Self-help groups and microfinance: banking on collectives

A self-help group is one of the simplest and most powerful ideas in Indian development: ten to twenty women, pooling small savings into a common fund, lending to each other, and then borrowing together from a bank that would never lend to any of them alone. From NABARD’s 1992 bank-linkage experiment, the model has grown into the world’s largest microfinance programme, with the DAY-NRLM mobilising more than ten crore women. UPSC has tested it from every angle: the SHG-Bank Linkage Programme as India’s own innovation (2015), the twin objectives of asset creation and empowerment (2020), microfinancing and the vicious cycle of poverty (2021), the withdrawal-of-the-state thesis (2017), and the legitimacy of microfinance outfits (2013). This article covers the SHG model, the NRLM machine, the microfinance regulation story and the Andhra lesson, and the deeper idea of SHGs as social capital.

The pioneers are worth naming: MYRADA (the Mysore Resettlement and Development Agency) and PRADAN popularised the SHG model in India, and SEWA, the Self-Employed Women’s Association founded by Ela Bhatt, is the movement’s most cited pioneer for organising informal women workers.

How the SHG works

NABARD defines an SHG as a small, economically homogenous and affinity group of the rural poor voluntarily coming together to save small amounts regularly, mutually agreeing to contribute to a common fund and to meet their emergency needs on the basis of mutual help. The model’s pillars are a group size of ten to twenty-five members with a homogeneous socio-economic background, voluntary and self-selected membership, regular savings, inter-loaning within the group, bank linkage through the SHG-Bank Linkage Programme running since 1992, democratic group decision-making, and joint liability for loan repayment, where peer pressure ensures discipline.

Under the DAY-NRLM of 2011, SHGs are organised into a three-tier structure: Self-Help Groups at the village level, Village Organisations at the hamlet or village level, and Cluster Level Federations at the gram panchayat or block level. This federation ladder is what turns small savings groups into institutions with bargaining power: SHG federations act as pressure groups holding local administration accountable for the delivery of water, electricity and sanitation, and SHG members serve as social auditors, worksite mates and planning participants in Gram Sabhas under the MGNREGA-SHG convergence.

The scale: the world’s largest microfinance programme

The numbers are the story. Per NABARD’s 2023 status report, over 12 million SHGs now exist, covering more than 130 million households. The SHG-Bank Linkage Programme, pioneered by NABARD in 1992, is the world’s largest microfinance programme by volume: the loan repayment rate stands at 96 per cent and above per the Economic Survey 2022-23, and cumulative credit disbursement has crossed four lakh crore rupees. Under the DAY-NRLM umbrella, 90.9 lakh SHGs have been formed, 10.05 crore women households mobilised, reach extended to 7,145 blocks across 745 districts, with 58,714.44 crore rupees of total capitalisation support disbursed since inception.

The state has moved from treating SHGs as a credit channel to making them the executor of rural development. The Lakhpati Didi initiative of August 2023 aims to make three crore women SHG members earn one lakh rupees or more a year through livelihood diversification, skilling and enterprise scaling, originally targeted at two crore, raised to three crore in Budget 2024-25 and further revised to six crore by March 2029, with around 1.5 crore SHG women certified as of August 2025. The Namo Drone Didi scheme, launched in November 2023 with a 1,261 crore rupee outlay, equips women SHGs with drones for agricultural rental services. Market linkage runs through the SARAS Collection on GeM, the esaras.in portal, and MoUs with Flipkart Samarth, Amazon Saheli, Meesho and JioMart.

