The Journey of SHGs: How They Develop and Grow with NGO Support

Self-Help Groups (SHGs) don’t come into existence overnight. Behind every thriving group of women managing loans, running enterprises, and negotiating with banks is a carefully structured developmental journey – one that unfolds across several months and sometimes years. This journey, guided at critical stages by NGOs, moves from identifying vulnerable communities all the way to building federations capable of sustaining themselves independently. Understanding this process matters because it reveals how financial empowerment at the grassroots level actually works – not as a single intervention, but as a layered, deliberate progression.

Pre-formation stage: laying the groundwork 🔗

Before a single SHG is formed, there is significant preparatory work that NGOs must complete. This is called the pre-formation stage, and its quality largely determines whether a group will survive or dissolve within months.

The first task is identifying where the need is greatest. NGOs use Participatory Rural Appraisal (PRA) methods – tools like village mapping, wealth ranking, and rapid assessments of local savings and credit systems – to understand the economic landscape of target communities. This isn’t a superficial survey. It is a structured process of listening to communities to identify who is financially excluded, who carries debt burdens, and which households are most vulnerable.

Once the community is assessed, NGOs begin creating awareness. Facilitators hold village meetings, door-to-door visits, and informal gatherings to explain the concept of collective savings and mutual credit. This awareness work is critical because many potential members have never engaged with formal or semiformal financial systems. The goal is not just to recruit members but to help people understand why collective action can change their circumstances.

Selection and composition of the group 🔗

Group composition requires careful attention. The ideal SHG size is between 10 and 20 members. Members should share a similar socioeconomic background – this homogeneity builds trust and reduces conflict over resources. Typically, only one member per family is allowed to join a group, and groups are formed as either all-women or all-men, with women’s groups consistently demonstrating stronger performance in savings and repayment.

Once a group of 15-20 women collectively decides to come together, they select group leaders and develop their own rules and norms. NGOs facilitate this process but deliberately avoid making decisions on the group’s behalf – the goal from day one is to build the group’s own governance capacity.

Formation stage: building the savings habit 🔗

The formation stage begins the moment a group constitutes itself. The most immediate priority is establishing a regular savings habit. Groups are encouraged to begin saving immediately after formation, even if the amounts are very small. This regularity – ideally weekly meetings – builds financial discipline and creates the group’s internal corpus, which will later serve as the basis for internal lending.

At this stage, the NGO is closely involved. It helps maintain group records and accounts, often bearing the cost of a group accountant initially. NGO field workers attend meetings, check that accounts are being maintained correctly, and introduce members to savings and credit concepts in accessible language. The meetings are also used for awareness-raising on broader issues – health, legal rights, and social concerns – turning the SHG into a platform for community dialogue, not just financial transactions.

Rules and norms are formalized during this period. Penalties for irregular savings or missed meetings are established by the group itself, making the governance structure internally owned rather than externally imposed. This is a deliberate design choice: rules that members create tend to be rules that members follow.

Stabilization phase I: internal lending and independent management 🔗

As a group’s savings grow over the first few months, it enters the first stabilization phase. Here, the group begins to lend its pooled savings to its own members – a practice known as internal lending. Members can access small loans for productive or emergency purposes, repaying them with interest that stays within the group fund. This circular flow of money within the group is foundational to the SHG model’s financial logic.

A key marker of this phase is the group’s increasing independence. Members begin to manage savings and credit transactions on their own, with norms for lending and repayment becoming routine rather than supervised. The NGO’s role begins to shift – from active participant to periodic monitor. Field workers visit less frequently, checking that accounts are accurate and that the group’s internal processes remain healthy.

Record-keeping and accountability 🔗

Groups are trained to maintain a core set of records: a minutes book capturing proceedings and decisions, a savings register tracking individual contributions, a loans register recording disbursements and repayments, and individual passbooks for each member. These simple but structured records enable transparency and are essential for the group’s eventual engagement with formal banks. Groups that maintain clean accounts and demonstrate consistent savings patterns are the ones that qualify for external credit linkage in later stages.

Stabilization phase II: cluster formation and banking linkages 🔗

After roughly one to two months of stable internal functioning, groups in a region begin interacting with one another. Leaders from nearby SHGs meet, exchange experiences, and learn from each other’s governance practices. This peer learning is formalized into cluster associations – structures promoted by 10 to 20 SHGs located in neighboring villages.

The cluster association serves several functions. It promotes and strengthens individual SHGs, facilitates mutual support during financial stress, and – critically – helps groups approach banks collectively. NABARD’s SHG-Bank Linkage Programme, launched as a pilot in 1992, became the formal mechanism through which SHGs could open savings accounts and access institutional credit. Under this model, a group that has demonstrated six months or more of regular savings and clean records can be linked to a bank for a loan of typically one to four times its total savings.

