Financing Practices in SHG

Principal Investigators: Amulyakrishna Champatiray, Parul Agarwal
Research Team: Misha Sharma
LEAD Centre: Centre for Microfinance
Focus Area: Credit, Savings
Project Geography: Madhya Pradesh, Bihar, Karnataka
Status: Completed


The SHG Bank linkage programme, initiated by NABARD in 1992, has been acknowledged as an effective mechanism to facilitate formal financial institutions to cater financial needs of the unbanked population. A variety of experiences revealed that aside from productive purposes, lives of the poor remained vulnerable due to their lack of access to financial services relating to lifecycle events which required small sums to meet these emergencies. Typically, access to these small finances was largely enabled through informal sources including relatives, friends, local moneylender etc. The SHG model progressed around the fact that while on an individual basis servicing microcredit loans by formal financial institutions would entail high transaction costs, grouping the requirement of these small loans could prove a cost-effective mechanism through which these financial need of the poor could be met. To keep arrangements simple and demystified, beyond the loans provided to SHGs the purposes for which loans were in lent to SHG members and terms and conditions repayment schedules, interest rates etc. were not stipulated by the banks/Financial Institutions.

Since its inception, SHG Bank linkage programme has come a long way and evolved around the founding principles of homogeneity, cohesiveness and equal opportunity. However, there is no standardized tracking and monitoring of intra group dynamics in both financial and social interactions either by NABARD or by the banks. In some instances, promoting institutions like the NGO-SHPIs seek to track the social and financial empowerment of SHGs and within that inter alia, their members. Given such long stable history of the model and the current policy developments (by introducing revisions – SHG2), it is important to understand the current state of the SHGs by understanding the group behaviour, performance, preferences and aspirations by narrowing down to an individual level. It will assist in consolidating the achievements of the model and provide relevant information in formulating better strategies to enable SHGs cope with the changes at this juncture.

The objective of this research is two-fold:

–     To understand the financial and non-financial interactions of SHG with external agencies like banks and SHPIs; and
–     To study the internal group dynamics in terms of financial transactions, decision making, cohesiveness, transparency and acceptance towards technology and new policy.

Research Methodology:
Two districts in each of the states of Madhya Pradesh, Bihar and Karnataka are selected based on the presence of strong identifiable SHPIs in the districts of which 200 SHGs are randomly drawn for the study (100 from each district) in a way that ensures that 50% of SHGs are 1-3 years old and the remaining are older than 3 years. The data will be collected across three streams: (i) Interviews with office bearer, (ii) Group Interviews among progressive and poor members of the groups, (iii) Administrative data that records SHG transaction. Modules for data collection will range over several categories such as: group profile, dynamics in lending and savings, financial and social behaviour, etc.

Related Resources
REPORT – Financing Practices in SHG