SHG Loan: How Self Help Group Loans Work in India
SHG Loan: How Self Help Group Loans Work in India
A Self Help Group (SHG) loan is a small credit facility offered to a group of 10 to 20 individuals (usually women) who save together regularly and borrow from a linked bank. It is one of the most successful financial inclusion models in India, supported by NABARD, the RBI, and state governments through programs like SHG-Bank Linkage.
If you are part of an SHG, you can access loans at relatively low interest rates, often without collateral, by leveraging your group’s collective savings and repayment track record.
Overview of SHG Loans
The SHG-Bank Linkage Programme (SBLP) was launched by NABARD in 1992. Under this model, SHGs are linked to commercial banks, regional rural banks (RRBs), or cooperative banks. The bank assesses the group’s savings discipline and internal lending history before disbursing a loan.
There are two main types of SHG loans: loans from the group’s own internal corpus to individual members, and loans from external banks to the entire group. The latter is what most people refer to as an “SHG bank loan.” Government schemes like DAY-NRLM (Deendayal Antyodaya Yojana) and SGSY actively promote SHG lending.
Interest Rates
External bank loans to SHGs typically carry interest rates of 7% to 12% per annum. Under DAY-NRLM, eligible SHGs receive interest subvention, which can reduce the effective rate to as low as 4% to 7% for prompt repayers.
| Loan Source | Interest Rate | Subvention Available? |
|---|---|---|
| Public Sector Bank | 8% to 10% p.a. | Yes, under DAY-NRLM |
| Regional Rural Bank | 9% to 11% p.a. | Yes, in select states |
| Microfinance Institution | 18% to 22% p.a. | Rarely |
Internal loans (from group savings to members) carry rates set by the group itself, usually 12% to 24%, with the interest income staying within the group corpus.
Eligibility
- Group must have 10 to 20 members (ideally from the same village or neighborhood)
- SHG must be at least 6 months old and have regular meeting and savings records
- Group must maintain a savings passbook, minutes register, and loan ledger
- Grading by the bank or NABARD-linked facilitator is required for the first bank linkage
- Members should belong to low-income households (BPL or near-BPL preferred)
Documents Required
- SHG bank account passbook
- Meeting minutes register (last 6 to 12 months)
- Savings and loan ledger maintained by the group
- Aadhaar cards of all members
- Photographs of all members
- Resolution passed by the group authorizing the loan
- Certificate from the block or district-level program officer (for government-linked SHGs)
Application Process
- Form or join an SHG: Groups are usually facilitated by NGOs, government departments, or bank correspondents.
- Build savings history: Save regularly for at least 6 months to establish the group’s credibility.
- Get graded: The bank or NABARD partner grades your SHG on attendance, savings, internal lending, and record-keeping.
- Apply for bank linkage: The SHG leader submits the application to the nearest bank branch with all group documents.
- Loan disbursement: Approved funds are credited to the SHG bank account, and the group distributes them to members.
- Repayment: Repayments go back to the bank account in monthly or quarterly instalments.
Frequently Asked Questions
What is the maximum loan amount for an SHG?
Under the SHG-Bank Linkage Programme, banks typically lend 1 to 4 times the group’s savings corpus in the first linkage, and up to 8 to 10 times in subsequent cycles. There is no fixed national cap, but most loans range from Rs 50,000 to Rs 5 lakh per group.
Can urban SHGs also get bank loans?
Yes. Urban SHGs can access loans from urban cooperative banks and some public sector banks under schemes like SJSRY (now restructured under DAY-NULM). The process is similar but facilitation support may be less readily available than in rural areas.
Does an SHG need collateral to get a bank loan?
No. The group’s savings record and repayment discipline serve as the primary security. No physical collateral like land or gold is required for SHG bank loans under NABARD guidelines.
What happens to the SHG loan if the group breaks up?
The outstanding loan remains the liability of all members. Individual members are jointly and severally liable for repayment. The bank can recover dues from any member.
