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

Proceedings from the "Seminar on the SHG Bank Linkage Programme in India" 25-26 November 2002, India

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.

About this Publication

By Siebel, H.D. & Dave, H. R.