Cost of Delivering Rural Credit in India

By Deepti George, IFMR Finance Foundation

Central to the debate on access to finance for India, is the question of the most appropriate channel for credit delivery. Credit intermediation has traditionally been the stronghold of banks, driven by policy mandates and regulatory backing. Over the years, banks have also used intermediaries for channeling credit to the end customer and a few such credit intermediation channels have established themselves as sustainable routes – these include the NABARD promoted Self Help Group (SHG)-bank linkage model, as well as the Joint Liability Group-based Micro Finance Institution (MFI) model.

IFMR Finance Foundation has published a note titled “Cost of Delivering Rural Credit in India”, the first note in its series – Notes on the Indian Financial System. This note takes a first principles look at the costs incurred for various lending channels: namely direct lending by public and private banks though branches, and lending by banks via intermediaries such as SHGs and MFIs.

The note attempts to build up the total cost of credit delivery by assessing 4 components: cost of debt, cost of equity, loan loss reserves and transaction costs. Comparing the total costs of credit delivery across these different channels is intended to throw light on the most efficient channels that banks could leverage for rural credit delivery.

Findings and Policy Implications

  1. Total Channel Cost: Total cost ranges from 13.75% at the lowest end for transmission of this credit through a AA rated MFI to 41.53% for the same task being performed by a Public Sector Bank directly through its branches or using the current model of Business Correspondents. The cost is lower at 32.07% for a Private Sector Bank but still significantly above the number for an MFI, even one that is barely investment grade. The SHG channel at 28.93% fares better than the bank branch channel but worse than the MFI channel from a total cost perspective.
  2. Total Capital Consumption: Similarly Total Tier 1 Capital Consumption ranges from a high of 20.08% for lending through SHGs to a low of 0.97% if the intermediation were to be done through high quality MFIs.

The note is available here.


  • Anuj Jain

    I wonder if this the right question to answer – ‘cost of delivering rural credit’? for too long, we have made this mistake of focussing on ‘loans’, rather than full suit of financial inter mediation. Rural bank branches continue to have a low CD ratio (barring exceptions in TN, AP, Karnataka, and Maharashtra); which means that banks continue to be the conduit for capita flight from rural to urban regions. also, by focussing on cost of credit delivery to the SHG from an external source (Bank), the analysis can easily lie because it may not factor in the credit that is available and rotated in the SHG through member savings. But these comments are based on certain assumptions of mine, which may not be true. Will try and read your report in more detail for more accurate comment. Must end by saying that IFMR’s reserach work is really helpful, because it does not confine itsef to ‘micro’ matters, byt looks at the systemic issues, so congratulations and thanks.

    • Deepti

      Thank you for raising many pertinent issues. The objective of the note is to evaluate the efficacy of channels available to banks in providing rural credit, one
      of which is the SHG channel. For the cost of equity (Unexpected Loss) in the
      bank-SHG channel, we have looked at default by the SHG on the bank loan, as
      well as default by members to the SHG. The PAR-360 numbers used from the EDA
      study have been constructed using portfolio reports and group records, and
      therefore can be considered to also capture intra-group defaults (on loans made
      from circulating member savings).

  • R Chandrasekar

    An interesting analysis. One question: the cost of maintaining a branch would be amortized over a variety of activities, not just this set of loans. This should imply a lower figure for these costs (even if they don’t alter your conclusions). Have you thought of looking at the cost structure of fund delivery using mobile phones compared with these channels?

    • Deepti

      Sir, we have used cost numbers from the Rangarajan Committee Report. It has estimated transaction costs based on particular loan sizes (Rs.25000 and Rs.10000) and arrived at a number taking into consideration proportional costs (wherever applicable) out of the total lending made by the rural branch. Since direct and indirect agri- lending dominate the rural branch’s portfolio, the apportionment of transaction costs for a Rs.10 cr portfolio seems reasonable.


    Apart from the channels of delivery included in this study, some emphasis should have been stressed on the ultra small banking (USB) for rural credit delivery.

    • Anand

      Thanks for the feedback Harish, this is something for us to look at.

  • chandrachudan

    My appreciations. Very exhaustively done. Cost of debt assumed @ 4% is too low,.(footnote says the lowest cost at which banks are able to raise this money ). Also the loan loss relating to rural credit is much higher. than what has been assumed – derived from total PS lending. So the cost would work out to be much higher. Some banks also provide additional employee benefits by way of hardship allowance and additional rent free accommodation which will again add up to the cost.

    • Anand

      Thanks Chandrachudan sir. Agreed that the costs might be higher on account of higher loan losses. However, even working off of available information, the differences across different channels are quite stark and have clear policy implications.

  • Bharati Joshi

    Interesting piece. But MFIs do not operate in isolation. Can we assume that their cost of credit delivery will remain unaffected if banks and other players withdraw from this space? What is the impact of competition on costs? Then there is of course a difference in the purpose of these institutions and their social responsibilities.

    • Deepti

      Bharati, MFIs and
      SHGs are in essence conduits for bank credit such as that which needs to be
      achieved under Priority Sector lending. Also MFIs and SHGs have local knowledge
      and reach and such capability has been difficult, time and again, for banks to
      develop. An analysis of social objectives is beyond the scope of this note.
      However, the concern of consumer protection is very real and this will need to
      be addressed by way of policy regulations that hold the institution responsible
      for offering only those products that are suitable for the customer (in fact
      the right to suitable products has been elucidated by FSLRC in its report).
      Such regulations will need to be complemented by supervision by banks of the
      entities it employs as its channel.