To the uninitiated, MFI use a model called JLG (joint lending group) and government supports SHG. The basic difference between these two is the fact MFIs lend money from the banks to make loans to poor people of the JLG model. In SHG model, on the other hand, participants are encouraged to open a bank account themselves and put their joint savings into it. When they need money and SHG approves it, they get a loan. They can also get money from bank, where they have a bank account, if they need. However in most cases, such external borrowings are very little as bank doesn't reach out to them. In the end, very little money from outside the economy is pumped into the local economy.
In my opinion, SHG model doesn't work that well when it comes to poverty alleviation. Here's how I'd like to present my point:
Diwali, to many, seem like a waste of time and money. How can such a poor(?) country put up with such spend thrift traditions! In spite of all the arm-chair musings, every time it comes along, people end up spending more money than last year. In the end, it ends up circulating a lot of money from the banks and pockets of the people to the deepest & darkest(TM) corners of our country. People buy clothes, sweets, fireworks, electric lightings, earth lamps, tisi oil, shares (on diwali night) etc. Most of these goods end up pushing money from people who have it to people who need it as these goods come from the toil of the poorest of our brothers. Lets look at these goods in a little detail and look at their value chain.
Buying of clothes -> cloth shop owner -> cloth weavers -> cotton farmers
Buying of sweets -> sweet shop owner -> poor people making these sweets -> sugar seller -> sugar companies -> farmers of sugar cane etc
Had there been no diwali, any other festivals or marriages, we would end up killing our clothing industry, cotton farmers, retail cloth shops and lively hood of other millions.
Currency only makes sense if it can be spent. Similarly SHGs are not doing any good by persuading people to put most of their money in the bank. As more and more people do it, the local economy suffers from lack of liquidity.
JLG model on the other hand *pumps* money in the local economy, which spurs *real* growth. People buy more, work more to earn more and this increased economic activity in turn empowers a lot many other people in the local economy to contribute effectively and feed their families. At the end of the day when these people have enough money they will turn to banks to save it. Pressurizing them to use SHGs exclusively is just going to make more people poor. In my view government is sticking to a model which is pre 1991 and doesn't make much sense in a globalized, connected economy.
Note: This post is about my thoughts & ideas and not of my employer's.