Self help groups and community institutions

The first principle

A poor woman alone has no collateral, no credit history and little voice, so banks will not lend to her and officials rarely hear her. Put fifteen such women together, let them save a little every week and lend to one another, and the group becomes something a bank can trust and a government can work through, because the members guarantee one another's repayment. The self help group (SHG) is built on this idea of turning social ties into economic capital. It is the reason SHGs are used both as a tool against poverty and as a channel through which the State reaches households, and the reason they raise the question of whether the State is withdrawing or simply working differently.

The core

How an SHG works

• Membership. An SHG is an informal group of usually 10 to 20 members, mostly women from similar economic backgrounds, who meet regularly and keep simple books.
• Thrift and internal lending. Members save a small fixed amount, and the pooled savings are lent to members for consumption or small enterprise at interest set by the group, which keeps the interest within the community.
• Peer pressure as collateral. Because every member is responsible for the group's credit, social pressure replaces physical collateral, and this is why banks are willing to lend to the group as a whole.
• Federations. SHGs combine into village organisations and then cluster or block level federations, which can borrow larger sums, run enterprises, negotiate with markets and speak to the government.

Measures of the Government of India

• SHG Bank Linkage Programme (1992). The National Bank for Agriculture and Rural Development (NABARD) began a pilot linking 500 SHGs to banks, and the programme grew into one of the largest microfinance systems in the world, built on bank credit rather than private lenders.
• Swarnajayanti Gram Swarozgar Yojana (SGSY, 1999). It made SHGs the main vehicle of self employment for the rural poor, with subsidy and bank credit, but it was criticised for a weak focus on capacity building.
• National Rural Livelihoods Mission (NRLM, 2011). The Ministry of Rural Development restructured SGSY into a mission that builds institutions of the poor first and credit later, and it was renamed Deendayal Antyodaya Yojana NRLM (DAY NRLM) in 2016. It now covers more than 10 crore women in about 90 lakh SHGs.
• Features of DAY NRLM. It provides a revolving fund and community investment fund, interest subvention on bank loans, and community resource persons, women from older SHGs who train new ones, so that the mission is run largely by the community itself. Specialised cadres such as bank sakhis and krishi sakhis carry services to the village.
• Lakhpati Didi (2023). Announced in 2023, it aims to help SHG women earn at least ₹1 lakh a year in household income on a sustainable basis, through skills, enterprise and market linkage.

Dimensions

• Economic. SHGs give access to credit at lower interest than moneylenders, help households smooth consumption in emergencies, and finance small assets such as livestock, sewing machines and shops.
• Social. Regular meetings give women a space outside the household, build confidence, and spread awareness of health, nutrition, sanitation and children's schooling.
• Political. SHG members are more likely to attend gram sabhas and contest panchayat elections, and federations have run social audits of schemes, which links SHGs to grassroots democracy.
• Governance. States use SHGs to deliver services: take home rations for Anganwadis, school uniforms, community kitchens and mask making during the COVID 19 pandemic.
• Gender. SHGs raise women's control over money, but they can also add unpaid work to women's already long day, a cost that rarely appears in programme accounts.

In practice

Models from the states

• Kudumbashree (Kerala, 1998). Kerala's poverty eradication mission organises women in neighbourhood groups federated up to the local body level, and it works closely with panchayats, which makes it a model of linking SHGs with local government. It runs canteens, farming groups and enterprises.
• Jeevika (Bihar). The Bihar Rural Livelihoods Promotion Society, begun with World Bank support, mobilised women in a low income state on a large scale, and its community institutions now run enterprises, food security funds and services. Its women's groups were also active in the campaign that led to prohibition in Bihar.
• Self Employed Women's Association (SEWA, Gujarat). SEWA shows the cooperative and union path, where informal women workers own their bank and organisations.

