Self-help group

Also called: SHG · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Class 10, Ch 3 "Money and Credit"; Class 11, Ch 5 "Rural Development"

Meaning

A self-help group (SHG) is a small group of rural poor people, mostly women and usually from one neighbourhood, who save small sums together, lend to each other from that pooled money, and later borrow from a bank in the group's name. The whole group is responsible for repaying the loan.

SHGs matter because they let poor women with no collateral (an asset, such as land or gold, that a borrower pledges and loses if they do not repay) get formal bank credit. Group responsibility replaces the pledged asset. This moves them away from moneylenders and builds women's agency.

Explanation

Why SHGs were needed

• Bank nationalisation in 1969 (the start of "social banking") took bank branches into villages. Even so, poor households kept borrowing from moneylenders.
• The collateral problem
• Banks ask for collateral before they lend.
• The rural poor, especially women, own little that they can pledge.

• So they borrowed at very high interest from moneylenders and fell into debt traps.

• Class 11 NCERT says SHGs arose because formal credit was inadequate and had "not been fully integrated into the overall rural social and community development".

How an SHG works

• Size: 15-20 members (NCERT Class 10). The DAY-NRLM norm is 10-20. Special groups, such as persons with disabilities or groups in remote tribal areas, can have as few as 5 members (RBI DAY-NRLM circular, 2018) [5].
• Thrift (the habit of saving small sums regularly): each member saves ₹25 to ₹100 or more, depending on what they can afford.
• Internal lending ("inter-loaning"): members take small loans from the pooled savings. The group charges less interest than a moneylender does.
• Bank linkage
• After a year or two of regular saving, the group can get a bank loan in the group's name for self-employment.

• Uses include releasing mortgaged land, working capital (money for day-to-day inputs such as seeds, fertilisers, bamboo and cloth), housing materials, and assets such as a sewing machine, handloom or cattle.

• The group decides the purpose, amount, interest rate and repayment schedule of each loan. The bank or NGO does not.

• Group liability: peer pressure replaces collateral
• The whole group is responsible for repaying the loan.
• If one member defaults, the others follow it up.

• So banks can lend to poor women without asking for security.

• Social role: SHGs are "building blocks of organisation of the rural poor". Their meetings also discuss health, nutrition and domestic violence.

Bank-lending rules for SHGs (RBI DAY-NRLM Master Circular, 2018)

• Eligibility: the SHG's account books must show it has been active for at least 6 months [5].
• "Panchasutra" (five rules the group must follow): meet regularly, save regularly, lend internally, repay on time and keep proper accounts [5].
• No collateral and no margin (margin = the part of the loan the borrower must pay from their own money) on loans up to ₹10 lakh [5].
• Banks may not place a lien (a legal hold that stops withdrawal) on the SHG's savings account when they give a loan [5].
• Loan doses (a cash credit limit that grows as the group proves itself) [5]:
• Year 1: 6 × corpus or ₹1 lakh, whichever is higher.
• Year 2: 8 × corpus or ₹2 lakh, whichever is higher.
• Year 3 onwards: at least ₹3-5 lakh, based on the group's micro-credit plan.

• Worked example: an SHG's corpus (savings plus funds received) is ₹20,000. In Year 1, 6 × ₹20,000 = ₹1.2 lakh. This is more than ₹1 lakh, so the limit is ₹1.2 lakh. In Year 2, 8 × ₹20,000 = ₹1.6 lakh. This is less than ₹2 lakh, so the limit is ₹2 lakh.

• Interest subvention (the government pays part of the interest for the borrower) [5]:

• Women SHGs in 250 identified districts can borrow up to ₹3 lakh at 7% a year.
• SHGs that repay on time get an extra 3%, so their effective rate falls to 4%.
• Worked example: on a ₹3 lakh loan, interest at 7% = ₹21,000 a year. At 4% it is ₹12,000. Prompt repayment saves ₹9,000.
• Banks are paid the gap between their lending rate and 7%, capped at 5.5% [5].

In India

• From pilot to national mission
• 1992: NABARD's SHG-Bank Linkage Programme (SHG-BLP) begins as a pilot with 500 groups.
• 1999: Swarnajayanti Gram Swarozgar Yojana (SGSY), a self-employment scheme built on SHGs.
• 2011: National Rural Livelihoods Mission (NRLM), "Aajeevika".

