The Hindu Business Line : `Banks must regularly review SHG linkages'

Commercial banks must regularly review their linkages with self-help groups (SHGs) and conduct an audit of the funds lent to them, said Ms Usha Thorat, Deputy Governor, Reserve Bank of India. Speaking at a seminar organised by FICCI, she said it is the best model for financial inclusion.

The SHG-bank linkage is the most popular model of micro finance in India, she said. SHGs are usually groups of women, who save and borrow from the bank and lend the money to themselves. There are over two crore SHGs in India and the cumulative assistance from the banking sector is put at Rs 11,400 crore. In 2005-06, nine lakh SHGs received assistance from banks.

"We are happy with SHGs. Once in a while banks need to see who the members are, what are the recovery methods and not merely confirm that the loan is getting repaid," Ms Thorat said.

Banks should reduce transactions costs and this can be done by technology and fully utilising the facilities at the rural branches, she said. There are about 45,000 rural and semi-urban branches in India.

Direct lending also needs to be encouraged for banks to reduce the cost of transactions and increase profits, Ms Thorat added. "The role of the banking system in providing direct access to credit is going to gain in importance. I don't see micro-finance institutions being on par with direct lending by banks," she said.

One suggestion is to use post offices; while using banking correspondents or business facilitators, banks should keep in mind the risk of reputation, she said.

The RBI is working on regulations for the MFIs, said Ms Thorat. There is also need for a credit bureau as the lack of information is raising the cost. Credit information companies can be set up, she felt.

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