How does "Self-Help Groups" fill the gap in the "Formal credit system" in the rural India?

They pool money and lend at low interest rates

Since some kind of collateral is required in normal banking system, vast proportion of poor rural households were automatically out of the credit network. Thus, SHGs come as a relieving factor for the rural India. They promote thrift in small proportions by a minimum contribution from each member. From the pooled money, credit is given to the needy members to be repayable in small instalments at reasonable interest rates.