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

Detail

1. Why SHGs were needed

• The formal credit gap. Bank nationalisation in 1969 (the start of "social banking") pushed bank branches into villages. Even so, poor households still depended on moneylenders.
• Banks ask for collateral (an asset, such as land or gold, that the borrower pledges and loses if they do not repay).
• The rural poor, especially women, own little that they can pledge.

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

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

• SHGs promote thrift and give credit repayable "in small instalments at reasonable interest rates".

2. The SHG mechanism

• Self-help group (SHG): a small group of rural poor people, mostly women, usually from one neighbourhood, who save together and lend to each other.
• Size: 15-20 members in Class 10; 10-20 under the DAY-NRLM norm.

• Special groups (persons with disabilities, groups in remote tribal areas) may 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 borrow 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;

• assets such as a sewing machine, handloom or cattle.

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

• Group liability: the whole group is responsible for repaying the loan.
• If one member defaults, the others follow it up.
• Peer pressure therefore takes the place of collateral.

• As a result, banks 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.

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

• Eligibility: the SHG must have been active for at least 6 months according to its account books [5].
• "Panchasutra" (five rules the group must follow) [5]:
• meet regularly;
• save regularly;
• lend internally among members;
• repay on time;

• keep proper accounts.

• No collateral and no margin (margin = the part of the loan the borrower must fund from their own money) on loans up to ₹10 lakh to SHGs [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 (cash credit limit, which 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.

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

• Women SHGs in 250 identified districts borrow up to ₹3 lakh at 7% a year.
• SHGs that repay on time get an extra 3% subvention, 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, a saving of ₹9,000 for prompt repayment.
• Banks are paid the gap between their lending rate and 7%, capped at 5.5% [5].

4. Microcredit — definition and channels

• Microcredit: small loans, usually collateral-free, given to poor borrowers for self-employment and household needs.
• It is delivered through three channels: SHGs, joint liability groups (JLGs) and microfinance institutions (MFIs).
• Current legal definition (RBI): a microfinance loan is a "collateral-free loan given to a household having annual household income up to ₹3,00,000" (Master Direction, 14 March 2022, effective 1 April 2022) [4].
• Household = husband, wife and their unmarried children [4].
• The loan cannot be tied to a lien on the borrower's deposit account. This keeps it truly collateral-free [4].

5. Kudumbashree (Kerala) — Class 11, Box 5.1

• A women-oriented, community-based poverty-reduction programme in Kerala.
• 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 acclaimed as "the largest informal bank in Asia" by participation and savings.
• It was formally launched as Kerala's poverty-eradication mission in 1998 (scaffold date; not checked against an external source).

6. From pilot to national mission

• 1992: NABARD's SHG-Bank Linkage Programme (SHG-BLP). The pilot covered 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 over time:
• 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 official figure (2025): 10.05 crore rural households in 90.90 lakh SHGs under DAY-NRLM [3]. (NCERT: about 6 crore women in 54 lakh SHGs, 2019.)

• Current revolving fund: ₹20-30,000 per SHG (scaffold figure; not checked against an external source).

• Lakhpati Didi: an SHG member whose annual household income is ₹1 lakh or more [2].

• Target: 3 crore Lakhpati Didis [2].
• Progress: 1.48 crore SHG women had become Lakhpati Didis by June 2025 [2].

7. Grameen Bank of Bangladesh

• Founded by Muhammad Yunus. It began as a project in 1976 and became a bank in 1983.
• Yunus and Grameen Bank shared the 2006 Nobel Peace Prize.
• 2018: over 9 million members in about 81,600 villages. Almost all borrowers are poor women.
• Model: individual loans to members who are organised in small groups. Peer pressure within the group takes the place of collateral.
• Lesson: poor women proved to be "reliable borrowers" who can run small income-generating activities.

8. JLGs, MFIs and regulation

• Joint Liability Group (JLG): an informal group of 4-10 borrowers.
• Each member takes an individual loan.
• All members guarantee each other's repayment.
• The scheme was introduced by NABARD in 2006.

• Unlike an SHG, members do not save together first.

• 2010 Andhra Pradesh microfinance crisis: aggressive MFI lending led to over-indebtedness and coercive recovery. The state then restricted MFIs.