The state models: Kudumbashree and the rest

Kudumbashree of Kerala, formally launched in 1998, remains the global reference: the world’s largest women SHG network with more than 45 lakh members in over 3 lakh SHGs, federating neighbourhood groups through Area Development Societies and Community Development Societies, pioneering urban SHGs and integration with local self-government, and recognised by the UNDP and the World Bank as a global benchmark. The other state flagships: JEEViKA, the Bihar Rural Livelihoods Project of 2007, with more than one crore women mobilised in over ten lakh SHGs; Mahalir Thittam in Tamil Nadu, with over 80 lakh women in 6.5 lakh-plus SHGs; Mission Shakti in Odisha (2001), with over 70 lakh women in 6 lakh-plus SHGs and the Mission Shakti Bazaar for product marketing; and MAVIM in Maharashtra, with over 20 lakh women in 1.5 lakh-plus SHGs.

Microfinance and the Andhra lesson

Microfinance is banking for those the banks ignore: collateral-free financial services for low-income individuals and groups with no access to formal finance. In India it primarily involves collateral-free loans to households with annual income up to three lakh rupees, per the RBI’s Master Directions. The models are the SHG-Bank Linkage Programme, the MFI model of Joint Liability Groups of five to ten members (Bandhan, Ujjivan, Spandana are the cited examples), direct bank lending including Small Finance Banks, cooperative banks, government schemes like PMMY/MUDRA with micro-loans up to ten lakh rupees, Stand-Up India and PM Vishwakarma, and digital fintech platforms using the RBI’s Account Aggregator framework. The gross loan portfolio is estimated at 4.1 trillion rupees with a borrower base of about 8.2 crore, NBFC-MFIs holding the largest share at roughly 40 per cent.

The significance is real: financial inclusion for the unbanked, poverty alleviation through income-generating activities, and a sharp break from moneylender exploitation, where moneylenders charged 60 to 100 per cent interest against microfinance’s 18 to 26 per cent. But the Andhra Pradesh microfinance crisis of 2010 is the permanent cautionary tale: over-indebtedness from multiple lenders targeting the same borrower, high interest rates, ghost borrowing where male family members use women as fronts, inadequate risk management, and coercive collection practices despite RBI bans. The way forward the sources converge on: a credit guarantee scheme for remote areas, Account Aggregator integration to see a borrower’s holistic cash flow, limiting the number of lenders per borrower, diversifying products beyond credit into savings, insurance and pensions, and protecting credit discipline against election-season loan-waiver promises.

Social capital: the deeper idea

Beyond credit, the SHG is social capital: the networks, norms and trust that let people act collectively. Economically, over 10.05 crore women are mobilised into 90.9 lakh SHGs accessing institutional credit worth over twelve lakh crore rupees, shifting from subsistence labour to micro-entrepreneurship, with SHG members more likely to own assets. Socially, financial contribution gives women a greater say in domestic decisions, the group becomes a collective voice against domestic violence, dowry, child marriage and alcoholism, and SHG-rich districts show better health and education outcomes. Politically, the SHG hierarchy of president, secretary and treasurer is a training ground for leadership, and federations act as pressure groups.

The honest critique, which is what UPSC rewards, has five strands. Outreach is skewed: penetration concentrates in South India, with Madhya Pradesh, Rajasthan and the North-East lagging, and the poorest of the poor are left out since entry requires regular small savings. Patriarchal resistance continues: only about 40 per cent of women have control over their own earnings per NFHS-5 data cited in the sources. Elite capture appears within groups, with better-off, more literate members dominating leadership. A significant share of SHGs are defunct, formed but inactive in meetings, savings and lending, per NABARD. And the 2017 question’s thesis deserves a direct answer: the emergence of SHGs points to the slow but steady withdrawal of the state from developmental activities only if credit is treated as a substitute for welfare; the sources’ position is that microfinance is a powerful complement to, not a substitute for, state-led welfare, since it cannot fix structural problems like poor public health infrastructure or limited market access on its own.

