Bank Transaction Costs in India's Self-help Group Banking Program

This paper explores the viability of the Self-Help Group (SHG) banking program for the banks. It examines the question whether the SHG banking program could become a commercial proposition that could be recommended to all banks as an instrument of both outreach and institutional viability.

The paper discusses:

• The question whether The National Bank for Agriculture and Rural Development's (NABARD) bank refinancing scheme distorts rural financial markets;
• The methodology of the study;
• Case studies of seven rural banks.

The study offers the following conclusions regarding SHG banking:

• NABARD's re-financing of banks has no distorting effect on rural finance;
• Banks have re-financed SHGs at rates between 9.75% and 16%, which is at the low end of their interest rate spectrum;
• Profitability is positive throughout all units studied, despite the very low interest rates charged by banks;
• Profits account for one-tenth of the total profits of the units studied;
• An increase in interest rates would be favorable in many ways;
• SHG banking outperforms the other products offered by banks by a wide margin;
• Internal funds have grown through savings and retained earnings, very often exceeding the amount of bank re-finance.

The study lists a number of commercial and social benefits of SHG banking, and discusses the sustainability of SHG banking. Finally, it lists a number of follow-up studies proposed by the authors.