Self-Help Groups as Financial

Institutions
Policy Implications Using a
Financial Model

by R. Srinivasan
Abstract: This paper uses a spreadsheet financial model to identify key
financial policy parameters that influence the performance of self-help
groups (SHGs) whose primary activity is microfinance. The focus is on
long-run (ten-year) performance. There is bad news for those policy makers
and practitioners who focus unduly on growth as measured by loan
activity. A conservative financial policy that does not inject external
funds into the SHG in the initial years and, when it does,
does so with moderation, seems appropriate in the long run. Additionally,
a high loan interest rate policy produces SHGs that are strong financial
institutions.

T
his paper uses a spreadsheet financial model to identify
key financial policy parameters that influence the per-
formance of self-help groups (SHGs) that have micro-
finance as a major activity. It also examines the consequences
of a conservative financial policy and of a high interest rate
policy at the SHG level. It is assumed that these SHGs operate
under the umbrella of a microcredit institution (MCI). 1 The
conclusions, based as they are on a simulation model and not
on field evidence are, hopefully, useful.
Journal of Microfinance

While some issues at the MCI level are discussed, the cen-
tral purpose of this paper is to enhance understanding of
SHGs. As a by-product, the model can be used by an individ-
ual MCI in its planning process. However, this model is simply
not designed as a substitute for a comprehensive planner, such
as Microfin. 2 In other words my concern is with SHGs; my
focus on the MCI is to ensure that the understanding of SHGs
is within an understanding of the total system. 3
A disclaimer is in order here. I am conscious that a suc-
cessful microfinance program may not appropriately be viewed
as a “financial institution” activity alone. The importance of
social relations and institutional features is stressed in
Woolcock (1999). I recognize the importance of these but
also believe that creating good financial institutions qua finan-
cial institutions does contribute to the success of such pro-
grams. I, therefore, proceed to look at SHGs and MCIs solely
as financial institutions.
The rest of this paper is organized as follows. The first sec-
tion provides a brief description of the SHG-MCI system and
describes the financial model used. The second contains an
analysis of the policy implications of the financial model out-
put, with SHG “best practices” as a point of reference. The
third section concludes the paper.

Financial Modeling Self-Helf Groups

SHG-MCI System
A typical SHG consists of twelve to thirty members
(Rutherford, 2000). The group is not merely a savings and loan
association, but serves as an “affinity” group that provides a
platform for a range of issues (such as watershed development,
awareness building, and family planning—see Fernandez, 1994,
for a comprehensive description of such SHGs). An SHG
meets regularly (often weekly), and in these meetings,
R. Srinivasan is professor and coordinator of the Finance & Control Area at the Indian
Institute of Management, Bangalore. Email: [email protected]

2 Volume 5 Number 1
 Self-Help Groups as Financial Institutions

members contribute savings and take decisions on loans to

members of the group. Group leadership is by rotation. The
SHG may initially lend out of its own pool of funds and after
gaining some experience with lending (and recovering loans), it
may borrow from an MCI for on-lending to members.
Briefly, the SHG-MCI system has financial linkages as fol-
lows. Each SHG in the system raises funds from individual
members and borrows from the MCI. Each SHG lends to mem-
bers and saves with the MCI. I will assume that there are no
regulatory restrictions 4 on the SHG activities. The MCI raises
funds from three sources: capital, SHG savings, and borrow-
ings from outside. The MCI lends to SHGs, invests outside,
and maintains a cash balance. The MCI may have regulatory
restrictions on assets, liabilities, and interest rates.
Financial Model
The spreadsheet financial model 5 (created in Microsoft Excel)
was developed to analyze possible strategies using what-if
analysis. The model generates two sets of outputs: SHG-level
and MCI-level projections. The model generates these projec-
tions based on input values provided for a number of factors at
SHG and MCI level.
A stylized description of the functioning of SHGs and the
MCI is provided, with the various input assumptions. To sim-
plify computation, a month has been taken as the standard
interval. Thus members save monthly, repay in monthly
installments, and so on.
Financial Model Inputs: SHG
• An SHG is formed by an initial set of members and the
group remains constant. (Initial membership fees are
ignored; they make little difference to the model output.)
• Each member saves a specified amount with the SHG. The
SHG pays interest on this amount. The members’ saving
should desirably be regular, but in practice it is often irregu-
lar (not all members may save in a given month or there may

