Sambasiva Rao Aluru
Role of NABARD in Strengthening SHGs
Tata In sti tute
Vol ume 71, Is sue 1
So cial Sci ences
Jan u ary 2010
Role of NABARD in Strengthening SHGs
Current Issues and Future Concerns
The SHG–Bank Linkage Programme has been heralded as one of the largest
microfinance programmes in the world. This article presents the evolution of the
concept, the efforts of NABARD in grounding the programme, and also the impact of
the programme as revealed in studies conducted by NABARD. The last section of this
article discusses the major challenges faced by the programme. The article ends with
a note that the SHG movement involves poor people across the country and
interference with the design of the SHG movement has the potential to vitiate the
credit culture and affect the relationship of SHGs with the banking structure.
Mr. Sambasiva Rao Aluru is Chief General Manager, NABARD, Andhra Pradesh
Regional Office, Hyderabad, Andhra Pradesh.

The SHG–Bank Link age Programme (SBLP) launched by the Na tional
Bank of Ag ri cul ture and Rural De vel op ment (NABARD) in 1992. One of
the larg est microfinance mod els in the coun try, it was first launched as a
pilot pro ject to link 500 SHGs1 with banks. Today, the SBLP has come a
long way, pass
ing through var
i ous stages: the pilot (1992–1995),
mainstreaming (1995–1998), and ex pan sion (1998 on wards) phases. It has
emerged as the larg
est non-di
rected microsavings and microcredit
programme in the de vel op ing world en abling around 410 lakh poor house -
holds to gain ac cess to microfinance from the for mal bank ing sys tem as of
March 31, 2007. The SBLP has re ceived strong pub lic pol icy sup port from

8 Sambasiva Rao Aluru
both the Gov ern ment of India (GoI) and the Re serve Bank of India (RBI).
While NABARD pro vided a lead er ship role, NGOs played a cat a lytic and
en abling role at the grass roots level in group for ma tion, nur tur ing, ca pac -
ity-build ing and en hanc ing credit ab sorp tion ca pac i ties of SHGs.
The SBLP is built on the peo ple’s own re sources sup ple mented by the
ex ist ing bank ing in fra struc ture, ob vi at ing the need for the cre ation of a
new in sti tu tional set-up. The con cep tual think ing be hind the SHG ini tia -
tive is: (i) self -help sup ple mented by mu tual help can be a pow er ful ve hi -
cle in the so cio eco nomic trans for ma tion of the poor; (ii) the poor can save
and are bank able; and (iii) the col lec tive wis dom of the poor and peer pres -
sure are valu able col lat eral sub sti tutes.
The de sign fea ture of the SBLP in volves iden ti fi ca tion, for ma tion and
nur tur ing of SHGs ei ther by NGOs, other de vel op ment agen cies or banks;
hand-hold ing; and ini tial pe riod of in cul ca tion of the habit of thrift fol -
lowed by col lat eral-free credit from the bank in pro por tion to the group’s
sav ings. The de ci sions to bor row, lend in ter nally and fix the rate of in ter est
are left to the dis cre tion of group mem bers. Thus, the de sign is built on
com bin ing the col lec tive wis dom of the poor, the or gani sa tional ca pa bil i -
ties of the so cial in ter me di ary and the fi nan cial strength of the Banks.
The SBLP has changed the at ti tude of the bank ing sys tem — that the
poor are not bank able and that com mer cial prin ci ples can not be ap plied in
lend ing to the poor. Banks have real ised that lend ing to the poor can also be
a vi a ble ac tiv ity apart from ful fill ing their so cial ob li ga tion (Thorat, 2005).
As of now, the SBLP has out grown its ini tial ob jec tive of pro vid ing sup -
ple men tary credit strat e gies for meet ing the credit needs of the poor and
has emerged as a tool for the em pow er ment of rural women.
This ar ti cle first traces the role of NABARD in the evo lu tion of the
SBLP. It then cov ers some of the major ini tia tives taken by NABARD and
fol lows it up with a look at the im pact of the SBLP. The ar ti cle con cludes
with the cur rent is sues and fu ture con cerns re gard ing the Programme.
Stud ies con ducted by the NABARD in the mid-eight ies brought out the
sim ple fact that the most im por tant and im me di ate bank ing needs of poor
house holds, in the order of pri or ity, are:
Opportunities to keep safe their occasional small surpluses for a
period convenient to them.
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 9
The credit needs of the rural poor are characterised by the absence
of any clear distinction between production and consumption
purposes, but have a strong bearing on productivity. The needs are
small, but often arise at unpredictable times and are usually of an
emergent nature. Their credit needs are ‘lifecycle’ events like
marriage, celebration of festivals, funeral expenditure, and so on.
They also need money to deal with ‘personal’ emergencies like
illness, accidents and ‘natural disasters’ like floods, cyclones, and
fires, among others.
Hassle-free access to financial services and products, including loans
for income-generating activities.
Viewed against such a de mand, there were se ri ous lim i ta tions on the sup ply
side as the ex ist ing bank ing sys tems, and its pro ce dures of de posit and loan
prod ucts were largely meant for a dif fer ent type of cus tomer seg ment, and
were not well-suited to meet the most im me di ate needs of the poor. Banks also
found it dif fi cult to meet the sav ings and credit needs of the poor due to the
high trans ac tion cost to be in curred on a large num ber of small ac counts. Fur -
ther, the poor do not have any col lat eral to offer as se cu rity to banks. Most im -
por tantly, meet ing the credit needs of the poor quickly, as and when they arise,
is cru cial to re duce their de pend ence on in for mal credit agents.
Keep ing these as pects in view, al ter na tive pol i cies, sys tems and pro ce -
dures, sav ings and loan prod ucts began to be ex plored to meet the re quire -
ments of poor rural house holds. It was found that the poor tended to — and
could be in duced to — come to gether in a va ri ety of in for mal ways for
pool ing their sav ings and dis pens ing small and un se cured loans at vary ing
costs to group mem bers on the basis of need. The ad van tages of a group ap -
proach are that the tasks are best car ried out by small groups as they allow
ac tive par tic i pa tion and con tri bu tion of the mem bers as the in ter ac tions
take place face-to-face. Ac cord ing to group be hav iour the ory, peo ple come
to gether and func tion as a group if they are or gan ised for a pur pose, which
fur thers their com mon in ter est.
The NABARD re cog nised the im por tance of this em pir i cal ev i dence
and, in the late eight ies, ini ti ated a few ac tion re search pro jects on groups
as a chan nel for de liv ery of microfinance. In 1987, NABARD pro vided a
grant sup port of Ru pees 10 lakh to the My sore Re set tle ment and De vel -
op ment Agency to pro mote Credit Man age ment Groups to ex per i ment
with the ‘group-ap proach’ for meet ing the fi nan cial needs of the rural
poor. This is the be gin ning of the story of the SBLP in India.
IJSW, 71(1), 7–26, January 2010

