Cost of Delivering Rural Credit in India
This note estimates the costs involved in delivering rural credit across five dominant channels: Public Sector Bank lending through its rural branch; Public Sector Bank lending through a Self-Help Group; Public Sector Bank lending through a Micro Finance Institution; Private Sector Bank lending through its rural branch; and Private Sector Bank lending through a MicroFinance Institution. The note analyzes each component of cost separately: cost of debt, cost of equity, transaction costs and loan loss provisions, and ascertain their contribution to total cost of credit. The note finds that:
- Total costs of rural credit delivery range from 13.75% for a bank lending through AA rated Micro Finance Institutions, to 41.53% for a Public Sector Bank lending directly through its rural branches.
- Total Tier 1 Capital consumption ranges from a high of 20.08% for lending through Self Help groups, to a low of 0.97% for lending through AA rated Micro Finance Institutions.
Given this analysis, the note concludes that the three policy goals of achieving complete financial inclusion, building low-cost financial inter-mediation infrastructure, and keeping systemic risks low, would be best served by the use of well capitalised high quality intermediaries instead of branches of banks or even self-help groups.