Volume 5 Number 1 3
Journal of Microfinance

be a shortfall in the individual saving quantum). The model

incorporates some irregularity in savings (this is not any
implied defense of irregularity).
• A loan cycle represents the repayment period of a loan to
members made by the SHG. The model accepts loan cycles
ranging from 1 to 24 months. The SHG accumulates savings
over the first loan cycle and maintains this with the MCI
(i.e., no lending is done in the first loan cycle).
• Thereafter, the SHG lends a fraction of the available funds to
members over several loan cycles (referred to as the self-cycle
phase). The balance is saved with the MCI. The loan to mem-
bers is repayable in monthly instalments over the loan cycle
period. Interest is paid monthly over the loan cycle. A frac-
tion of the loans are delinquent with members taking three
months more than the loan cycle to repay. Of these, a frac-
tion will default; defaulting members pay neither interest
nor principal.
• At the end of the self-cycle phase, the SHG raises funds from
the MCI and lends a fraction of the total available funds
(member savings, surplus retained, and borrowing from
MCI) to members. The balance is saved with the MCI. The
loan from the MCI can be back-to-back (i.e., identical in
tenor to the SHG loan to members), or range for periods
from 1 to 24 months.
• The SHG incurs an annual operating cost expressed as a frac-
tion of the common fund (member savings plus accumulated
operating surplus).
• The SHG makes annual profits (losses) that add to (reduce)
the accumulated surplus.
Financial Model Inputs: MCI
• The MCI starts with a certain capital base. It can raise a
multiplier of this capital and accumulated surplus by
borrowing from outside.
• The MCI adds SHGs over a period of five years. The number
of SHGs stabilizes thereafter.

4 Volume 5 Number 1
 Self-Help Groups as Financial Institutions

• The MCI has to maintain a minimum fraction of its borrow-

ing and SHG savings as cash and maintain another minimum
fraction in approved investments. The remaining funds are
available for lending to the SHGs. A fraction of the loans to
SHGs are delinquent and a smaller fraction default.
• The MCI incurs an annual operating cost expressed as a frac-
tion of its borrowings plus SHG savings.
• The MCI makes annual profits (losses) that increase (reduce)
the total accumulated surplus.
The MCI capital is not an input item. The model generates
annual capital requirements (consistent with the inputs) as an
output. 6 Table 1 contains the definitions of inputs based on
these assumptions.
Financial Model: Output
The model produces the following output at SHG and MCI
levels:
• Balance sheets for 10 years.
• Income statements for 10 years and an aggregate income
statement for the 10-year period.
• Financial analysis.
• Sensitivity analysis.
In addition, funds flow statements for 10 years and an aggre-
gate funds flow statement for the 10-year period are produced
at the SHG level

Policy Implications
Table 1 contains definitions of inputs and numerical values for
the base case. I do not claim that the base numbers are realistic,
although many of these numbers are in the realm of possibility
in India. A deliberate major deviation from realism has been
made at the SHG level. The interest rate that the SHG charges
on loan to members is, at 20% on outstanding balances, un-
realistic. The number chosen is convenient, as it straddles
the 10% or so-called “politically correct” interest rates that a

Volume 5 Number 1 5
Journal of Microfinance

financial institution would have been compelled to charge in

India and the 30% plus rate that SHGs actually use. 7 There has
been fear expressed that a government that seeks to regulate
microfinance may impose ceilings on interest rates making
microfinance unsustainable (Peck & Rosenberg, 2000). Use of
this intermediate rate of interest of 20% is to help highlight the
positive contribution to organization performance that a
higher rate of interest can make.
A good benchmark for understanding some of these inputs
is provided by Mysore Resettlement and Development Agency
(MYRADA). The financial criteria for SHGs rated as “good” 8
by MYRADA include the following: At least 95% of members
save the minimum stipulated amount per month. At least 95%
repay against demand. The common fund (the total pool of
funds from members consisting of deposits and surplus
retained in the SHG) is rotated at least 100%. There is no idle
capital and there should be minimum balances with the MCI.
Good practices also require that when an SHG seeks MCI
credit, the SHG will have run at least one self-cycle. Internal
over-dues should not be more than 15% of total outstanding
loan amount. The savings to borrowing ratio should not be
more than 1:3. MYRADA compares borrowing with savings.
This model compares borrowing with the entire common fund
(member savings plus accumulated operating surplus). The
MYRADA ratio of 1:3 is roughly equal to the borrowing
multiplier of 1:2, which I used. 9
With these base numbers, sensitivity analysis provides cer-
tain implications. I have divided these into three categories:
key financial policy parameters (essentially focusing on the rel-
ative importance of input assumptions), the “cost” of financial
conservatism at SHG level, and the consequences of a “high-
interest” rate lending policy at the SHG level.
Sensitivities are specified with respect to a set of measures
of performance, at SHG and MCI levels, measured after 10
years. (The spreadsheet provides an intermediate sensitivity
analysis after five years, but that will not be used in this paper.)

