Self-Help Group 2 Vs. MFIs-Competing to Serve the Poor

Indian microfinance is unique, in that it is dominated not by specialist microfinance institutions (MFIs), as in most countries, but by existing commercial banks, through their branches' linkages to SHGs. Banks have always provided a better alternative than MFIs, because they can offer secure savings and other financial services, and are licensed and regulated by the Reserve Bank. MFIs have nevertheless recently captured a growing share of the microfinance market, because of aggressive profit-driven marketing, and in spite of their higher interest rates which are actually of less importance to poor borrowers than speed, convenience and service. The MFIs have recently 'stumbled', however, and this provides an opportunity for the SHG movement to regain its primary position, under the leadership of NABARD. The 20th anniversary of the formal launch of the SHG movement in February 1992 is to be used to launch 'SHG2', a re-engineered version of the original SHG model, emphasising savings as well as credit, with features such as smaller joint liability groups for larger borrowers, cash credit limits to replace term loans, and offering SHG members a 'ladder' to genuine financial inclusion through individual full service bank accounts. The technological, regulatory and institutional aspects of the environment are conducive for such an initiative, and all it requires is bold leadership from NABARD.