Self-help groups and microfinance

In short

A self-help group (SHG) is a small, voluntary, homogeneous group - typically 10-20 poor women from one habitation - that saves regularly, pools the savings, lends to its own members by group decision, and later borrows from a bank against that record. Microfinance is the wider supply of small collateral-free loans, savings, insurance and remittance services to low-income households that formal banks once treated as unbankable. For Home Science / Community Science extension, SHGs are the standard delivery channel for nutrition, health, home-based enterprise and women's empowerment work, and the subject is examined in extension-education papers, UGC-NET Home Science, and interviews for NRLM/State Rural Livelihoods Mission, NABARD, Kudumbashree, KVK, NGO and CSR livelihood posts. The core regulatory anchor today is the RBI Master Direction - Regulation of Microfinance Loans, 2022, and the main programme anchor is DAY-NRLM (Deendayal Antyodaya Yojana - National Rural Livelihoods Mission).

Explained

Concept, features and the SHG principles

• Definition: a self-managed, affinity-based group of poor people (usually women) that mobilises thrift, lends internally at a rate it fixes itself, and functions by consensus with written rules.
• Size: 10-20 members (minimum 5 in difficult terrain, hills or for persons with disabilities, under DAY-NRLM norms); one member per household; a group above 20 members would need registration as a society/cooperative.
• Homogeneity and affinity: similar economic status and a single neighbourhood, so peer knowledge substitutes for collateral and documentation.
• Panchasutra (the five disciplines): regular meetings, regular savings, regular internal lending, regular repayment, and up-to-date books of account. Groups are graded on these before bank linkage.
• Legal status: an SHG is an unregistered association of persons; it operates on a bye-law and a bank savings account opened in the group's name with 2-3 authorised signatories. Federations are registered - commonly under the Societies Registration Act, 1860, a state cooperative societies Act, the Multi-State Co-operative Societies Act, 2002, a public trust Act, or as a producer company under the Companies Act, 2013.
• Office-bearers: president, secretary, treasurer, rotated to spread capability; records kept are minutes book, savings and loan ledgers, cash book, individual passbooks, attendance register.
• Three-tier architecture under DAY-NRLM: SHG at habitation level → Village Organisation (VO) at village level → Cluster Level Federation (CLF) at cluster/block level, each a legal body handling bulk funds and auditing the tier below.

Microfinance: definition, models and institutions

• Microfinance is financial services - credit, savings, micro-insurance, micro-pension, remittances - in very small amounts, without conventional collateral, to low-income households, usually with doorstep delivery and frequent (weekly/fortnightly/monthly) repayment.
• RBI's 2022 definition of a microfinance loan: a collateral-free loan given to a household with annual income up to ₹3,00,000 (rural and urban alike), where "household" means husband, wife, unmarried children.
• Delivery models in India:
• SHG-Bank Linkage Programme (SBLP) - savings-led, launched by NABARD as a pilot in 1992 after MYRADA's credit-management-group experiments of the mid-1980s; the world's largest microfinance programme by outreach.
• Grameen / JLG model - credit-led, adapted from Bangladesh's Grameen Bank (Muhammad Yunus, 1983); a Joint Liability Group of 4-10 members gives mutual guarantee for individual loans, used by almost all NBFC-MFIs.
• Individual lending by banks, small finance banks and NBFCs with cash-flow assessment.
• Cooperative and mutually-aided societies, thrift-and-credit cooperatives, Self-Reliant Cooperatives.
• Business correspondent (BC) model - bank sakhi / BC sakhi at the doorstep, including SHG members acting as BC agents.
• Three NABARD SBLP linkage models: Model I - bank forms and finances the SHG directly; Model II - an NGO/SHPI promotes, bank finances (the commonest); Model III - bank lends to an NGO/MFI which on-lends to groups.
• Institutional players: commercial and regional rural banks, cooperative banks, NBFC-MFIs, small finance banks (a licence category from 2015-16; several, such as Ujjivan and Equitas, grew out of MFIs, and Bandhan became a universal bank), Section 8 not-for-profit MFIs, NABARD (refinance, SHPI grants, promotion), SIDBI (MFI lending through SIDBI Foundation for Micro Credit), and MUDRA (refinance; Shishu up to ₹50,000, Kishore ₹50,000-₹5 lakh, Tarun ₹5-10 lakh, with a higher Tarun Plus slab announced for repeat borrowers - check the current circular for the limit).

