Cost Efficiency of Institutional Credit Delivery to Rural Women through Micro Finance Approaches in India

Outreach of institutional credit to rural poor has made significant growth, during the last two decades, in India, through the micro finance approaches. Financing through informal groups (Self Help Groups) had the advantage of timeliness and adequacy of credit besides cost effectiveness for both the lenders and borrowers. This paper attempts to assess the cost efficiency of the loan transaction among three alternative credit delivery mechanism through comparing the transaction costs of those different models at both lender and borrower level, based on a micro-level study conducted in three states across India. Time and cost allocation method was used to estimate the cost components in the loan transaction. Secondary data collected from bank statements and primary data collected from the bank personnel and borrowers were used for estimating the transaction costs. The results of the study established that the intermediation of Self Help Groups (SHGs) have reduced the time spent by bank personnel in identification of borrowers, documentation, follow up, credit linking and in the entire process of credit delivery to rural people. The transaction cost of lending of the banks was the least under model I where the banks undertake both financial and non-financial roles. The transaction cost of Micro Finance institutions (MFIs) was relatively higher than SHG-Bank linkage model which might be due to lower average loan amount as compared to other models. The transaction cost of borrowers was the minimum under model I where the banks perform both financial as well as non financial role. The study findings concluded that for ensuring better access to institutional credit, banks need to continue the efforts on expanding and deepening the SHG-bank linkage program and the rural financial institutions can rope in the SHGs for credit delivery as well as recovery as it reduces the transaction cost of lending.