RESEARCH PAPER ON “AN ANALYSIS OF THE
EFFECTIVENESS OF SHG-BANK LINKAGE PROGRAM AS A
MEASURE OF PROMOTING MICROFINANCE”
Author
Govinda Gowda HG,
Mount Carmel College, Autonomous,
#58, Palace Road, Vasanthnagar,
Bengaluru-560052.
Mob- 09844169326.
Email- gowda0212@gmail.com
“AN ANALYSIS OF THE EFFECTIVENESS OF SHG-BANK LINKAGE PROGRAM AS A
MEASURE OF PROMOTING MICROFINANCE”
**Mr. Govinda Gowda HG, Research Scholar, Research Centre, Bharathiar University, Coimbatore
*Dr. Y Rajaram, Dean & Professsor, Ramiah Institute of Management Studies, New BEL Road, Bengaluru
*Dr.S. Ramesh, Dean, Faculty of Commerce & Management(PG), Mount Carmel College Autonomous,
Bengaluru-560052.
Key Words:
 Self Help Groups (SHGs)
 Bank Linkage Program
 Microfinance
 NGOs
Introduction:
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, and 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 institutionalized1. 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 NonGovernmental 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 women3.
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
1
Indian Journal of Industrial Economics and Development Volume 7 No. 2 (2011): 1-10
2
NABARD, APRACA and ILO Master Circular on SHG-Bank Linkage Programme
NABARD Liquidity Support to Banks for SHG-bank Linkage
3
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 program 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 etc4.
Eligibility to Microfinance5




