Why are the rural poor, especially women, often unable to obtain loans directly from formal sources of credit? How do Self Help Groups (SHGs) address this problem?
Generated by claude-sonnet-4-6 · 2026-06-26 13:22 · grounding rag
Model Answer
Rural poor, especially women, lack collateral (assets to guarantee loans) and proper documents, which banks require for loans. Banks are also not present everywhere in rural India, making access difficult.
SHGs address this problem by:
- Organising 15–20 members who pool their savings regularly.
- Allowing members to take small loans from the group itself at lower interest rates.
- After 1–2 years of regular savings, the group becomes eligible for a bank loan sanctioned in the group's name — collateral is replaced by group responsibility.
- Since all members are jointly responsible for repayment, banks are willing to lend even without individual collateral.
Source: Chapter 3, Self-Help Groups for the Poor
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Explanation
What examiners look for (3 marks):
- 1 mark — reason rural poor/women can't access formal credit (no collateral, no documents).
- 2 marks — how SHGs solve this: pooling savings → group loan eligibility → group guarantees repayment replacing collateral.
Key terms to use: collateral, pool savings, group responsibility/liability, self-employment. Avoid long lists; 2–3 crisp points on SHGs is enough. Don't write a general essay on SHGs beyond what's asked.