Micro Finance

Small loans will be provided to the SHGs formed under the target JFMCs, EDCs, and PSS?s of the Project as initial capital for them to carry out IGAs. The objective is to enable the members of the SHGs, who have limited access to financial resources, to secure funds to develop IGAs. The Project will provide a block grant to a target JFMC, EDC, or PSS to operate the microfinance subcomponent. The grant will be used as a revolving fund to finance SHG activities. Loans will be provided to the SHGs with a nominal interest rate. The rate should be discussed and agreed on in the General Body meeting of a JFMC, EDC or PSS. The rate should be lower than or equal to that of banks and microfinance institutions. However, before the provision of the block grant to any JFMC, EDC or PSS, the committee must hold enough capacity to handle the funds. The Project, i.e., the PMU, will appraise this capacity by examining whether the committee?s financial operations, such as book-keeping and account management, are sound. The PMU will not provide the grant until the committee becomes capable of managing it. Three SHGs are estimated to be formed under each JFMC, EDC or PSS. Each SHG is entitled to receive the loan twice a year, provided it pays back in a timely manner. However, preference would be given to SHGs who have not received any financial assistance. The maximum amount will be INR 30,000 per SHG per loan. Therefore, the maximum amount of the block grant provided to each JFMC, EDC or PSS will be INR 180,000. 

For an SHG to qualify for a loan, it will need to demonstrate that it can operate in a financially sound manner. Before obtaining the loan, SHG members must contribute a small amount of money to their common account every month. The amount to be collected from the members should be fixed and agreed on by all members. The money collected should be lent out to each SHG member until all the members receive a loan. This cycle of saving and lending should be continued successfully for at least six months. The SHG members should carry out activities utilizing the loan they receive. The SHG will become eligible for receiving loans from its JFMC, EDC, or PSS only after it demonstrates that it can operate this cycle successfully. 

There should be at least a six month interval between one loan and the subsequent one. To receive the second loan, SHGs need to be evaluated based on their track record of activities during the past six months. Only the SHGs that operate and function well can receive the loan for the second time. Performance evaluation indicators should be developed by the Project and included in the management manual. The JFMCs, EDCs, and PSS?s will utilize these indicators when judging whether an SHG is eligible for a second loan. SHGs must utilize the loan for starting or boosting the micro-enterprise they have selected. The loan should not be used for consumption purposes. SHGs should invest the loan in its activities, generate profits, and return the principal and interest. On one hand, the principal will be utilized by a JFMC, EDC, or PSS to provide loans to SHGs in the subsequent year onwards because the block grant is given only once from the Project to JFMCs, EDCs, and PSSs. On the other hand, the interest should be deposited into the VDF of their respective JFMC, EDC or PSS to be utilized for the benefit of the entire committee on voluntary basis.

If an SHG provides loans to its members, each member will return the principal and interest to the SHG. The interest should be deposited into the SHG bank account to be utilized for purposes that will benefit the entire SHG. SHG members who receive a loan will be prohibited from lending out this money to other individuals for the purpose of making profits. SHGs will be allowed to borrow from other financial institutions such as banks and microfinance institutions. To attain the objective of the microfinance scheme of the Project, however, the target JFMCs, EDCs and PSS?s must ensure that the SHGs access loans only under favorable conditions. The JFMCs, EDCs, and PSS?s must properly maintain and actively utilize its revolving fund. At the same time, the committees must make sure that they do not fund poorly-performing SHGs.