How an SHG is formed and financed - step by step

1. Situation analysis and rapport: the promoting institution (SHPI - NGO, bank, mission staff, community resource person) identifies the poorest habitations using Participatory Identification of Poor (PIP), not a mere BPL list.
2. Group formation: affinity-based meetings, agreement on savings amount, meeting day, interest rate, penalties; bye-laws written; office-bearers chosen.
3. Savings and internal lending: fixed thrift every meeting (commonly ₹20-₹100 per member per week or month) pooled as the group corpus; loans given from it for consumption, health, education, then production, at a group-decided rate (often 1-2% per month on reducing balance).
4. Bank account and grading: after about 3-6 months of regular functioning the group opens a savings account; after about 6 months it is graded on the panchasutra (attendance, savings regularity, recovery, book-keeping, meeting quality).
5. Programme funds (DAY-NRLM): Revolving Fund (RF) of roughly ₹10,000-₹15,000 once per eligible SHG as corpus support, Community Investment Fund (CIF) routed through the VO/CLF for livelihood plans, and a start-up/vulnerability-reduction fund - amounts are revised by the mission, so quote the current framework note.
6. Credit linkage: the bank sanctions a cash credit limit (CCL) for 3-5 years, drawn and repaid repeatedly, sized on the group's Micro-Credit Plan / Micro-Investment Plan built up from members' own plans.
7. Loan multiples: the traditional savings-to-credit ratio is 1:1 to 1:4, rising with grade and repayment history; under the DAY-NRLM framework banks are advised to sanction limits well above corpus multiples for mature groups, and RBI has prescribed collateral-free, no-lien lending for SHG loans up to a specified ceiling (₹10 lakh under the DAY-NRLM circulars, with a higher slab up to ₹20 lakh where savings may be taken as security - the ceilings have been revised more than once, so verify the latest RBI/NRLM circular).
8. Livelihood and institution-building layer: skill training, producer groups, Farmer Producer Organisations, community cadres - krishi sakhi, pashu sakhi, bank sakhi, drone didi - and the Lakhpati Didi goal of household income above ₹1 lakh a year, with a national target of 3 crore Lakhpati Didis.

Regulation, pricing and client protection

• RBI Master Direction - Regulation of Microfinance Loans, 2022 (effective 1 April 2022) applies activity-wise to all regulated lenders - banks, SFBs, NBFC-MFIs, other NBFCs:
• microfinance loans must be collateral-free, with no prepayment penalty and no security deposit/margin;
• repayment capacity rule: total monthly repayment obligations of a household (all loans) must not exceed 50% of monthly household income; each lender must have a board-approved household-income assessment policy and report to all credit information companies;
• interest-rate ceilings were withdrawn - pricing is by a board-approved policy with an all-inclusive APR disclosed in a one-page Key Fact Statement in a language the borrower understands; rates must not be usurious and are supervised by RBI;
• borrower choice of weekly/fortnightly/monthly repayment; recovery only at a designated place (or the borrower's choice), no visits at odd hours, no coercion, no recovery from a bereaved family without due process;
• NBFC-MFI remains a licence category: microfinance loans must be at least 75% of total assets (the earlier norm was 85% of net assets as "qualifying assets").
• History of regulation: the Andhra Pradesh microfinance crisis of 2010 (over-lending, multiple lending, coercive recovery, the AP MFI Ordinance/Act) triggered the Malegam Committee (2011), the creation of the NBFC-MFI category (2011-12), margin and interest caps (removed in 2022), the self-regulatory organisations Sa-Dhan and MFIN with their codes of conduct, and mandatory credit-bureau reporting. The Micro Finance Institutions (Development and Regulation) Bill, 2012 lapsed; state Money Lenders Acts still apply to unregulated lenders.
• Other relevant law and practice: interest on loans is an exempt financial service under GST (GST slabs are 5%/18%/40% since 22 September 2025, relevant to the products SHG enterprises sell); income-tax exemptions for cooperative/producer entities are now under the Income-tax Act, 2025 (in force from 1 April 2026), which renumbered all sections - cite the provision by name unless the new number is verified; VB-G RAM G (which replaced MGNREGA from 1 July 2026, 125 days) wage work is commonly combined with SHG livelihoods.
• Deposits: an SHG or MFI may not collect public deposits; only savings of its own members are pooled. Accepting deposits from non-members is illegal.

