Self-Help Groups (SHGs)

Self-Help Groups (SHGs) are small, informal, and voluntary associations of individuals—predominantly women—who come together to save regularly, pool their resources, and access credit for productive and consumption needs. SHGs have emerged as a powerful instrument of financial inclusion, poverty alleviation, and socio-economic empowerment in India. Within the framework of banking and finance, SHGs serve as an important bridge between formal financial institutions and low-income households that are otherwise excluded from the organised credit system.
In the Indian economy, SHGs play a dual role by strengthening grassroots-level financial intermediation and contributing to inclusive and sustainable economic development.

Concept and Structure of Self-Help Groups

An SHG typically consists of 10 to 20 members who share similar socio-economic backgrounds. Members make regular savings contributions, which are deposited in a common fund. This fund is used to provide small loans to members for purposes such as income generation, healthcare, education, and consumption smoothing.
Key features of SHGs include:

• Regular savings and internal lending among members.
• Group-based decision-making and peer monitoring.
• Simple record-keeping and transparency.
• Emphasis on mutual trust and collective responsibility.

The group mechanism reduces credit risk for banks, as peer pressure and collective accountability encourage timely repayment.

Evolution of SHGs in India

The SHG movement in India gained momentum during the early 1990s as a response to widespread financial exclusion and rural poverty. The formal recognition of SHGs as a viable credit delivery mechanism marked a turning point in India’s approach to rural finance.
A major milestone was the launch of the SHG–Bank Linkage Programme, which enabled banks to provide direct credit to SHGs without collateral. This initiative transformed SHGs into an integral part of the Indian financial system and significantly expanded access to institutional finance for marginalised communities.

Role of SHGs in the Banking System

In the Indian banking framework, SHGs act as intermediaries between banks and individual borrowers. Banks extend loans to SHGs, which in turn distribute credit among their members based on internal assessments and priorities.
The Reserve Bank of India has supported the SHG model by encouraging banks to adopt simplified lending procedures and flexible norms for group-based lending. Public sector banks, regional rural banks, and cooperative banks play a major role in financing SHGs.
Benefits of SHGs for the banking system include:

• Lower transaction and supervision costs.
• Reduced credit risk due to group accountability.
• Expansion of banking services to unbanked regions.
• Improved repayment performance compared to individual lending.

Role of NABARD and Institutional Support

The development and expansion of SHGs in India have been strongly supported by the National Bank for Agriculture and Rural Development (NABARD). NABARD has played a pivotal role in promoting SHGs by providing refinance support, capacity building, and policy guidance.
Institutional support mechanisms include:

• Financial assistance for SHG formation and training.
• Refinance facilities for banks lending to SHGs.
• Monitoring and evaluation of SHG–bank linkage performance.
• Promotion of best practices and standardised norms.

This institutional backing has enabled SHGs to scale up and integrate more effectively with the formal financial system.

SHGs and Financial Inclusion

Self-Help Groups are a cornerstone of India’s financial inclusion strategy. By enabling access to savings, credit, and basic financial services, SHGs empower individuals who lack collateral, credit history, or formal documentation.
SHGs contribute to financial inclusion by:

• Encouraging savings habits among low-income households.
• Providing affordable and timely credit.
• Reducing dependence on informal moneylenders.
• Facilitating access to insurance and pension schemes.

Through their linkage with banks, SHGs have brought millions of households into the formal financial network.

SHGs and Women Empowerment

A distinctive feature of the SHG movement in India is its strong focus on women. Women-led SHGs have been instrumental in enhancing economic independence, decision-making power, and social status.
Economic and social benefits of women SHGs include:

• Increased participation of women in income-generating activities.
• Improved household financial management.
• Greater awareness of health, education, and social issues.
• Enhanced leadership and collective bargaining capacity.

By empowering women economically, SHGs contribute to broader human development outcomes in the Indian economy.

Contribution to the Indian Economy

At the macroeconomic level, SHGs contribute to inclusive growth by mobilising savings, promoting micro-enterprises, and supporting rural livelihoods. SHG-based microfinance has enabled the expansion of small-scale activities in agriculture, handicrafts, dairy, and services.
The impact of SHGs on the Indian economy includes:

• Generation of self-employment and supplementary income.
• Reduction in rural poverty and vulnerability.
• Strengthening of local economies through grassroots entrepreneurship.
• Support for government-led development and welfare programmes.

SHGs often act as effective channels for implementing public schemes related to livelihoods, nutrition, sanitation, and social security.

SHGs and Government Initiatives

The Government of India has actively promoted SHGs as part of its development strategy. SHGs are integrated into various national programmes aimed at poverty reduction and rural development.
Government support includes:

• Financial incentives for SHG formation and sustainability.
• Skill development and entrepreneurship training.
• Market linkage support for SHG products.
• Digital and financial literacy initiatives.