Before DAY-NRLM: the SGSY years

The SHG movement’s programme lineage begins before DAY-NRLM. The Swarnjayanti Gram Swarozgar Yojana (SGSY), launched in 1999 by merging earlier rural self-employment programmes, organised the rural poor into self-help groups and linked them to bank credit plus a capital subsidy. In 2011 the SGSY was restructured and renamed as the National Rural Livelihoods Mission, later prefixed Deendayal Antyodaya Yojana to become DAY-NRLM. The shift was philosophical as much as administrative: from subsidy-led self-employment of individuals to institution-building, federations of SHGs, and diversified livelihoods. The scale described above, the world’s largest microfinance programme, rests on this programme lineage: SGSY built the habit of group formation, and DAY-NRLM built the institutions on top of it.

The NRLM definition and the SHG-bank linkage milestones

As per the National Rural Livelihoods Mission, a Self-Help Group is "a group of people who pool their savings into a common fund, meet regularly, and use the fund for mutual benefit, fostering financial inclusion and collective action" Three elements carry the whole weight: pooling of savings, regular meetings, and mutual benefit. Everything the movement built since rests on that triad.

Two institutional details examiners like. e-Shakti is NABARD's project to digitise SHG records, the plumbing that lets banks assess group creditworthiness without guesswork. And a dedicated Women SHGs Development Fund of Rs 500 crore targets Left Wing Extremism-affected districts, while the Rashtriya Mahila Kosh extends credit to women the formal system otherwise ignores.

Lakhpati Didi and Drone Didi: the 2024-26 updates

The Lakhpati Didi initiative of August 2023 set out to make three crore women SHG members earn at least one lakh rupees a year. By July 2026, the Ministry of Rural Development reported that 3.46 crore SHG members had been enabled under the scheme, crossing the original target; in his 80th Independence Day address on 15 August 2026, the Prime Minister raised the bar to six crore by 2029-30. A dedicated portal, lakhpatididi.gov.in, supports implementation, and FY2025-26 carries an additional target of 8.44 lakh women. Running alongside is the National Campaign on Entrepreneurship under DAY-NRLM, mobilising 50,000 community resource persons to reach 50 lakh SHG members.

Namo Drone Didi, announced in the 2024-25 Union Budget with an outlay of Rs 1,261 crore, trains 15,000 women SHGs to operate drones for agricultural services such as spraying and surveying. Training centres are coming up at IIT Mandi and IIT Guwahati, and Haryana alone is training 5,000 women from 500 SHGs. Together the two schemes mark the movement's shift from microcredit to enterprise and technology.

The cooperative revival: from the 97th Amendment to the 2025 policy

As per International Cooperative Alliance, a cooperative is "an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise." India's constitutional home for that idea is Article 43B, inserted by the 97th Amendment in 2011: "The state shall endeavor to promote voluntary formation, autonomous functioning, democratic control and professional management of the co-operative societies".

The 97th Amendment, 2011 did three things: it added the word cooperatives to Article 19(1)(c), inserted Article 43B among the Directive Principles, and added Part IXB to the Constitution. In Rajendra N. Shah v. Union of India (2021), the Supreme Court struck down the parts of the Amendment that touched state-level cooperatives, since cooperatives are a State subject; Part IXB now survives only for multi-state cooperative societies.

Institutionally, the Ministry of Cooperation (2021) carries the vision of Sahakar se Samriddhi, prosperity through cooperation. The National Cooperation Policy, 2025, unveiled on 24 July 2025, is the movement's first fresh policy in over two decades: six strategic pillars, sixteen objectives and eighty-three recommendations, flowing from a committee chaired by former Union minister Suresh Prabhu. Its targets are quantified: triple the cooperative sector's contribution to GDP by 2034, one primary cooperative in every panchayat, and five model cooperative villages in every district. The Multi-State Cooperative Societies (Amendment) Act, 2023 already created a cooperative election authority, an ombudsman and a cooperative rehabilitation fund, and made boards more inclusive with one SC/ST seat and two women seats.

