Poor women with no assets to offer as collateral are generally unable to get loans from banks individually. Yet, banks are willing to lend to Self-Help Groups whose members are the same women. Explain how the way an SHG is organised makes it creditworthy in the eyes of a bank, even in the absence of individual collateral.
Generated by claude-sonnet-4-6 · 2026-06-26 13:23 · grounding rag
Model Answer
An SHG is creditworthy to a bank because of the following features of its organisation:
- Pooled savings as internal creditworthiness: A typical SHG has 15–20 members who save regularly (₹25–₹100 per month). This pooled saving over 1–2 years demonstrates financial discipline to the bank.
- Loan sanctioned in group's name: The bank lends to the group collectively, not to an individual. The group itself acts as a guarantee, replacing the need for individual collateral.
- Group responsibility for repayment: The entire group is responsible for loan repayment. If any one member defaults, other members follow up seriously to ensure recovery. This social pressure replaces collateral as security for the bank.
- Democratic decision-making: Members themselves decide the purpose, amount, interest rate, and repayment schedule of loans, ensuring discipline and accountability within the group.
- Track record: Regular savings and internal lending before approaching the bank establish a repayment history, making the group trustworthy in the bank's eyes.
Thus, collective responsibility and savings discipline substitute for individual collateral.
Source: Chapter 3, Self-Help Groups for the Poor
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Explanation
The examiner expects students to explain the mechanism, not just state that SHGs exist. Key points are: (i) group liability replacing collateral, (ii) social/peer pressure ensuring repayment, (iii) regular savings as proof of discipline, and (iv) the loan being in the group's name. Avoid vague phrases like "women are empowered" — stick to structural reasons the bank finds credible. 5 crisp points with brief elaboration is ideal for 5 marks.