SHG should be in existence for at least 6 months
Group of 10-20 women
A minimum Savings/Corpus of Rs 5,000
Acceptable level of financial and administrative discipline in running of the SHG
Separate Segment under priority sector: In order to enable the Institutions to report their SHG lending
without difficulty, it was decided that the Institutions 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.
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 micro finance 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,
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 program, 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.
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.
4http://www.ruralfinance.org/fileadmin/templates/rflc/documents/1100879155210_formingshgs.pdf
5Self-Help
Groups: A Keystone of Microfinance in India - Women empowerment & social security October 2005 CS Reddy, APMAS CEO Sandeep Manak,
APMAS Intern
Capacity Building and Training: An important step in the Linkage Program 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 programs for the field level functionaries. In addition, suitable
awareness/sensitization programs may be conducted for their middle level controlling officers as well as
senior officers.
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.
EMERGING MODELS OF SHG - BANK LINKAGE6
The Predominant model in the Indian Micro finance context continues to be the SHG Bank Linkage Model
that accounts for nearly 20 million clients. It started as an Action Research Project in 1989. Under this
model, Self Help Promoting Institution usually a NGO, helps groups of 15-20 individuals through an
incubation period after which time they are linked to banks. The SHG had proved their efficacy over time
but they suffer from a meager resource base which handicapped their capacity to expand the economic
activities of their members. The factors received by the SHG members were the lack of information, time
consuming and expensive procedures for obtaining bank loans, rigid lending policies of banks in respect of
unit costs, unit sizes and group guarantee for loans. There are three linking models in the country.
(i). SHG Bank Linkage Model - I
Fig.1: Bank – SHG Members (SHGs Formed and Financed by Banks)
BANKS
PROMOTION
PROMOTION
TRAINING
TRAINING
ANDAND
SHGs
CREDIT
CREDITSUPPORT
SUPPORT
In this model, the bank itself acts as a Self-help group promotion institution (SHPI), taking initiatives in
forming the groups, nurturing them over a period of time and then providing credit to team after satisfying
itself about their maturity to absorb credit
(ii) SHG – Bank Linkage Model - II
Fig. 2: Bank – Facilitating Agency - SHG Members (NGOs/Government agencies as SHPIs) NGO s act as
Facilitators and SHGs Financed directly.
PROMOTION
NGOs or
Govt.
Agencies
6International
5973)
SHGs
TRAINING AND
HELPING IN BANK
LINKAGE
BANKS
Journal in Multidisciplinary and Academic Research (SSIJMAR) Vol. 1, No. 3, September-October (ISSN 2278 –
In this model, groups are formed by NGOs in most of the cases or by Government Agencies and are
nurtured and trained by these agencies. The bank then provides credit directly to the SHGs after observing
their operations and maturity to absorb credit. While the banks provide loans to the groups directly, the
facilitating agencies continue their interactions with the SHGs. Most linkage experiences being with the
model with NGOs playing a major role. This model has also been popular and more acceptable to banks.
3. SHG – Bank Linkage Model – III
Fig. 3: Bank – NGO – MFIs – SHG Members (NGOs as Financial intermediaries)
PROMOTION
TRAINING AND
NGOs
SHGs
CREDIT SUPPORT
BANKS
Due to various reasons, banks in some areas are not in a position to even finance SHGs promoted and
nurtured by other agencies. In such cases, the NGOs act as both facilitator and micro finance intermediaries.
First they promote the groups, nurture and train them and then approach the banks for bulk loans for lending
to the SHGs. SHG – Bank Linkage progress in India. Thus there are several models of SHG - Bank linkage.
it is to be seen how effective these models are in promoting financial inclusion through Microfinance
Statement of the Problem:
As a business, the bank has to provide various benefits schemes to ensure the customers' welfare. While this
may increase the business expense and negatively affect the bottom line, looking after customers and
providing them with varieties of schemes will benefit the Bank in other ways. In fact, it's almost impossible
to operate a business without offering a basic set of benefits for the customers' welfare. Therefore it is
important to know the effect of micro finance (SHG-Bank linkage program) schemes of Microfinance
Institutions.
Objectives of the Study
1. To study the awareness level of Microfinance (SHG-Bank linkage program) and also to find out
what are the microfinance (SHG-Bank linkage program) schemes offered to the customers.
2. To find out whether customers are satisfied and benefited out of microfinance (SHG-Bank linkage
program) schemes.
3. To find how microfinance (SHG-Bank linkage program) helps in women empowerment.
4. To study the importance and role of microfinance in poverty reduction.
Scope of the Study:
The study covers the theoretical aspects regarding the micro finance and its schemes. The study also covers
the level of awareness and how it is beneficial to the customers (SHGs) and Banks and how frequently the
micro finance schemes are sold by the bank, what measure the bank has been taken to bring awareness
among the customers (SHGs). The study is confined to the state of Karnataka.
Research Methodology
The study is based on sample survey technique. For this a sample of 100 beneficiaries (SHGs) were
selected and their views and opinions were elicited on different parameters. Personal interviews and
informal discussions were held with the customers. Further applying simple statistical techniques the data
are analysed.
Types of Data Collected
There are two types of data used. There are primary data collected from respondents through interview
using a Schedule and Secondary data collected from books, Journals, company brochures, product
brochures, the company website, RBI, NABARD, ILO, newspaper articles etc.
Plan of analysis
In order to achieve the various objectives mentioned, the data collected will be entered, arranged and
presenting using the Microsoft Excel. The secondary data collected for the study is summarized and initial
analysis is done using average and percentage, wherever required. Tables were used to simplify the data for
analytical purpose.
Limitations of the Study:
The sample size available was not sufficient. The employees and the customers were not willing to share
their opinion. Some of the respondents did not give their correct opinion in the Schedule. Due to time
constraint data collection was restricted to a sample of 100 respondents only. The study requires more time
for better results. It was not possible to communicate with all the members of SHGs.
Data Analysis and Interpretation
Table 1: Age of the Respondents.
Age-Years
No. of Respondents
Percentage
25 to 35
21
21
35 to 45
59
59
45 to 55
10
10
55 and above
10
10
Total
100
100
From the above table it can analyzed that 59% of the respondents who responded to the schedule belongs to
the age group between 35-45 range where as 21% of them belonged to the age group of 25-35 years, and
about 10% of them were of 45-55 years and 10% of them are 55 and above.
Table 2: Educational Qualification of Respondents
Qualification
No. of Respondents
Percentage
Illiterate
10
10
SSLC fail
24
24
SSLC pass
66
66
Graduate
4
4
Any other
6
6
Total
100
100
It is observed that 10% of the customers are illiterate, 24% of them are SSLC fail, 66% of them are SSLC
pass, 4% of them are graduates and 6% of them belong to the other category. It is shows that majority of the
respondents who are benefitted by the micro finance are SSLC pass candidates.
Table 3: Occupation of Respondents
OCCUPATION
No. of Respondents
Percentage
Service
12
12
Labor
34
34
Petty business
44
44
Others
10
10
Total
100
100
The table indicates that 12% of the respondents are employed in service sector, 34% of respondents are
labourers, 44% of respondents are petty business owners, 10% belongs to other category. The respondents
who availed micro finance are petty business owners. Finance is received to do business.
Table 4: Income per annum of Respondents
Per annum
No of respondents
Percentage
Less than Rs50000
47
47
50000-80000Rs
14
14
80000-1,00,000Rs
23
23
1,00,000 and above
16
16
Total
100
100
The above table indicates that 47% of the respondents earn less than Rs50000p.a, 14% of the respondents
earn Rs50000-80000p.a, 23% earn Rs80000-100000p.a,16% earn Rs100000 and above. Respondents
earning less than Rs. 50000 are more benefited with microfinance (SHG-Bank linkage program) as they
could enhance their standard of living.
Table 5: Awareness of the schemes in microfinance (SHG-Bank linkage program)
Awareness
Micro credit
Micro insurance
Saving schemes
Employment schemes
Total
No of respondents
17
23
50
10
100
Percentage
17
23
50
10
100
It is seen that 17% of the respondents are aware about the micro finance (SHG-Bank linkage program)
scheme, 23% of them are aware of micro insurance, 50% of them are aware of saving schemes and 10% of
them are aware of employment schemes. Majority of the respondents are more interested towards the saving
schemes of micro finance and tend to save more for the future.
Table 6: Microfinance (SHG-Bank linkage program) and women empowerment
Particulars
No. Of Respondents
Percentage
empowers
69
69
Does not empower
31
31
Total
100
100
It is observed that 69% of the respondents agree that microfinance (SHG-Bank linkage program) helps
women
empowerment
and
31%
of
them
did
not
agree
with
this.
Microfinance (SHG-bank linkage program) is contributing towards the women empowerment through
providing financial support, housing facilities, educational facilities to the women’s.
Table 7: Satisfaction level of microfinance (SHG-bank linkage program) customers
Particulars
No. Of Respondents
63
27
10
Percentage
70
20
10
Satisfied
Dissatisfied
Neither satisfied nor
dissatisfied
Total
100
100
It is seen that 63%of the respondents were satisfied with micro finance (SHG-bank linkage program)
contributing towards the development of rural area, 27% of respondents were dissatisfied and 10% of them
were neither satisfied nor dissatisfied. It is shows that majority of the respondents were benefited with
availability of micro finance (self-help groups-bank linkage program) offered by the bank.
Table 8 microfinance (SHG-Bank linkage program) contributing towards eliminating poverty
Particulars
No. Of Respondents
Percentage
Satisfactory
72
72
Unsatisfactory
28
28
Total
100
100
It is observed that 72% of the respondents stated that microfinance (SHG-Bank linkage program) is
contributing towards eliminating poverty and 28% of them were unsatisfied with this. By providing
financial support in order to earn their livelihood which contributes towards eliminating poverty in India.
Summary of Findings, Recommendations and Conclusion








