Microfinance and Self-Help Groups in India Explained

Microfinance is the provision of small loans, savings, insurance and other financial services to low-income households and micro-entrepreneurs who are usually excluded from the formal banking system. In India, microfinance is delivered mainly through Self-Help Groups (SHGs) linked to banks, and through microfinance institutions (MFIs) regulated by the Reserve Bank of India (RBI).

The Indian approach grew from the NABARD-led SHG-Bank Linkage Programme, launched in 1992, and from private lenders that expanded rapidly in the 2000s before a crisis in Andhra Pradesh in 2010 reshaped the sector. This guide explains how the models work, who regulates them, what the government programmes are, and where the risks lie. It was last reviewed on 13 October 2026.

Key Takeaways

• Microfinance in India means small loans and financial services for low-income households, delivered mainly through Self-Help Groups, Joint Liability Groups and regulated microfinance institutions.
• The SHG-Bank Linkage Programme, pioneered by NABARD in 1992, links informal savings groups of women to formal bank credit and is widely described as one of the largest microfinance programmes in the world.
• A Self-Help Group is a small voluntary group, usually of ten to twenty members and often all women, that pools savings, lends internally and borrows from a bank as a group.
• NBFC-MFIs are non-banking finance companies that lend to low-income households and are regulated by the Reserve Bank of India, which created the category in 2011 after the Malegam Committee report.
• The 2010 Andhra Pradesh crisis, triggered by multiple lending and coercive recovery, led to a state ordinance and then to national regulation, credit-bureau reporting and self-regulatory bodies.
• Deendayal Antyodaya Yojana-NRLM mobilises rural women into SHGs and federations, and over-indebtedness remains the principal risk in Indian microfinance.

What is microfinance?

Microfinance is a set of financial services, including small loans, savings accounts, insurance, remittances and pension products, designed for people with low and irregular incomes who cannot easily access conventional banks. The loans are usually of small size, repaid in frequent instalments and used for income-generating activity such as dairy, tailoring, petty trade, small farming and craft work.

The modern global movement is associated with Muhammad Yunus and the Grameen Bank in Bangladesh, whose work earned a Nobel Peace Prize in 2006. India developed its own variants, which rely heavily on group savings and bank linkage rather than purely on lending by specialised institutions.

Microfinance serves the goal of financial inclusion, which is making basic financial services reachable and affordable for every adult. It operates alongside other inclusion tools such as the Pradhan Mantri Jan Dhan Yojana accounts and the Pradhan Mantri MUDRA Yojana.

How did microfinance develop in India?

Microfinance in India developed in stages: informal savings and credit traditions, the formal SHG-Bank Linkage Programme from 1992, the rapid growth of private MFIs in the 2000s, and a regulated phase after 2010. Rural cooperative credit societies had existed since the early twentieth century, but they did not reach the poorest households effectively.

Timeline

• 1982: NABARD established as the apex body for rural and agricultural credit.
• 1991-92: NABARD begins a pilot to link SHGs with banks, and the RBI soon permits banks to open savings accounts for SHGs.
• 1993: Rashtriya Mahila Kosh set up to provide credit to poor women through intermediaries.
• 1999: Swarnajayanti Gram Swarozgar Yojana launched, promoting group-based self-employment.
• 2000s: MFIs and NBFC-based lenders expand quickly using the Grameen-style joint liability model.
• 2010: Andhra Pradesh crisis; the state passes a law restricting MFI operations.
• 2011: RBI creates the NBFC-MFI category; National Rural Livelihoods Mission begins.
• 2015: Small finance banks licensed, and some large MFIs convert into banks or small finance banks.

What is a Self-Help Group (SHG)?

A Self-Help Group (SHG) is a small, informal and voluntary association of people, typically ten to twenty members from a similar economic background, who save regularly, lend to one another from the pooled fund and repay with interest. Most SHGs in India consist entirely of women.

SHGs follow a set of practices that are often called the “panchasutra”, meaning five principles: regular meetings, regular savings, regular internal lending, timely repayment and proper book-keeping. The group makes decisions collectively, keeps its own records and sets its own rules.

