Reserve Bank of India Circular on Micro Credit (Updated upto 30.06.04)

(RBI Letter RPCD. No. Plan, BC 21/04.09.22/2004-05 Dt. 21.08.04)

a) SHG Lending as Normal Lending Activity: The SHG linkage programme would be treated as a normal business activity of banks.

b) Separate Segment under priority Sector: In order to enable the banks to report their SHG lending without difficulty, the banks should report their lending to SHGs and /or to NGOs for on-lending to SHGs/members of SHGs/discrete individuals or small groups which are in the process of forming into SHGs under the new segment, viz. ‘Advances to SHGs’ irrespective of the purposes for which the members of SHGs have been disbursed loans. Lending to SHGs should be included by the banks as part of their lending to the weaker sections.

c) Inclusion in Service Area Approach: The service Area branch managers may have constant dialogue and rapport with the NGOs and SHGs of the area for effecting linkage. If a NGO/SHG feels more confident and assured to deal with a particular branch other than Service Area branch and the particular branch is willing to finance, such a NGO/SHG may, at its discretion, deal with a branch other than the Service Area branch. It has to be borne in mind that the SHG linkage is a credit innovation and not a targeted credit programme.

d) Opening of Savings Bank A/c: The SHGs registered or unregistered which are engaged in promoting savings habits among their members would be eligible to open savings bank accounts with banks. These SHGs need not necessarily have already availed of credit facilities from banks before opening savings bank accounts.

e) Margin and Security Norms: As per operational guidelines of NABARD, SHGs are sanctioned savings linked loans by banks (varying from a saving to loan ratio of 1:1 to 1:4). Experience showed that group dynamics and peer pressure brought in excellent recovery from members of the SHGs. Banks were advised that the flexibility allowed to the banks in respect of margin, security norms, etc. under the pilot project would continue to be operational under the linkage programme even beyond the pilot phase.

f) Documentation: Keeping in view the nature of lending and status of borrowers, the banks may prescribe simple documentation for leading to SHGs.

g)  Presence of Defaulters in SHGs: The defaults by a few members of SHGs and/or their family members to the financing bank should not ordinarily come in the way of financing SHGs per se by banks provided the SHG is not in default to it. However, the bank loan may not be utilized by the SHG for financing a defaulter member to the bank.

h) Interest Rates: The interest rate applicable to loans given by banks to micro-credit organizations or by the micro-credit organizations to Self Help Groups/member beneficiaries would be left to their discretion.

i) Mainstreaming and Enhancing Outreach:

1. The banks may formulate their own model(s) or choose any conduit/intermediary for extending micro credit. Micro Credit extended by banks to individual borrowers directly or through any intermediary would be reckoned as part of their priority sector lending.

2. The criteria for selection of micro credit organizations are not prescribed. It may, however, be desirable for banks to deal with micro credit organizations having proper credentials, track record, system of maintaining accounts and records with regular audits in place and manpower for closer supervision and follow-up.

3. Banks may prescribe their own lending norms keeping in view the ground realities. They may devise appropriate loan and savings products and the related terms and conditions including the size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. the intention is to provide maximum flexibility in regard to micro lending, keeping in view the prevalent local conditions and the need for provision of finance to the poor. Such credit should, therefore, cover not only consumption and production loans for various farm and non-farm activities of the poor but also include their other credit needs such as housing and shelter improvements.

4. Micro credit should form an integral part of the bank’s corporate credit plan and should be reviewed at the highest level on a quarterly basis.

5. A simple system requiring minimum procedures and documentation is a precondition for augmenting flow of micro credit. Hence, banks should strive to remove all operational irritants and make arrangements to expeditiously sanction and disburse micro credit by delegating adequate sanctioning powers to branch managers.

j) Delivery Issues: The Reserve Bank constituted four informal groups in October 2002 to examine various issues concerning micro-finance delivery. On the basis of the recommendations of the groups and as announced in the Governor’s Statement on mid-term Review of the Monetary and Credit Policy for the year 2003-04, banks have been advised as under:

1. Banks should provide adequate incentives to their branches in financing the Self Help Groups (SHGs) and establish linkages with them, making the procedures absolutely simple and easy while providing for total flexibility in such procedures to suit local conditions.

2. The group dynamics of working of the SHGs may be left to themselves and need neither be regulated nor formal structures imposed or insisted upon.

3. The approach to micro-financing of SHGs should be totally hassle-free and may include consumption expenditures.