10 Sambasiva Rao Aluru
Based on the pos i tive and en cour ag ing find ings of the ac tion re search pro -
jects, NABARD, in con sul ta tion with the RBI, ini ti ated a pilot pro ject in
1992 to link 500 SHGs with banks. The ob jec tive of this link age was to
evolve sup ple men tary credit strat e gies for meet ing the credit needs of the
poor by com bin ing flex i bil ity, sen si tiv ity and re spon sive ness of the in for -
mal credit sys tem with the strengths of tech ni cal and ad min is tra tive ca pa -
bil i ties, and fi nan cial re sources of the for mal credit in sti tu tions.
This pilot pro ject was de signed as a part ner ship model be tween three
agen cies — the SHGs, banks, and the NGOs. The SHGs were to fa cil i tate
col lec tive de ci sion-mak ing by the poor and pro vide ‘door step bank ing’;
banks — as whole sal ers of credit — were to pro vide the re sources; and
NGOs were to act as agen cies to or gan ise the poor, build their ca pac i ties
and fa cil i tate the pro cess of em pow er ing them. The pro cess under the
SHG–bank link age is sim ple, as ex plained in Box 1.
The members of SHGs make voluntary thrift on a regular basis and use the
pooled resources to make small interest-bearing loans to their members on the
terms decided by the group. The process helps them to imbibe the essentials of
financial intermediation, including prioritisation of needs, setting terms and
conditions, and account-keeping. This gradually builds financial discipline and
credit history for themselves, as the money involved in lending operations is
their own hard earned money saved over time with great difficulty. This is
‘warm money’. They also learn to handle resources of a size that is much
beyond their individual capacities.
The SHG members begin to appreciate that resources are limited and have a
cost. Once the groups show this mature financial behaviour, banks are
encouraged to make loans to the SHG in certain multiples of the accumulated
savings of the SHGs. The bank loans are given without any collateral and at
market interest rates. Banks find it easier to lend money to groups as its
members have developed a credit history. ‘Cold (outside) money’ gets added to
the own ‘warm money’ in the hands of the group and becomes its ‘common
fund’. The groups enforce credit discipline among the members. The members
have experienced the benefits of credit discipline by being able to save and
borrow regularly without many hassles. The groups continue to decide the
terms of loans to their own members. The peer pressure ensures timely
repayments and replaces the ‘collateral’ for the bank loans.
Source: Kropp and Suran (2002:vii)
In the ini tial phases, it was a mod est be gin ning. Dur ing 1992–1993, 255
SHGs; in 1993–1994, 620 SHGs; and dur ing 1994–1995, 2,122 SHGs
were brought under the fold of the SBLP. The growth of the link age model
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 11
gath ered mo men tum once the RBI, in 1996, clas si fied the loan under SHG
as a main stream ac tiv ity of banks under their pri or ity sec tor lend ing.
In the de cade that fol lowed (1998–2007), the SHGs linked with banks
grew at a CAGR of 113.17%. Fam
lies that were as
sisted grew by
108.38%. The av er age loan per SHG in creased by more than two times,
grow ing at an an nual com pound growth rate of around 15.79% (Table 1).
Growth Indicators of SBLP
CAGR (%)
Number of SHGs Linked
Number of Families Assisted (lakhs)
Bank Loan (in lakh Rupees)
Refinance Assistance (in Lakh Rupees)
Average Loan Size per SHG (Rupees)
Number of Participating Banks
Source: NABARD Annual Reports.
The mis sion of NABARD was to form and as sist, by the end of the 11th
Five Year Plan (2011–2012), 40 lakh SHGs cov er ing about 5.6 crore fam i -
lies under the SBLP.
Promotion and Nurturing of SHGs
The for ma tion and nur tur ing of SHGs re quires a self-help pro mot ing in sti -
tu tion (SHPI). The NABARD has been sanc tion ing fi nan cial as sis tance by
way of grants to NGOs for the pro mo tion and credit link age of SHGs. In
ad di tion, ser vices of NGOs are also uti lised for ca pac ity build ing of SHGs
and other stake holders. Ser vices of in di vid ual rural vol un teers like re tired
and ac tive school teach ers, post mas ters, vil lage el ders, anganwadi work -
ers, mem bers of ex ist ing SHGs, and so on, are also used in the SBLP by ex -
tend ing grant sup port for pro mo tion, for ma tion and nur tur ing of SHGs. In
order to widen the spec trum of SHPIs, the Re gional Rural Banks (RRBs),
Co op er a tive Banks and Farmer’s Clubs have also been in cluded and in -
volved. The num ber of SHGs formed by SHPIs and other agen cies with the
as sis tance of NABARD as on March 31, 2007, is given in Table 2.
IJSW, 71(1), 7–26, January 2010