Microfinance as an anti poverty vaccine

• Asset creation and income security. Small loans build productive assets, and savings and insurance protect households from shocks that would otherwise push them into debt. This is why microfinance is called a vaccine: it prevents a fall into poverty rather than curing it.
• The Andhra Pradesh crisis (2010). Aggressive lending by for profit microfinance institutions, multiple loans to the same borrower and coercive recovery led to distress and reported suicides. The state issued an ordinance in October 2010 regulating these lenders, and repayment in the state collapsed.
• Malegam Committee (2011). Set up by the Reserve Bank of India (RBI), it recommended a separate category of non banking finance companies for microfinance, caps on margins and interest, limits on the number of lenders per borrower, and fair recovery practices.
• RBI harmonised framework (2022). All regulated lenders now follow the same rules for microfinance, which is defined as collateral free loans to households with annual income up to ₹3 lakh, and loan repayments are capped at 50 per cent of household income to prevent over borrowing.

Withdrawal of the State or partnership?

• The withdrawal argument. When groups of poor women run kitchens, collect savings and deliver rations, the State appears to hand over its tasks to unpaid or underpaid citizens, and credit appears to replace public spending.
• The partnership argument. The State created the SHG Bank Linkage Programme, funds DAY NRLM, pays community resource persons, subsidises interest and directs priority sector lending, so it shapes and scales SHGs rather than retreating. SHGs widen the State's reach to the last household.
• A balanced view. SHGs are better described as a partnership in which the State works through community institutions, but the concern about shifting costs onto women's unpaid labour is real and needs fair payment for the work they do.

Issues and way forward

• Debt and over borrowing. Multiple loans from SHGs and microfinance lenders can trap households, so credit bureaus should cover SHG loans and the RBI's income based cap should be enforced.
• Quality of groups and federations. Many groups become dormant or exist only on paper, and members drop out when savings stop. Regular grading, audits and training by community resource persons keep groups alive.
• Market linkage. Most SHG enterprises are small and sell in crowded local markets, so branding, e commerce platforms, Government e Marketplace (GeM) access and producer organisations are needed to raise incomes.
• Elite capture. Better off members can dominate leadership and loans, so the poorest, including Dalit and Adivasi women, need special inclusion.
• Dependence on subsidy. Groups built for subsidy collapse when it ends, which is why NRLM shifted from subsidy to institution building.
• Mixed evidence. Studies find clearer gains in women's mobility, confidence and access to credit than in large income increases or nutrition outcomes, so SHGs should be combined with health, nutrition and employment programmes rather than expected to end poverty alone.

Common confusions

• SHG and microfinance institution. An SHG is owned by its members and lends their own savings and bank credit. A microfinance institution is a lender, often a company, that lends to individuals or joint liability groups and earns a return.
• SHG and joint liability group. An SHG saves before it borrows and lends internally. A joint liability group of four to ten members is formed mainly to take a loan together and does not usually pool savings.
• NRLM and DAY NRLM. They are the same mission; NRLM, launched in 2011, was renamed DAY NRLM in 2016.
• Kudumbashree and Jeevika. Kudumbashree is linked to local governments in Kerala; Jeevika is a state society in Bihar that grew from a project with external support.

For the exam

• Keyword bank: self help group, thrift and credit, peer collateral, SHG Bank Linkage, NABARD, DAY NRLM, community resource person, federation, Lakhpati Didi, Kudumbashree, Jeevika, microfinance, Malegam Committee, harmonised framework, women's agency.
• Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: "More than 10 crore rural women are members of about 90 lakh self help groups under the Deendayal Antyodaya Yojana National Rural Livelihoods Mission, making it one of the largest women's institutions in the world."
  • Introduction with a report: "The Andhra Pradesh crisis of 2010 and the Malegam Committee that followed showed that credit without regulation can deepen poverty, which is why the SHG model puts savings and community ownership before loans."
  • Conclusion: "SHGs show the State working through communities rather than withdrawing from them; the task now is to raise incomes through markets and to pay women fairly for the public work they do."
  • Conclusion: "Microfinance can protect the poor from falling deeper, but breaking the cycle of poverty, gender inequality and malnutrition needs SHGs to be joined with nutrition, health and employment programmes."