6 Volume 5 Number 1
 Self-Help Groups as Financial Institutions

Table 2 contains the definition of output financial measures

used in this paper.
At the SHG level, these include a measure of total
resources (SHG funds); two measures of cumulative operating
performance (SHG surplus) and the proportion of cumulative
surplus to the total common fund (SHG surplus/common
fund); and two measures of lending performance, cumulative
loan disbursements (SHG loan disbursed to members) and
lending in a year relative to the common fund (SHG common
fund rotation).
At the MCI level, these include a measure of total
resources (MCI total assets); a measure of cumulative operating
performance (MCI surplus); a measure of capital requirements
(MCI capital) and a return on capital measure (MCI return on
equity—MCI ROE). 10
Key Financial Policy Parameters
Table 3 (Panel A) contains output from a sensitivity analysis. I
realize the problems of comparing deviations from base case
(for instance, is a 1% increase in the loan interest rate to mem-
bers at par with a 1% increase in the members’ loan delin-
quency rate?). Since a large number of input and output
measures are used, the corresponding input from Table 1 (out-
put) and Table 2 (item number) is provided in parentheses in
the analysis below. The input assumptions in Table 3 exclude a
number of items in Table 1 that are unimportant in a financial
sense (in that the output measures are insensitive to changes in
these items). The broad implications are as follows.
For SHGs, the SHG funds (O1) and the SHG surplus (O2)
are strongly determined by default of SHG members (I12), the
loan interest rate to members (I07), the loan interest rate
charged by MCI on its lending to the SHG (I20), the SHG
operating cost (I09), and the SHG borrowing multiplier from
MCI (I06). SHG loan disbursed to members (O4) is addi-
tionally influenced by the length of the loan cycle (I05). The
pool of funds available with the SHG and, therefore, its lend-
able resources are influenced strongly by the amount of money

Volume 5 Number 1 7
Journal of Microfinance

the SHG borrows from the MCI and the annual surplus the
SHG makes. This surplus is in turn determined by the rate of
interest at which the SHG lends, the rate of interest at which
it borrows, default by members, and the operating cost of the
SHG.
Further insight is provided by Table 3 (Panel B) where
sensitivity is “normalized” by looking at changes required to
produce the same increase (roughly 13%) in SHG loan dis-
bursed to members (O4). The loan interest rate charged by the
SHG to members (I07), the loan interest rate charged by the
MCI to the SHG (I20), SHG operating cost (I09), and default
by members (I12) all produce similar impacts on SHG Funds
(O1), 11 SHG Surplus (O2), SHG surplus/common fund (O3),
and SHG loan disbursed to members (O4). This is unsurprising
since all act through the income statement. Increasing the SHG
borrowing multiplier from MCI (I06) leads to smaller sur-
pluses, as does reducing the SHG savings rate (I03). Again this
is expected: both of these lead to an immediate increase in
funds available for disbursement as loans to members without
adding significantly to operating surplus. Reducing the loan
cycle (I05) adversely impacts surplus because of the assumption
that delinquent loans are delayed by three months, irrespective
of the original tenor of the loan.
At the MCI level, the MCI surplus is strongly influenced
by default, either by SHGs or by members (I12 and I24 respec-
tively), by the MCI borrowing multiplier from outside (I14),
the SHG borrowing multiplier from MCI (I06), and the loan
interest rate charged by MCI on its lending to the SHG (I20).
Beyond this brief summary, I do not intend to discuss MCI
level output.
Financial Conservatism at SHG level
The building blocks of a conservative financial policy at the
SHG level include self-financing loan cycle (I08), the borrow-
ing multiplier from MCI (I06), and the SHG savings rate with
the MCI (I03—the fraction of SHG funds with the MCI, serv-
ing as a self-imposed reserve requirement). By conservative I

