Self-Help Groups (SHGs)
Origin: Rooted in the social concept of mutual aid, emphasizing community and empowerment.
Structure: Small local groups, mainly consisting of women, who save and borrow collectively at a low-interest rate (around 12% per annum), facilitated by state subsidies.
Repayment Responsibility: Each borrower is individually responsible for their repayment, without a collective liability on the group.
Benefits:
Empowerment: Encourages distributed and contextually aware decision-making.
Trust and Personal Development: Builds trust and fosters personal development among members.
Support: Receives state support, including subsidies facilitating low-interest rates.
Joint Liability Groups (JLGs)
Origin: Formed by MFIs with a business-centric approach, focusing on economic calculations and profit.
Structure: Comprises individuals, often strangers, brought together for lending purposes, with loans often having higher interest rates (around 22% per annum).
Repayment Responsibility: The group shares a collective responsibility for loan repayment, fostering a sense of joint liability.
Operations:
Technology-Driven: Utilizes sophisticated technology systems for operations, including digital disbursement of loans.
Commercial Funding: Around 60% of operational and other costs are funded through commercial bank debts.
Challenges:
High Interest Rates: The business model necessitates higher interest rates compared to SHGs.
Limited Trust and Community Engagement: The focus on business growth limits the development of trust and community engagement seen in SHGs.
Support: Lacks direct state support and cannot engage in group savings.
Regulatory Landscape
RBI's Stance: The Reserve Bank of India (RBI) has been urging MFIs to focus more on economic development aid and less on business growth, aiming to steer the sector towards its foundational goal of economic aid and empowerment.
Way Forward
Balancing Growth and Moral Obligations: The sector is at a juncture where it seeks to harmonize business growth with the moral responsibility of aiding economic development and empowering women.
Understanding the distinct origins and operational models of SHGs and JLGs, including their different approaches to repayment responsibility, can foster a more nuanced approach to regulating and nurturing the growth of the microfinance sector, aligning it more closely with its core promise of economic aid and empowerment.
