A silent revolution which has been sweeping rural India in the last six years has been the bank linkage of lakhs of self-help groups (SHG) of women who are being supported with micro loans for their livelihood projects at moderate rates of interest, mainly by public sector banks (PSBs).

The National Rural Livelihoods Mission (NRLM) under the Deendayal Antyodaya Yojana (DAY) aims to uplift the last in the line category of marginalised women who do not normally have access to formal means of credit. The Modi Government’s account-opening campaign, the Jan Dhan Yojana, provided the initial impetus for the NRLM to make such a big headway.

Had financial inclusion initiatives by way of bank accounts not been originated, the subsequent effort for sanction and disbursal of loans for income-generating activities for these women would never have materialised. In terms of sequencing, a bank account is the first step for inclusive micro credit to make an impact on the ground in the rural areas.

It is now known that there are at least 20.05 crore women who hold basic banking accounts under the PMJDY, this being the number of women who got the benefit of a ₹500 transfer under the PM Garib Kalyan Yojana as part of the stimulus measures of the Atmanirbhar package.

Under the NRLM, as per latest estimates, about 34 lakh SHGs have been credit-linked; that is, the members of these SHGs have been given small loans for activities like homestead food processing, dairying, tailoring, micro-trade and floriculture on small plots. Each SHG has a minimum of 10 and a maximum of 20 members. Thus the total beneficiaries, all of them women, number at least 3.5 crore, which translates to loan for 3.5 crore households. The annual progress of credit flow is given in the accompanying table. As per NRLM figures, 60 lakh SHGs are bank-linked as on date (they have bank accounts) and, therefore, we can assume at least an opportunity for credit-support to another about 25 lakh SHGs without much ado.


This is the opportunity that can be tapped by banks by looking at this “bottom of the pyramid” as not a social obligation or mandated lending but as a viable commercial opportunity. It will be rewarding for shareholder value too. India’s largest lender, SBI, has taken the first step by creating a separate Financial Inclusion/Micro Markets (FIMM) vertical headed by a Deputy Managing Director to build on such opportunities.

The government and the RBI have also announced a number of measures to make lending under this model hassle-free.

Some of the key measures are:

SHG is an informal group and registration under any Societies Act, State Cooperative Act or a partnership firm is not mandatory as per RBI instructions

The only condition is that SHGs should follow the Panchasutras , the five essential rules of conduct — regular meetings, regular savings, regular internal lending, regular recoveries and maintenance of proper books of accounts.

DAY has a provision for interest subvention, to cover the difference between the lending rate of the banks and 7 per cent, on all credit from the banks/financial institutions availed of by women SHGs

It is enough if SHGs have been in existence for at least six months as per the books of account of SHGs and not from the date of opening of SB account. This means that SHGs can be given loans six months after formation, even if the SB accounts are recent.

The loans may be used by members for meeting social needs, high-cost debt swapping (repaying informal loans sourced at “blade” rates), construction or repair of house, construction of toilets and taking up sustainable livelihoods by the individual members within the SHGs or to finance any viable common activity started by the SHGs.

No collateral and no margin would be charged up to ₹10 lakh limit to the SHGs. As part of the Atmanirbhar announcement, this limit has been increased to ₹20 lakh but implementation of this proposal is delayed.

These livelihood loans have much lower default than corporate loans. There is no siphoning off of funds, there are no fancy projections being presented to get bank loans and there is no fudging of figures to show that non-existent capital has been brought in. There is nothing of the usual corporate machinations leading bankers up the garden path. In terms of job creation per unit of credit, undoubtedly these micro loans would trump the corporate loans.

And finally, when corporate loans undergo the IBC process, haircuts have been as high as 99 per cent. Bankers got ₹1 crore against ₹100 crore of outstandings from one corporate insolvency proceeding. It couldn’t have got worse than that in recoveries!

Low default rates

In contrast, these livelihood loans have a national average NPA rate of just 2 per cent with some States like Bihar, Andhra Pradesh and West Bengal having default rates of 1 per cent and below. Do we require any further proof of who the banks should be lending to and where the focus should be?

The average interest rate on these loans is near about 12 per cent. For the lenders, this gives an attractive net interest margin. For the borrowers, this is a much softer alternative. While informal credit in rural areas would cost upwards of 100 per cent in actual annual interest rates, even the microfinance institutions (MFIs) regulated by the RBI charge 22-24 per cent per annum to cover costs and earn margins.

There is a strong case for pushing credit through the DAY, in fact, even doubling the credit flow within a year. PSBs have been at the forefront of this massive rural push.

DAY-NRLM should ensure that at least one member from each identified rural poor household, a woman, is brought under the SHG network before March 2022. It is observed that a majority of the loans under DAY are used for agri and allied activities.

As the borrower-women are mostly members of farm households, these micro loans, more than even the conventional Kisan Credit Card (KCC) loans have the potential to improve farm incomes.

Given the fact that the agri sector has been recording growth even in these Covid times, a thrust by way of some incentives for DAY (small amounts of capital subsidy, say ₹5,000 per one-year-old SHGs, or implementation of the interest subvention in all districts of India) has the potential to achieve Doubling of Rural Household Incomes.

The writer is a top public sector bank executive. Views are personal.