Self-Help Groups

A Self-Help Group (SHG) is a small, informal group of 10-20 individuals from similar socio-economic backgrounds who come together to solve their common problems through self-help and mutual help. The SHG movement is a powerful tool for financial inclusion, poverty alleviation, and women’s empowerment in India.

Key Features of a Self-Help Group

  • Group Size: Typically 10 to 20 members.
  • Membership: Usually homogeneous, with members from a similar background (e.g., all women from the same village).
  • Democratic Functioning: The group elects its own leaders and functions in a democratic manner.
  • Regular Meetings: Members meet regularly (usually weekly or fortnightly) to discuss issues and collect savings.

The ‘Panchasutra’ (Five Principles) of SHGs

For an SHG to be considered healthy and well-functioning, it must follow five key principles, known as the Panchasutra:

  1. Regular Meetings
  2. Regular Savings
  3. Regular Internal Lending (loaning money among members from their pooled savings)
  4. Regular Repayment
  5. Maintaining Proper Books of Accounts

The SHG – Bank Linkage Programme

This is the program that connects SHGs to the formal banking system, pioneered by NABARD.

How it Works: The Process

  1. Group Formation and Nurturing: An NGO or a government agency helps form and guide the SHG for the first few months.
  2. Internal Lending: The group starts by pooling their own small savings and using this money to give small, internal loans to its members. This builds financial discipline.
  3. Opening a Bank Account: After functioning well for about 6 months, the SHG opens a savings bank account in its own name.
  4. Accessing Bank Loans: Once the bank is satisfied with the group’s performance (based on the Panchasutra), it provides a loan directly to the SHG as a single unit. This is called “credit linkage.”
  5. On-Lending to Members: The SHG then on-lends this money to its members for various income-generating activities, such as buying a sewing machine, a cow, or starting a small shop.
  6. Collective Responsibility: The entire group is collectively responsible for repaying the loan to the bank. This peer pressure ensures very high repayment rates.

Role of Banks and NABARD

  • Banks:
    • Open savings accounts for SHGs.
    • Provide loans (credit linkage) to well-functioning SHGs.
    • Lending to SHGs is considered a Priority Sector Advance under the Weaker Sections category.
  • NABARD (National Bank for Agriculture and Rural Development):
    • Is the pioneer and promoter of the SHG-Bank Linkage Programme.
    • Provides refinance to banks for their lending to SHGs.
    • Provides training and capacity-building support to SHGs and NGOs.

Summary

Self-Help Groups are small, voluntary groups (10-20 members) that use pooled savings and peer pressure to provide financial services to their members. The cornerstone of the SHG movement is the SHG-Bank Linkage Programme, which allows mature SHGs to access larger loans from banks without any collateral. Banks lend to the group as a single entity, and the group’s collective responsibility ensures high repayment rates. This model, promoted by NABARD, has been incredibly successful in promoting financial inclusion, empowering rural women, and alleviating poverty.

Quick Revision Points

  • SHG: A small group of 10-20 members.
  • Panchasutra: The five principles of a healthy SHG (meetings, savings, internal lending, repayment, bookkeeping).
  • SHG-Bank Linkage: The process of connecting SHGs with banks for credit.
  • No Collateral: Bank loans to SHGs are not backed by any collateral.
  • Collective Responsibility: Peer pressure within the group ensures loan repayment.
  • Priority Sector: Lending to SHGs is a part of Priority Sector lending.
  • Promoting Agency: NABARD is the main promoting and refinancing agency for the SHG movement in India.