12 Sambasiva Rao Aluru
SHGs Formed with Financial Support from NABARD
Cumulative Progress up to March 31, 2007
Grant Assistance
Number of
Number of
(in Lakhs)
SHGs Formed
SHGs Linked
Farmer Clubs
Source: NABARD Annual Reports.
Capacity-building of Partner Institutions
The large-scale ca pac ity build ing taken up by NABARD of all the stake -
holders has been one of the major con trib ut ing fac tors for the phe nom e -
nal growth of the SBLP in the coun try. The ori en ta tion programmes have
been con ducted by NABARD for a wide range of of fi cials from the high -
est to the low est lev els of hi er ar chy. A large num ber of meet ings and sem -
i nars have also been or gan ised for prop a gat ing the con cept of the SBLP.
Best prac tices and in no va tions of part ner agen cies have been widely cir -
cu lated among the stake holders.
Microenterprise Promotion by SHGs
The NABARD has ini
ti ated a pilot pro
ject for the pro
mo tion of
microenterprises by mem bers of ma tured SHGs in nine se lect dis tricts
across the coun
try — Ajmer (Rajasthan), Chandrapur (Maharashtra),
Kangra (Himachal Pradesh), Madurai (Tamil Nadu), My sore (Karnataka),
24 North Parganas (West Ben gal), Panchmahal (Gujarat), Puri (Orissa),
and Rae Bareilly (Uttar Pradesh), in as so ci a tion with Mar ket ing and Re -
search Team (MART) as the tech ni cal part ner. The pro ject adopts a 3-M
model cov er ing microplanning, microfinance and micromarkets. The
NGOs iden ti fied under the pro ject act as microenterprise pro mo tion agen -
cies and have been pro vided train ing by MART in con duct ing vil lage sur -
veys and iden ti fy ing key ac tiv i ties which have mar ket po ten tial. The
NGOs also con duct train ing for the SHGs in key ac tiv i ties and help in the
mar ket ing of the prod ucts. At pres ent, a sur vey of vil lages and SHGs by
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 13
NGOs has been un der taken and microbusiness de vel op ment plans have
been pre
pared for each dis
trict wherein po
tial ac
ties have been
mapped for the ben e fit of SHG mem bers.
The NABARD also ex tends grant sup port to NGOs for con duct ing
microenterprise de
vel op ment train
ing programmes for ma
ture SHGs.
These train ing programmes pro vide tech ni cal skills in run ning an en ter -
prise, en tre pre neur ial in puts, en ter prise man age ment and mar ket ing as -
pects to the SHG mem bers. The train ing is for the ac tiv i ties in both the farm
and non-farm sec tors.
Microfinance Development and Equity Fund
The NABARD has es
tab lished the Microfinance De vel op ment Eq uity
Fund with a cor pus of Ru pees 200 crores and the ob jec tive to fa cil i tate and
sup port the or derly growth of the microfinance sec tor for en larg ing the
flow of fi nan cial ser vices to the poor — par tic u larly women and vul ner a -
ble sec tions of so ci ety. The fund is to sup port in ter ven tions to el i gi ble in sti -
tu tions and stake holders, like:
(i) ca pac ity-build ing of SHGs for live li hood, skill upgradation and
microenterprise de vel op ment;
(ii) ca pac ity-build ing of microfinance in sti tu tions (MFIs), banks, NGOs,
gov ern ment de part ments, NABARD, and so on;
(iii) fund ing sup port for con trib ut ing eq uity/other forms of cap i tal sup port to
NGOs/Vol un tary as so ci a tions (VAs), com mu nity-based or gani sa tions,
MFIs, banks, and so on, to pro vide fi nan cial sup port for start-ups and
on-lend ing for microfinance ac tiv i ties, sup port ing self-help pro mo tion
ini tia tives of banks and other SHPIs, and rat ing of MFIs;
(iv) sup port ing sys tems man age ment with re gard to man age ment in for ma -
tion sys tem (MIS), ac count ing, in ter nal con trols, au dits and im pact as -
sess ment;
(v) build ing an ap pro pri ate da ta base and sup port ing its de vel op ment;
(vi) stud ies, pub li ca tions and re search; and
(vi) MIS of SHGs, NGOs/VAs, banks, MFIs, NABARD.
Enhancing Ground Level Credit Flow to the SHGs
Re fi nance sup port is pro vided to banks at concessional rates to en able
them to en hance ground level credit to the SHGs. NABARD has cu mu la -
tively pro vided re fi nance as sis tance of Ru pees 54.59 bil lion as on March
31, 2007, under the SBLP to the banks in the coun try.
IJSW, 71(1), 7–26, January 2010

14 Sambasiva Rao Aluru
Innovative Pilot Projects
The NABARD has ini
ated sev
eral pilot pro
jects in the area of
microfinance, some of which are enumerated below:
Application of Information Technology in SBLP: Introduction of
Processor/Memory Cards

