Master Circular on SHG-Bank Linkage Programme

1. Despite the vast expansion of the formal credit system in the country, the dependence of
the rural poor on moneylenders somehow continued in many areas, especially for meeting
emergent requirements. Such dependence was pronounced in the case of marginal farmers,
landless labourers, petty traders and rural artisans belonging to socially and economically
backward classes and tribes whose propensity to save is limited or too small to be mopped
up by the banks. For various reasons, credit to these sections of the population had not
been institutionalized. The studies conducted by NABARD, APRACA and ILO on the informal
groups promoted by Non-Governmental Organizations (NGOs) brought out that Self-Help
Savings and Credit Groups had the potential to bring together the formal banking structure
and the rural poor for mutual benefit and that their working had been encouraging.

2. Accordingly, NABARD launched a pilot project to cover Self-Help Groups (SHGs)

promoted by Non-Governmental Organizations, banks and other agencies under the pilot
project and supported it by way of refinance. The quick studies conducted by NABARD in a
few states to assess the impact of the linkage project brought out encouraging and positive
features like increase in loan volume of the SHGs, definite shift in the loaning pattern of the
members from non-income generating activities to production activities, nearly 100%
recovery performance, significant reduction in the transaction costs for both the banks and
the borrowers etc, besides leading to gradual increase in the income level of the SHG
members. Another significant feature observed in the linkage project was that about 85% of
the groups linked with the banks were formed exclusively by women.

3. With a view to studying the functioning of SHGs and NGOs for expanding their activities
and deepening their role in the rural sector, in November 1994, RBI constituted a working
Group comprising eminent NGO functionaries, academicians, consultants and bankers
under the Chairmanship of Shri S.K.Kalia, the then Managing Director, NABARD. The
Working Group was of the view that the linking of SHGs with the banks is a cost effective,
transparent and flexible approach to improve the accessibility of credit from the formal
banking system to the unreached rural poor, which is expected to offer the much needed
solution to the twin problems being faced by the banks, viz recovery of loans in the rural
areas and the high transaction cost in dealing with small borrowers at frequent intervals. The
Group, therefore, felt that the thrust of the policy should be to encourage the formation of
SHGs and their linking with the banks and in this regard, the banks have a major role to play.
The Working Group had recommended that the banks should treat the linkage programme
as a business opportunity and they may design area specific and group specific loan
packages taking into account inter alia the potential, local needs, available talent/skills etc.

4. The Reserve Bank constituted four informal groups in October 2002 to examine various
issues concerning micro-finance delivery. Linking of SHGs with banks have been
emphasized in the Monetary policy of Reserve Bank of India and Union Budget
announcements from time to time and various guidelines have been issued to banks in this
regard. To scale up the SHGs linkage programme and make it sustainable, banks were
advised that they may consider lending to SHGs as part of their mainstream credit
operations both at policy and implementation level. They may include SHG linkage in their
corporate strategy/plan, training curriculum of their officers and staff and implement it as a
regular business activity and monitor and review it periodically.

5. Separate Segment under priority sector: In order to enable the banks to report their
SHG lending without difficulty, it was decided that the banks should report their lending to
SHGs and/or to NGOs for on-lending to SHGs/members of SHGs under the new segment,
viz. 'Advances to SHGs' irrespective of the purposes for which the members of SHGs have
been disbursed loans. Lending to SHGs should be included by the banks as part of their
lending to the weaker sections.
6. Opening of Savings Bank A/c: The SHGs registered or unregistered which are engaged
in promoting savings habits among their members would be eligible to open savings bank
accounts with banks. These SHGs need not necessarily have already availed of credit
facilities from banks before opening savings bank accounts. KYC verification of all the
members of SHG need not be done while opening the savings bank account of the SHG as
KYC verification of all the office bearers would suffice. Further, it is clarified that since KYC
would have already been verified while opening the savings bank account and the account
continues to be in operation and is being used for credit linkage, no separate KYC
verification of the members or office bearers is necessary at the time of credit linking of
SHGs,

7. SHG lending to be a part of planning process: Bank lending to SHGs should be

included in branch credit plan, block credit plan, district credit plan and state credit plan of
each bank. While no target is being prescribed under SHG bank linkage programme, utmost
priority should be accorded to the sector in preparation of these plans. It should also form an
integral part of the bank’s corporate credit plan.