State missions, outreach and what SHGs deliver in Home Science work

• DAY-NRLM / State Rural Livelihoods Missions (Aajeevika), with well-known state models: Kudumbashree (Kerala, 1998 - neighbourhood groups, ADS, CDS under local government), Jeevika (Bihar), Mission Shakti (Odisha), SERP (Andhra/Telangana), MAVIM (Maharashtra), TNCDW (Tamil Nadu); the urban counterpart is DAY-NULM. Earlier programmes: IRDP, DWCRA, Mahila Samakhya (1989), SGSY (1999, restructured into NRLM in 2011).
• Outreach (NABARD's annual Status of Microfinance in India): roughly 1.4 crore+ SHGs are savings-linked with banks, with savings in the region of ₹60,000-₹70,000 crore and credit outstanding of about ₹2.5 lakh crore with around 80 lakh credit-linked groups; DAY-NRLM reports mobilisation of about 10 crore women into roughly 90 lakh SHGs. These figures move every year - always quote the latest NABARD report and the mission dashboard rather than a remembered number.
• Digitisation: NABARD's E-Shakti project (from 2015) digitised SHG books to make groups bank-ready; state SHG MIS and e-book-keeping by cadre book-keepers now carry this forward; payments through the group's bank account, UPI and BC points.
• Home Science / Community Science applications: nutrition and POSHAN campaigns through SHG platforms, Village Health Sanitation and Nutrition Committees, supplementary-nutrition production units and Take-Home Ration manufacture by SHGs/mahila mandals under ICDS, Didi ki Rasoi and mid-day-meal kitchens, kitchen gardens and nutri-gardens, food processing micro-enterprises (PMFME scheme support), tailoring and garment units, millet and bakery units, handloom and craft groups, sanitary-napkin and soap units, and the SHG platform for behaviour-change messaging on handwashing, breastfeeding, anaemia and early childhood care.
• Measured gains and limits: documented increases in savings habit, access to credit at far below moneylender rates, reduced distress borrowing, mobility and bargaining power, and participation in local government; weaker results where groups are formed only to disburse a subsidy.

Advantages, limitations and comparisons

• Advantages: collateral-free access; peer appraisal and peer pressure give repayment rates typically above 95%; doorstep, small-ticket, flexible loans; savings mobilised locally; very low transaction cost for the bank (one account instead of twenty); a ready-made platform for extension, health, nutrition and literacy work; women's control over money and a route into local governance.
• Limitations: elite capture and dominance by a few literate members; drop-outs and defunct groups; over-dependence on the promoting agency; weak book-keeping; multiple lending and over-indebtedness when MFIs and SHG loans stack up; loans diverted to consumption or to repay old debt; subsidy-chasing groups that collapse once funds stop; tiny enterprises crowded into the same low-margin activities (tailoring, pickles, candles) with no market linkage; lending often controlled in practice by male household members; ceilings on loan size that cannot fund a real enterprise.
• SHG versus JLG versus moneylender:

Key points

• SHG - 10-20 poor people, usually women, one per household, saving and lending among themselves by consensus.
• Panchasutra - regular meetings, savings, internal lending, repayment and book-keeping; the basis of grading.
• SHPI - self-help promoting institution (NGO, bank, mission, community resource person) that forms and nurtures groups.
• SBLP - NABARD's SHG-Bank Linkage Programme, pilot in 1992; Models I, II and III by who promotes and who lends.
• Three-tier NRLM structure - SHG → Village Organisation → Cluster Level Federation.
• Revolving Fund and Community Investment Fund - one-time corpus support and livelihood capital under DAY-NRLM.
• Cash credit limit - the preferred SHG credit product; drawn and repaid repeatedly over 3-5 years.
• Micro-credit plan - members' individual credit needs aggregated into the group's loan proposal.
• RBI Master Direction, 2022 - microfinance loan = collateral-free loan to a household with annual income up to ₹3 lakh.
• 50% rule - all loan repayments of a household must stay within half its monthly income.
• APR and Key Fact Statement - all-inclusive annual rate, disclosed on one page; interest-rate caps were removed in 2022.
• NBFC-MFI - NBFC with at least 75% of total assets as microfinance loans.
• AP crisis 2010 and Malegam Committee 2011 - the origin of today's client-protection and pricing rules.
• Grameen Bank / JLG - credit-led model with joint liability, 4-10 members, weekly repayment.
• Interest subvention (DAY-NRLM) - SHG pays 7% p.a. with an extra 3% rebate for prompt repayment in notified districts; terms are notified yearly.
• Lakhpati Didi - SHG household earning above ₹1 lakh a year; national target 3 crore.
• Kudumbashree - Kerala's SHG network linked to local government through NHG-ADS-CDS, a standard Home Science case study.
• Common failure modes - elite capture, drop-outs, multiple lending, subsidy-driven formation, no market for the product.

Formulas and examples

Example 1 - corpus and bank eligibility. An SHG of 15 members saves ₹100 per member per month for 24 months. It has earned ₹6,400 as interest on internal loans and received a Revolving Fund of ₹25,000.

