What Credit Flow Tell Us about the State of Self-Help Groups in Various States

A comparison between the 2017-18 and 2020-21 financial years reveals that the amount of loans issued has increased by 43%, and the amount of interest subvention has gone up by 27%.

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In India, self-help groups (SHGs) are supported through easy access to credit under the National Rural Livelihood Mission (NRLM), which has been a significant public intervention when it comes to poverty alleviation and the development of sustainable livelihoods.

Launched in 2011, the number pertaining to SHGs and credit disbursement look pretty good. To date, around 77.9 lakh SHGs have been formed. Through bank linkages, around Rs 5.32 crore loans have been disbursed since 2013-14. The SHGs receive interest subvention (IS) under certain limits, making credit cheaper to the group members.

The recovery rate of the loans is awe-inspiring. At the end of March 2022, the outstanding amount was Rs 1.50 crore with a non-performing asset (NPA) rate of 2.14% only. The target of loaning fresh SHGs has increased over the years. The 2022-23 target is around 12 lakh groups, much higher than the target set for 2021-22 of about 8 lakh. The Reserve Bank of India (RBI) came out with a new circular in July 2022 that introduced IS on additional loans to SHGs.

As we look forward to the future, it is important to critically assess these strides, looking into the performance of SHGs in different states.

Slicing the data

A comparison between the 2017-18 and 2020-21 financial years reveals that the amount of loans issued has increased by 43%, and the amount of IS has increased by 27%.

However, the state-wise variations are worth analysing. Many smaller states and Union territories such as Andaman and Nicobar Island, Goa, Himachal Pradesh, Manipur, Nagaland and Telangana have experienced a fall in the number of SHGs that received loans, total loans and total IS per year. The same has also happened for a larger state like Uttar Pradesh. The number of SHGs that received loans and the IS amount has also declined in Punjab.

In Puducherry and Sikkim, the number of SHGs that received loans has declined, although the total loan disbursed or IS amount has increased. Nevertheless, there are also reasons for hope. The number of SHGs received loans, total loan and IS amount per year has increased in major states like Tripura, Assam, West Bengal, Odisha,  Bihar, Chattisgarh, Madhya Pradesh, and Rajasthan.

Amongst smaller states, Meghalaya and Mizoram have experienced a massive rise in all these indicators.

The loan outstanding in 2020-21 compared to 2017-18 demonstrates a different scenario. Although the overall NPA of the SHG loan is very low, the outstanding amount has increased by 89% between these two years. No state or UT has demonstrated a fall in outstanding credit, barring Dadra and Nagar Haveli. This may have been due to the increase in loan disbursement. But there are many major states where outstanding amounts have increased despite a fall in loan disbursement.

The number of SHGs that received loans, total loans and IS per year has decreased in Uttar Pradesh and Telangana, but the outstanding loan has increased by 99% and 73%, respectively. In Punjab, the number of SHGs that received loans and IS have fallen with a tiny rise in loans disbursed per year. However, the outstanding amount has almost doubled in Punjab. The NPA was staggeringly high at 13.51% in Uttar Pradesh and 9.85% in Punjab by March 2022. This implies a lack of demand for loans and repayment capacity.

The SHG loans through bank linkage become cheaper to members through IS. It improves the welfare of people who were earlier unable to access and afford it. Both IS and loan outstanding can increase with additional loan disbursement.

Comparing 2020-21 and 2017-18, the IS has not increased or marginally increased in Haryana, Gujarat, Jharkhand and Puducherry, but the loan outstanding has increased substantially. In Uttar Pradesh, Uttarakhand, Punjab, Telangana, Himachal Pradesh, Nagaland, and Manipur, the IS amount has fallen, but the loan outstanding has increased. The fall in IS amount in Uttar Pradesh, Uttarakhand and Punjab is 73%, 23% and 38% respectively but the rise in outstanding loan amount is 99%, 199% and 90% respectively. This indicates that not all is well. There is a lack of demand for fresh loans against which IS is issued. At the same time, the capacity to repay the outstanding loan is low.

Credit: Mukesh Gupta/Reuters

Representative image. Photo: Mukesh Gupta/Reuters.

This analysis manifests that the demand for fresh loans is high in major states like Tripura, Assam, Bihar, Chhattisgarh, Madhya Pradesh, Odisha and West Bengal. But the same is not true for many other major states like Uttar Pradesh, Telangana, Himachal Pradesh and Punjab, whether loan disbursement is falling, but outstanding credit is increasing. The situation is also alarming in Jharkhand, Haryana and Gujarat, where the IS has increased only marginally, but credit outstanding has increased substantially. In Jharkhand, the credit outstanding has tripled between 2020-21 and 2017-18.

The RBI introduced a new provision of IS from 2022-23, by which banks would provide loans between Rs 3 lakh and Rs 5 lakh at a subvented interest rate equivalent to the marginal cost of funds or 10%, whichever is lower. This is in addition to the ongoing subvented interest rate of 7% for loans up to Rs 3 lakh. Going forward a higher amount of credit would be available to SHGs under IS. This would help borrowers affected by the Covid-19 pandemic and economic downturn.

Also read: How India’s Financial Inclusion Infrastructure Failed During the Pandemic

However, more cheaper loans may also have unwanted consequences when credit demand is already low, and the outstanding amount is higher in certain states. It may have a further negative effect on repayment. The problem is serious as between 2020-21 and 2021-22, there has been an increment of outstanding credit balance by 28% in the country as a whole. The increment of the same is highest in Punjab at 97%. In terms of NPA, it has now increased to 2.37% in 2022-23. In Uttar Pradesh and Punjab, the NAP is currently at 15.41% and 8.59%, respectively.

Providing easy access to cheap credit for poor households is a laudable welfare measure. But at the same time, this is also a powerful tool for political patronage. Surprisingly, the disbursement target in problematic states like Punjab, Telangana and Himachal Pradesh in 2022-23 is higher by 90%, 52% and 59% respectively compared to 2021-22. These are also much higher than the 44% increment of the disbursement target nationally. The disbursement target is 25% higher in Uttar Pradesh.

On the other hand, the disbursement target has slid in West Bengal and Tripura by 27% and 15%, respectively, with no increment in the target of loaning fresh SHGs. A higher credit target with IS may not be economically efficient with doubtful welfare implications. The increasing target of SHG formation and loan disbursement does not benefit poor households always. Several constraints, such as skills and marketing facilities, may negatively impact the development of gainful livelihood activities.

Indranil De is an Associate Professor at the Institute of Rural Management Anand.