Sustainability of Microfinance Self Help Groups in India: Would Federating Help?

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 INR20 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%. Savings in these groups is estimated to be at least INR8 billion (US $170 million). Despite these considerable achievements, sustainability of the SHGs has been suspect because several essential services required by the SHGs are provided free 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 to the SHGs and others that SHG members need, but which SHGs cannot feasibly provide.

Using a case study approach, this paper 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. However, their sustainability is constrained by several factors - both internal, related to the federations themselves and external, related to the other stakeholders. The paper concludes by recommending some actions to address these constraints.[From the author]