• Malegam Committee: an RBI Board sub-committee chaired by Y.H. Malegam, which reported in January 2011 [6]. It recommended:
• a separate category of NBFC-MFIs;
• a margin cap and an interest-rate cap on individual loans;
• transparency in interest charges [6].

• RBI accepted the framework in the Monetary Policy Statement 2011-12 and issued NBFC-MFI directions in December 2011 [6].

• RBI framework (2022, updated July 2025) [4]:

• Applies to all lenders (commercial banks, cooperative banks and NBFCs, including MFIs), not only MFIs.
• Repayment cap: a household's total monthly loan repayments (microfinance and other loans) must not exceed 50% of monthly household income.
  • Worked example: household income = ₹20,000 a month. All EMIs together can be at most ₹10,000.
• The old interest-rate cap has been replaced by a board-approved pricing policy. Each lender's board must set its interest-rate model, split into cost of funds, risk premium and margin, plus a ceiling on charges.
• No prepayment penalty. A late-payment penalty applies only to the overdue amount.
• NBFC-MFI: at least 60% of total assets (net of intangibles) must be microfinance loans.
• Other NBFCs: microfinance loans may be at most 25% of total assets.
• Recovery conduct: no threatening or abusive language, no calls outside 9 a.m.-6 p.m., no harassing relatives, and no publishing borrowers' names.

	SHG	JLG	Grameen
Size	10-20	4-10	Small groups
Savings first?	Yes	No	Yes
Loan to	The group	Individuals, mutually guaranteed	Individuals in groups
Collateral substitute	Group liability	Joint liability	Peer pressure

9. Critiques

• Class 11: "borrowings are mainly confined to consumption purposes". Loans often do not fund productive activity.
• Over-indebtedness: one household borrows from several lenders (SHG, JLG, MFI) at the same time. The 50% repayment cap exists to prevent this [4].
• Coercive recovery: this was the trigger for the 2010 AP crisis [6].
• Stress cycle in 2024-25: rising microfinance defaults (scaffold point; not checked against an external source).
• Uneven coverage: SHG-BLP is strongest in the southern states. Many groups stay at the stage of small loans and do not grow into enterprises.

Prelims Hooks

• SHG size: 15-20 (NCERT Class 10) vs 10-20 (DAY-NRLM). Special groups can have 5 members [5]. JLG = 4-10 members, and they do not save first.
• SHG-BLP started as a NABARD pilot of 500 groups in 1992. The sequence is SGSY (1999) → NRLM "Aajeevika" (2011) → DAY-NRLM (2016).
• RBI microfinance loan = collateral-free loan to a household with annual income up to ₹3 lakh [4]. Trap: the limit is per household, not per individual.
• The 50% cap covers all of a household's loan repayments, not only microfinance loans [4].
• Malegam Committee (2011) → created the NBFC-MFI category. It followed the 2010 Andhra Pradesh crisis [6].
• NBFC-MFI: at least 60% of assets in microfinance loans. Other NBFCs: at most 25% [4].
• Panchasutra = regular meetings, regular savings, internal lending, timely repayment, proper accounts [5].
• Women SHGs: 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". Grameen Bank = Bangladesh, Yunus, a bank from 1983, Nobel Peace Prize 2006.

Mains Points

• Social collateral vs physical collateral: group liability and peer pressure let banks lend to asset-less women. This moves the poor from moneylenders to formal credit and builds women's agency. SHGs thus combine financial inclusion with women's empowerment (GS-III inclusive growth; GS-I/II women's issues).
• Growth vs over-indebtedness: easy multiple borrowing caused the 2010 AP crisis and later stress cycles. RBI's 2022 shift was deliberate:
• from an interest-rate cap on MFIs only
• to a household-level 50% repayment cap covering all lenders, board-set pricing and conduct rules for recovery [4][6].

• Use this to discuss regulation that protects borrowers without choking credit supply.

• Consumption vs production: NCERT notes that SHG loans often fund consumption. DAY-NRLM's Lakhpati Didi push aims to turn credit into livelihoods: 1.48 crore achieved against a 3 crore target (June 2025) [2][3]. The link to markets, skills and value chains is the missing piece.

• Models compared: SHG (savings-led, the group decides), JLG (credit-led, individual loans) and Grameen (individual loans within groups). An answer can argue that savings-first models build discipline, while credit-first models grow faster but carry more risk.