SHG–Bank Linkage Model

The Self-Help Group–Bank Linkage Model (SHG–Bank Linkage Model) is one of the most significant institutional innovations in India’s financial inclusion framework. It provides a structured mechanism through which informal self-help groups, primarily consisting of low-income households, are linked with the formal banking system for savings, credit, and other financial services. The model has emerged as a cornerstone of India’s rural and inclusive finance strategy, integrating social mobilisation with formal banking to support poverty alleviation, women empowerment, and grassroots economic development.
By combining collective responsibility with institutional finance, the SHG–Bank Linkage Model has reshaped the relationship between banks and marginalised communities, thereby strengthening the foundations of the Indian economy.

Concept and Meaning of the SHG–Bank Linkage Model

The SHG–Bank Linkage Model refers to a system under which banks provide financial services directly to Self-Help Groups (SHGs), which are small, voluntary associations of individuals—usually women—who come together to save regularly and lend internally among members. Over time, these groups establish credit discipline and financial records, enabling banks to extend loans to the group as a whole rather than to individual members.
The core idea of the model is to use group-based lending and mutual accountability as substitutes for traditional collateral. This significantly reduces transaction costs and credit risk for banks while improving access to finance for underserved populations.
Key features of the model include:

• Regular savings by SHG members.
• Internal lending based on group consensus.
• Bank linkage for savings accounts and credit.
• Collective responsibility for loan repayment.

Evolution and Institutional Background

The SHG–Bank Linkage Model was formally initiated in the early 1990s as a pilot programme and later expanded nationwide. It gained momentum with policy support and institutional backing from the National Bank for Agriculture and Rural Development, which played a central role in promoting, refinancing, and supervising the model.
The Reserve Bank of India provided regulatory support by encouraging banks to treat SHG lending as part of priority sector lending. Over time, the model evolved from a pilot initiative into the world’s largest microfinance programme in terms of outreach.
Non-governmental organisations, self-help promoting institutions, and state governments have also played a vital role in nurturing SHGs and facilitating their linkage with banks.

Structure and Operational Mechanism

The SHG–Bank Linkage Model typically follows a phased approach. In the initial stage, SHG members pool small savings on a regular basis and use these funds for internal lending. This helps build trust, financial discipline, and management capacity within the group.
Once the group demonstrates satisfactory performance, a bank opens a savings account in the name of the SHG. After assessing the group’s track record, banks extend credit to the SHG, usually as a multiple of the group’s accumulated savings. The loan is then distributed among members according to group decisions.
Repayment responsibility rests collectively with the SHG, and peer pressure ensures high repayment rates. This mechanism reduces default risk and strengthens the sustainability of the model.

Role in Banking and Financial Inclusion

The SHG–Bank Linkage Model has transformed the way banks engage with low-income and rural populations. Traditional banking models often found it costly and risky to serve small borrowers due to lack of collateral and high transaction costs. The SHG-based approach addresses these challenges effectively.
For banks, the model:

• Expands the depositor and borrower base.
• Reduces credit risk through group accountability.
• Supports priority sector lending targets.
• Enhances outreach without extensive branch expansion.

For households, it provides access to affordable credit, safe savings, and a pathway into the formal financial system. As a result, the model has become a key driver of financial inclusion in India.

Significance for Rural and Microfinance Development

Rural India has historically faced limited access to institutional credit, leading to dependence on informal moneylenders. The SHG–Bank Linkage Model has helped bridge this gap by integrating rural communities into the banking system.
The model supports micro-enterprises, agriculture-related activities, and household consumption needs. By providing timely and reasonably priced credit, it reduces exploitation and stabilises rural incomes. It also complements other rural development initiatives by strengthening local financial capacity.
In the broader microfinance landscape, the SHG–Bank Linkage Model represents a socially embedded alternative to purely commercial microfinance institutions.

Women Empowerment and Social Impact

One of the most distinctive features of the SHG–Bank Linkage Model is its focus on women. A majority of SHGs in India are women-led, making the model a powerful instrument of gender empowerment.
Participation in SHGs enhances women’s financial literacy, decision-making ability, and social status. Access to credit enables them to invest in income-generating activities, education, and health. Over time, this contributes to improved household welfare and community development.
The collective nature of SHGs also fosters social capital, cooperation, and leadership at the grassroots level.

Impact on the Indian Economy

At the macroeconomic level, the SHG–Bank Linkage Model contributes to inclusive and sustainable economic growth. By mobilising small savings and channelling them into productive uses, it strengthens domestic resource mobilisation.
The model:

• Supports entrepreneurship at the micro level.
• Enhances employment opportunities in rural areas.
• Improves credit flow to priority sectors.
• Reduces regional and social disparities.