The study has found that majority of the respondents are middle aged and are been benefited by
microfinance (SHG-Bank linkage program)
The scheme is mainly opted by low qualification group in order to maintain the standard of living
through self-employment.
Majority of the respondents who availed micro finance are petty business owners.
Finance is received to do business. As the number of members in a family increases, then the cost of
living also increases which in turn demands for more finance. Hence there arises the need for micro
finance.
Microfinance is also mainly opted by the respondents who are residing in rented house to meet their
rent and living expenses and respondents are more interested towards the saving schemes of
microfinance and tend to save more for the future.
It is found that majority of the respondents are aware of micro finance facility from self-help group
representatives. And it’s mainly given to the women to promote their standard and enhance women
welfare and to be self-dependent.
Microfinance (SHG-Bank linkage program) has contributed towards women empowerment with the
support of self-help group’s representatives and micro finance is also contribution towards the
eliminating poverty through providing finance as the micro finance is mainly provided for the
empowerment of women and provides employment opportunities in the rural area. Hence the rural
area is the most profitable segment of micro finance.
Finally the researchers have found that the respondents are satisfied by the micro finance services,
as they perceive that it would be beneficial for those who are not aware of the micro finance (SHGBank linkage program) and the schemes offered by Institutions. Hence, more schemes with similar
benefits is of great importance in financial inclusion and empowerment.
Recommendations:



Only the middle aged respondents are benefited out of Bank linkage scheme of microfinance, which
is more consumption oriented. The govt. should bring new schemes such as educational and Health
related schemes in Microfinance to attract the other age groups also.
The contribution and the good performance as a result of the collaborative efforts like Banks-, NGOs
collaboration with SHG etc. should be published nationally to gain public support and general
goodwill
Majority of the respondents are not aware about the microfinance schemes. Still we can create
awareness among the poor about the government schemes and bank procedures. Through publicity
training and education at different levels of the rural eco system.

. Special schemes are required to encourage building trust between Bank, NGOs, SHGs, Village
Panchayats and the rural poor through frequent meetings and integrated rural development approach.

One third of the respondents says that microfinance (SHG-Bank linkage program) does not help in
women empowerment. It is required to change/modify the schemes and provide seed capital,
Technology and marketing support on this linkage programme to empower the women
Conclusion:
Thus it can be concluded that the microfinance (SHG-Bank linkage program) schemes have satisfactory
conditions and many respondents have provided positive feedback regarding the schemes. Though in India
multi-agency approach has been in existence to provide credit to the rural sector, majority of the marginal
groups still have no access to credit from formal sector banking institutions. Subsidized and targeted credit
programmes like priority sector lending have made little impact on rural poor house-holds. In this back
ground micro-credit assumes greater importance. All MFIs Commercial banks are dominant one. SHGs
have emerged as community institutions through which formal sector building system reaches the rural
households which are earlier considered as unworthy of the bank lending. SHG-bank linkage offers triple
benefits to banks. Of the three emerging models, Bank facilitator agency- SHG-Members Model is a
dominant model in India with regard to regional spread of SHG-bank linkage.
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