• Member savings = 15 × 100 × 24 = ₹36,000
• Corpus = 36,000 + 6,400 + 25,000 = ₹67,400
• At a 1:4 savings-multiple the bank's cash credit limit = 67,400 × 4 = ₹2,69,600 (sanctioned, say, as a ₹2,70,000 CCL).

Example 2 - internal lending income. From a corpus of ₹60,000 the group lends ₹50,000 to members at 2% per month on the reducing balance, recovered in 10 equal monthly principal instalments of ₹5,000 with interest on the opening balance.

• Interest = 2% × (50,000 + 45,000 + 40,000 + … + 5,000) = 0.02 × 275,000 = ₹5,500 for the 10 months.
• Average outstanding = 275,000 ÷ 10 = ₹27,500, so the group earned 5,500 ÷ 27,500 = 20% in 10 months (24% p.a.) on the money actually lent, which stays inside the group and is shared or retained.

Example 3 - flat versus reducing rate (the commonest exam trap). A loan of ₹10,000 for 12 monthly instalments.

• At 12% flat: interest = 10,000 × 0.12 × 1 = ₹1,200; total ₹11,200; instalment = 11,200 ÷ 12 = ₹933.33. Effective rate ≈ 2 × 12 × 1,200 ÷ (10,000 × 13) = 28,800 ÷ 130,000 = 22.2% p.a.
• At 12% on monthly reducing balance: i = 0.01, n = 12, (1.01)¹² = 1.12683; EMI = 10,000 × 0.01 × 1.12683 ÷ 0.12683 = ₹888.49; total paid ₹10,661.88, interest ₹661.88.
• The same quoted "12%" costs ₹1,200 one way and ₹662 the other - which is why RBI requires the all-inclusive APR in the Key Fact Statement.

Example 4 - interest subvention under DAY-NRLM. A graded SHG in a notified (Category I) district takes ₹3,00,000 for one year; the bank's own rate is 11% p.a.

• SHG pays at 7%: interest = 3,00,000 × 0.07 = ₹21,000; the bank receives 4% (₹12,000) as subvention.
• For prompt repayment the SHG gets an additional 3% back = 3,00,000 × 0.03 = ₹9,000, credited to its account.
• Net cost = 21,000 − 9,000 = ₹12,000, i.e. 4% p.a. (Subvention rates, district categories and the window are notified each year - check the current circular.)

Example 5 - RBI repayment-capacity test. A household's annual income is ₹2,40,000 (₹20,000 a month). It already repays ₹4,000 a month on an old loan.

• Permitted total monthly outgo = 50% × 20,000 = ₹10,000; headroom = 10,000 − 4,000 = ₹6,000 a month.
• A proposed loan of ₹1,00,000 at 24% p.a. reducing over 24 months: i = 0.02, n = 24, (1.02)²⁴ = 1.60844; EMI = 1,00,000 × 0.02 × 1.60844 ÷ 0.60844 = ₹5,287.
• ₹5,287 < ₹6,000, so the loan is permissible; a 12-month tenure (EMI ₹9,456) would breach the rule. Note also the ₹3,00,000 household-income ceiling for a loan to count as microfinance - this household qualifies.

Example 6 - quality indicators. A CLF's 120 SHGs had 2,880 instalments due in a quarter; 2,765 were paid on time. Of a ₹1.80 crore portfolio, ₹7.2 lakh of principal is overdue beyond 30 days. Membership averaged 1,500 and 90 members left.

• On-time repayment rate = 2,765 ÷ 2,880 × 100 = 96.0%
• PAR 30 = 7,20,000 ÷ 1,80,00,000 × 100 = 4.0%
• Drop-out rate = 90 ÷ 1,500 × 100 = 6.0%

Where it is used

• Rural livelihood missions: DAY-NRLM/SRLM posts - block/cluster coordinator, livelihoods specialist, social inclusion and gender officer, Lakhpati Didi and farm-livelihood roles; Kudumbashree, Jeevika, Mission Shakti, MAVIM, SERP.
• Banking and microfinance: RRBs and commercial banks (SHG linkage and agri-MSME desks), small finance banks, NBFC-MFIs (field officer, branch manager, credit, audit and client-protection roles), NABARD and SIDBI project and refinance roles, business correspondent networks.
• ICDS, health and nutrition programmes: SHG-run supplementary-nutrition and take-home-ration units, Didi ki Rasoi and mid-day-meal kitchens, POSHAN and anaemia campaigns using SHG meetings as the platform, VHSNC work.
• Home-based and micro-enterprise promotion: food processing (PMFME), bakery, millet and spice units, tailoring and garments, handloom and handicraft, sanitary napkin, soap and detergent units; FPOs and producer companies marketing through state brands and e-commerce.
• NGOs, CSR and development consultancies: MYRADA, PRADAN, SEWA, BAIF, Dhan Foundation and corporate CSR livelihood programmes; monitoring and evaluation, impact assessment and social audit assignments.
• Teaching, research and extension: KVK and university extension units, UGC-NET/SET Home Science and rural development syllabi, ICSSR/NABARD-funded studies on SHG impact, dissertation fieldwork on group dynamics and women's empowerment.

