New Delhi: The federal cabinet has cleared a proposal to give loans to women self-help groups (SHGs) at 7% interest rate, cheaper than the existing 11.5-14%, bringing the cost of loans on a par with those given to farmers.

SHGs that repay loans within the stipulated period will be eligible for loans at an even cheaper 4% rate, rural development minister Jairam Ramesh told reporters on Monday.

The cabinet took this decision—under the National Rural Livelihoods Mission (NRLM) programme—on 1 May but it was not made public because of restrictions on new announcements because of assembly elections in Karnataka on 5 May.

The NRLM was launched by the rural development ministry in June 2011. Aided in part by the World Bank, the programme aims to create efficient institutional platforms for the rural poor, enabling them to boost household income through sustainable livelihood initiatives and improved access to financial services. The decision comes as the Congress party-led United Progressive Alliance (UPA) government nears the end of its second five-year term in office. Programmes aimed at the poor and low-income groups have propelled the UPA to power in 2004 and 2009. With its reputation tarnished by a series of graft allegations in the second term, the government is looking at ways to improve its image ahead of national elections that are due in May 2014.

“The cabinet has approved the provision of interest subvention to women SHGs, enabling them to avail loans up to 300,000 at an interest rate of 7%," said a statement issued by the rural development ministry. “The initiative, in the first phase, would focus on 150 districts, including the 82 districts, affected by Left-wing extremism."

The decision by the cabinet was “pursuant to the announcement made by finance minister P. Chidambaram in the 2012-13 budget", the rural development ministry statement said.

The other districts will be chosen on the basis of their poverty levels, Ramesh said. In these districts, “the central government will bear the entire cost of interest subvention," Ramesh said, adding in other parts of the country, the cost of interest subvention will be shared between the Centre and the state with the former shouldering 75% of the cost and the latter 25%.

In all, the proposal will benefit 2.5 million SHGs and their 30 million women members. In the next five years, these numbers are expected to grow to 6 million SHGs and 70 million members, the minister said.

The total amount of money that will be spent by the central and the state governments this year would be 1,650 crore, Ramesh said.

N.C Saxena, a former secretary in the ministry of rural development, was sceptical about the announcement, saying that the SHG movement in states such as Jharkhand, Uttar Pradesh and Bihar were very weak. “In these areas, credit is not the most important requirement, it is the promotion of the SHGs," he said, adding that the ministry should look at introducing activities that will foster SHG activity.

Ramesh said that he has “proposed to the finance minister (P. Chidambaram) that a separate NABARD (National Bank for Agriculture and Rural Development) like institution for women self-help groups be set up."

In another change to the existing framework of the NRLM, the cabinet approved “that target groups (like SHGs) under NRLM will be determined by a well defined, transparent and equitable process of Participatory Identification of Poor (PIP)" at the level of the gram sabha and gram panchayats. “The PIP process will also have a set of exclusion criteria, automatic inclusion criteria and a set of deprivation indicators for enabling poverty ranking in a participatory manner. This delinks NRLM target group from the BPL list," the statement said.

Currently, only those rural households included in the official below poverty line estimates—prepared in 2002, with many defects and not updated since—are targeted by the NRLM, the government statement said. The changes will provide additional resources and the flexibility to implement the NRLM in a more effective manner, Ramesh said, adding that the cabinet also approved the setting up of an “autonomous, adequately staffed, professionally managed and empowered agency at the national level to implement the NRLM", called the National Rural Livelihoods Promotion Society that would provide technical support to the NRLM.

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