Urban co-op banks allowed to lend to self help groups

The Reserve Bank of India (RBI) today allowed urban cooperative banks (UCBs) to give loans to self help groups (SHGs), a move that will help in promoting financial inclusion in the country.

"With a view to further expanding the outreach of UCBs and opening an additional channel for promoting financial inclusion, it has been decided to allow UCBs to lend to SHGs and Joint Liability Groups (JLGs)," an RBI notification said.

The central bank in its recent monetary policy had proposed to allow UCBs to lend to the two segments.

Lending to SHGs and JLGs would be considered as normal business activity of the bank. UCBs will be required to frame a comprehensive policy on lending to SHGs and JLGs.

The maximum amount of loan to SHGs should not exceed four times of the savings of the group, the RBI said.

It further said JLGs were not obliged to keep deposits with the bank and hence the amount of loan granted to them would be based on their credit needs and the bank's assessment of the credit requirement.

SHGs are micro entrepreneurs having homogeneous social and economic background who voluntarily come together to save small amounts regularly and mutually agree to contribute to a common fund to meet their emergency needs.

The main purpose of JLG is to facilitate mutual loan guaranteeing and execution of joint liability agreement, making them severally and jointly liable for payment of interest and repayment of loans obtained from the bank.