Microfinance Focus, June 4, 2011: In a move to open an additional channel for financial inclusion, the Reserve bank of India has allowed Primary Urban Co-operative Banks (UCBs) to lend to Self Help Groups (SHGs) and Joint Liability Groups (JLGs).

In a notification sent out to all UCBs, RBI said that UCBs will be required to frame a comprehensive policy on lending to SHGs / JLGs, including the maximum amount of loan, interest rate chargeable on loans etc.

UCBs are required to lend directly to SHGs / JLGs and lending through intermediaries will not be permitted, the notification said.

According to RBI’s lending guidelines, loans to SHGs / JLGs for agricultural and allied activities would be considered as priority sector advance. Further, other loans to SHGs / JLGs up to Rs. 50,000 would be considered as Micro Credit and hence treated as priority sector advances. Lending to SHGs, which qualify as loans to priority sector, would also be treated as part of lending to weaker sections.

The maximum amount of loan to SHGs cannot exceed four times of the savings of the group. However, the limit may be exceeded in case of well managed SHGs subject to a ceiling of ten times of savings of the group. The groups may be rated on the basis of certain objective parameters such as proven track record, savings pattern, recovery rate, housekeeping etc.

The amount of loan granted to JLGs would be based on the credit needs of the JLG and the bank's assessment of the credit requirement.

The SHGs / JLGs would be eligible to open Savings Bank account with UCBs. The UCBs need to adhere to the KYC (Know Your Customer) guidelines in respect of each member of the SHG / JLG before opening savings bank account or granting of loans.

SHGs are small groups, formal/informal, of individuals promoting savings habit among members. These savings are then lent by the group to the members for income generating purposes. On the other hand, JLG is an informal group of individuals coming together for the purpose of availing of bank loan either singly or through the group mechanism against mutual guarantee in order to engage in similar type of economic activities.