SHG Bank Linkage Programme

The Self-Help Group–Bank Linkage Programme (SHG–BLP) is one of India’s most important financial inclusion initiatives. It aims to integrate the rural poor, especially women, into the formal banking system by combining collective self-help with institutional finance. Introduced in the early 1990s, the programme enables low-income households to access savings, credit, and other banking services in an affordable and sustainable manner.

Background and Genesis

The SHG–Bank Linkage Programme emerged in response to long-standing challenges in rural credit delivery. During the 1970s and 1980s, government-led credit schemes such as the Integrated Rural Development Programme (IRDP) suffered from weak targeting, poor repayment performance, and limited outreach. These experiences highlighted the need for an alternative approach to rural finance.
Following its establishment in 1982, the National Bank for Agriculture and Rural Development (NABARD) began exploring community-based microfinance models. In 1986–87, NABARD initiated pilot projects that linked informal Self-Help Groups with banks, allowing them to access credit collectively without collateral. The pilots demonstrated high repayment rates and improved socio-economic outcomes.
Encouraged by these results, NABARD formally launched the SHG–Bank Linkage Programme in 1992 in collaboration with the Reserve Bank of India (RBI) and commercial banks. The programme marked a shift from individual-based lending to group-based finance, using collective responsibility and social cohesion as substitutes for physical collateral.

Objectives of the Programme

The key objectives of the SHG–Bank Linkage Programme are to expand access to institutional credit for the rural poor, promote regular savings and financial discipline, encourage self-employment and micro-entrepreneurship, empower women and marginalised groups, strengthen partnerships between banks, NGOs, and communities, and integrate informal savings and credit practices with the formal banking system.

Structure and Mechanism

The programme is built on the principle that poor households are capable of managing credit responsibly when supported by appropriate institutional mechanisms.
Formation of SHGs
A typical Self-Help Group consists of 10–20 members, largely women, drawn from similar socio-economic backgrounds. Members contribute small savings at regular intervals, which are pooled into a common fund. The group maintains basic financial records, elects office bearers, and meets periodically to discuss financial and social matters.

Role of Promoting Institutions

SHGs are usually promoted by non-government organisations, community-based organisations, or government agencies. These institutions provide handholding support, including training in bookkeeping, group management, and financial literacy, particularly during the initial stages.

Bank Linkage Process

After demonstrating stability through regular meetings and savings for about six months, an SHG becomes eligible for bank linkage. The linkage operates through three models:

• In Model I, banks themselves form, nurture, and finance SHGs.
• In Model II, SHGs are formed by NGOs or government agencies but directly financed by banks; this is the most widely adopted model.
• In Model III, NGOs act as financial intermediaries, borrowing from banks and on-lending to SHGs.

In all models, SHGs open savings accounts with banks. Based on their track record, banks extend collateral-free loans, usually in multiples of the group’s accumulated savings.

Financial Features

SHGs build a financial history through regular savings deposited in bank accounts. Credit is extended based on group performance and repayment capacity rather than individual collateral. Loans are provided without security, relying on mutual guarantee and peer pressure. In many cases, revolving funds from NABARD or government programmes enhance the group’s lending capacity.

Role of NABARD and RBI

NABARD plays a central role as the nodal agency for the programme. It provides refinance to banks, formulates operational guidelines, supports capacity building of bankers and SHG facilitators, and monitors programme implementation.
The Reserve Bank of India supports the initiative through regulatory measures, including simplified lending norms, permission for collateral-free loans, and classification of SHG lending under priority sector lending.

Growth and Progress

The SHG–Bank Linkage Programme has expanded rapidly since its launch. From about 500 SHGs linked to banks in 1992–93, the programme grew to over 12 million credit-linked SHGs by March 2023. Total outstanding bank credit under the programme has crossed ₹1.5 lakh crore. Nearly 90 percent of SHGs are women’s groups, reflecting the programme’s strong gender focus.
Since 2011, the programme has been further strengthened under the Deendayal Antyodaya Yojana – National Rural Livelihoods Mission (DAY-NRLM), which promotes federations of SHGs at village, block, and district levels to ensure sustainability and scale.

Socio-Economic Impact

The SHG–Bank Linkage Programme has had wide-ranging impacts. It has enhanced women’s decision-making power within households and communities, increased participation in local governance, and strengthened collective action. Access to affordable credit has supported income-generating activities in agriculture, livestock, handicrafts, and small businesses, reducing dependence on moneylenders. The programme has significantly advanced financial inclusion by bringing millions of rural households into formal banking. SHGs have also functioned as platforms for addressing social issues related to health, education, sanitation, and welfare delivery.

Challenges and Limitations

Despite its success, the programme faces several challenges. There are regional imbalances, with southern states accounting for a disproportionate share of SHGs and credit. Rapid expansion has sometimes affected the quality and cohesion of groups. Over-indebtedness can occur due to borrowing from multiple sources. Limited financial literacy remains a concern, and some SHGs continue to depend heavily on external support rather than becoming self-sustaining institutions.

Government and Policy Support

Several policy measures have been introduced to address these challenges. DAY-NRLM focuses on strengthening SHG federations and improving market linkages. Interest subvention schemes reduce borrowing costs for eligible women SHGs. NABARD’s e-Shakti initiative promotes digitisation of SHG records to improve transparency and efficiency. Financial literacy and skill development programmes aim to improve credit management and entrepreneurial capabilities.

Comparison with Other Microfinance Models

Unlike microfinance institutions that directly lend to individuals at market-based interest rates, the SHG–Bank Linkage Programme is community-owned and managed. It emphasises empowerment and inclusion rather than commercial profitability, offers relatively lower interest rates, and primarily targets rural women and poor households. This makes SHG–BLP a more development-oriented and participatory model of microfinance.