8 Volume 5 Number 1
 Self-Help Groups as Financial Institutions

mean what would be described as prudential in mainstream

banking. A longer self-financing cycle would put the members’
money at risk but not the outsiders’. A lower borrowing multi-
plier from the MCI again would put less of the outsiders’
money at risk. A higher SHG savings rate with the MCI
reduces the loan exposure to members. This, in the context of
an SHG, matters less as will discussed later on.
The self-financing cycle (I08) does not influence the SHG
operations in a major way. Reducing the cycle to 1, from the
base of 2, increases SHG loans disbursed to members (O4) by
1.64%. Increasing the cycle to 3 from the base of 2 reduces
loans disbursed by 2.55%. 12 Thus if there is a strong belief that
operating with their own money initially can establish desir-
able group processes within the SHG, there is no operational
reason to hurry.
The SHG savings rate (I03) does make a difference to SHG
performance. For instance, reducing the savings rate from 10%
to 5.6% (see Table 3, Panel B) has the same impact on SHG
loan disbursed to members (O4) as increasing the SHG loan
interest rate to members by 1%. However, an SHG is not like
other banks where the pool of depositors and the pool of
borrowers do not overlap. In such banks, a “reserve” require-
ment offers some protection for the depositors. In the case of
an SHG, the pool of depositors and of borrowers would be co-
terminus in the long run. In a sense, to talk of a “reserve”
availability is devoid of meaning. Borrowing from the MCI and
saving with the MCI are both essentially the same net activity
(except that a deposit can make cash available in an
emergency).
Increasing the borrowing multiplier (I06) from 2 to 3
increases the loans disbursed to members (O3) by 57% and the
SHG surplus (O2) by 46% (Table 3, Panel C). But all it takes is
an increase in loan default by members (I12) by 0.4% to effec-
tively leave the surplus at the base level. 13 In other words, if an
increase in lending to members is accompanied by even a small
increase in default, then the SHG surplus remains at the same

Volume 5 Number 1 9
Journal of Microfinance

level as with a lower lending volume. Raising the multiplier to

4 increases the loans disbursed to members (O3) by 134% and
the SHG surplus (O2) by 105%. But again all it takes is an
increase in the loan default by members (I12) by 0.7% to effec-
tively leave the surplus at base level.
With a borrowing multiplier of 3, default of about 3.2% is
enough to wipe out the entire SHG surplus (O2). In the base
case, default of about 3.4% would use up the entire SHG sur-
plus (O2). Unlike in the previous paragraph, we are dealing
here with the entire SHG surplus (and not just incremental
over the base level). This and the previous paragraph taken
together imply the following: higher lending volumes will lead
to a higher SHG surplus if default levels can be maintained at
base level. A slightly higher-than-base level default will wipe
out any SHG surplus gains from increased lending. With
higher lending volumes, defaults hurt the SHG more than with
lower lending volumes. As a consequence, the overall SHG sur-
plus can be exhausted entirely at lower default rates than at the
base level of lending. While loan portfolio quality is always
important, increasing the borrowing multiplier makes the need
for assuring quality of the loan portfolio even more important.
The implication of this for the organizations involved, both
SHGS and the MCI, is examined below.
The quality of the loan portfolio of an MCI is a function
of three factors. The first is the loan absorptive capacity of
individual SHG members, their ability to deploy loan funds
(and indeed their own funds) effectively in their individual
businesses. Business development interventions address this.
The second is the effectiveness of loan management at the SHG
level, reflecting the quality of the SHG’s loan appraisal,
disbursement, monitoring, and recovery activities. The third is
the effectiveness of loan management at the MCI level. Thus
any planned growth of the loan activity has to ensure that
these three factors are addressed. There is some evidence that
mature SHG programs have a higher average portfolio at risk
(PAR greater than 60 days—measured at MCI level) than new

