY-NRLM has The efforts of DAY-NRLM have led to an led to a reinvigoration of the SHG-Bank exponential growth in the disbursement Number of SHGs credit linked (In Million) 12.1 Loan Outstanding (in USD billion) 9.9 6.4 4.7 5.5 4.6 1.0 1.2 1.3 1.6 1.7 1.8 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Enabling access to life and health a two pronged strategy to address such As of June 2019, more than insurance incidents: 12.6 million SHG members have been covered under life and Health shocks and/or death of an earning (i) developed a special loan product within accident insurance schemes member are among the major reasons that the amount allocated for community floated by GoI and concerted push households into a poverty trap. These investment support viz. a Vulnerability efforts to enroll many more tragic episodes lead poor households Reduction Fund; and SHG members under life, to exhaust their savings and compel (ii) facilitated access of SHG member accident and health insurance them to borrow loans at usurious rates households to insurance and pension are ongoing. of interest. The DAY-NRLM has adopted schemes to SHG member households. 1. Assam, Bihar, Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Uttar Pradesh, West Bengal. Key Lessons and the Way Forward The DAY NRLM experience of promoting rates by banks as an incentive to move away financial inclusion using a platform from agents in the informal economy. The provided by community institutions holds quality of these community-based institutions valuable lessons for decision makers and (including SHGs) has a direct bearing on the practitioners. Learning from the experiences institutionalization of systems, norms and of other state programs, the approach of procedures, which is critical to the success of promoting collective access to finance any bank-linkage program. provides perspective on overcoming the challenges of a weak banking infrastructure. Under the DAY-NRLM, efforts were made to bridge the gap between the rural The key focus areas of financial inclusion poor and the formal financial system by under the project are to engaging with the community to address a) build financial literacy and financial cultural issues as well as instill confidence financial inclusion to financial deepening. management capacity; in SHG members. A key strategy was The need for such customized financing b) institutionalize a culture of regular investing heavily in engaging CRPs as products has also emerged in the process savings, internal lending and regular frontline workers for implementing the of developing both national projects like the repayment within the SHGs; programme. These “community heroes” National Rural Economic Transformation c) enable access to financial services received extensive training and were able Project (NRETP) and state specific from public and private sector banks; and to understand and address constraints projects such as Bihar Transformative d) build a cadre of community resource and requirements of fellow women better Development Project (BTDP), Jharkhand persons to help promote financial than any staff/line department functionary Opportunities for Harnessing Rural Growth inclusion of rural poor women. possible could. Project (JOHAR) and Tamil Nadu Rural Transformation Project (TNRTP). The project provided investment grants Similarly, deploying SHG members as that serve as seed capital for SHGs and frontline workers to facilitate implementation NRETP envisages that nearly 64,000 help in establishing a culture of regular of other financial inclusion interventions women-led/women owned enterprises inter-lending, repayment and book keeping, such Bank Mitra (non-cash transactions will have access to funds from financial thereby reducing reliance on extortionist at the bank branch), BC Sakhi (last mile institutions. The project aims at enabling money lending traditions. The due diligence delivery of financial services), Bima Sakhi access to 500,000 SHG member and system-strengthening measures (Insurance) and FL-CRPs (training of SHG households in accessing digital financial instituted by the program has helped SHG members on financial literacy) have helped services and allied services by 2023-24. members in accessing institutional finance in connecting with SHG members as well from banks based on credit and repayment as the rapid scale-up of the initiative. Over the above-mentioned targets, history built under the project. NRLM has set itself an ambitious target of With an increased focus on improving leveraging bank credit to the tune INR 3 The success and replicability of the SHG- household incomes through economic lakh crore (USD 42 billion), deploying SHG Bank Linkage Programme is contingent initiatives in farm and non-farm sectors members as Banking Correspondents for on certain prerequisites including sufficient and enabling larger value loans (beyond doorstep delivery of financial services in penetration of banking infrastructure, an SHG bank linkage) for Nano and Micro about 2 lakh Gram Panchayats (about 80% enabling policy environment that recognizes enterprises (NME) and producer collectives of total Gram Panchayats in the country) and SHG women (rural poor women) as under the next phase of rural livelihoods covering 40 million SHG members under life bankable clients and a differentiated lending projects, there is a need to move from and accidental insurance schemes. About the discussion note series This note is part of the South Asia Agriculture and Rural Growth Discussion Note Series, that seeks to disseminate operational learnings and implementation experiences from World Bank financed rural, agriculture and food systems programs in South Asia. Author(s): Shantanu Kumar, Alreena Renita Pinto, Amit Arora, Sourav Roy Series editors: Alreena Renita Pinto, Deepti Kakkar Publication design & illustrations: Satwik Gade We are grateful for the generous support from the Ministry of Rural Development, the Bill & Melinda Gates Foundation, the Department for International Development, and various State Rural Development departments. We would like to thank the respective state governments, project staff, and World Bank task team members for their contributions to the implementation of these approaches and on-ground activities. Disclaimer: The findings, interpretations, and conclusions expressed in this note are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations or to members of its Board of Executive Directors or the countries they represent.