Significance of Establishing Linkages with Self-Help Groups and Banks

Can linking self help groups (SHGs) with banks lead to credit access in rural areas?

9 pages

The SHG-Bank linkage program in India, was launched by the National Bank for Agriculture and Rural Development (NABARD) in the year 1992, with it circulating guidelines to banks for financing Self Help Groups (SHGs) under a pilot project that aimed at financing 500 SHGs across the country through the banking system.

This paper presents the rationale, along with the strategy, of the SHG-Bank linkage program.

The author states the following reasons for the exclusion of the poor from formal financial institutions:

High transaction costs;
Risk perception in financing small borrowers;
Lack of physical collateral since the poor hardly own any assets;
Urban orientation and a lack of flexibility on the part of formal financial institutions;
Poor's perception of banks as alien institutions.

The author further states that availability of alternative financial services could do much to improve the welfare of rural poor and their families. He identifies SHGs as a crucial link in the chain and presents the following models of linking SHGs with banks:

SHGs formed and financed by banks;
SHGs formed by NGOs and formal agencies, but directly financed by banks;
SHGs financed by banks using NGOs and other agencies as financial intermediaries;
SHG members directly financed by banks upon the recommendation of SHGs or NGOs.

The author concludes that the SHG-Bank linkage program can go a long way in improving the outreach of institutional financial services to the poor.