Group lending through an SHG bank-linkage programme in India: transaction costs and social benefits

ABSTRACT

Group lending is useful in channelling credit to the self-employed poor in developing countries, to whom banks usually prefer not to lend, and formation of self-help groups (SHGs) helps facilitate this. In India, SHGs can access credit through private microfinance organisations or can approach banks through a state-led bank-linkage programme. Scholars argue that transaction costs are high while borrowing from banks despite relatively lower interest rates, making this uneconomical. This article uses a field survey to estimate transaction costs, presents other social benefits of the programme, and finds empirical justifications for strengthening the bank-linkage programme.

KEYWORDS:

• Labour and livelihoods – microfinance
• economics
• aid – development policies
• South Asia

Acknowledgements

The support of RBI and ICSSR to the Institute for Social and Economic Change is acknowledged. NABARD had sponsored an earlier research on this topic and we are thankful to NABARD for its support. We are thankful to two anonymous referees for their valuable comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Meenakshi Rajeev is the RBI Chair Professor at the Institute for Social and Economic Change (ISEC), Bangalore, India. Her areas of interest include issues related to banking and credit, development economics (game theoretic modelling), industrial economics, and labour relations.

B. P. Vani is an Associate Professor at the Centre for Economic Studies and Policy (CESP), Institute for Social and Economic Change, Bangalore, India. Her research focuses on poverty and income distribution.

Veerashekharappa was the Associate Professor and head at the Centre for Economic Studies and Policy at ISEC, Bangalore before his retirement. With a diverse and successful career, his research interests included microfinance, development finance, and the economics of public utilities.

Notes

1 Given the total transaction cost (collected for a year) for a group and total money lent, we estimated cost per 100 rupees for a year term. Subsequently, we arrived at the average value of transactions costs for groups belonging to different banks and locations.