With the in creas ing num ber of SHG ac counts in bank branches, banks are
fac ing prob lems in mon i tor ing and ad e quately ser vic ing SHG ac counts.
Branch man agers in rural areas are hard pressed for time and as a re sult do
lit tle for de vel op ing the busi ness of the branch or scout ing for new busi ness
op por tu ni ties for the branch. It was felt that the use of in for ma tion tech nol -
ogy in the form of pro ces sor/mem ory cards for SHGs and other cli ents cou -
pled with au to ma tion in a branch would serve to solve these vexed is sues
and leave ad e quate time for busi ness de vel op ment work. NABARD has,
there fore, de cided to launch an ex per i ment through five branches each of
two RRBs in Andhra Pradesh and Karnataka. The first pilot pro ject on
smart cards has been launched with Sri Visakha Grameena Bank in Andhra
Pradesh (re or gan ised as the Andhra Pradesh Grameen Vikas Bank). With
the use of pro ces sor/mem ory cards, the trans ac tion data of each SHG col -
lected from the field could be con sol i dated at the branch of fice to gen er ate
MIS re ports, which the branch staff could ef fec tively use to track the func -
ing of SHGs, and en
sure prompt credit. In
tro duc tion of pro
ces -
sor/mem ory cards for ac
tive cli
ents and SHGs and au
tion of
book-keep ing in SHGs is ex pected to re duce paper work, save time and
thus im prove the ef fi ciency of the field worker.
SHG–Post Office Linkage Programme
A pilot pro ject for the link age of 200 SHGs with rural post of fices in
Kancheepuram and Pudukottai dis tricts of Tamil Nadu is being im ple -
mented by NABARD with the ob jec tive of ex am in ing the fea si bil ity of uti -
lis ing the vast net work of post of fices in rural areas in the dis burse ment of
credit to the rural poor. The cov er age of the pro ject has since been ex -
tended to 10 more states.
Computer Munshi
Qual ity and reg u lar ity of book-keep ing is an im por tant as pect of link age
ing, which is most af
fected be
cause of the wide
spread il
amongst the SHG women. NABARD has ex tended grant sup port of Ru pees
6.10 lakh to Pradan to en gage skilled rural youth as ‘com puter munshies
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 15
(CM)’ and es tab lish 10 CM units in the states of Jharkhand and Orissa. The
trained in di vid u als would be equipped with a com puter and soft ware to serve
100–300 SHGs. The SHG-level meet ing trans ac tion state ment will be sent
to the CM after every meet ing. This will be keyed in by the trained in di vid -
ual using the soft ware, which would gen er ate out puts like trial bal ance,
mem ber sav ings and loan bal ances. The SHG pro moter and the banker could
also ac cess data about SHGs from the CM on pay ment of a fee. The soft ware
for the pro ject has been de vel oped by Pradan.
Pilot Project on Joint Liability Groups
In order to de velop ef fec tive credit prod ucts for mid-seg ment cli ents hav ing
ac cess to pro duc tive as sets, NABARD had pi loted the pro
ject dur
2004–2005 in eight states of the coun try through 13 RRBs through the
model of joint li a bil ity ap proach. Dur ing 2004–2005, these se lect banks pro -
moted 285 joint li a bil ity groups (JLGs) and ex tended fi nance of Ru pees 4.48
crores. In the sec ond year of the pro ject, banks dis bursed Ru pees 6.79 crores
to 488 JLGs. Based on the feed back of the pro ject, NABARD has for mu -
lated a scheme for fi nanc ing JLGs of ten ant farm ers in Sep tem ber 2006.
Rythu Mithra Groups: Bank Linkage Programme
The Gov ern ment of Andhra Pradesh formed Rythu Mithra Groups
(RMGs) con sist ing of small, mar ginal and ten ant farm ers with the ob jec -
tive of train ing and tech nol ogy dis sem i na tion in ac tiv i ties like soil test ing,
train ing and as sess ing input re quire ments and pro vide ac cess to credit fa -
cil i ties from banks. Each RMG con sists of 15 farm ers be long ing to the
small, mar ginal and ten ant farmer cat e go ries. They func tion along the lines
of SHGs by sav ing Ru pees 50 every month with reg u lar meet ings, in ter nal
lend ing, book-keep ing, and so on. A pilot pro ject for fi nanc ing RMGs by
the banks was launched by NABARD in 13 dis tricts of Andhra Pradesh
dur ing 2004–2005. En cour aged by the suc cess, the pro ject was ex tended to
all dis tricts of the state. The ground level credit to the RMGs for the past
three years is given in Table 3.
Security System for SHG Members
A com mu nity-based, so cial se cu rity sys tem for im prov ing the live li hood
and se cur ing un cer tain ties of life for mem bers of SHGs in rural areas is
being im ple mented through Or gani sa tion for Aware ness of In te grated So -
cial Se cu rity, an NGO. So far, two vil lages cov er ing 500 poor house holds
from Betul dis trict of Madhya Pradesh state, in volv ing a grant as sis tance of
IJSW, 71(1), 7–26, January 2010

