Context:

• Women self-help groups can bring about economic gains via joint liability and mobilization of small-scale savings.
• As we approach M.K. Gandhi’s 150th birth anniversary, it is perhaps fitting to revisit the Gandhian approach to rural development. In this context, an analysis of the idea of women self-help groups (SHGs) as a vehicle to transform the rural landscape would be timely. These SHGs can act as powerful institutions of participation and can contribute to India’s growth trajectory.

About SHGs

• SHGs are essentially diminutive and economically homogeneous groups of rural poor
• Mostly they consist of 10-15 members
• The underlying philosophy guiding an SHG is that members periodically save a small amount of money, unanimously agreeing to make a contribution to a common pool
• United leadership coupled with an informal horizontal network helps to create social capital among the poor, especially among the women
• They act as safety nets to achieve twin goals—economic security and social well-being

Why are SHGs relevant in the context of a forward looking and inclusive developmental agenda?

• Women SHGs can be an avenue for achieving the goal of financial inclusion by making women’s access to the banking system easier and hassle-free
• This happens because SHGs filter out the potentially high-risk borrowers through local information
• As a result, banks are more willing to lend as it minimizes their risk

Solving bank problems

• The creation of women SHGs helps finesse the widespread problem of adverse selection that plagues the Indian banking system
• Under normal circumstances, when a bank lends money to a potential borrower, creditworthiness is seen as an essential prerequisite
• More often than not, banks do not have access to relevant local information regarding the creditworthiness of the borrower, which can either lead to denial of credit or increasing number of defaults and bad debts
• However, in the case of women SHGs, women entrepreneurs possess the required local information regarding potential members, which banks do not
• As SHGs are based on the sound principle of joint liability, a woman entrepreneur would be pairing up with a creditworthy and low-risk partner

NPA problem not created

The problem of a non-performing asset (NPA) arises in two cases

• One, when there is no asset creation, to begin with
• Two, when there is asset creation, but the asset fails to generate enough cash flow because of various reasons
• The SHGs are built on the concept of joint liability, there is a common interest, which ensures the creation of an asset
• Also, as each and every member has joint and individual liability to pay off the loan, the problem of moral hazard (inability of the bank to observe the efforts of the debtor) is circumvented

Reducing socioeconomic disadvantage in India:

• It is no secret that women suffer from a vast range of socioeconomic disadvantages in India
• This includes being denied basic rights that range from the freedom to engage in economic activities to the right to choose their calling in life
• The access to credit through the SHG channel helps women to break through these barriers
• By bringing women into the financial net, SHGs act as potent agents of change that go a long way in empowering them and, consequently, their families as well
• Financially empowered, they find themselves in a better position to assert themselves in family matters such as family planning, child education, financial investments

Way Forward

• SHGs are a realistic, viable and sustainable option for achieving rural development objectives
• A greater push for the creation of more SHGs in rural India is needed
• This will help reduce the dependence of women borrowers on informal sources of credit and help work towards their continual inclusion into the formal financial system
• Women SHGs can potentially be a potent means of breaking free from the vicious circle of poverty.

Source: LIvemint