Effectiveness of Self-Help Group Lending in Reducing Dependency on Informal Credit Sources: Evidence from Rural India

Abstract

Despite significant strides in the availability of formal credit in recent years, access to credit in rural households in India continues to be a big challenge because borrowing from informal credit sources like moneylenders, local traders and relatives was common. The present study is entitled “Effectiveness of Self-Help Group Lending in Reducing Dependency on Informal Credit Sources: Evidence from Rural India” which focuses on the role of “SHGs in enhancing the access to formal credit and to reduce the dependency of rural households on informal credit lending mechanisms. The study is descriptive and analytical in nature and is purely based on secondary data. The secondary data were taken from the various sources such as reports from the National Bank for Agriculture and Rural Development (NABARD), Reserve Bank of India (RBI), Ministry of Rural Development, Self Help Group–Bank Linkage Programme reports, Government publications and various academic literature. The study examines growth of SHGs, mobilization of savings, credit taken and repayment behavior and rural credit pattern changes. The results demonstrate that SHG lending has played an important role in promoting financial inclusion by linking rural people with formal financial institutions. SHG-bank linkage has created more supply of institutional credit and has reduced the need for high-cost informal lenders. The results indicate that there has been a positive change in the borrowing pattern as the rural households have started availed of the credit facility available through SHG or banks rather than depending largely on the moneylender and other informal institutions. SHG involvement has also promoted the saving habits, better financial management, micro enterprises and enhanced women's economic role. But informal credit still plays a role given the ease of access in an emergency, and the lack of formal financial services in certain rural communities. The study finds that SHG lending can be an effective tool for reducing credit dependency, financial empowerment and thereby sustainable rural development. Enhancing the impact of SHG in inclusive financial growth in rural India can be further strengthened through strengthening SHG networks, financial literacy programmes and institutional credit support.