Skip to main content

Is it time for SHG2? Revisiting the SHG Model

We feature a collborative post by Parul Agarwal, Amulya Champatiray & Misha Sharma on the results from their recently concluded research study, 
‘Self Help Group Bank Linkage: Through the Responsible Finance Lens’.

The self-help group (SHG) program, which began as a women’s empowerment initiative through financial inclusion in the 1980’s added a significant component in 1992, when a NABARD initiative linked a small number of SHGs with banks. Today, there are over 73.18 lakh savings-linked SHGs and 44.51 lakh credit linked SHGs in India, covering approximately 95 million households[1]. SHGs are more than just a conduit for credit – they also act as a delivery mechanism for various other services, ranging from entrepreneurial training to savings deposits and now with changing paradigms, a channel to deliver community level development programmes.  
Despite the success of  the SHG model, the impact of SHG programs on the lives of the poor has been limited. There are several reasons for this, ranging from inadequate support from the self-help group promoting institutions (SHPIs) to low quality of SHGs in terms of their regular functions, such as savings, group meetings, borrowing, internal lending and book-keeping. In order to overcome these limitations, National Bank of Agriculture and Rural Development (NABARD) proposed a revised form of SHG referred to as SHG2 in a circular dated March 2012[2]. Under this revision, NABARD proposed several changes that provided flexibility to the SHG model. One such change was to enable Joint Liability Groups (JLGs) within SHGs to facilitate higher loan amounts to group members who wanted to finance their individual economic activity. Another innovative change was brought in the form of allowing voluntary savings. This helped SHGs to save over and above the compulsory amount, thereby providing an opportunity to group members to graduate from community to individual banking. Other significant revisions proposed under SHG2 was bringing modifications in credit products by making them purpose neutral, improving risk mitigating mechanisms to ensure the sustainability of the SHG movement and lastly, building second tier institutions that could help promote, finance and train SHGs.

This column discusses the implications of the above mentioned revisions by citing evidence from a recently completed study by IFMR Lead on SHGs titled ‘Self Help Group Bank Linkage: Through the Responsible Finance Lens’ (Agarwal, Sharma and Champatiray, 2013)[3]. The objective of the study was to understand the financial and non-financial interactions of SHGs with external agencies and review the internal group dynamics in terms of financial interactions, decision making, cohesiveness and transparency.

  Relevance of SHG2: Evidence from Tri-State study on SHGs

  • Results from the study depict a general sense of lack of adequate savings among SHGs. There are a significant percentage of group members who are unable to comply with the compulsory savings and the amount of monthly average savings per member is low for group members in Bihar (Rs. 35) and MP (Rs. 10)[4]. In such a scenario, allowing voluntary savings might have a limited impact, since it would be followed only by members that fulfill the current norm, have the capacity to save further and belong to the SHGs that have at least a few such members.

Picture Courtesy: Hand in Hand, India
  • Modifications in credit products is a welcome change since there are several occasions when SHG members mostly belonging to low-income households require credit for non-income generating activities, such as a health emergency, schooling for children, marriage, consumption smoothing etc.

  • The proposition to form JLGs within SHGs for members with requirement for higher loan amount is an important revision, since the findings from our study indicate that approximately 75% of SHGs in Bihar and MP and 94% of SHGs in Karnataka have at least one member who mentioned the need for higher amount of loans to meet their business expenses.

  • From the perspective of financial service provider, catering to the needs of low income households is associated with certain risks. Some of the major type of risks that banks could face varies from legal, financial and operational risks which could be managed through regular monitoring and developing procedures in place to mitigate such risks. Results from the study suggest that a majority of SHG members maintain a very low standard in updating their books of accounts. This propels developing certain risk mitigating mechanisms such as self-rating tools to conduct audits at the SHG level.
  • Lastly, the SHG2 model suggests building second tier institutions (in addition to SHPIs) that constitute of active members of well- functioning SHGs or other entities (NGOs) that can be engaged in promotion and facilitation of services to SHGs. This is an essential requirement since there is still a long way to go for the current SHG movement to reach its fullest potential and become ‘self-sufficient’. This is also substantiated in our study where sample SHGs across all the three states expressed their willingness to be a part of training sessions, acquire new skillsets, and adopt technology in their new operations, all of which is facilitated to group members by external agencies.

Concluding Thoughts

Over the last few decades, the SHG model has proven to be a great medium for social and economic empowerment for women and has been the most preferred model for financial inclusion. However, several concerns have been raised with respect to the implementation of the SHG program. Ironically, the problems faced by the SHG model of financial inclusion have not changed much, i.e. the type of drawbacks that surrounded SHG movement a decade ago, hold relevant even today. Hence, it becomes imperative to see what works for the SHGs and what doesn’t, what are the qualities of SHGs that are successful versus those that are not, etc. Prior to introducing modifications in the SHG movement, it is essential for the stakeholders of the industry to take a step back and assess the performance of the current SHG model before moving to the next level of financial inclusion.


[1] Status of Microfinance in India 2012-13, NABARD
[3] Self Help Group Bank Linkage: Through the Responsible Finance Lens (Published by ACCESS- ASSIST, 2013) :
[4] The monthly average savings per group member in Karnataka was 115 rs.


Popular Posts

Vocationalisation of education in India: Current Scenario, Key Challenges and New directions

“Every handicraft has to be taught not merely mechanically as is done today, but scientifically. This is to say, the child should learn the why and wherefore of every process.” - Gandhi’s Philosophy of Education

The greatest challenge in Indian education system today is to provide skill based education to the youth. This is exacerbated by a mismatch in demand and supply for the skilled workforce. The penetration of vocational education and training remains poor not only in rural areas, but also in urban regions where there is a higher installed capacity to impart the same. This post is an attempt to make the readers understand the need of vocational education in India. Also, this is an attempt to summarise a few recommendations on the same. 
A recent survey (61st round) conducted by the NSSO found that:

1. The percentage of population that completed primary education was 70%, but less than 10% went on to complete a graduation course and above. Almost 97% of individuals in the age bracket…

Rockstar of Financial Inclusion: Business Correspondent Model of India

About Author:  Jatinder Handoo is a social business enthusiast and a branchless banking practitioner. Currently works at FINO PayTech Ltd and is based out of Mumbai. He is reachable at
India is a hot bed of financial exclusion. A country which houses nearly 16% of the global population  has more than 65% of its people outside the formal financial system (Global Findex 2012). The Indian banking system has adopted multiple approaches to make universal financial inclusion a reality right from early days Indian post-independence banking system. Be it bank nationalization in 1969 or formation of Regional Rural Banks. Formation of NABARD or fostering microfinance through Bank-SHG linkage programme in early 90’s. A shimmering ray hope was rekindled with the growth of JLG based microfinance, however later studies made it clear that the model is credit led, concentrated predominately in the southern region of India thus could not be seen as painting complete financial…

A Platform for Knowledge - Enabling people to learn ..

I received a rather interesting link/website via my email today. The link read as MR University and all I could think of was, "Ok, this must be another website portal of some university or college". Well, on clicking the link and looking through the contents of the site, I was pleasantly surprised. The site is an online education portal or platform that allows users or teachers to upload short videos on topics or lessons they wish to impart. First topic that I come across is Development Economics.
The intent of the website is eloquently put out by the two economists, Tyler Cowen and Alex Tabarrok in the intro video. What started as a blog focusing on economics and its various implications in understanding why things are the way they are around us, has now an interesting addition. A video portal titled MRUniversity or Marginal Revolution University that focuses on online education with subjects pertaining to economics. It brought back to my mind,…