16 Sambasiva Rao Aluru
Rupees 8 lakh have benefitted. Self-employed groups from SHGs are
formed by the NGO to pro vide var i ous ser vices in volv ing sell ing of prod -
ucts at a dis count. The pro ject com po nents in clude pro vi sion of a pack age
of health in sur ance, life in sur ance, and so on, for SHG house holds by pay -
ing pre mium gen er ated through dis counts of fered by ser vice pro vid ers like
gro cery shop, cloth mer chant, and so on, in the pro ject area for SHG mem -
bers in rural areas.
RMGs Financed in Andhra Pradesh
Number of
Estimated Number of
Farmers Covered
Of which TF
Note: SF= Small Farmers, MF = Marginal Farmers, and TF = Tenant Farmers.
Source: NABARD.
Distance Education Programme
The Indira Gan dhi Na tional Open Uni ver sity, New Delhi, is con duct ing a
six-month cer tif i cate course on ‘Em pow er ing Women’s Self Help Groups’
as a dis tance ed u ca tion programme. NABARD re im burses the course fee
of Ru pees 1,000 to can di dates who suc cess fully com plete the course in the
first at tempt. This ap proach was ex pected to fa cil i tate the spread of the
SHG con cept by de vel op ing a cadre of com pe tent re source per sons in the
sub ject area.
Certificate Course for SHG Facilitators
The NABARD has part nered with Yashwantrao Chavan Maharashtra Open
Uni ver sity, Nashik, in de vel op ing and of fer ing a six-month cer tif i cate course
for SHG fa cil i ta tors on pro mo tion and nur tur ing of SHGs. This com pre hen -
sive course on the sub ject of fers cov er age of top ics like em pow er ment of
women, pov erty al le vi a tion, is sues on so cial com mu ni ca tion at the pre-for ma -
tive stage of SHGs, and as pects like sta bili sa tion of group func tions, con flict
res o lu tion, and so on. NABARD has also ex tended its sup port by re im burs ing
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 17
the course fee to the first batch of 500 can di dates who have suc cess fully
passed the cer tif i cate course ex am i na tion in the first at tempt.
The programme has proved to be an at trac tive prop o si tion for banks due to
high re cov ery rates and low er ing of trans ac tion costs by outsourcing costs
as so ci ated with mon i tor ing and ap praisal of loans. Re cords show a re cov -
ery rate as high as 95% for loans ex tended by banks to SHGs. In a study
spon sored by the Foun da tion for De vel op ment Co op er a tion (FDC, 1996),
Aus tra lia, it was ob served that the re duc tion in costs for the bank ers is
around 40% as com pared to ear lier loans under the In te grated Rural De vel -
op ment Programme (IRDP). Seibel and Dave (2002) have come out with
sim i lar find ings with re spect to the com mer cial ben e fit of SHG lend ing to
banks. The study has ob served that SHG bank ing is a ro bust fi nan cial prod -
uct in terms of low, non-per form ing loans, higher re turn on as sets of SHG
bank ing, higher op er a tional self-suf fi ciency ra tios, per form ing well in
healthy and dis tressed fi nan cial in sti tu tions.
Form ing and nur tur ing small, ho mo ge neous and par tic i pa tory SHGs of
the poor has today emerged as a po tent tool for human de vel op ment. This
pro cess en ables the poor — es pe cially women from poor house holds — to
col lec tively iden tify and ana lyse the prob lems they face in their so cial and
eco nomic en
ron ments. It helps them pool their mea
gre re
sources — human and fi nan cial — and pri ori tise their use for solv ing their
own prob lems. The em pha sis on reg u lar thrift col lec tion and its use to
solve im me di ate prob lems of con sump tion and pro duc tion not only helps
to meet their most ur gent needs, but also trains them to han dle larger fi nan -
cial re sources more skill fully, pru dently and with a more last ing im pact.
We can, thus, see the evo lu tion of SHGs at three lev els:
House holds use microfinance to meet ‘sur vival’ re quire ments where
small sav ings and loans serve as a buffer in the event of an emer gency
or smoothen con sump tion or even ser vice pre vi ous debts to give it self
more li quid ity dur ing lean times.
‘Sub sis tence’ needs are met through microfinance, where a house hold
be gins to uti lise microfinance to di ver sify its bas ket of in come-gen er -
at ing ac tiv i ties, or to meet work ing cap i tal re quire ments in tra di tional
ac tiv i ties.
As house holds reach a stage where they can as sume a higher de gree of
risk, microfinance would be used to in vest in set ting up an en ter prise
IJSW, 71(1), 7–26, January 2010

