Self Help Groups (SHGs) can be a bridge between formal banking structures and the rural poor. Recognizing the potential of this linkage, the Reserve Bank of India (RBI) has issued guidelines and instructions to banks from time to time. The RBI has now updated and consolidated these guidelines in the Master Circular on SHG-Bank Linkage Programme.
This Master Circular, issued on March 31, 2023, is a comprehensive document that includes all the existing guidelines on the subject. This article will discuss the key features of the Master Circular, and provide a guide for banks to enable effective linkage of SHGs with the banking sector.
RBI Master Circular on SHG-Bank Linkage Programme dated 01/04/2023
The Potential of SHG-Bank Linkage Programme
Studies conducted by the National Bank for Agriculture and Rural Development (NABARD) have shown that the SHG-Bank Linkage Programme has brought out many positive features. These include an increase in loan volume for SHGs, a shift in the loaning pattern of members from non-income generating activities to production activities, nearly 100% recovery performance, significant reduction in transaction costs for both banks and borrowers, and a gradual increase in the income level of SHG members. Additionally, about 85% of the groups linked with banks were formed exclusively by women.
Guidelines for Effective Linkage of SHGs with the Banking Sector
Opening of Savings Bank Account
SHGs, registered or unregistered, that promote savings habit among their members are eligible to open savings bank accounts with banks. Banks must adhere to the simplified Customer Due Diligence (CDD) guidelines applicable to SHGs, as prescribed in the Master Direction – Know Your Customer (KYC) Direction, 2016 (as updated from time to time).
Lending to SHGs
Bank lending to SHGs should be included in branch credit plan, block credit plan, district credit plan, and state credit plan of each bank. The sector should be given utmost priority in preparation of these plans, and should also form an integral part of the bank’s corporate credit plan.
SHGs may be sanctioned savings linked loans by banks (varying from a saving to loan ratio of 1:1 to 1:4). However, in case of matured SHGs, loans may be given beyond the limit of four times the savings, as per the discretion of the bank.
Banks have the discretion to decide on the interest rates applicable to loans given to SHGs/member beneficiaries, subject to regulatory guidelines on interest rate on advances contained in Master Direction – Reserve Bank of India (Interest Rate on Advances) Directions, 2016 issued on March 3, 2016, as amended from time to time.
No loan related and ad hoc service charges/inspection charges should be levied on priority sector loans up to Rs 25,000. In the case of eligible priority sector loans to SHGs/Joint Liability Groups (JLGs), this limit will be applicable per member and not to the group as a whole.
Separate Segment under Priority Sector
Loans to SHGs are allowed to be classified under Priority Sector Lending (PSL) under the respective categories viz Agriculture, MSME, Social Infrastructure and others, subject to extant guidelines of Master Directions – Priority Sector Lending (PSL) – Targets and Classification issued vide Master Directions dated September 4, 2020, as amended from time to time.
Capacity Building and Training
Banks may initiate suitable steps to internalize the SHG linkage project and organize exclusive short duration programmes for the field level functionaries. Suitable awareness/sensitization programmes may also be conducted for their middle level controlling officers as well as senior officers.
Moreover, banks shall refer to the instructions on Financial Literacy by Financial Literacy Centres (FLCs) and rural branches – Policy review vide Circular dated March 02, 2017 conducting tailored programs targeting SHGs.
Monitoring and Review of SHG Lending
Considering the potential of SHGs, banks must closely monitor the progress regularly at various levels. To give a boost to the ongoing SHG bank linkage programme for credit flow to the unorganized sector, monitoring of SHG bank linkage programme shall be a regular item on the agenda for discussion at the State Level Bankers’ Committee (SLBC) and District Consultative Committee (DCC) meetings. It should be reviewed at the highest corporate level on a quarterly basis. Further, progress of the programme may be reviewed by banks at regular intervals. The progress under SHG-BLP, as prescribed vide RBI letter dated April 26, 2018 shall be reported to NABARD (Micro Credit Innovations Department), Mumbai, on a quarterly basis, and the returns in the prescribed format shall be submitted within 15 days from due date.
Reporting to Credit Information Companies (CICs)
Recognizing the importance of credit information reporting in respect of SHG members for financial inclusion, banks are advised to adhere to the guidelines on Credit information reporting in respect of Self Help Group (SHG) members dated June 16, 2016, and Credit information reporting in respect of Self Help Group (SHG) members dated January 14, 2016.
In conclusion, the Master Circular on SHG-Bank Linkage Programme provides comprehensive guidelines to banks for effective linkage of SHGs with the banking sector. The guidelines emphasize the importance of simplifying procedures and documentation, providing adequate incentives to branches, and closely monitoring progress. By adhering to these guidelines, banks can ensure financial inclusion for the rural poor, while also benefiting from the potential of the SHG-Bank Linkage Programme.