Transaction Costs of Lending to the Rural Poor
Transaction Costs of Lending to the Rural Poor, a 1995 study by Dr V. Puhazhendhi published by The Foundation for Development Cooperation in collaboration with NABARD, examines how non-governmental organisations (NGOs) and self-help groups (SHGs) can serve as intermediaries between Indian banks and the rural poor to reduce the cost of small-loan delivery. Drawing on sample data from bank branches in Karnataka and Tamil Nadu, the study compares four lending models — from direct lending to full intermediation through NGOs and SHGs — and finds that intermediation cut bank transaction costs by 21 to 41 per cent and borrower transaction costs by about 85 per cent, while also sharply lowering default risk compared with direct lending. The report concludes that effective NGO/SHG intermediation meaningfully improves both the viability of bank branches and access to credit for the rural poor, and recommends further studies to confirm and extend these findings.
