The present age capitalism is financialized capitalism. And micro-finance has emerged as its response to poverty, alongside fueling the efforts of women empowerment and rural development. In 2006, The Nobel committee while presenting the Nobel Peace Prize to Professor Muhammad Yunus asserted that “Microfinance is an important liberating force and an ever more important instrument in the struggle against poverty”. Far from being unimportant at the global scale, the multitude of small scale transactions that are being organized by the micro-finance systems across the world stand paradigmatically for the shift of rural credit system from Savkaar (local moneylender) centric to self-sustainable, organized and much more accessible and reliable financial institutions. It is the fact that despite having a vast network of formal financial institutions such as banks and the like, there have been severe constraints upon their capacity to make credit available to poor borrowers.

On one hand, bankers have perceived the poor as credit risks, the poor on the other hand have always perceived banks as alien institutions that exist to serve the needs of the rich. It was in these circumstances that microcredit programs emerged as a powerful tool to alleviate poverty.

After working in one of such well-established microfinance institution for about a month, I am writing this blog describing the operational and financial structure of a 30-year-old federation of SHGs in Kanpur. Boond Bachat Sangh, promoted by my fellowship host organization Shramik Bharti, is probably the oldest of such organizations in Uttar Pradesh. The official objective of the organization is to promote and make possible savings and credit activities among poor, jointly together in the form of Self-Help Groups, to help and improve economic and social conditions, particularly of the poor. Apart from the objective of the provision of credit, the other major goal of the program is to undertake community development activities that were required and demanded by the people.

After visiting a few other federations, it came to my knowledge that there is no uniform set of rules and regulations for the working of a federation. A facilitator organization or a group of people undertake a survey followed by an educational and consultative process with SHGs to make them understand the whole concept and then design an operational strategy suitable to the needs and livelihoods of the community. Having a successful track record and ever-increasing financial capabilities, Boond Bachat Sangh has been following a distinct operational strategy as described below:

Functioning Of Federation (Sangh)

Flow of currency in Bood Bachat Sangh indicated by brown arrows

Federation facilitates financial activities of the member SHGs such as:

  • Annual Deposit/Compulsory Deposit:
    It was decided by the Board of Trustees (which also includes representatives from member SHGs, elected for five years) that each SHG would deposit Rs. 1000 per year according to its age of formation. It is called the annual deposit. SHGs will get loans from the federation in multiples of the annual deposit and on the basis of their grading. Federation will pay 6% interest on the annual deposit
  • GUF (Group Unutilized Fund):
    The SHGs may also deposit their unutilized fund with the federation on which federation pays interest at 6%. The same may be withdrawn by SHGs as and when required.
  • Federation Loan:
    Federation gives loans to SHGs at 12% interest (at reducing balance). Loan size is decided as per the grade from 2 to 8 times of their annual deposit with Federation. Steps involved in this are:
  1. Member in need of loan submits a written application form to the SHG leader mentioning the loan amount and purpose of the loan. Loans are disbursed to members as per their needs from their deposited savings with the SHG. In case of a shortage of funds, remaining loan applications are sent in the cluster meeting.
  2. The sanctioned loans are disbursed in the group meeting of the next month.
  3. As per scheduled recovery, the principal as well as the interest is repaid in the monthly meeting of the SHG to the Federation.
  • Community Contribution:
    Federation receives 1/3rd of the interest received by the SHGs in monthly meetings as a group’s contribution towards mentoring services provided by the Federation.
An SHG meeting in progress. Starting to implement digitized platform to conduct meetings. Sani (author and India Fellow) is the one with laptop

At the end of the financial year, 90% of the profits of the Federation are redistributed to the member SHGs. I am currently helping Boond Bachat Sangh in complete digitization of their SHGs and Federation. We shall discuss my understanding and experiences with SHGs and their impact in detail in upcoming posts.

On asking the members of these SHGs about how much this program has helped them, a woman said Pehle toh cycle tak kharidne ki gunjaish nahi thi. Ab ghar baand liya, gaadi khareed li, dukaan bhi khol diye (she has been the member of Boond Bachat Sangh for about 20 years). The Federation has helped thousands of women and their families become financially more capable than ever before. Here lies the paradigm of a serviceable micro-finance institution.

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