Microfinance and Self-Help Groups (SHGs) in India – Notes with PYQs

Many poor families cannot get a loan from a bank. They have no property to offer as security. Microfinance was built to solve this problem. Self-Help Groups are the main way it reaches people in India. Exams ask about Grameen Bank, NABARD, the SHG-Bank Linkage Programme, DAY-NRLM and MUDRA. This post explains microfinance and SHGs in simple words. It ends with 15 previous year questions.

1. What microfinance is

Microfinance means providing small financial services to poor people. It includes small loans, savings, insurance and money transfer. The small loan part is often called microcredit.

Normal banks ask for collateral. Collateral is property kept as security for a loan. Poor families usually have none. So they borrow from moneylenders at very high interest. Microfinance gives them another way.

The key idea is trust within a group. Instead of property, the group stands behind each member. If one member does not repay, the whole group feels the pressure. This keeps repayment rates high.

The idea became famous through Muhammad Yunus of Bangladesh. He started lending small amounts to poor village women in the 1970s. This grew into the Grameen Bank. In 2006, Yunus and the Grameen Bank jointly won the Nobel Peace Prize.

In India, an early example was SEWA - the Self Employed Women's Association in Ahmedabad. It was founded by Ela Bhatt in 1972. It later set up its own bank for poor working women.

2. Self-Help Groups (SHGs)

A Self-Help Group is a small group of people from a similar background. Most SHGs in India are made up of women. A group usually has about 10 to 20 members.

An SHG works in simple steps:

1. Members meet regularly and save a small amount each time.
2. The savings are pooled into a common fund.
3. Members take small loans from this fund for their needs.
4. The group keeps records and repays on time.
5. After some months of good record, a bank lends to the group.

SHGs do more than give loans. They build savings habits. They teach members to keep accounts. They also give women a stronger voice at home and in the village. Many SHG members have started small businesses like dairy, tailoring or food products.

Kerala's Kudumbashree is a well-known state programme built on women's groups. It was launched in 1998.

3. The SHG-Bank Linkage Programme

SHGs needed a link to banks to grow. NABARD - the National Bank for Agriculture and Rural Development - made that link. It launched the SHG-Bank Linkage Programme as a pilot in 1992.

Under this programme, banks open savings accounts for SHGs. After the group shows good savings and repayment, the bank gives it a loan. The loan is given to the group, not to one person. No collateral is needed.

It has grown into one of the largest microfinance programmes in the world, in terms of people reached.

NABARD also promotes Joint Liability Groups (JLGs). A JLG is a small group, usually of 4 to 10 people. Each member takes an individual loan, but all members jointly promise repayment. JLGs are used mostly for tenant farmers and small farmers who do not own land.

4. Government schemes for SHGs and small borrowers

DAY-NRLM stands for Deendayal Antyodaya Yojana - National Rural Livelihoods Mission. Its aim is to bring poor rural women into SHGs and link them to banks and livelihoods. Scheme targets and features are revised from time to time, so check the latest details from official sources.

MUDRA stands for Micro Units Development and Refinance Agency. MUDRA loans have three main categories, based on the stage of the business:

• Shishu - the smallest loans, for new businesses (originally up to Rs 50,000).
• Kishore - for growing businesses (originally Rs 50,000 to Rs 5 lakh).
• Tarun - for bigger small businesses (originally Rs 5 lakh to Rs 10 lakh).

The loan limits have been revised since 2015, and a higher Tarun Plus category was added later. Check the current limits before an exam.

5. Who gives microfinance in India

Microfinance in India reaches people through many kinds of lenders:

• Banks, mainly through the SHG-Bank Linkage Programme.
• NBFC-MFIs - non-banking financial companies that focus on microfinance. They are regulated by the RBI.
• Small Finance Banks - a type of bank licensed by the RBI to serve small borrowers. Several of them began as microfinance companies.
• Cooperatives and NGOs.

The sector has also faced problems. In 2010, a crisis hit microfinance in Andhra Pradesh. Borrowers had taken too many loans, and there were complaints of harsh recovery. After this, the RBI set up the Malegam Committee to suggest rules for the sector.

Today, the RBI treats a microfinance loan as a collateral-free loan to a low-income household. The income limit and other rules are set in RBI's current framework, so check the latest version.

6. Previous year questions

1. Who is known as the father of microfinance? – Muhammad Yunus
2. Grameen Bank was started in which country? – Bangladesh
3. In which year did Muhammad Yunus win the Nobel Peace Prize? – 2006
4. Which institution launched the SHG-Bank Linkage Programme? – NABARD
5. In which year was the SHG-Bank Linkage Programme launched? – 1992
6. What does a Self-Help Group usually not need to get a bank loan? – Collateral
7. DAY-NRLM is run by which ministry? – Ministry of Rural Development
8. In which year was the National Rural Livelihoods Mission launched? – 2011
9. Which scheme did NRLM replace? – Swarnjayanti Gram Swarozgar Yojana (SGSY)
10. What does MUDRA stand for? – Micro Units Development and Refinance Agency
11. In which year was PM MUDRA Yojana launched? – 2015
12. Which is the smallest loan category under MUDRA? – Shishu
13. Kudumbashree is a women's programme of which state? – Kerala
14. SEWA was founded by whom? – Ela Bhatt
15. Which committee was set up by the RBI after the 2010 microfinance crisis? – Malegam Committee

7. How to revise this topic

Start with the people and places: Muhammad Yunus and Grameen Bank in Bangladesh, Ela Bhatt and SEWA in Ahmedabad, and Kudumbashree in Kerala.

Next, learn the years in one line: SEWA 1972, SHG-Bank Linkage 1992, SGSY 1999, Nobel 2006, NRLM 2011, Jan Dhan 2014, MUDRA 2015.

Then keep the three MUDRA categories in order - Shishu, Kishore, Tarun - and note that limits have been revised.

Finally, remember who runs what. NABARD runs SHG-Bank Linkage. The Ministry of Rural Development runs DAY-NRLM. The RBI regulates NBFC-MFIs.

8. Frequently Asked Questions

What is microfinance?

Microfinance means small financial services for poor people - small loans, savings, insurance and money transfer - usually given without collateral. It helps families who cannot get loans from normal banks.

What is a Self-Help Group?

A Self-Help Group is a small group of about 10 to 20 people, mostly women, from a similar background. Members save regularly, lend to each other from the pooled fund, and later get bank loans as a group without collateral.

Who started the SHG-Bank Linkage Programme?

NABARD started the SHG-Bank Linkage Programme as a pilot in 1992. Under it, banks open accounts for SHGs and give them loans after they show good savings and repayment records.

What is DAY-NRLM?

Deendayal Antyodaya Yojana - National Rural Livelihoods Mission. It was launched in 2011 as NRLM (Aajeevika) and renamed in 2016. It is run by the Ministry of Rural Development and builds women's SHGs in rural areas.

What are the categories of MUDRA loans?

Shishu, Kishore and Tarun, based on the stage and size of the business. The loan limits have been revised since the scheme began in 2015, and a higher Tarun Plus category was added later.

For more Economy topics in simple language, see our Banking System in India, Poverty and Unemployment and Government Schemes posts, or browse the Economy section. Preparing for a specific exam? Start with the NABARD Grade A guide or join the 100 Hour GS Course.