Self Help Group Loan for Agriculture Activities: Farmer Guide

The RBI master circular lists the permitted uses of an SHG loan: social needs, swapping out high cost debt, house construction or repair, building a toilet, taking up sustainable livelihoods, or financing a viable common activity started by the group.

Farming sits inside sustainable livelihoods. On the priority sector side the position is more specific. Loans to SHGs for crop loans, medium and long term agricultural loans, and pre-harvest and post-harvest activities are classified under agriculture, with the SHG treated as a group of individual farmers and the lending limits applied per member, provided the bank keeps member-wise data.

Where the loan is for something other than agriculture or an MSME activity, it falls under a different priority sector head with a limit of Rs 2 lakh.

The share that must go to income generation rises with loan size. Above Rs 1 lakh, at least half. Above Rs 4 lakh, three quarters. Above Rs 6 lakh, 85 per cent.

Groups across states use SHG credit for a fairly consistent set of activities. Vegetable cultivation on small plots. Dairy, usually one or two animals per member. Goat rearing. Backyard poultry. Vermicompost production. Mushroom growing. Seed production on contract. Bee keeping. Buying a sprayer, a pump set or small implements shared across the group. Leasing land for a season. Paying labour and input costs at sowing.

What SHG credit is poor at is large fixed investment. A tractor, a borewell with a submersible pump, or a shed of any size will normally exceed the group's drawing power in the early years, and the repayment period on an SHG loan is shorter than the life of the asset. For those, a term loan against the asset, or an FPO route, fits better.

An SHG cash credit limit is sanctioned for three years and reviewed each year. A term loan usually runs 24 to 60 months with monthly repayment. Farm income does not arrive monthly. It arrives once or twice a year.

Groups that manage this well do one of three things.

Some use the cash credit limit rather than a term loan. Drawing at sowing and repaying after harvest is exactly what a cash credit is built for, and interest is charged only on the amount actually drawn. If your group's borrowing is seasonal, ask the branch for a cash credit limit rather than a term loan, and put the reason in writing in the application.

Some stagger members inside the group. Not everyone grows the same crop or harvests in the same month. A group that lends to its dairy members and its vegetable members alongside its paddy members has money coming back every month, which lets it meet a monthly bank repayment even though individual members repay seasonally.

Some keep a repayment buffer from the group corpus. Members repay to the group at harvest, and the group meets the bank instalment through the year from the corpus plus internal interest.

The one approach that fails is a group where every member grows the same single crop, takes a term loan with monthly repayment, and hopes. That is how groups become overdue in their first year.

These three get confused, and choosing wrong costs money.

A Kisan Credit Card is a crop loan facility in an individual farmer's name, linked to land records, priced with interest subvention for prompt repayment. If you have land in your own name and you need crop inputs, KCC is normally the cheapest route. Use it.

A Joint Liability Group is a small group of four to ten farmers, promoted by NABARD, designed specifically for tenant farmers, oral lessees and sharecroppers who cannot produce land documents. Members take individual loans against a joint guarantee. If you farm land you do not own, and you want a crop loan rather than a livelihood loan, JLG is often the right instrument and very few pages mention it.

An SHG is a savings-first group of 10 to 20 members. It suits allied activities, mixed livelihoods, members with no land record, and households where the credit need is a mix of farm and non-farm. It is also the route that comes with government support such as Revolving Fund and interest subvention.

Many households end up using more than one. A woman may be in an SHG for livelihood credit while the household holds a KCC for the crop. That is normal and not barred.

The limit is not a fixed number. It grows with your corpus, which is savings plus interest earned on internal lending.

Under DAY-NRLM the cash credit limit is sanctioned for three years with a minimum of Rs 6 lakh, and the drawing power is set each year: six times the corpus or Rs 1.5 lakh in year one, eight times the corpus or Rs 3 lakh in year two, and a minimum of Rs 6 lakh from year three, based on the Micro Credit Plan.

RBI's collateral-free ceiling for SHG loans is Rs 20 lakh. Up to Rs 10 lakh there is no collateral and no margin, and the bank cannot mark a lien on the group's savings account. Between Rs 10 lakh and Rs 20 lakh the bank may take a margin of up to 10 per cent of the amount above Rs 10 lakh.

Bank practice varies. Some banks lend up to the full Rs 20 lakh, others cap SHG exposure lower. Ask your branch for their internal ceiling rather than quoting RBI at them.

On rate, a women's SHG under DAY-NRLM pays 7 per cent a year up to Rs 3 lakh. Men's groups are not covered by that subvention and pay the bank's normal SHG rate.

The interest subvention under DAY-NRLM is for women's SHGs. That does not mean men's groups cannot get SHG credit. Banks lend to men's and mixed SHGs under the SHG Bank Linkage Programme on normal terms, and the loans still count as priority sector.

In practice most SHG lending in India is to women's groups. As of 31 March 2024, exclusive women's SHGs made up 83.5 per cent of savings-linked groups and 72.30 lakh of the 77.42 lakh groups with loans outstanding. If your area's bank staff and community mobilisers work almost entirely with women's groups, a men's group may face more friction, and it helps to approach a branch that has done it before.

Form the group. Ten to twenty members, from similar economic backgrounds so that the loan sizes people need are broadly comparable.

Save every week or every month, without a break. The amount matters less than the regularity.

Lend internally from the group's own money. This is the evidence a bank looks for.

Open the group's savings account. Do this within about two months of forming.

Follow the Panchasutras. Regular meetings, regular savings, internal lending on demand, timely repayment, and proper books of account. These five are what the grading is based on.

Get graded after six months of active existence.

Apply for credit linkage. Ask for the facility type that fits your cropping pattern.

The full linkage process, and what to do if the branch refuses, is set out in SHG bank linkage programme explained.

There comes a point where the group is not short of credit but short of scale. Members are producing well and still selling to the same trader at the same price.

At that stage the constraint is marketing, not finance, and the answer is aggregation rather than a bigger loan. That is what an FPO does, and it needs a much larger membership. The comparison is in SHG vs FPO: which is better for farmers.

Before that stage, the cheapest gain available to most groups is buying inputs together. A group that consolidates its seed and crop protection requirement for a season, and buys directly from a manufacturer instead of member by member at the counter, keeps the margin that would otherwise go down the supply chain. It is worth getting bulk supply quotes before deciding how much working capital your group actually needs.