SHG-Bank Linkage Programme and MSME vs SHG

While an SHG's internal savings and internal lending can meet only the small day-to-day credit needs of its members, many members eventually need larger amounts of credit than the group's own pooled savings can provide. To address this, India developed the SHG-Bank Linkage Programme, a mechanism that connects established, well-functioning Self Help Groups directly to the formal banking system. The programme is facilitated at the national level by the National Bank for Agriculture and Rural Development (NABARD), which works together with commercial banks, regional rural banks, and cooperative banks to extend credit to SHGs.

Under this programme, once an SHG has demonstrated a track record of regular savings and disciplined internal repayment over a period of time, a bank opens a savings account in the group's name and, subsequently, extends credit directly to the group — often for an amount that is a multiple of the group's own accumulated savings. The group then on-lends this bank credit to its individual members, exactly as it does with its own internally pooled funds, and the group as a whole remains responsible to the bank for timely repayment. Because the bank is lending to a group with a proven collective track record rather than to an individual with no credit history or collateral, the SHG-Bank Linkage Programme has been able to extend formal credit to very large numbers of low-income households, particularly rural women, who would otherwise have remained entirely outside the formal banking system.

The SHG-Bank Linkage Programme is widely regarded as one of the most significant microfinance initiatives in India in terms of the sheer number of households it has brought within the fold of formal banking. It has strengthened rural credit delivery, reduced dependence on informal moneylenders who typically charge very high rates of interest, and has been an important instrument in advancing financial inclusion across rural India.

It is useful, finally, to be clear about how an MSME differs from an SHG, since the two are sometimes confused despite being fundamentally different in nature.