18 Sambasiva Rao Aluru
or fa cil i tat ing entry into em ploy ment in one way or the other in order
that the house hold be comes ‘sus tain able’.
Eval u a tion stud ies con ducted on the im pact of the SBPL in the state by
NABARD and other agen cies have re ported sig nif i cant im pact on the so -
cio eco nomic front of the rural poor. The main find ings are that:
Economic Impact
Financially excluded disadvantaged sections of society have been
able to access financial services from the formal banking sector.
Microfinance has reduced the incidence of poverty though an
increase in income, enabled the poor to build assets and thereby
reduce their vulnerability.
It has contributed to a reduced dependency on informal
moneylenders and other non-institutional sources. The interest rates
of moneylenders have also come down.
Access to credit has enabled women to meet their consumption
expenditures initially. There is a gradual shift in loaning pattern from
consumption loans to production activities with creation of assets.
Economic activities taken up by women are mainly agriculture,
animal husbandry, service and business sector activities. Access to
credit has enabled them to improve income levels of the poorest of
the poor and enabled the near poor to cross the poverty line.
Social Impact
It has enabled households to spend more on education than non-client
households. Families participating in the programme have reported
better school attendance and lower drop-out rates.
It has empowered women by enhancing their contribution to
household income, increasing the value of their assets and generally by
giving them better control over the decisions that affect their lives. A
positive impact on the level of confidence, self-reliance, and ability to
make decisions, articulation and empowerment of women has taken
Housing conditions generally improved with a shift in the ownership
from kuchha (mud walls, thatched roofs) to pucca (brick walls, tiled
roofs) housing.
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 19
Members were relatively more assertive in confronting social evils
and problem situations. As a result, there was a fall in the incidence of
family violence.
In certain areas, it has reduced child mortality, improved maternal
health and the ability of the poor to combat disease through better
nutrition, housing and health — especially among women and
children. In Andhra Pradesh, the average annual rate of growth of
population has shown a significant decline from 2.17% in 1981–1991
to 1.30% in 1991–2001, amounting to a 40% decline in the 10-year
period. The decline in decadal growth rate of population has also
been attributed to the phenomenal growth of SHGs in the state in
addition to better governance of both family planning-related and
welfare-oriented programmes.
The SHG movement has expanded avenues for women to assume
leadership position. In Andhra Pradesh, a large number of community
activists, community resource persons, and para-professionals have
emerged from SHGs who have helped in the formation of new SHGs,
spreading awareness on health, hygiene, education, and so on. Women
were able to discuss confidently the social issues with the political
leadership and the government officials.
The growth of microfinance in India has reached a stage where fu ture pol -
icy op tions have to be care fully weighed so that this move ment can be come
a truly strong one. The cur rent is sues and fu ture con cerns with re gard to the
programme are dis cussed below.
Regional Imbalances
The first chal lenge is the skewed dis tri bu tion of the SHGs across the states.
About 60% of the SHGs credit linked in the coun try are in the south ern
states of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala. Thus, the
num ber of SHGs per lakh pop u la tion for the south ern re gion is 703, which
is more than dou ble the av er age at the all-India level (310) and al most five
times of the Cen tral Re gion (142) (Kumar and Ramesh, 2009:129). How -
ever, in states which have larger share of the poor, the cov er age is com par -
a tively low. This skewed dis
tri bu tion is at
trib uted to the over
sup port ex tended by some of the state gov ern ments to the programme,
IJSW, 71(1), 7–26, January 2010

20 Sambasiva Rao Aluru
skewed dis tri bu tion of NGOs, local cul ture and prac tices. To re duce the re -
gional im bal ances in the spread of SBLP, NABARD has iden ti fied 13
states hav ing a large pop u la tion of the poor for fo cussed at ten tion, and has
started giv ing new di rec tions to the link age programme.
Quality of SHGs
The mas sive mo bi li sa tion of SHGs has posed chal lenges to their qual ity and
sustainability. The crit i cal in di ca tors of the qual ity of SHGs are reg u lar ity in
sav ings, in crease in the cor pus of the groups, in ter nal lend ing, re pay ment of
loans, at ten dance of mem bers in meet ings, reg u lar ity of meet ings, up-to-date
and ac cu rate main te nance of books of ac count, and par tic i pa tion of all the
mem bers in the group ac tiv i ties. The tar get-ori ented ap proach of some state
gov ern ment de part ments, in ad e quate fa cil i ties for train ing and in suf fi cient
in cen tives to NGOs pro mot ing SHGs for nur tur ing them on a sus tain able
basis are stand ing in the way of at tain ing the re quired qual ity. Con tin u ous
train ing of all the stake holders — SHG mem bers, SHG pro mot ers and the
bank staff — is of par a mount im por tance.
Thrust for Formation of Farmer Groups
The SHG move ment has mainly re mained gen der-centric, cov er ing only
women. There are a large num ber of farm ers in the coun try who are mar -
ginal farm ers, small farm ers, share-crop pers/ten ant farm ers, and so on,
who are un able to ac cess credit from for mal fi nan cial in sti tu tions ei ther due
to the small size of their landholdings or lack of clear title. The SHG move -
ment has not touched these seg ments in large parts of the coun try. More ef -
forts are re quired from the NGOs in mo bi lis ing this seg ment of farm ers in
the group mode. Such ex pe ri ences are al ready avail able in a lim ited way in
the RMGs of Andhra Pradesh and Farmer Groups formed by the
Dharmasthala Rural De vel op ment Trust in Karnataka. NABARD has for -
mu lated guide lines for banks to fi nance JLGs of ten ant farm ers. This
scheme can be in stru men tal in pur vey ing credit to small farm ers, mar ginal
farm ers, ten ant farm ers and the land less.
Loan Size to Group
Dur ing 2006–2007, the av er age loan pro vided to new SHGs was Ru pees
44,342 and the av er age loan per fam ily worked out to Ru pees 3,167.2
Many be lieve that such loan amounts are grossly in ad e quate for pur su ing
any mean ing ful live li hood ac tiv ity and mak ing the SHG mem bers move
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 21
to tak ing loans from MFIs. How ever, per ca pita loans in ma ture SHGs are
in creas ing grad u ally. It has also to be kept in view that mem bers take very
short-term loans of three to six months on many oc ca sions and there can
be more than one cycle of bor row ing/re pay ment in a sin gle year.
In case all the fam ily needs are taken into ac count, SHGs may have to
be ad vanced higher amount of credit than what is being given at pres ent.
It is es ti mated that to rise above the pov erty line, each mem ber may re -
quire bank credit of Ru pees 25,000–30,000. The ques tion is whether such
a higher quan tum of loans can be given under the pres ent SHG mode or
whether the mem bers re quir ing higher quan tum of loan should be en cour -
aged to take re sort to the reg u lar bank ing sys tem. These ques tions have to
be re solved in the in ter est of sus tain ing the growth of SHGs as vi a ble
means of pov erty al le vi a tion.
From Consumption Credit to Income-Generating Activities
An other chal lenge is to grad u ate the SHGs from avail ing loan for con sump -
tion pur poses to in come-gen er at ing microenterprises. Stud ies have in di cated
that the SHG mem bers are avail ing loans for in come-gen er at ing ac tiv i ties
once their con sump tion needs are met. Tran si tion to microenterprise level by
SHG mem bers is a ‘train ing in ten sive’ pro cess, and bank loans alone can not
en sure this tran si tion. This needs a ho lis tic ap proach of skill de vel op ment,
de vel op ment of en tre pre neur ial qual i ties, de vel op ing an un der stand ing of
the mar kets, and so on. Ex ist ing live li hoods of the group mem bers are to be
kept in view and in come-gen er at ing ac tiv i ties need to be in tro duced, based
on known skills, knowl edge and re sources. Mar ket link ages are cru cial for
the pro mo tion of microenterprises. Mar ket sur veys need to be con ducted for
re source map ping and the right type of prod ucts suit ing the ca pac i ties of
SHG mem bers may have to be iden ti fied. This task has to be han dled with
care to en sure that gen u ine con cerns do not lead to fail ure of en ter prises, in -
creased debt bur den, and then de fault.
Role of State Governments
There is no doubt that the SBLP has achieved its out reach and scale due to
the proactive role played by the state gov ern ments. A few state gov ern -
ments have used SHGs as the route for pov erty erad i ca tion and as a means
of mak ing pub lic ser vices avail able to the rural poor. But many state gov -
ern ments have been over-stretch ing to achieve scale and ac cess with out
crit i cal as sess ment of humanpower and skill sets avail able with them for
form ing and nur tur ing groups and hand-hold ing and main tain ing them
IJSW, 71(1), 7–26, January 2010

