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The RBI on Monday directed all banks to provide adequate incentives to their branches in financing the Self Help Groups (SHGs) and establish linkages with them, making the procedures simple and easy.

“The group dynamics of working of the SHGs need neither be regulated nor formal structures imposed or insisted upon. The approach towards financing the SHGs should be totally hassle-free and may also include consumption expenditures. Accordingly, the guidelines should be adhered to enable effective linkage of SHGs with the banking sector,” the RBI has stated in its master circular to all banks.

The circular states that no loan-related and ad hoc service charges or inspection charges should be levied on priority sector loans up to 25,000. In the case of eligible priority sector loans to SHGs/ JLGs, this limit will be applicable per member and not to the group as a whole.

The RBI has also pointed out that loans to SHGs are allowed to be classified under Priority Sector Lending (PSL) under the respective categories such as Agriculture, MSME etc.

The circular further states that SHGs, registered or unregistered, which are engaged in promoting savings habits among their members are eligible to open savings bank accounts with banks.

Bank lending to SHGs should be included in the branch credit plan, block credit plan, district credit plan and state credit plan of each bank. Utmost priority should be accorded to the sector in preparation of these plans. It should also form an integral part of the bank’s corporate credit plan, the circular added.

The circular highlights that SHGs have the potential to bring together the formal banking structure and the rural poor for mutual benefit. Studies conducted by NABARD in a few states to assess the impact of the linkage project have brought out encouraging and positive features like an increase in loan volume of the SHGs, a definite shift in the loaning pattern of the members from non-income generating activities to production activities, nearly 100 per cent recovery performance, significant reduction in the transaction costs for both the banks and the borrowers etc., besides leading to a gradual increase in the income level of the SHG members.

Another significant feature observed in the linkage project is that about 85 per cent of the groups linked with banks were formed exclusively by women, it adds.