Commercial Aspects of Self-Help Group Banking in India: A Study of Bank Transaction Costs

The National Bank of Agriculture and Rural Development (NABARD) bank linkage program in India, has two outstanding aspects:

• It has achieved an outreach of 500 000 SHGs and a population of 40 million poor;
• The lending rate at 7% is amongst the lowest.

The results, based on a study of seven branches in three banks, reveal the following:

• Non-performing loans to SHGs were zero percent indicating the effectiveness of group lending to the very poor;
• Returns on average assets of SHG banking ranged from 1.4% to 7.5%;
• The operational self-sufficiency of SHG banking ranged from 110% to 165%;
• Self reliance of the SHGs were growing rapidly based on their savings and retained earnings.

The study indicates that five factors are essential for the future sustainability of the SHGs:

• Sound self-supporting institutional framework;
• Restructing of the rural banks which have not performed well;
• Increase in the deposit reserves of SHGs;
• Effective supervision of SHGs.

After considering the findings of this study, the paper highlights some of the areas of further study on SHG bank linkages:

• Pricing financial products in rural financial institutions;
• Extending SHG banking to the middle poor;
• Delegated supervision for SHGs and cooperatives;
• Collateral for larger loans within SHGs;
• Loan protection through life insurance;
• Options for individual performance incentives in banks and cooperatives.