Transaction Costs of Self-Help Groups - A Study of NABARD’s SHG Banking Programme in India

Publication Date: 2004
Document Type: Paper (Microsoft Word)

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How profitable are self-help groups?

This paper explores the idea of self-help groups (SHGs) being a viable commercial proposition. It states that:

• A pilot study of bank transaction costs in a select few bank branches found that they were moderate; it also found that SHG banking was highly profitable for the banks.
• However, another pilot study that used a different methodology found that the selected bank branches were making losses on this product.
• Both studies agree that rural banks need to be reformed, interest rate structures adjusted and SHG banking made more efficient.

A study also examined whether SHGs were burdened by excessive transaction costs shifted by the banks. The findings and the conclusions of the study were:

• Findings:
  • The poor repay their bank loans, while many of the non-poor don’t;
  • Even the poorest can borrow, save and repay;
  • Interest rate margins represent a major source of income to the groups.
• Conclusions:
  • Transaction costs of SHGs were so low that immediate intervention was not required;
  • SHG banking was highly profitable to banks and highly beneficial to SHGs and their members.

The paper concludes by recommending that:

• NABARD, banks and NGOs should continue expanding and deepening the program;
• There should be an increase in training, control and supervision;
• NABARD should be encouraged to facilitate the annual reporting and auditing of the balance sheets and performance data of SHGs, through banks and other cooperating partners;
• Other countries, such as Indonesia, should learn from India’s experience.