Bank Penetration and SHG Bank Linkage Programme: A Critique

This paper examines the outreach of Self Help Group (SHG)-Bank Linkage Programme (SBLP) in the backdrop of growing banking and socio-economic divide between regions in India. The ‘defining event ’ in the build-up of financial architecture in India was the nationalisation of major commercial banks. The aftermath of nationalisation witnessed a remarkable spread of the banking system to the unbanked and under-banked rural areas. However, the dependence on informal sources of credit has not decreased in rural areas. The problem accentuated as banks veered away from rural to urban India. The relative decline of commercial banking network in the rural areas runs contrary to the objective of financial inclusion and is a formidable challenge in the way of faster and more inclusive growth. SBLP was conceived to fill the existing gap in the formal financial network and extending the outreach of banking to the poor. However, the present distribution of the SBLP is skewed against the poorer regions of the country. While less than one-fifth of total loans to SHGs went into the Eastern and Central Regions taken together, they accounted for more than three-fifth of the total poor in India. Banks need to be encouraged as facilitators in extending the SHG movement in the poorer regions, perhaps by introducing a scheme of performance-linked incentive. Specific funds may be created to address the regional imbalances in the SBLP. SHGs need to be formed around activities of rural infrastructure such as construction and renovation of minor irrigation tanks, feeder channels, rural roads, etc. This will generate significant external economies for agricultural yields and overall rural development. Enhanced efforts should be made towards embedding livelihood activities, micro-insurance and grain banks in the SHG model. JEL Classification: G21, G2