Monday, November 28, 2011

Andhra Pradesh announces interest free loans to Self Help Groups

Interest-free loans for SHG members from January:
"The members of Self Help Groups in the Andhra Pradesh will get interest-free loans up to Rs 5 lakh from January 1.
This was announced by the Chief Minister, Mr N. Kiran Kumar Reddy, in the Rachabanda programme at Shadnagar in Mahabubnagar district on Friday. However, women would be eligible for interest waiver only if they ensure prompt repayment.
As banks were now charging 14 per cent interest on loans to self help groups, the interest-free loans would cause a financial burden of Rs 1,400 crore on the State Government, the Chief Minister said. .................
The Govt had a target of disbursing Rs 10,000 crore loans to poor women this year. The self help groups in the rural areas would be given Rs 9,000 crore loans while those in the urban areas would get Rs 1,000 crore. In the last five years, Rs 800 crore was given to the poor women under the scheme, he added. There are 1.11 crore women in the State in self help groups."
Guljar Natarajan says in Negative interest rate for microloans :
"Given the nearly 10% rate of inflation, the state government would actually be lending at minus 10% to these SHGs. It would form the most generous bank-lending program in scale anywhere (possibly anytime) in the world."
The following post Multiple Borrowing: One, Two, Three…..How many loans are enough? from India Development blog gives some ideas of the amounts borrowed. The largest group seem to borrow about 5000-15000 rupees at a given time. In a small microloan group I am familiar with, the usual loans are about five to eight thousand rupees. Even though these amounts are very small ( some middle class people with whom I went to school now claim to have assests worth several crores, a few upto thousand crores), they seem to help the getting by though they may not get out of poverty or may not lead to investment and growth.
Rohini Mohan in a quick write up on the microfinance crisis in AP wrote about the genesis of SHGs in AP Money for nothing. And misery for free :
"Two decades ago — around the same time that Nobel laureate Mohammad Yunus was setting up the Grameen Bank model of microfinance in Bangladesh — post-liberalisation India too was mulling over a staggering figure. Sixty percent of the country did not have access to bank savings or credit. Yunus was turning the rules of banking upside down, giving millions of small loans without collateral to people normal banks thought least creditworthy: poor rural women. India’s pilot project came in 1992, when NABARD created the SHG-Bank Linkage Programme, involving 255 SHGs across the country.

In the SHG programme, women form groups of 11-20 members. Every member must first save at least Rs. 30 a month, which collectively acts as the collateral against which the group can avail bank loans at 12-15 percent interest. The group then relends to its members at 16-25 percent interest, factoring in possibilities of default.

“As a group, low-income women not only get access to bank credit, but also become more creditworthy with every full repayment, eligible for bigger loans,” says Reddy. Since the creditworthiness of the group rides on repayment, each woman in the group exerts pressure on the other to invest the loan in productive activities.

Of the 11 million SHGs, AP has the largest number (9,75,362 SHGs), with close to 90 percent of the state’s rural women as members. “AP has been the most active state in rural microcredit,” says Reddy. “The number of SHGs has increased 10- fold in the past decade.” However, in mid-2010, Hyderabad’s Centre for Economic and Social Studies published a study that shows SHG microcredit is popular, but members get three-fourths of their credit from other sources. So who was meeting this demand?"

My impression is that SHG were only able to help a fraction of the needy but their success laid the ground work for the entry of MFIs and their easy credit policiesslowly led to the later disaster in AP. Probably, we will hear more from
fractured earth and David Roodman's Microfinance Open Book Blog , though Rajshekhar's interests seem to be shifting a bit.

6 comments:

Liz said...

How to become a member of the SHG? I'm quite interested in applying for an interest free loan but I can't find any loan provider offering such deal nowadays.

snigdha G said...
This comment has been removed by the author.
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