Lavesh Kumar Agarwal
Lavesh Kumar Agarwal

Feb 17 2016

Andhra Pradesh: Leading by example in using the Bank-Linkage program to reduce poverty

Andhra Pradesh: Leading by example in using the Bank-Linkage program to reduce poverty

Poverty alleviation has been at the top of the agenda for all developing nations. One of the ways to achieve that is through extending microfinance and furthering financial inclusion in rural are. The Self-Help Group (SHG) – Bank Linkage programme is part of the government’s policy for extending microfinance, which has been operationalised by state governments with support from the national refinancing agency, the National Bank for Agriculture and Rural Development, NABARD. Self Help Groups formed by 10-20 villagers, mostly women, are roped into the formal financial system by linking bank services such as savings and loans to these groups.

The role of the United Nations’ Development Programme, UNDP in proving the bankability of SHGs to enable them to get credit from formal channels under their South Asian Poverty Alleviation Programme, SAPAP, cannot be overlooked. It was not that SHGs were not working to bring people together and work towards the common goal of poverty reduction through participatory training before this, but it was the UNDP’s efforts which brought formal credit to SHGs in a big way.

The government of Andhra Pradesh played a vital role in spearheading the SHG movement by putting in place the Society for Elimination of Rural Poverty (SERP) as a sensitive support organisation for handholding the SHGs. SERP was assisted by the World Bank-funded AP Rural Poverty Reduction Programme from 2000- 2011. Over this decade, SERP succeeded in building up a massive social capital of women who came out of poverty and were able to spread the message of self-help across the country.

Photo Courtesy: AP SERP Bank Partnership Unit

The Process

Capacity building was an important component in the scaling up of AP’s poverty alleviation initiatives. Training including participatory training methods, SHG formation and strengthening, book keeping and financial management, were provided to groups of women. SERP also helped members and leaders to develop linkages with banks and other institutions. The primary aim of the SHG Bank linkage program is to integrate informal savings and credit groups with mainstream banking by providing them with credit to enhance their fund base. Once an SHG has demonstrated its capacity to sustain and to absorb outside credit, loans are extended to it from the formal banking structure.

SHGs follow the “panchsutras” or the five aphorisms – regular savings, periodical and regular meetings, proper maintenance of accounts, internal lending and recovery in the last six months which makes it easier for them to be linked to banks for term loans or Cash Credit Limits (CCL). Presently, the focus is on CCL.

The CCL is arrived at for a period of 3 to 5 years; however, the SHGs have a drawing power based on their savings or based on State-level Bankers' Committee guidelines, whichever is advantageous. They may be given higher drawing powers depending on their micro credit plans which take into account all the credit needs of its members including investment in income generation activities, health, and education of children and even retiring high cost debt.

To enable SHGs to have an even higher CCL, the government of Andhra Pradesh has also invested capital in SHGs to increase their saving corpus.

Interest Subvention Scheme (Vaddi Leni Runalu – VLR)

Effective from January 2012, the government of Andhra Pradesh has modified administration of VLR and SHGs have to pay only the principal portion, called SHG portion of the EMI, and the rest of the EMI is credited directly by the Government into the loan accounts of SHGs.

  • In CCL, entire interest charged by the bank is reimbursed by the government, provided the SHG has paid at least 3% of the previous month’s loan outstanding.

  • In case of outstanding Term Loans, Government pays maximum of Rs. 3255 as interest component when banks are charging rate of interest at 14% and loan has 50 EMIs provided loan has not moved to overdue or NPA status.

The complete process is technology driven, with banks sharing transactional information of all SHG loans in the state on a monthly basis. The interest subvention is arrived at by using the transactional data shared by banks and VLR is paid directly into the loan accounts of SHGs through NEFT/RTGS

Progress of BLP in AP

The following graph illustrates the performance of the Bank Linkage Program in Andhra Pradesh:

At the end of January 2016, 7.16% of the outstanding loan amount was under Non Performing Assets, NPA (amount overdue for 3 months or more) which was 10.55% at the end of October-2015. SERP team is actively working with SHGs to reduce the NPAs using the following strategies, besides counselling:

  • Persuading SHGs to clear the overdue amount in one go with investment capital and interest redemption grant being provided by the government.

  • For those SHGs that have small outstanding loans, securing higher cash credit limit if they pay entire loan outstanding in one go.

  • Where outstanding amount is large, restructuring of loan with convenient repayments to encourage SHGs to repay.

  • If one or two members have migrated or died and that has resulted in the account becoming a NPA, persuading other members to clear their portion of the loan, so that banks could take a view to write-off the loan portion of the missing members.

The Road ahead

It is suggested that rather than having an equal distribution, available funds should be distributed according to the requirements of members.

Making SHG transactions cashless, will, in the long term, create credit history for individual SHG members and will make them eligible for individual loans from banks. Cashless transactions will also help reduce the malpractices currently prevalent within SHGs. Improving financial literacy of SHG members is imperative to ensure better utilization of available CCL.

Big banks still do not see these programs as business opportunities but with the introduction of differentiated banks (payments banks, small banks, etc.) the situation may change and SHG members individually should be able to get cheaper credits from banks for their requirements.

Andhra Pradesh’s Bank linkage programme is an encouraging example of the use of technology, continued communication with SHG members, and having a focused strategy in reducing the poverty level of the rural poor. A lot of work remains, but the good reach of the program should help make a difference in achieving the end goal. The first step of getting access to credit for the excluded population has been taken. The next step would be to take SHG members to a higher level of financial awareness and make them eligible for individual loans from formal channels for income generating activities by getting them a credit history through cashless transactions.



  1. Mr. Y V Raghunatha Reddy, Director Bank Partnership Unit – AP SERP

  2. Mr. Kesava Kumar, PM Bank Partnership Unit – AP SERP


  1. Achievements and Challenges of SHG Bank Linkage Program in India: The Result of Village Surveys in Andhra Pradesh and Maharashtra by Toshihiko Suda and M. C. S. Bantilan



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