PAPER WRAP-UP: Sustainability of Self-Help Groups in India: Two Analyses

By Jennifer Isern and Robert Peck Christen, et al, published by the Consultative Group to Assist the Poor (CGAP), Occasional Paper No. 12, August 2007, 48 pages, available at

The paper reports the findings of two separate studies: one which analyzes the financial sustainability of self-help groups (SHGs) in India and the other which examines whether or not the SHG model can be successfully replicated in other areas of the world.

The two analyses draw several significant conclusions, including:
1) Many well-run SHGs are achieving financial sustainability,
2) SHGs reach very poor and marginalized clients, and
3) Well-executed SHGs have very high repayment (over 95 percent in some cases) of external loans they receive from commercial banks.

A self-help group is a member-managed collective of typically 10 to 20 poor women that provides financial services to its members. Loans are funded by interest charged to members (SHGs borrow from banks at interest rates of 8 to 12 percent and lend to members at 24 percent), loans from banks and other external sources, members’savings and other revenues collected. SHGs are often formed with the assistance of self-help promotional institutions (SHPIs) such as non-government organizations (NGOs), government agencies, banks and microfinance institutions (MFIs). The most distinctive feature of SHGs is that they generally end up borrowing from a commercial bank.

Self-help groups are currently the most common form of microfinance in India. In March 2006, there were 2.23 million SHGs reaching 33 million members. The success of SHGs in the country has lead some to question the sustainability and replicability of this lending model. Yet, little has been published on the financial performance of SHGs.

The Consultative Group to Assist the Poor conducted two separate studies involving nine SHG programs. The first reviews a sample of five well-established institutions representing the main approaches to SHG promotion in India and analyzes and compares the financial sustainability of the approaches. This study covers 150 SHGs. The second study evaluates the operational structure and financial performance of four leading SHG programs and proposes a methodology for designing financially sustainable SHG programs.

The results of the first study are inconclusive with respect to differing approaches to the SHG model. Programs with higher start-up costs have varying strengths—some have better loan repayment, others have higher profitability, etc. The least expensive program to launch has weaker outreach, lower collection and less profitability than other programs, suggesting that “cheaper” programs lose out in the long run.

The second study concludes that SHGs compare favorably to alternative microfinance programs. In order to become truly sustainable, though, banks would need to charge SHGs more to cover long-term support costs. Currently, much of the cost of establishing, equipping and running SHGs are covered by NGOs, donations and government subsidies. CGAP points out that unless external support is provided to community-based financial programs, including SHGs, in a sustainable way and paid for by revenue generated by the programs themselves, they will degrade over time and eventually collapse.

Both of these studies review SHGs that are exceptionally well-managed—rather than taking a random sample of SHGs. The studies are designed to analyze the potential of the SHG model, as opposed to analyzing the current state of SHGs in India. In order to determine the potential for financial viability of SHG programs, it is most relevant to examine the programs that are performing well. If trends in the microfinance industry are any indication, it is likely that the well-run, sustainable programs will grow more rapidly and cause greater impact than inefficient programs.

The following results, therefore, exemplify the current state of the best Indian SHGs and the potential of SHG programs as a whole, but not the current state of the average SHG:
1) Well-executed SHGs can and are reaching financial sustainability. High income from loan portfolios and low operating expenses enable most SHGs to be profitable, even after accounting for all expenses. However, the picture is mixed. The return on assets of some SHGs are very poor (9 percent loss) and others are very strong (7 percent profit)
2) The top SHGs rarely default on external loans owed to financial institutions.
3) In terms of administrative costs, the studies found that SHGs are comparable to other microfinance models. However, these calculations do not take into account the time members spend at meetings or the added risk to which members are subject.
4) There is little evidence of elite capture, domination of resources by a powerful few in the community, which tends to be a problem with other forms of community-based, member-managed finance.
5) Though arrears are high among all SHGs, this does not necessarily translate into high default rate. Some SHGs are quite successful in the eventual collection of loans owed by members, and thus are surviving despite high delinquency. This is because, for many poor members, cash flows do not correspond to monthly loan installment schedules, but rather depend on seasonal income such as agriculture and animal husbandry.
6) Members of SHGs do not often engage in voluntary saving outside of the minimum requirements needed to qualify for loans. This may indicate that members do not consider groups useful for storing surplus money and choose to use other savings mechanisms.
7) Approximately a quarter of SHG members continue to borrow from moneylenders. Among SHGs promoted by NGOs, however, only 2 percent of members use moneylenders for credit.
8) Most of the SHGs in the studies are successful in reaching the most vulnerable people who own little or no land, are predominantly illiterate, are from scheduled castes and tribes* and who lack access to formal financial services.

These findings paint a primarily optimistic picture of the future of SHGs in India. However, the question of replicability remains largely unanswered. Most SHGs depend on loans from commercial banks, and the majority of banks in India that lend to SHGs are state-owned. Because SHGs began to grow in India on a wide scale only after the government required state banks to support community finance programs, more research is needed before it can be determined if commercial banks would lend to SHGs in the absence of government-imposed quotas.

*Scheduled castes and tribes are communities that were excluded from the four-caste system that made up the structure of Hindu society for thousands of years. They were consigned to the most menial labor in the most economically and socially insolvent areas of the country.

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