Once a group has been functioning for a period and has built discipline, it becomes eligible for a loan from a bank. The loan is sanctioned to the group, not to individual members, and the group decides how to distribute the money among members.

How does the SHG-Bank Linkage Programme work?

The SHG-Bank Linkage Programme (SHG-BLP) works by connecting informal self-help groups to formal banks so that groups can open savings accounts, receive loans and build a credit history. NABARD launched it as a pilot in 1992, and the RBI backed it by allowing banks to treat SHG lending as a normal activity.

The stages generally run as follows.

• Formation: a non-governmental organisation, a bank, a government agency or a community mobiliser helps women form a group.
• Savings and internal lending: the group saves and lends within itself for several months, building a track record.
• Grading and bank account: the group opens a savings account and may be assessed on its meetings, savings and repayment record.
• Bank credit: the bank lends to the group, typically as a multiple of the group’s savings.
• Repayment and repeat loans: timely repayment unlocks larger loans in later cycles.

The programme is notable because it relies on peer monitoring and social collateral rather than property as security, and because banks, cooperatives and Regional Rural Banks all take part. NABARD provides promotional support, training and refinance to participating banks.

What are Joint Liability Groups (JLGs)?

A Joint Liability Group (JLG) is an informal group of four to ten individuals who come together to borrow from a bank or a lender, with each member jointly responsible for the repayment of the loans taken by the others. The members are usually engaged in similar activities, such as farming, and need not save together as an SHG does.

NABARD promoted JLGs from the mid-2000s, especially for tenant farmers and oral lessees who lacked land titles. The difference from an SHG is that the JLG is mainly a borrowing arrangement, while the SHG is first a savings and mutual-help institution.

What are MFIs and NBFC-MFIs?

Microfinance institutions (MFIs) are organisations that provide small loans and related services to low-income customers, and NBFC-MFIs are those MFIs registered as non-banking financial companies and regulated by the Reserve Bank of India. They emerged as an alternative to the SHG model and often use a group-lending method with weekly or fortnightly repayments.

MFIs can take different legal forms: non-profit societies and trusts, Section 8 companies, cooperatives and NBFCs. Because most large lending volume came to be handled by NBFCs, the RBI created a special category called NBFC-MFI in 2011.

The RBI framework for NBFC-MFIs has addressed issues such as minimum capital, the proportion of loans that must go to low-income households, limits on the number of lenders per borrower, transparency on pricing and fair recovery practices. The rules have been revised over time, and the 2022 framework applied a common, activity-based approach to all regulated entities lending to microfinance borrowers, including a ceiling on household income for eligible borrowers and board-approved pricing. Small finance banks and commercial banks also lend in this segment.

What happened in the 2010 Andhra Pradesh microfinance crisis?

The 2010 Andhra Pradesh microfinance crisis was a sectoral shock in which allegations of over-lending and coercive recovery by MFIs led the state government to issue an ordinance in October 2010 restricting their operations, causing repayments to collapse. Andhra Pradesh was then the largest microfinance market in India, and many borrowers held multiple loans from several lenders.

The state’s ordinance was followed by a law, the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act. It required MFIs to register, restricted recovery methods and made lending subject to local authority controls. MFI repayment rates in the state fell sharply, and lenders, including banks, suffered heavy losses.

Reforms that followed

• The RBI set up the Malegam Committee, which submitted its report in January 2011 and recommended a dedicated NBFC-MFI category.
• Limits were introduced on loan size, borrower income, the number of lenders per borrower and the spread charged.
• Reporting to credit bureaus became mandatory so that lenders could see borrowers’ total debt.
• Fair-practice codes were adopted, and the RBI recognised self-regulatory organisations, notably the Microfinance Institutions Network (MFIN) and Sa-Dhan.
• Some MFIs turned into small finance banks, bringing them under bank-style regulation.

What is DAY-NRLM and how does it support SHGs?

