The Empirics of Borrower Transaction Costs in Models of Financial Intermediation for the Poor

This study explores the determinants of borrower transaction costs of the models of financial intermediation for the poor while they avail of finance from the institutional and informal sources in India. The loan size is an essential determinant of borrower transaction costs of the bank lending model. Though the loan size and age of the borrower are key determinants in the SHG lending model, the relationship is direct and not inverse as in the case of the bank lending model. The study shows that the distance from the borrower's household to the financial intermediary (spatial element) exerts a significant effect on the borrower transaction costs. This underscores the importance of the expansion of the networks of the financial institutions as well as imbibing modern information technology for reducing such distance between the borrower and the financial intermediary for lowering transaction costs. The borrowers with a higher level of education and being of an older age are found to experience reduced transaction costs. Though the age of the borrower is one of the determinants of the borrower transaction costs in the SHG lending model, the relationship is direct and not inverse as in the case of the bank lending model.