How Should an SHG Record Loans Between Its Members?

An SHG should record every loan to a member in four places: a resolution in the minutes book, the member's page in the loan ledger, the cash book, and the member's passbook, with a written repayment schedule and the source of funds. Interest should be calculated on a method the group has agreed in its rules, preferably on the reducing balance, and overdues should be shown openly every month. Practices described here are as of November 2026; your State Rural Livelihood Mission (SRLM) or promoting agency may give its own formats.

Internal lending is one of the Panchasutras in the RBI master circular on DAY-NRLM (regular meetings, regular savings, regular internal lending, regular recoveries and proper books). Banks grade SHGs on how well this is done before linking them to credit; see our NRLM SHG loan guide.

Step-by-step: recording one internal loan

1. Application at the meeting. The member states the amount, purpose and how she will repay.
2. Group decision. Members discuss and approve. Record in the minutes: name, amount, purpose, interest rate, method (flat or reducing), number of instalments, first due date, and the fund source (own savings, revolving fund, CIF loan or bank loan).
3. Payment. Pay by bank transfer or from cash in front of members. Enter it in the cash book as a payment and get the member's signature or thumb impression.
4. Loan ledger. Open a page for the loan in the member's section with the date, amount, rate, schedule and source.
5. Passbook. Write the loan in the member's passbook so she has her own copy.
6. Every meeting. Record principal and interest received separately, update the balance, and mark any amount not paid as overdue.
7. Closure. When fully repaid, write "closed" with the date in the ledger and passbook.

What each record should show

Principal repaid goes back into the loan fund it came from. Interest goes to the group's interest income, not to the member's savings. Keeping those apart is covered in SHG savings vs loan fund records.

When the money comes from a bank loan

Under the RBI DAY-NRLM circular, a bank loan to an SHG is distributed among members based on the Micro Credit Plan (MCP) the group prepares. The circular also sets minimum shares for income-generating use: at least 50% of loans above ₹1 lakh, 75% of loans above ₹4 lakh and 85% of loans above ₹6 lakh should be used primarily for productive purposes, with the MCP deciding purpose and use.

So for bank-funded loans:

• Copy each member's MCP amount and purpose into the minutes and loan ledger.
• Mark the source as "bank loan" so the group can show the bank how its money was used.
• Fix the member's repayment schedule so the group can meet the bank instalment on time, with a small buffer.
• If the group charges members a higher rate than the bank charges the group, the difference is group income; record it as interest income and decide its use in a meeting.

Worked example: ₹10,000 at 1% a month

The rate is illustrative; your group sets its own.

A member borrows ₹10,000 repayable in 10 monthly instalments of ₹1,000 principal plus interest at 1% a month on the reducing balance.

Total interest = ₹100 + ₹90 + ... + ₹10 = ₹550. Total repaid = ₹10,550.

At a flat 1% a month on the original ₹10,000, interest would be ₹100 × 10 = ₹1,000, almost double, because the member keeps paying interest on money already returned. If your group uses flat interest, members should understand that the effective cost is higher.

If the member prefers equal instalments, the same 1% a month over 10 months gives an EMI of about ₹1,056 and total interest of about ₹558. You can check such figures in the EMI calculator by entering 12% a year.

Handling overdues honestly

• Show the overdue amount in the ledger and demand-collection-balance sheet every month.
• Discuss reasons at the meeting and record any agreed new schedule in the minutes.
• Apply any penalty only if it is in the written rules, and record it separately.
• Do not give a fresh loan to clear an old one without a minuted decision; it hides problems that the bank and federation will see later.
• The RBI circular says wilful defaulters should not be financed under DAY-NRLM, though they may benefit from the group's thrift and credit, and the group may be financed excluding them; non-wilful defaulters should not be debarred. So keep a clear record of why any member is behind.

Rules to write down once

• Maximum loan per member as a multiple of her savings or a fixed limit
• Interest rate and method (reducing or flat)
• Repayment frequency and maximum tenure
• Priority order when many members ask at once (emergency, livelihood, others)
• Penalty for late payment, if any
• What happens to a loan if a member leaves; see member leaving with debt outstanding

What the borrowing member should keep

• Her passbook with the loan amount, rate, method and schedule written in
• A note of each repayment she made, signed or initialled by the treasurer
• The date her loan was closed, written in the passbook

If her passbook and the group's ledger ever differ, the group should check the cash book and minutes at the next meeting and correct the wrong entry with a note, not by overwriting.

Common mistakes

Key takeaways

• Every internal loan needs a minuted decision, a ledger page, a cash entry and a passbook entry.
• Record the source of funds and keep interest separate from savings.
• Bank loans are shared among members according to the group's Micro Credit Plan.
• In the example, ₹10,000 at 1% a month cost ₹550 on reducing balance versus ₹1,000 flat.
• Show overdues openly and follow written rules on penalties and rescheduling.

Related guide: How to Reconcile an SHG Passbook With the Group Ledger.