8. Margin and Security Norms: As per operational guidelines of NABARD, SHGs may be
sanctioned savings linked loans by banks (varying from a saving to loan ratio of 1:1 to 1:4).
However, in case of matured SHGs, loans may be given beyond the limit of four times the
savings as per the discretion of the bank. Experience showed that group dynamics and peer
pressure brought in excellent recovery from members of the SHGS. The flexibility allowed to
the banks in respect of margin, security norms, etc. under the pilot project continues to be
operational under the linkage programme even beyond the pilot phase.

9. Documentation: A simple system requiring minimum procedures and documentation is a

precondition for augmenting flow of credit to SHGs. Keeping in view the nature of lending
and status of borrowers, banks should strive to remove all operational irritants and make
arrangements to expeditiously sanction and disburse credit by delegating adequate
sanctioning powers to branch managers. The loan application forms, procedures and
documents should be made simple. It would help in providing prompt and hassle-free credit.

10. Presence of defaulters in SHGs: The defaults by a few members of SHGs and/or their
family members to the financing bank should not ordinarily come in the way of financing
SHGs per se by banks provided the SHG is not in default to it. However, the bank loan may
not be utilized by the SHG for financing a defaulter member to the bank.

11. Capacity Building and Training: An important step in the Linkage Programme would be
the training of the field level officials and sensitization of the controlling and other senior
officials of the bank. Considering the need and magnitude of training requirements of bank
officers/staff both at field level and controlling office level, the banks may initiate suitable
steps to internalize the SHGs linkage project and organize exclusive short duration
programmes for the field level functionaries. In addition, suitable awareness/sensitization
programmes may be conducted for their middle level controlling officers as well as senior
officers.

12. Monitoring and Review of SHG Lending: Having regard to the potential of the SHGs,
banks may have to closely monitor the progress regularly at various levels. In order to give a
boost to the ongoing SHG bank linkage programme for credit flow to the unorganized sector,
banks were advised in January 2004 that monitoring of SHG bank linkage programme may
be made a regular item on the agenda for discussion at the SLBC and DCC meetings. It
should be reviewed at the highest corporate level on a quarterly basis. Further the progress
of the programme may be reviewed by the banks at regular intervals. A progress report, as
prescribed vide circular FIDD.FID.BC.No.56/12.01.033/2014-15 dated May 21, 2015, may be
sent to NABARD (Micro Credit Innovations Department), Mumbai, on a half-yearly basis, as
on 30 September and 31 March each year so as to reach within 30 days of the half-year to
which the report relates.

13. Encourage SHG Linkage: Banks should provide adequate incentives to their branches
in financing the Self Help Groups (SHGs) and establish linkages with them, making the
procedures absolutely simple and easy while providing for total flexibility in such procedures
to suit local conditions. The group dynamics of working of the SHGs may be left to
themselves and need neither be regulated nor formal structures imposed or insisted upon.
The approach to financing of SHGs should be totally hassle-free and may include
consumption expenditures.

14. Interest rates: The interest rate applicable to loans given by banks to Self Help
Groups/member beneficiaries would be left to their discretion.

15. Total Financial Inclusion and Credit Requirement of SHGs: Banks have been
advised to meet the entire credit requirements of SHG members, as envisaged in the
Paragraph 93 of the Union Budget announcement made by the Honourable Finance Minister
for the year 2008-09 where in it was stated as under: "Banks will be encouraged to embrace
the concept of Total Financial Inclusion. Government will request all scheduled commercial
banks to follow the example set by some public sector banks and meet the entire credit
requirements of SHG members, namely, (a) income generation activities, (b) social needs
like housing, education, marriage, etc. and (c) debt swapping".