Self-help group (SHG) is an association of 15 to 20 people who want to help each other during any kind of emergency, such as financial crisis, natural disaster, accident, etc.
Usually, SHG is formed at villages with the help of nongovernment organizations, social workers, village Panchayat, and government organizations which work for rural development.
The main purpose of forming SHG is to facilitate easy lending facility to the vulnerable people who have to face several challenges while seeking a loan from the banks directly.
All the members in a SHG must have the habit of thrift or to save and each member should tend to save Rs20-30 per week. It is a virtual platform that promotes compulsory savings.
The purpose of the saving is to provide an internal loan to a group member during his/her need at the minimum interest rate. The process of lending within a group is completely based on faith and confidence.
The borrower should have a genuine reason of borrowing and should repay the loan within due date. The member with a good track record can borrow more than Rs. 5000.
• A group creates a common fund by offering their small savings on a weekly basis.
• The group develops its flexible working system and manages its available resources in a democratic way based on the decision of each member in the group.
• The group considers the loan request during the periodic meeting and reach a settlement based on everyone's concern with a bare minimum documentation and.
• Usually, the loan is small and for short term.
• The interest rate varies from group to group.
Involvement of SHGs with banks
When a SHG has some respectable amount of savings, it is better for it to establish a link with any nationalized, cooperative or commercial bank.
Linking with banks could prevent the group members from paying high transaction costs while seeking credit from the banks, as it will bypass some banking formalities. Moreover, if a SHG maintains a good track record then it has no need to go through collateral, excessive documentation, and physical access.