Interview questions

• Q: Why are SHG loans given without collateral? A: Group affinity and joint social pressure substitute for security - members know each other's capacity, and continued access to credit for the whole group depends on each member repaying, which keeps recovery above 95%.
• Q: What is the panchasutra of an SHG? A: Regular meetings, regular savings, regular internal lending, regular repayment and up-to-date books of account - the five norms on which a group is graded before bank linkage.
• Q: Difference between an SHG and a joint liability group? A: An SHG saves first and borrows as a group that on-lends to members by its own decision; a JLG of 4-10 members is formed mainly to guarantee individual MFI loans on a fixed repayment schedule, with no savings function.
• Q: How does RBI define a microfinance loan today? A: Under the Master Direction - Regulation of Microfinance Loans, 2022, it is a collateral-free loan to a household with annual income up to ₹3 lakh, with no prepayment penalty and total household repayments capped at 50% of monthly household income.
• Q: Are microfinance interest rates capped? A: No - the margin and rate caps were withdrawn in 2022; each lender fixes rates under a board-approved policy, must disclose an all-inclusive APR in a Key Fact Statement, and RBI supervises against usurious pricing.
• Q: Why is a "12% flat" loan more expensive than "12% reducing"? A: Flat interest is charged on the original principal throughout even as the borrower repays it, so the effective rate is roughly double - about 22% for a 12-instalment loan.
• Q: What caused the 2010 Andhra Pradesh microfinance crisis and what changed after it? A: Aggressive multiple lending, over-indebtedness and coercive recovery led to mass default and state legislation; the Malegam Committee (2011) prompted the NBFC-MFI category, pricing and client-protection norms, credit-bureau reporting and industry codes of conduct.
• Q: What are the three tiers of community institutions under DAY-NRLM? A: SHG at habitation level, Village Organisation at village level and Cluster Level Federation at cluster level, with the federations handling bulk funds, audit and livelihood services.
• Q: What is a Lakhpati Didi? A: An SHG member whose household earns over ₹1 lakh a year from diversified livelihoods; the national target is 3 crore such members.
• Q: Why does DAY-NRLM insist on women-only groups? A: Women spend a larger share of income on food, health and schooling, repay more reliably, and gain mobility, voice and household bargaining power - but programme design still has to prevent male relatives capturing the loan.
• Q: An SHG's loan is used to repay a moneylender. Is that a failure? A: Partly - debt swapping at a far lower rate genuinely raises household income, but if no asset or enterprise follows, the group gains no repayment capacity and the next cycle is at risk; mature groups should move towards production credit.
• Q: How would you judge whether an SHG is healthy before recommending a loan? A: Check attendance and minutes, savings regularity, internal lending turnover and recovery, book-keeping quality, bank-account transactions, drop-out rate and whether decisions are made collectively rather than by one dominant member.

Common mistakes

• Treating microfinance as only credit - savings, insurance, remittance and pension services are part of the definition, and in the SHG model savings come first.
• Quoting withdrawn rules as current: the 26%/margin caps and the 85%-of-net-assets qualifying-asset norm were replaced by the 2022 Master Direction (75% of total assets, no rate ceiling).
• Confusing flat and reducing-balance interest, or quoting a monthly rate as if it were annual (2% a month is 24% a year).
• Memorising one year's outreach figures - SHG counts, savings and credit outstanding change annually in NABARD's Status of Microfinance report; name the source and year.
• Mixing up the SHG model with the Grameen model, or crediting SBLP to 1983 - Grameen Bank is 1983 Bangladesh, NABARD's SBLP pilot is 1992 India.
• Writing that an SHG is a registered body, or that it may accept deposits from non-members - it is an unregistered association; only federations are registered.
• Reporting an SHG programme as successful on savings and credit numbers alone, with no evidence on income, assets, drop-outs or who in the household actually controlled the loan.

Related topics

Agricultural extension · Communication for development and behaviour change · Women's empowerment and gender in development · Entrepreneurship development and micro-enterprise management · Rural development programmes and schemes · Community nutrition and ICDS.