Transaction Costs in Group Micro Credit in India

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Oct 2006
India , October, 11 2006 - Case Studies of Three Micro Finance Institutions There are three kinds of costs that a lending institution incurs when it provides a loan: the cost of the money that it lends; the cost of prudent financial practices such as provisioning for loan defaults; and the cost of transaction, which includes the costs of identifying and screening the client, processing the loan application, completing the documentation, disbursing the loan, collecting repayments and following up on non payment.

 

Unlike the cost of funds and the cost of defaults, transaction cost is not proportional to the amount lent. The average microfinance loan size being smaller than most other loans—corporate and personal—the transaction cost on a percentage basis for a microfinance loan tends to be higher.

The group lending model adopted entails peculiar costs such as group formation costs, costs on training the borrowers on the procedures to be followed, a higher degree of supervision and a higher frequency of installment payments (usually weekly or bi monthly.)

The most popular model for the dispensation of microcredit in India is the grouplending model. As per Sa-dhan (Industry Association of Community Development Finance Institutions in India) data, group loans account for 93% of the microfinance in India.

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