The world noticed too: the UN declared 2025 the International Year of Cooperatives, and India hosted the ICA Global Cooperative Conference in November 2024, the first time in the movement's 130-year history. Two experiments illustrate the new imagination. Lijjat Papad, founded in Mumbai in 1959 by seven women with Rs 80 of capital and now 45,000-plus members, is the classic worker cooperative that scaled on collective ownership, cost-plus pricing and strict quality control without outside capital. Sahkar Taxi, a platform cooperative under the MSCS Act, 2002 being piloted in Delhi and Gujarat, is the cooperative answer to app-based taxi platforms.

Key Terms

• International Year of Cooperatives: 2025, declared by the United Nations in June 2024; India hosted the ICA Global Cooperative Conference in November 2024, the first time in the movement's 130-year history.
• National Cooperation Policy, 2025: Unveiled on 24 July 2025, with six strategic pillars, sixteen objectives and eighty-three recommendations; it targets tripling the cooperative sector's GDP contribution by 2034, one primary cooperative per panchayat, and five model cooperative villages per district.
• SHG-Bank Linkage Programme: The SHG-Bank Linkage Programme is NABARD's flagship microfinance model linking informal Self-Help Groups to formal banks for savings and credit. Launched as a pilot in February 1992 covering 500 SHGs, it grew into the world's largest microfinance programme, with banks extending collateral-free loans to groups following the Panchsutras of regular meetings, savings, internal lending, repayment and book-keeping. It matters for UPSC as the canonical example of financial inclusion and women-led development. NABARD pilot, February 1992
• Namo Drone Didi: The 2024-25 Union Budget scheme with an outlay of Rs 1,261 crore to train 15,000 women SHGs to operate drones for agricultural services.
• Gram Panchayat: A Gram Panchayat is the village-level institution of the Panchayati Raj system, constitutionally mandated by the 73rd Amendment for a village or group of villages. Headed by a directly elected Sarpanch, it handles local functions from sanitation and drinking water to implementing schemes like MGNREGA. For UPSC, it is the foundational unit of grassroots democracy and the third tier of federalism. India has over 2.5 lakh Gram Panchayats, making them the largest elected local-government layer in the world.
• Lakhpati Didi: The August 2023 initiative to make three crore women SHG members earn at least one lakh rupees a year; by July 2026, 3.46 crore SHG members had been enabled, and the target was raised to six crore by 2029-30 in August 2026.
• Lijjat Papad: The worker cooperative founded in Mumbai in 1959 by seven women with Rs 80 of capital, now 45,000-plus members, built on collective ownership, cost-plus pricing and quality control.
• social audit: A social audit is a participatory review in which beneficiaries and citizens directly examine public expenditure and scheme implementation, usually through gram sabha meetings and public hearings. Section 17 of MGNREGA mandates such audits, making them a tool of transparency and accountability. For UPSC they exemplify citizen-centric governance. Andhra Pradesh institutionalised MGNREGA social audits through a dedicated Society for Social Audit, a model cited nationally.
• Article 43B: The Directive Principle inserted by the 97th Amendment (2011) stating that the state shall endeavor to promote voluntary formation, autonomous functioning, democratic control and professional management of the co-operative societies.
• Sahkar Taxi: A platform cooperative under the MSCS Act, 2002 being piloted in Delhi and Gujarat as a cooperative alternative to app-based taxi platforms.
• Gram Sabha: The Gram Sabha is the assembly of all persons registered as voters within a village panchayat's area, recognized as the foundation of Panchayati Raj by the 73rd Constitutional Amendment under Article 243. It approves development plans, audits panchayat accounts, and selects beneficiaries for welfare schemes. For UPSC, it is the basic unit of grassroots democracy and the mechanism through which participatory governance and social audit operate.
• World Bank: The World Bank is the Washington-based multilateral lender created at the Bretton Woods Conference in 1944 to finance reconstruction and development. Its two main arms are the IBRD, which lends to middle-income governments, and IDA, which gives concessional loans and grants to the poorest countries. For UPSC, it is a staple of economy and IR questions on multilateral finance and conditionality. Its financing of India's rural roads programme (PMGSY) and the Swachh Bharat Mission, showing how it channels funds into national development priorities.

Practice questions