Step 1: Understanding the Concept:
Self-Help Groups (SHGs) are small voluntary associations of people (usually women) from similar socio-economic backgrounds who come together to solve their common problems through mutual help.
Step 2: Detailed Explanation:
1. Encouraging Savings: Members contribute small amounts of savings regularly. This pooled money is used to give small loans (micro-credit) to members for consumption or productive needs.
2. Collateral-Free Loans: Unlike formal banks, SHGs do not require physical collateral. The group's collective guarantee serves as security.
3. Empowerment: Since most SHGs are women-led, they promote financial independence and decision-making power among rural women.
4. Reducing Debt Traps: By providing low-interest credit, they protect rural households from the exploitative high-interest rates of local moneylenders.
Step 3: Final Answer:
SHGs act as a bridge between the poor and formal banking systems, promoting financial inclusion and alleviating poverty through micro-finance.