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Sustainability of microfinance self help groups in India: would federating help?


  • Nair, Ajai


The major form of microfinance in India is that based on women's Self Help Groups (SHGs), which are small groups of 10-20 members. These groups collect savings from their members and provide loans to them. However, unlike most accumulating savings and credit associations (ASCAs) found in several countries, these groups also obtain loans from banks and on-lend them to their members. By 2003, over 700,000 groups had obtained over Rs.20 billion (US$425 million) in loans from banks benefiting more than 10 million people. Delinquencies on these loans are reported to be less than 5 percent. Savings in these groups is estimated to be at least Rs.8 billion (US$170 million). Despite these considerable achievements, sustainability of the SHGs has been suspect because several essential services required by the SHGs are providedfree or at a significantly subsidized cost by organizations that have developed these groups. A few promoter organizations have, however, developed federations of SHGs that provide these services and others that SHG members need, but which SHGs cannot feasibly provide. Using a case study approach, Nair explores the merits and constraints of federating. Three SHG federations that provide a wide range of services are studied. The findings suggest that federations could help SHGs become institutionally and financially sustainable because they provide the economies of scale that reduce transaction costs and make the provision of these services viable. But their sustainability is constrained by several factors-both internal, related to the federations themselves, and external, related to the other stakeholders. The author concludes by recommending some actions to address these constraints.

Suggested Citation

  • Nair, Ajai, 2005. "Sustainability of microfinance self help groups in India: would federating help?," Policy Research Working Paper Series 3516, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3516

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    Cited by:

    1. Koirala, Krishna H. & Mishra, Ashok K. & Mehlhorn, Joey, 2014. "Using Copula to Test Dependency between Energy and Agricultural Commodities," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170364, Agricultural and Applied Economics Association.
    2. Singh, Nirvikar, 2006. "ICTs and rural development in India," MPRA Paper 1274, University Library of Munich, Germany.
    3. Johny, Judit & Wichmann, Bruno & Swallow, Brent, 2014. "Role of Social Networks in Diversification o Income Sources in Rural India," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170357, Agricultural and Applied Economics Association.
    4. Pati, A.P., 2009. "Subsidy Impact on Sustainability of SHGs: An Empirical Analysis of Micro Lending through SGSY Scheme," Indian Journal of Agricultural Economics, Indian Society of Agricultural Economics, vol. 64(2).
    5. Bönte, Werner & Filipiak, Ute, 2012. "Financial literacy, information flows, and caste affiliation: Empirical evidence from India," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3399-3414.
    6. M Nadiya & Francisco Olivares-Polanco & T Radha Ramanan, 2012. "Dangers in Mismanaging the Factors Affecting the Operational Self-Sustainability (OSS) of Indian Microfinance Institutions (MFIs) - An Exploration into Indian Microfinance Crisis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(3), pages 448-462, July.
    7. Thapa, Ganesh, 1. "Sustainability and Governance of Microfinance Institutions: Recent Experiences and Some Lessons for Southeast Asia," Asian Journal of Agriculture and Development, Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), vol. 3(1).


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