22 Sambasiva Rao Aluru
over time. In the pro cess, a few basic and next gen er a tion is sues have
arisen for main tain ing the qual ity of SHGs and sustainability of SHGs.
There is an other dan ger of state gov ern ments ob sessed with the tar get ap -
proach and pop u list de mands, and over load ing the SHGs with other de vel -
op ment func tions. Once mem bers of the SHG per ceive that gov ern ment
mon ies and sub si dies are avail able in plenty, the self-help spirit and mu tual
trust will get eroded and mal prac tices will grow, as has hap pened in the case
of co op er a tives. It is also to be noted that sub si dies will even tu ally turn out to
be a con stric tion rather than an in cen tive due to bud get ary lim i ta tions.
Emergence of Federations
In many states, SHG fed er a tions have started emerg ing as im por tant play -
ers in the field of microfinance. Fed er a tions rep re sent the ag gre ga tion of
col lec tive bar gain ing power, econ o mies of scale, and are a forum for ad -
dress ing so cial and eco nomic is sues. How ever, there is a con cern that
every ad di tional tier in creases the cost of the funds to the SHG mem bers
and may weaken the pri mary build ing blocks. NABARD be lieves that:
SHG federations should be evolved based on the felt need of the
SHGs and the group should have freedom to join or not to join the
Federations need to evolve as member-owned, member-driven
institutions so that they can function in a democratic manner, keeping
in view the aspirations of their constituents, the SHGs.
The promoting organisation should commit itself for mentoring the
SHG federation so as to ensure that it is able to function on a
sustainable basis. This would mean that the SHG federation needs to
put in place a mechanism for pricing its services to the members.
The process and systems of federations need to be designed in such a
way that these federations do not depend on the promoter perpetually
and become self-managed over a period of three years.
The federations should not normally involve themselves in managing
the financial resources of SHGs and in on-lending to groups as it is
likely to weaken the self reliance of the groups. However, they can
act as business facilitators and business correspondents to the banks.
NABARD has de cided to sup port the SHG fed er a tions on a model-neu tral
basis for build ing the ca pac i ties of SHGs, to con duct train ing programmes
for SHG mem bers for tak ing up microenterprises, and for fa cil i tat ing SHG
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 23
mem bers to par tic i pate in the or gan ised sup ply chain man age ment and pri -
mary pro cess of pro duce.
Need to Restructure Design and Direction of Swarnjayanti
Gram Swarozgar Yojana Subsidy

The norms and work ing of groups pro moted under Swarnjayanti Gram
Swarozgar Yojana (SGSY) are not in tune with the SBLP. The re port of the
Sub-Group on In no va tive Fi nance and Microfinance, Plan ning Com mis -
sion, GoI, had ob served that the avail abil ity of sub sidy to groups under
SGSY had led to weak en ing of the con cept of self-help as most peo ple
joined groups for avail ing only the sub sidy. The pres sure for achiev ing tar -
gets has led to the for ma tion of groups that lack un der stand ing of group
con cept and work ing. The sur vival rate of the groups, after the pro ject loan is
sanc tioned, is poor. This hap pens be cause mem bers usu ally lose in ter est
after re ceiv ing their sub si dies. The sub-committee had, there fore, rec om -
mended for greater syn ergy be tween the SHG programme of NABARD
and SGSY. Var i ous stud ies, con ducted by the Na tional In sti tute of Bank
Man age ment and Na tional In sti tute of Rural De vel op ment, point out that
link ing credit with sub sidy is not an ef fec tive ap proach for reach ing out to
the poor.
The Com mit tee on Fi nan cial In clu sion (Rangarajan, 2006) has rec om -
mended that sub si dies pro vided under SGSY be re struc tured. The Com mit -
tee felt that there is a need to for mu late a sin gle programme synergising the
pos i tive fea tures of SGSY such as spe cific tar get ing of BPL fam i lies, and so
on, and those of the SBLP such as group co he sive ness, and dis ci pline. The
Com mit tee rec om mended that the gov ern ment may con sider re di rect ing
sub sidy in the SGSY for the fol low ing pur poses:
capacity-building of NGOs and other field-based agencies such as
Krishi Vigyan Kendras, to form and strengthen SHGs;
exposure visits to successful models by bankers, government
officials and SHG leaders; and
strengthening input supply and marketing arrangements.
Emergence of MFIs
The MFIs those are in sti tu tions, other than banks, which are en gaged in the
‘pro vi sion of thrift, credit and other fi nan cial ser vices and prod ucts of very
small amount to the poor in rural, semi-urban and urban areas for en abling
IJSW, 71(1), 7–26, January 2010

