AI-generated practice question — model-generated for extra practice, not a previous-year CBSE board question.
The SHG charges interest because it pools members' savings and also borrows from banks — both of which involve costs. The interest collected helps the group repay its bank loan and meet administrative expenses. It also builds a common fund for future lending. Though lower than moneylenders' rates, it ensures the group remains financially self-sustaining.
Source: Chapter 3, Self-Help Groups for the Poor
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The passage states that the SHG charges interest on loans to members, which is less than what a moneylender charges. Examiners expect you to explain the reason interest is charged at all — focus on two points: (1) the group itself borrows from banks and must repay with interest, and (2) interest income keeps the group financially viable. Avoid saying SHGs are profit-driven — they are not; sustainability is the key word here.