9 min readConcept sheetMCQ · institution-role match and SHG models
Institutional finance for small industries
Small units borrow from development financial institutions, commercial and cooperative banks, and microfinance. SHG-bank linkage, piloted by NABARD in 1992, brought group credit to the poor.
SIDBIApex institution for MSME finance: refinance, direct lending, venture funds
NABARD (1982)Apex for rural credit; refinances cooperative banks and RRBs; launched the SHG-Bank Linkage Programme (pilot 1992)
Short-term cooperative creditThree tiers: State Cooperative Bank → District Central Cooperative Bank → Primary Agricultural Credit Society
MicrofinanceSmall collateral-free loans to the poor through SHG-bank linkage, JLGs and MFIs
Sources of institutional finance
| Type | Institutions | Main help to small units |
|---|---|---|
| All-India development institutions | SIDBI, NABARD, EXIM Bank; earlier IFCI (1948), ICICI (1955), IDBI (1964) | Refinance, term loans, export credit, rural non-farm support |
| State-level institutions | State Financial Corporations (SFC Act 1951), State Industrial Development Corporations | Term loans, industrial estates |
| Commercial banks | Public, private and foreign banks; Regional Rural Banks; small finance banks | Working capital and term loans; lending to micro and small enterprises counts as priority-sector lending |
| Cooperative banks | State and district cooperative banks, urban cooperative banks | Local credit to artisans, small traders and small units |
| Microfinance | SHGs, JLGs, NBFC-MFIs, small finance banks | Small, collateral-free loans to micro entrepreneurs |
| Others | Venture capital, angel investors, Fund of Funds for Startups, TReDS | Equity for startups; invoice financing |
Forms of bank credit
| Form | Meaning |
|---|---|
| Cash credit | Running account against stocks and receivables (hypothecation or pledge); interest only on the amount used |
| Overdraft | Drawing beyond the current account balance, up to a limit |
| Bill discounting | The bank pays against trade bills before they mature |
| Term loan | For fixed assets; repaid in instalments over several years |
| Letter of credit and bank guarantee | Non-fund-based support |
| Tandon Committee (1974) | Norms for working-capital lending; maximum permissible bank finance (MPBF) |
| Nayak Committee (1991) | Working-capital needs of small units assessed as a share of projected turnover |
SHG-bank linkage models (NABARD)
| Model | Who forms the SHG | Who lends |
|---|---|---|
| Model I | The bank itself forms and nurtures SHGs | The bank lends directly |
| Model II | NGOs or government agencies form SHGs | The bank lends directly to the SHGs (the most common model) |
| Model III | NGOs or MFIs form SHGs | The bank lends to the NGO or MFI, which on-lends to SHGs |
Microfinance in brief
- Muhammad Yunus founded Grameen Bank in Bangladesh (a formal bank from 1983); he and the bank shared the 2006 Nobel Peace Prize.
- An SHG is a group of typically 10-20 people, mostly women, who save regularly, lend among themselves and then borrow from banks.
- Joint liability groups (JLGs) are small informal groups whose members guarantee each other's loans, without collateral.
- DAY-NRLM (launched 2011) builds SHGs of rural poor women on a large scale.
- NBFC-MFIs are regulated by RBI; the Malegam Committee (2011) shaped these rules after the 2010 Andhra Pradesh microfinance crisis.
- Small finance banks, licensed from 2015, serve small borrowers; several, such as Ujjivan and Equitas, began as MFIs.
Cooperative banks vs commercial banks
Cooperative banksOwned by members, one member one vote; serve local farmers, artisans and small units; long under dual control of RBI (banking) and state Registrars (management); RBI's oversight was strengthened by the Banking Regulation (Amendment) Act 2020.
Commercial banksOwned by shareholders or the government; governed by the Banking Regulation Act 1949 and RBI; wider network and larger loans.
NET asks you to match institutions with their roles and years (SIDBI-MSMEs, NABARD-rural, EXIM-exports), to recall the SHG-bank linkage models, and to order the three tiers of cooperative credit.
Typical MCQ: “Which institution launched the SHG-Bank Linkage Programme?” NABARD, with a pilot in 1992. Trap: not SIDBI or RBI.
Typical MCQ: “In which SHG-bank linkage model does the bank lend directly to SHGs formed by NGOs?” Model II, the most common model.
Cooperative ladder from the top, S-D-P: State Cooperative Bank, District Central Cooperative Bank, Primary Agricultural Credit Society: 'State Districts Pay'.