24 Sambasiva Rao Aluru
them to raise their in come level and im prov ing liv ing stan dards’. MFIs are
ex tremely het er o ge neous groups com pris ing non-bank ing fi nance com pa -
nies, so ci et ies, trusts and co op er a tives. Dur ing the bud get speech of
2005–2006, the Fi nance Min is ter an nounced that the GoI in tended to pro -
mote MFIs in a big way. The GoI has felt the need to iden tify MFIs, clas sify
and rate such in sti tu tions and em power them to in ter me di ate be tween the
lend ing banks and cli ents. The Min is ter also in
di cated that com mer
banks may ap point such MFIs as ‘bank ing co re spon dents’ to pro vide trans -
ac tion ser vices on their be half.
Keep ing the pol icy thrust to MFI, NABARD has de cided to sup port
the rat ing of MFIs by the ac cred ited rat ing agen cies such as CRISIL,
M-CRIL, Planet Fi nance and CARE to en able the MFI sec tor to avail fi -
nance from the bank ing sec tor. NABARD has also de cided to pro vide
cap i tal/eq uity sup port to MFIs so as to en able them to le ver age cap i -
tal/eq uity for ac cess ing com mer cial funds from banks and pro vide fi nan -
cial ser vices at an af ford able cost to the poor. This can en able the MFIs to
achieve sustainability in their credit op er a tions over a pe riod of three to
five years.
Cer tain con cerns re gard ing the op er a tions of MFIs such as lack of trans -
par ency in op er a tions, high rates of in ter est, co er cive meth ods of re cov ery,
hid den charges in the form of pro cess ing fees, ser vice charges, and so
forth, have come up in the pub lic do main. The chal lenge be fore the MFI
sec tor is to gain ac cep tance by adopt ing best man age ment prac tices and
trans par ency in their op er a tions. As a large num ber of MFIs come from the
NGO sec tor, they suf fer from ca pac ity and skills con straints to de liver fi -
nan cial ser vices. Thus, the sec tor needs ca pac ity build ing in fi nan cial con -
trol and man age ment, busi ness plan ning, prod uct de sign, MIS, and in ter nal
con trols, among others.

Keep ing these in view, NABARD has evolved the fol low ing strategies to
re late with the microfi nance sec tor:
Facilitate formation, nurturing and linkage of SHGs to access credit
from formal banking channels.
Scale up the programme in 13 priority states,3 which account for
70% of rural poor in the country.
IJSW, 71(1), 7–26, January 2010

Role of NABARD in Strengthening SHGs 25
Build capacity of all stakeholders through training, awareness
creation, exposure visits and skill development training
Promote microenterprises among mature SHGs through skill
development training programme.
Develop the MFI sector with support for rating, equity and refinance
through the banking sector.
The SHG move ment in volves com mon peo ple across the coun try with
their main strength being mu tual in ter est, in for mal ity and flex i bil ity. It is,
there fore, de sir able that their or gani sa tional struc ture, method of rais ing
funds, in ter est rate, and struc ture should be left to them selves. The in ter fer -
ence with the de sign of the SHG move ment has the po ten tial to vi ti ate the
credit cul ture and af fect the re la tion ship of SHGs with the bank ing struc ture.
But steps to con sol i date the move ment and up grade their ac tiv i ties from
intra-lend ing to in come-gen er at ing ac tiv i ties, and group microenterprises
are wel come de vel op ment, which the bank ing sec tor should en cour age and
sup port as part of so cial bank ing. Lastly, the MFIs hold sig nif i cant po ten tial
for reach ing the fi nan cial ser vices to the poor peo ple pro vided it can ad dress
the crit i cal chal lenges con front ing them such as sustainability, cap i tal, ca -
pac ity and trans par ency.
An SHG is an unregistered ‘affinity group’ of about 20 poor people from a
homogeneous class, who come together for addressing their socioeconomic problems.
After successfully running the group for a period of six months, the group can
approach the nearby bank branch for credit.
As on March 31, 2008, the average loan provided to SHGs was Rupees 64,027 and the
average loan per member worked out to around Rupees 6,000.
Assam, Bihar, Chhattisgarh, Gujarat, Himachal Pradesh, Jharkhand, Maharashtra,
Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, Uttaranchal, and West Bengal.
Kropp, E.W. and
: Linking Banks and (Financial) SHGs in India: An Assessment.
Suran, B.S.
Paper Presented at the Seminar on SHG–Bank Linkage
Programme, November 25–26, New Delhi.
Seibel, H.D. and
: Bank Transaction Costs in India’s Self-Help Group Banking
Dave, H.R.
Programme, Mumbai: NABARD.
IJSW, 71(1), 7–26, January 2010

26 Sambasiva Rao Aluru
Rangarajan, C.
: Report of the Committee on Financial Inclusion, New Delhi:
Planning Commission, Government of India.
Thorat, Y.S.P.
: Micro Finance in India: Sectoral Issues and Challenges. Theme
Paper Presented at the High Level Policy Conference on
‘Microfinance in India’, May 3–5, New Delhi.
IJSW, 71(1), 7–26, January 2010