Deendayal Antyodaya Yojana-National Rural Livelihoods Mission (DAY-NRLM) is a flagship poverty-reduction programme of the Ministry of Rural Development that organises poor rural women into SHGs and larger federations to improve their livelihoods and access to finance. It began in 2011 as the National Rural Livelihoods Mission, branded Aajeevika, and was renamed in 2015.

DAY-NRLM replaced the earlier Swarnajayanti Gram Swarozgar Yojana and uses a community-based approach. Women’s SHGs form village organisations and then cluster-level federations, which act as institutions for credit, collective purchase, marketing and social action.

• Capital support: SHGs can receive revolving funds and community investment funds to build their own lending capital.
• Interest subvention: eligible SHGs get relief on bank loan interest so that effective rates stay low.
• Community resource persons: trained women from the community help form and train groups.
• Livelihood promotion: training supports agriculture, livestock, non-farm enterprise and skills.

An urban counterpart, the Deendayal Antyodaya Yojana-National Urban Livelihoods Mission (DAY-NULM), supports urban poor and street vendors.

How does microfinance empower women in India?

Microfinance empowers women in India by giving them access to savings, credit and collective decision-making, which can raise their income, mobility and bargaining power within the household. Most SHG members are women, and group membership often provides their first bank account and first experience of managing money.

Studies and programme experience point to several positive effects.

• Women gain a regular savings habit and a safety net for emergencies.
• Access to credit lets them start or expand small enterprises such as dairy, tailoring and food processing.
• Group meetings build confidence and leadership, and many SHG members contest local body elections or serve on village committees.
• Federations take up issues such as health, education, sanitation and prevention of domestic violence.

However, empowerment is not automatic. Evidence is mixed on whether loans always lead to women controlling the enterprise, and in some households men use the loan, leaving women to carry the repayment burden.

What are the risks and criticisms of microfinance?

The main risk of microfinance is over-indebtedness, which arises when borrowers hold more loans than they can repay, often from several lenders at once. Repayment pressure, high effective interest rates relative to income, and the use of loans for consumption rather than income generation can all strain households.

Safeguards now include credit-bureau checks, caps on indebtedness, fair-practice codes, grievance redress and the oversight of self-regulatory organisations. Policy attention has also turned to bundling credit with savings, insurance and livelihood support.

Bottom Line

Microfinance in India grew from the SHG-Bank Linkage Programme and expanded through regulated MFIs, becoming a major route to financial inclusion for poor households, especially women. Its future depends on responsible lending, borrower protection and linking credit to real livelihoods.

Frequently Asked Questions

What is microfinance in India?

Microfinance in India is the supply of small loans, savings and insurance to low-income households that lack access to regular banks. It is delivered mainly through Self-Help Groups linked to banks and through microfinance institutions regulated by the RBI. Its aim is financial inclusion and livelihood support.

Who started the SHG-Bank Linkage Programme?

NABARD started the SHG-Bank Linkage Programme as a pilot in 1992, with support from the Reserve Bank of India. It connects groups of poor people, mostly women, with banks for savings accounts and loans. It is regarded as one of the largest microfinance programmes in the world.

What is the difference between an SHG and an MFI?

An SHG is a small group of members who save and lend among themselves and then borrow from a bank, while an MFI is an institution that lends directly to low-income customers. SHGs are member-owned and informal, whereas NBFC-MFIs are companies regulated by the RBI.

What caused the 2010 Andhra Pradesh microfinance crisis?

The crisis was caused by rapid expansion, multiple lending to the same borrowers and complaints of coercive recovery. In October 2010 the Andhra Pradesh government issued an ordinance restricting MFIs, and repayments fell sharply. The RBI then adopted reforms based on the Malegam Committee report.

What is DAY-NRLM?

Deendayal Antyodaya Yojana-NRLM is the Ministry of Rural Development’s national mission that organises rural poor women into SHGs and federations. It began in 2011 and was renamed in 2015. It offers capital support, interest subvention and livelihood training.

What are the main risks of microfinance?

The main risk is over-indebtedness caused by borrowing from many lenders at once. Other risks include high effective interest costs, coercive recovery, mission drift and income shocks from drought or economic disruption. Credit-bureau reporting and RBI rules aim to reduce these risks.

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