Microfinance, SHGs and Joint Liability Groups

1. What is microfinance?#

Microfinance provides small-scale financial services to lower-income households that may not have conventional access to formal credit.

It can support:

• livelihoods;
• consumption smoothing;
• emergency needs;
• microenterprise;
• household investment.

But modern microfinance regulation focuses strongly on preventing:

• over-indebtedness;
• coercive recovery;
• opaque pricing.

2. RBI definition of a microfinance loan#

Under the current RBI framework, a microfinance loan is broadly:

a collateral-free loan to an eligible low-income household within the prescribed household-income threshold.

The loan's end-use does not by itself determine whether it is microfinance.

3. Household approach#

RBI assesses eligibility and indebtedness at the household level.

The household unit broadly includes:

• husband;
• wife;
• unmarried children,

under the current framework.

This prevents multiple family members from borrowing independently without considering total household debt.

4. Income threshold#

The RBI framework uses an annual household-income limit.

The current threshold belongs in the module's current-data box.

The durable principle is:

microfinance regulation targets low-income households rather than defining microfinance merely by small loan size.

5. Collateral-free requirement#

If a loan is backed by security such as:

• gold;
• equipment;
• hypothecated asset,

it does not fit the regulatory definition of a collateral-free microfinance loan.

6. Repayment-obligation cap#

RBI requires regulated entities to control the total monthly debt burden of the household.

The current ceiling is expressed as a percentage of monthly household income.

Importantly, the calculation considers:

• microfinance loans; and
• other household loans.

This reduces multiple-lending risk.

7. Why household indebtedness matters#

Suppose a household earns ₹30,000 per month.

It has:

• Loan A EMI ₹6,000;
• Loan B EMI ₹5,000;
• proposed Loan C EMI ₹7,000.

Total after new loan:

₹18,000.

Even if Loan C looks small in isolation, total household debt burden may be too high.

8. Pricing of microfinance#

RBI requires regulated entities to maintain:

• Board-approved pricing policy;
• transparent interest/charges;
• disclosure;
• fair conduct.

The modern framework does not rely only on one simple universal rate cap.

9. Key Facts / fact sheet#

Borrowers must receive clear information about:

• interest;
• fees;
• repayment;
• grievance redressal;
• charges.

Transparency matters because borrowers can be financially vulnerable.

10. Recovery conduct#

Microfinance recovery must not involve:

• intimidation;
• harassment;
• abusive behaviour;
• coercive methods.

Responsible recovery is part of borrower protection.

11. Who can provide regulated microfinance?#

RBI's framework covers regulated entities such as:

• commercial banks;
• RRBs;
• co-operative banks specified in the framework;
• NBFCs;
• NBFC-MFIs;
• other regulated lenders within scope.

12. MFI vs microfinance loan#

MFI means an institution specialising in microfinance.

But a microfinance loan can also be provided by:

• a bank;
• RRB;
• SFB;
• other regulated lender.

Therefore:

microfinance is a type of credit; MFI is a type of institution/business model.

13. Self Help Group - SHG#

An SHG is a small voluntary group whose members:

• save regularly;
• meet regularly;
• build a common fund;
• lend internally;
• develop collective credit discipline.

SHGs are strongly associated with women's financial inclusion in India.

14. SHG-Bank Linkage Programme - SHG-BLP#

NABARD launched the SHG-Bank Linkage Programme on a pilot basis in 1992.

The model links informal groups to formal banks.

Typical progression:

Group formation
↓
Regular savings
↓
Internal lending
↓
Credit discipline
↓
Bank savings account
↓
Bank loan / repeat linkage

15. Savings-led model#

SHG-BLP is not simply:

"bank gives loan to a group of poor people."

The classic model emphasises:

• savings first;
• group discipline;
• peer knowledge;
• internal lending;
• later bank linkage.

This creates an information and trust record.

16. NABARD Panchsutras#

Good-quality SHGs are often associated with five basic practices:

1. regular meetings;
2. regular savings;
3. internal lending;
4. timely repayment;
5. proper books of accounts.

These are commonly known as the Panchsutras.

17. How bank lends to SHG#

The bank can provide a bulk loan to the SHG.

The SHG then allocates funds among members according to:

• group decisions;
• member needs;
• internal rules.

The bank does not necessarily make a separate retail loan to every member.

18. Why SHG lending can work without conventional collateral#

The model uses:

• peer knowledge;
• social capital;
• savings behaviour;
• group discipline;
• repeat relationships

instead of relying only on property collateral.

19. SHGs and priority sector#

Qualifying SHG loans can count under:

• agriculture;
• microenterprise;
• weaker sections;
• other PSL categories,

depending on purpose and borrower characteristics.

20. Joint Liability Group - JLG#

A JLG is an informal group of borrowers who are engaged in similar economic activities and agree to take joint responsibility for repayment.

NABARD's classic JLG model commonly uses:

• small groups;
• often 4 to 10 members;
• mutual guarantee;
• individual or group loans.

21. Who uses JLGs?#

JLGs are particularly useful for:

• tenant farmers;
• oral lessees;
• sharecroppers;
• small/marginal farmers;
• asset-poor rural borrowers.

These borrowers may lack:

• clear land title;
• conventional collateral.

22. JLG savings requirement#

Unlike SHG, regular group savings is not the central mandatory feature of the traditional JLG model.

The main purpose is:

credit access through joint liability.

23. SHG vs JLG#

24. JLG vs individual loan#

Individual loan:

• borrower alone is contractually responsible.

JLG finance:

• group members jointly undertake repayment responsibility according to product structure.

This can substitute partly for conventional collateral.

25. SHG vs MFI group lending#

SHG-BLP:

• savings-led;
• group may borrow directly from a bank;
• strongly associated with NABARD/NRLM ecosystem.

MFI group lending:

• lender/MFI originates microfinance to borrowers/groups;
• follows RBI's regulated microfinance framework where applicable.

They can serve similar households but the institutional model differs.

26. DAY-NRLM#

Deendayal Antyodaya Yojana - National Rural Livelihoods Mission supports large numbers of women's SHGs and rural livelihood institutions.

Banks provide:

• savings linkage;
• credit linkage;
• repeat finance

within the scheme framework.

Detailed Government-scheme features belong in Module 09.

27. SHG credit grows with track record#

A well-performing group can obtain larger repeat finance as:

• savings history improves;
• internal discipline develops;
• repayment track record strengthens.

This is relationship-based lending.

28. Microfinance and credit bureaus#

Regulated lenders use Credit Information Companies to assess:

• existing loans;
• household indebtedness;
• repayment behaviour.

This helps prevent over-lending.

29. Financial inclusion vs over-indebtedness#

More credit is not always better.

Responsible microfinance must balance:

• access;
• affordability;
• repayment capacity;
• borrower dignity;
• sustainable lending.

30. Current scale of SHG-BLP#

NABARD's latest published microfinance reports show that SHG-BLP is one of the world's largest group-based financial-inclusion programmes.

Quick check - BA-08-06#

1. What is the core RBI feature of a microfinance loan?
2. Why is repayment assessed at household level?
3. What is the core difference between SHG and JLG?
4. In which year did NABARD launch SHG-BLP?
5. What are the Panchsutras?
6. Does a microfinance loan have to be provided by an MFI?

Quick answers#

1. Collateral-free loan to an eligible low-income household under the regulatory framework.
2. To capture total indebtedness and prevent over-borrowing.
3. SHG is savings-led; JLG is primarily credit/joint-liability-led.
5. Regular meetings, savings, internal lending, timely repayment and proper books.
6. No.