Transaction Costs of Self-Help Groups: a study of NABARD’s SHG Banking Programme in India
High transaction costs (TC) are one of the impediments to bank loans to the poor in low-income countries. As earlier studies have shown (Seibel & Dave 2002), bank TC can be lowered substantially by lending to self-help groups (SHGs) as financial intermediaries. Under the SHG Banking Program of the National Bank for Agriculture and Rural Development (NABARD) in India, over one million self-help groups with 16 million members (90% women), comprising some 90 million household members of the rural poor belonging to scheduled castes, were linked to 36,000 bank branches and financial cooperatives at commercial interest rates (March 2004).
As the program, which in contrast to former programs is not mandatory, continues to grow rapidly, the question becomes all the more pertinent whether the success of financial intermediation by SHGs is due to overall lower TC or a shifting of TC to SHGs and their members. In Karnataka State, 78 SHGs with 1160 members were selected for a pilot study. TC of SHGs were found to be low, comprising real costs of 0.62% and opportunity costs of 0.60% of loans outstanding to members. Real costs of members were 0.04% and opportunity costs 2.3%. It is tentatively concluded that SHGs are an efficient intermediary for bank loans to vast numbers of the rural poor. The study provides a methodology that can be used in more representative national and local samples.