Understanding Different Models of SHG-Bank Linkages in Rural Financing

Millions of women in rural India have gained access to formal credit not by walking into a bank branch alone, but by coming together in small groups, pooling savings, and building a collective financial identity. This is the foundation of the Self-Help Group-Bank Linkage Programme (SHG-BLP), launched by NABARD in 1992 as a pilot with just 500 groups. Today, it has grown into the world’s largest coordinated microfinance programme, covering over 17 crore households. Central to this programme are three distinct models of how SHGs connect with banks – and understanding each model reveals how rural financing actually reaches the last mile.

What is the SHG-bank linkage programme? 🔗

Before diving into the models, a quick grounding: a Self-Help Group (SHG) is typically a community-based group of 10 to 25 women from similar socio-economic backgrounds who meet regularly, save small amounts collectively, and lend those savings to members in need. Once a group demonstrates financial discipline – regular meetings, consistent savings, and internal lending – it becomes eligible to access credit from formal banks.

The SHG-BLP was designed to bridge the gap between these informal groups and the formal banking system. It replaced the old logic of individual collateral with collective creditworthiness. According to NABARD’s framework, the linkage between SHGs and banks operates through three primary models, each suited to different ground realities. Over 83% of all linked SHGs are exclusively women’s groups, making this programme a critical lever for women’s economic empowerment.

Model I: Direct bank-SHG relationship 🔗

In the first model, the bank deals directly with the SHG. The bank itself takes on the role of identifying, forming, nurturing, and eventually financing the group. There is no third-party intermediary standing between the bank and the SHG at the point of lending.

This is considered the simplest and most direct form of linkage – the bank provides financial assistance to the group for on-lending to individual members. In practice, what this means is that the bank manager or a bank-appointed community volunteer interacts directly with the SHG, evaluates its savings record and internal lending history, and then disburses a loan to the group as a whole.

Role of the SHG Promoting Institution (SHPI) in Model I 🔗

Even though the lending relationship is direct, a Self-Help Group Promoting Institution (SHPI) – which could be an NGO, a government agency, or even a Rural Volunteers network – often plays a role in the pre-linkage phase. The SHPI provides initial training and guidance to help rural poor organize themselves into thrift and credit groups. After linkage is established, the SHPI continues to monitor the group’s functioning without formally mediating the financial transaction.

This model works well in areas where banks are operationally active, where bank staff have the capacity to engage with community groups, and where SHGs are already well-organized and financially mature. The benefit here is direct accountability – the SHG is answerable directly to the bank, which tends to sharpen repayment discipline. The downside is that it demands significant bandwidth from bank staff, which limits its scalability in remote or underserved regions.

Model II: NGO as facilitator, bank as lender 🔗

The second model is a variation of the first, and it is the most widely adopted model under the SHG-BLP. Here, the bank still lends directly to the SHG, but the SHG is formed, trained, and supported by an NGO or government agency acting as the SHPI. The NGO does not handle any money – its role is purely facilitative.

Think of it this way: the NGO does the community work – identifying vulnerable women, building trust, conducting meetings, training members in bookkeeping, and nurturing group cohesion. Once the group is stable and has a savings track record of at least six months, the NGO facilitates a link with the nearest bank branch. From that point, the bank takes over the financial relationship. The NGO stays engaged post-linkage to ensure the group continues functioning well, but it is the bank that disburses and recovers the loan.

Why this model is so widely adopted 🔗

Model II distributes responsibilities more efficiently. NGOs are better equipped to navigate social dynamics in rural communities – language, trust, gender sensitization – while banks bring the capital and formal infrastructure. This model has been popular and more acceptable to banks, as some of the difficult functions of social dynamics are externalised to the NGO. Banks essentially receive a group that is already organized and ready for credit – reducing their operational burden considerably.

For NGOs with broad anti-poverty mandates, financial intermediation is generally seen as an entry point to wider goals – empowering women, improving nutrition, increasing school enrolment, and building leadership within communities. Model II allows them to pursue these goals without taking on financial risk or regulatory responsibilities. It is a clean division of labour that has made SHG-bank linkage a scalable proposition across diverse geographies.

NABARD has recognized NGOs, Regional Rural Banks (RRBs), District Central Cooperative Banks (DCCBs), Farmers’ Clubs, SHG Federations, and Individual Rural Volunteers as legitimate SHPIs under this model. All are eligible for promotional grant assistance from NABARD to support SHG formation and credit linkage activities.

