SHG-Bank Linkage Programme

The SHG-Bank Linkage Programme connects small, savings-based rural groups to banks so that members can obtain formal credit collectively. Introduced as a pilot by NABARD in 1992, it treats the group, rather than each member, as the bank's principal customer for savings and credit.

How the linkage works

The programme follows a savings-led process that builds financial discipline before external borrowing.

• Members make regular savings, maintain group records and use the pooled fund for internal lending according to collectively decided terms.
• A bank opens a savings account in the SHG's name; formal registration of the group is not essential for opening this account.
• After assessing the group's functioning, savings record and repayment behaviour, the bank provides a generally collateral-free loan to the SHG.
• The SHG decides how the bank loan is distributed among members and collects repayments, while the group remains responsible to the bank.

Institutional arrangement

Commercial banks, regional rural banks and cooperative banks provide savings and credit services. NABARD supports the programme through policy guidance, capacity building, promotional assistance and refinancing support, while banks, voluntary organisations and government agencies may form or nurture SHGs.

• The group's records, peer monitoring and collective responsibility operate as social collateral, reducing information and transaction costs for banks.
• Repeated saving and repayment can create a credit history and permit progressively larger bank loans.

Economic significance and limitations

Formal group credit can finance consumption needs and rural livelihoods, including farm inputs, livestock, processing, storage and collective marketing. It can reduce dependence on informal lenders and help small producers avoid distress sales, although credit alone cannot substitute for infrastructure and assured markets.

• Its effectiveness depends on sound bookkeeping, regular meetings, appropriate loan use and timely repayment.
• Weak group capacity, uneven bank engagement and excessive borrowing from multiple sources can impair sustainability.