Transaction costs in group microcredit in India

Abstract

Existing literature indicates that transaction costs are a major contributor to high interest rates on microcredit loans. A study was conducted using the case study method in order to examine the transaction costs of three established microfinance institutions. Transaction cost includes the costs of group formation, training, appraisal, documentation, disbursement and monitoring. First year and repeat loan transaction costs were studied. Life cycle transaction costs, namely the costs over the group's life cycle were also examined. Based on the findings, implications for policy makers and microfinance institutions (MFIs) were drawn.

Microfinance Beyond the Standard? Evaluating Adequacy and Performance of Agricultural Microcredit

“…The reason is that distances are longer and population densities are lower, making it more time and fuel consuming for banks to approach and to monitor borrowers (Armendáriz de Aghion and Morduch, 2010;Caudill et al, 2009). Collection costs are considered to be one of the largest operational cost components in microfinance (Shankar, 2007). Here, grace periods increase the time period that loan amounts are outstanding and, hence, lead to higher interest returns for the MFI, contributing to compensate for higher operational costs.…”

Corporate social responsibility: making trade work for the poor

“…In their paper on managing the linkage between export development and poverty reduction, Skae and Barclay (2007) seek to remedy that situation, by proffering a management framework through which the linkage between exports and poverty reduction can be better understood and strengthened. We then move to several specific examples, in the form of case studies from Brazil (Barin- Cruz, et al, 2007), Malawi and Ethiopa (Duke and Long, 2007), and India (Shankar, 2007).…”

“…Both have been criticised as well as praised, by both ends of the political spectrum (cf Neff, 1996;Tucker, 2006). One area of criticism, high interest rates on microcredit loans and the transaction costs that contribute to them, has been examined by Shankar (2007), with a view to being able to draw implications on how lending rates in microcredit could be reduced in a sustainable manner. Shankar (2007) studied three established microfinance institutions in India to determine the composition of transaction costs, and found that the key drivers of direct transaction costs are field worker compensation and the number of groups handled per field worker, with collection activity as the single largest contributor.…”

“…Shankar (2007) studied three established microfinance institutions in India to determine the composition of transaction costs, and found that the key drivers of direct transaction costs are field worker compensation and the number of groups handled per field worker, with collection activity as the single largest contributor. On the basis of the study findings, Shankar (2007) proposes that microfinance institutions can reduce direct transaction costs by increasing the number of groups per square kilometre, while indirect costs can be reduced by minimising the number of layers of fixed costs and implementing alternative revenue generating activities that can be undertaken with minimal incremental costs.…”

“…With this appreciation, of the contexts within which we seek to alleviate poverty, Skae and Barclay (2007) provide a way of framing process. We move on to a series of case studies, as examples of what is happening on the ground in terms of poverty alleviation -Caras Do Brasil (Faces of Brazil) (Barin Cruz, et al, 2007); a "grass roots" NGO using agricultural programs to generate economic viability in developing countries (Duke and Long, 2007); and an analysis of transaction costs in group microcredit in India (Shankar, 2007). Dwyer (2007) asks "how do we know if it's working" and then proceeds to consider how we might determine this.…”