• 2016: renamed Deendayal Antyodaya Yojana-NRLM (DAY-NRLM).

• Scale

• NCERT Class 11 (May 2019): about 6 crore women in 54 lakh SHGs. Each SHG got a ₹10-15,000 revolving fund (seed money that the group lends and re-lends) and ₹2.5 lakh from the Community Investment Support Fund.

• Latest figure (2025): 10.05 crore rural households in 90.90 lakh SHGs under DAY-NRLM [3].

• Lakhpati Didi: an SHG member whose annual household income is ₹1 lakh or more [2]. The target is 3 crore [2]. By June 2025, 1.48 crore SHG women had reached it [2].

• Kudumbashree (Kerala) (Class 11, Box 5.1): a women-focused, community-based poverty-reduction programme.
• It began in 1995 as a thrift and credit society, a small savings bank for poor women.
• It mobilised ₹1 crore in thrift savings.

• It is called "the largest informal bank in Asia" because of its participation and savings.

• Regulator: the RBI sets bank-lending rules for SHGs through the DAY-NRLM Master Circular (2018) [5]. NABARD runs the SHG-BLP.

Don't confuse with

• Joint Liability Group (JLG): 4-10 borrowers. Each member takes an individual loan and all guarantee each other. Members do not save together first. NABARD introduced the scheme in 2006. In an SHG, the group saves first and the loan goes to the group.
• Microfinance institution (MFI): a lender (for example, an NBFC-MFI) that gives microcredit. An SHG is a borrowers' group, not a lender. MFIs follow the RBI's 2022 microfinance framework, which defines a microfinance loan as a collateral-free loan to a household with annual income up to ₹3,00,000 [4].
• Grameen Bank (Bangladesh): founded by Muhammad Yunus. It began as a project in 1976 and became a bank in 1983. It gives individual loans to members organised in small groups. An SHG takes the loan in the group's name.
• Microcredit: the broad idea of small, collateral-free loans to the poor. SHGs are only one channel for it. The other two are JLGs and MFIs.

Prelims Hooks

• SHG size: 15-20 (NCERT Class 10) vs 10-20 (DAY-NRLM). Special groups can have 5 members [5]. A JLG has 4-10 members and does not save first.
• Sequence: NABARD's SHG-BLP pilot of 500 groups (1992) → SGSY (1999) → NRLM "Aajeevika" (2011) → DAY-NRLM (2016).
• Panchasutra = regular meetings, regular savings, internal lending, timely repayment and proper accounts. An SHG must also have been active for at least 6 months before a bank lends to it [5].
• Loans to SHGs up to ₹10 lakh need no collateral and no margin, and banks may not put a lien on the SHG's savings account [5].
• Women SHGs in 250 districts: 7% on loans up to ₹3 lakh, falling to 4% with prompt repayment [5].
• Lakhpati Didi = SHG member with annual household income of at least ₹1 lakh. Target: 3 crore [2]. Kudumbashree = Kerala, 1995, "largest informal bank in Asia".

Mains Points

• Social collateral vs physical collateral: group liability and peer pressure let banks lend to women who own no assets. This moves the poor from moneylenders to formal credit, and it links financial inclusion with women's empowerment (GS-III inclusive growth; GS-I/II women's issues).
• Consumption vs livelihoods
• Class 11 NCERT notes that SHG "borrowings are mainly confined to consumption purposes".
• DAY-NRLM's Lakhpati Didi push aims to turn credit into income: 1.48 crore achieved against a 3 crore target (June 2025) [2][3].

• The missing pieces are links to markets, skills and value chains. Coverage is also uneven: SHG-BLP is strongest in the southern states, and many groups never grow beyond small loans.

• Growth vs over-indebtedness

• One household often borrows from an SHG, a JLG and an MFI at the same time.
• Aggressive lending and coercive recovery caused the 2010 Andhra Pradesh microfinance crisis, which led to the Malegam Committee (2011) [6].
• The RBI's 2022 framework caps a household's total loan repayments at 50% of monthly household income [4].
• Use this to argue that savings-first SHGs build discipline, while credit-first models grow faster but carry more risk.

Related concepts

• Thrift
• Group liability
• Microcredit
• Joint Liability Group

Read more

• Self-help groups, micro-credit and the Grameen model