The banking linkage is transformative. It moves the SHG from a closed internal system to a participant in the formal financial ecosystem. As of 2023, SHGs in India had collectively accessed bank loans amounting to over ₹7.68 lakh crore since 2013-14, making this one of the largest financial inclusion programmes in the world. NGOs play an active role in preparing groups for bank linkage – training members to approach financial institutions, negotiate loan terms, and understand repayment responsibilities.

Growth phase: income generation and expanding activities 🔗

Once a group has stable internal lending and at least one cycle of bank credit, it enters the growth phase. Here, the focus shifts from pure savings-and-credit management to income-generating activities (IGAs). Members invest loans into micro-enterprises: small-scale agriculture, animal husbandry, weaving, food processing, petty trade, and other livelihood activities suited to the local economy.

NGOs continue to play a role during this phase, but it is now an advisory one. They help groups identify viable income activities, stabilize existing enterprises, and connect members to skill development programmes. NABARD’s Livelihood and Enterprise Development Programme (LEDP), for instance, provides intensive skill training, backward-forward market linkages, and handholding support for SHG clusters pursuing livelihood expansion.

Leaders within the group take on greater responsibility during this phase. They manage activity planning, coordinate with external agencies, and represent the group at cluster-level meetings. The shift of leadership from NGO facilitators to group leaders themselves is one of the defining markers of a mature SHG.

Social dimensions of growth 🔗

The growth phase is not limited to economic activity. As members gain financial confidence, they become more vocal in community affairs. SHGs have consistently been linked to improvements in gender equality, reductions in social ills like early marriage and dowry practices, and stronger women’s participation in local governance. The regular meetings that started as financial gatherings evolve into spaces where members discuss health, education, rights, and civic issues.

Federation formation and self-sustainability 🔗

The most advanced stage in SHG development is the formation of federations – larger umbrella bodies that bring together multiple SHGs or cluster associations under a common governance structure. Federations typically operate at the village, block, or district level and serve as collective voices for their member groups.

A federation brings together elected representatives from individual SHGs to create a body capable of resource mobilization, advocacy, and inter-group support at a scale no single group could achieve. Federations can access larger institutional funds, manage common service centers, and negotiate with government departments on behalf of members.

NGOs guide the structural formation of federations – helping design governance frameworks that are democratic and inclusive, supporting fund management systems, and facilitating connections with government schemes. As groups reach maturity, they begin seeding new SHGs, creating an organic replication of the model – experienced members becoming facilitators for newly forming groups.

The ultimate objective throughout all these stages is the NGO’s own gradual withdrawal. A successful NGO-SHG partnership ends with the group no longer needing the NGO. Capacity-building – in financial literacy, leadership, enterprise management, and governance – is designed precisely so that external support becomes redundant. Sustainable SHGs are those that have developed strong internal systems and clear connections to external resources, enabling them to operate independently and continue benefiting their members long after NGO involvement ends.

The role of NGOs across each stage 🔗

What stands out across the entire development process is how deliberately the NGO’s role changes. At the pre-formation stage, the NGO is an investigator and mobilizer. During formation, it is a teacher and record-keeper. In stabilization, it becomes a monitor. By the growth phase, it is a strategic advisor. And at federation stage, it is a governance architect stepping back as the structure becomes self-sustaining.

This staged withdrawal is not incidental – it is the design. An NGO that remains too controlling will produce groups that depend on it indefinitely. One that withdraws too early will leave groups without the tools to manage crises. The NGO sector’s role as a Self Help Group Promoting Institution (SHPI) has been formally recognized by NABARD, which provides promotional grants to NGOs and other institutions that demonstrate effective group formation and credit linkage outcomes. This policy acknowledgment reflects how central the NGO function is to the broader SHG ecosystem in India.

The numbers speak to the scale of what this process, when done well, can achieve. Over 100 million women have been mobilized into approximately 9.1 million SHGs under the DAY-NRLM programme alone – a collective transformation driven not by a single intervention but by the careful, stage-by-stage developmental process described here.

What do you think? At which stage of the SHG development process do you believe NGO support is most critical – and why? As SHGs mature into federations and become financially self-reliant, what challenges do you think they face in maintaining their original community-centered values?

References

1. https://agriculture.institute/institutional-support/steps-to-forming-self-help-groups/
2. http://www.ofsds.in/Publication/ajy_CB_manual/3_Formation_SHG.pdf
3. https://www.publicsphereproject.org/content/self-help-groups
4. https://www.nabard.org/content.aspx?id=477
5. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1985779
6. https://www.nabard.org/contentsearch.aspx?AID=225&Key=shg+bank+linkage+programme
7. https://byjus.com/free-ias-prep/self-help-group/
8. https://www.ncbi.nlm.nih.gov/books/NBK310972/
9. https://thesharetrust.org/self-help-groups
10. https://ruralduniya.com/shg/