You are here: Home » Finance » News » Others
Business Standard

Credit flow to SHGs set to touch Rs 11,000 cr

BS Reporter  |  Chennai/ Hyderabad 

Though lending by microfinance institutions in Andhra Pradesh has suffered a setback due to the recent controversies, credit flow into rural areas through the self-help group (SHG)-bank linkage is quite intact and set to grow further in 2011-12.

“The total credit flow to SHGs from banks is expected to touch Rs 11,000 crore from the present Rs 7,000 crore next year,” R Subrahmanyam, principal secretary, Rural Development Department, told Business Standard.

Unlike high interest rates and weekly repayment model adopted by MFIs, banks charge a maximum of 12 per cent interest from SHGs, which also enjoy the ‘Pavala Vaddi’ scheme. Under this scheme, the government ploughs back the amount paid towards interest over and above 3 per cent into the accounts of these women SHGs based on prompt repayment.

Since the scheme had been designed as an incentive for prompt repayment, banks found an attractive business opportunity in lending more to SHGs, he said. The total outstanding under this category had gone up three-fold to Rs 32,073 crore by September 2010 from Rs 11,742 crore in March, 2008.

Meanwhile, change in political leadership combined with increased stress on public finances resulted in delays in release of reimbursement of interest subsidy amounting to around Rs 600 crore for 2009-10. The new chief minister had ordered release of the subsidy amount last month. Banks extended fresh credit of Rs 6,000 crore in 2009-10 and an estimated Rs 7,000 crore this financial year.

But, this delay in release of interest subsidy to SHGs has not affected the credit flow, Subrahmanyam pointed out. “The government enters the picture only after the repayment of credit by SHGs. Besides, banks have not taken any hit by way of defaults, etc,” he said.

The contrasting scenarios, one involving bank loans and the other involving MFIs while clients being the same target group, basically arises out of the fact that 80 per cent of the loans extended under SHG-Bank linkage are given for productive or entrepreneurial endeavours whereas the same by MFIs are given for purchase of consumer durables, including bikes apart from constructing houses, according to the government official.

The Pavala Vaddi scheme, which may be unsustainable in future owing to growing credit offtake by SHGs, had also helped SHGs cope with low margin rural businesses they are engaged in. “The average internal rate of return (IRR) from a typical rural enterprise is about 6 per cent. That is where the interest subsidy scheme has made their endeavours sustainable. But in some cases, like dairy projects, the IRR is as high as 20 per cent,” Subrahmanyam said.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Thu, March 10 2011. 00:24 IST