Model III: NGO as financial intermediary for on-lending 🔗

The third model is structurally distinct from the first two. Here, the NGO does not just facilitate – it actually becomes a financial intermediary. The bank lends a bulk amount to the NGO, and the NGO then on-lends those funds to the SHGs it has promoted. The financial link between the bank and the SHGs is indirect.

In this arrangement, the NGO accepts contractual responsibility for repayment to the bank. This is a significant departure from Models I and II. The NGO is no longer just a community organizer – it is now a microfinance institution in functional terms, managing credit risk, loan disbursement, and recovery on behalf of the bank.

When and why Model III is used 🔗

This model is typically deployed in areas where banks have limited or no physical presence – remote tribal belts, hilly terrains, geographically isolated districts. In such places, it is simply not practical for a bank branch to maintain direct lending relationships with dozens of SHGs spread across difficult terrain. The NGO, already embedded in the community, fills this operational vacuum.

In Model III, NGOs which promoted the groups act as financial intermediaries – they promote the SHGs, nurture and train them, and then approach banks for bulk loans which they channel to the groups. The interest rate differential between what the NGO pays the bank and what it charges the SHG typically covers the NGO’s operational costs.

In this third model, the NGOs act as both facilitators and microfinance intermediaries. They promote the groups, nurture and train them, and then approach banks for bulk loans for lending to the SHGs. This dual role demands a high level of organizational capacity and financial accountability from the NGO.

Risks and trade-offs in Model III 🔗

While Model III extends financial reach into underserved areas, it comes with structural trade-offs. Banks lose direct contact with SHGs, making credit monitoring more difficult. The entire repayment chain depends on the NGO’s integrity and management capacity. If the NGO faces a financial or governance crisis, repayment to the bank is at risk. This is why banks lose their direct contact with SHGs if federations or intermediaries act between the financing banks and SHGs, which can sometimes dilute accountability.

Despite these risks, Model III remains essential for reaching populations that are genuinely excluded from formal banking. In remote areas, the choice is often not between Model II and Model III – it is between Model III and no access at all.

How the three models compare 🔗

Each model represents a different balance between bank reach, NGO capacity, and the maturity of the SHG itself. In Model I, the bank does the heavy lifting and maintains direct control. In Model II, the NGO handles community mobilization while the bank retains the financial relationship. In Model III, the NGO takes on both roles – organizer and lender – to reach where banks cannot go.

It is worth noting that these models are not mutually exclusive or fixed. The adoption of a particular model depends on the perception of the bank, the strength of the SHGs, and the capacity of the NGO. A conservative banker in a new territory might start with Model III, relying heavily on the NGO’s local knowledge, and gradually shift toward Model II or even Model I as the SHGs mature and the bank gains confidence in the community’s creditworthiness. The models can be understood as a progression – with Model I representing the most evolved state of the bank-SHG relationship.

The broader impact on women’s financial inclusion 🔗

Across all three models, the SHG-bank linkage programme has fundamentally changed how rural women relate to formal finance. After becoming SHG members, women who previously had no bank accounts developed banking habits and in some cases began using ATMs – a striking shift for communities where financial exclusion had been the norm for generations.

The three models together have made this scale possible. No single model could have reached the diversity of India’s rural landscape – from well-connected villages in Andhra Pradesh to isolated hamlets in Jharkhand. By allowing for flexibility in who forms the group, who lends the money, and who bears the risk, the SHG-BLP has built a genuinely adaptive system of rural credit.

What started as a pilot of 500 SHGs in 1992 has grown – through these three models working in tandem – into a programme that covers over 17.75 crore households and has become the largest savings-led microfinance model in the world.

What do you think? As banks expand digital infrastructure into rural areas, does the case for Model III weaken – or does the human element that NGOs provide remain irreplaceable even when geography is no longer the barrier? And given that all three models ultimately rest on women’s collective discipline to function, how much credit does the formal financial system actually deserve for the programme’s success?

References

1. https://www.nabard.org/content.aspx?id=477
2. https://www.gktoday.in/shg-bank-linkage-programme/
3. http://www.gdrc.org/icm/nanda-4.html
4. https://www.gdrc.org/icm/linkage-model.html
5. https://www.researchgate.net/publication/236604902_Progress_of_SHG-Bank_Linkages_in_India_An_Assessment_of_Key_Issues
6. https://en.wikipedia.org/wiki/Self-help_group_(finance)
7. https://www.nabard.org/content1.aspx?id=1758&catid=8&mid=8
8. https://www.inspirajournals.com/uploads/Issues/2145459311.pdf
9. https://slbckarnataka.com/UserFiles/slbc/Chap_VII.pdf
10. https://pmc.ncbi.nlm.nih.gov/articles/PMC10238733/