10 Volume 5 Number 1
 Self-Help Groups as Financial Institutions

programs (M-CRIL, 2001). This could possibly imply that the

third factor, the effectiveness of loan management at the MCI
level, has been less than adequately addressed. However, given
the relatively brief history of even the so-called mature pro-
grams in India, I would hesitate to cite this as clinching
evidence that loan management effectiveness falls as the size of
the loan portfolio increases. But there is a cautionary tale here;
growth for both SHGs and an MCI makes loan portfolio
quality an overriding concern.
A High Interest Rate Policy
A high interest rate on the loans to members (I07) not only
dramatically increases (see Table 3, Panel C) the loans dis-
bursed to members (O4), but also enhances the SHG Surplus
(O2). Thus, an increase from the base interest rate of 20% to
30% increases loans disbursed to members (O4) by 291% and
the SHG surplus (O2) by 894%. The loan default has to go up
to 7.2% to wipe out the surplus. Rutherford (2000) provides an
insightful analysis of interest rates and growth rates in the con-
text of an ASCA. Essentially, a high interest rate policy (keep-
ing default rates constant) can rapidly add to the SHG surplus
and, therefore, to the pool of funds available for lending. This
drives growth. A high interest rate policy (within reasonable
limits) not only facilitates growth, but can provide a cushion
for default by building the SHG surplus.
It is important to note that the SHG, in this model, is
viable even with a 20% rate of interest. In this case an increase
to 30% is not based on a need to meet transaction costs. It is
based on the premise that the enhanced surplus, derived from
a higher interest rate, can strengthen the pool of funds mem-
bers have with the group and promote growth based on owned
funds.
The issues are two-fold: with high interest rates, will there
be enough takers of loans, and do such high interest rates breed
default? There is considerable empirical support that low inter-
est rates can indeed damage the credit environment. Adams
(1984) and Von Pischke (1991) argue that the essential issue is

Volume 5 Number 1 11
Journal of Microfinance

not whether credit is cheap, but who has access to financial ser-
vices and what does it cost to provide these services. Rosenberg
(1996) provides a justification of a high-interest rate policy,
contending that “There is overwhelming empirical evidence
that huge numbers of poor borrowers can indeed pay interest
rates at a level high enough to support microfinance institution
sustainability.” This would support the model’s assumption
that there will be takers for loans at high interest rates, but
with the three factors that affect loan quality, listed in the pre-
vious section, addressed. The truth is more complex; high
interest rates that are still lower than in the informal sector
may strengthen SHGs but render them less useful for the very
poor.
Given that even these high rates are usually lower than
rates prevailing in the informal sector, I would argue that too
low an interest rate may even tempt a member to borrow from
the SHG, not for production/consumption within her house-
hold, but for on-lending in the informal market, possibly
increasing the loan portfolio risk considerably.
On the whole, a high interest rate policy may be justified
not on the grounds of transaction costs alone, but from the
financial strength of the SHG derived from enhanced surplus
creation and retention.

Conclusion
For policy makers and MCI managers involved with SHGs, the
central message is to not be in a hurry. SHGs are somewhat
fragile (as indeed are most financial institutions), and a small
reduction in the loan portfolio quality can seriously damage it.
In the first few years of an SHG, institutionalizing group
processes is much more important than accelerating lending.
Size is as much an issue as quality. Over a sustained period, an
emphasis on growth is probably unwise and unwarranted.
At an operational level, this paper attempts to enhance
awareness of the relationship between decisions on interest
rates and borrowing multipliers (and the entire list of items
described here as input assumptions), and outcomes, such as
operating surplus, funds, and loan disbursement.

12 Volume 5 Number 1
 Self-Help Groups as Financial Institutions

Notes
1. This shows that I started on this paper some time back before microcredit
enlarged in scope and became microfinance. I find the thought of making
changes in a range-named EXCEL file alarming, so please bear with me.
2. See the CGAP website: http://www.cgap.org/html/mfis_technical_
guides.html. Again, for those whose concern is the financial performance of the
MCI, the microCAMEL website http://www.gdrc.org/icm/micro-camel.html is
a good source.
3. For instance, default by an SHG is, in a shortsighted sense, good for the
SHG, but not good for an MCI at all.
4. Peck and Rosenberg (2000) discuss the regulation of microfinance institu-
tions, including small-community based ones.
5. The model is accessible at http://202.41.106.14/~rsrini/shgmodel.xls.
Feel free to use or adapt with acknowledgement. Remember that it is a research
model, not a practitioner’s one.
6. Because capital is an output, the MCI operating cost is dependent on bor-
rowing and SHG savings and not on capital. This ensures that the model has no
circular references.
7. Also, many SHGs do not pay any interest on members’ savings with them,
while I have assumed an interest payment.
8. While I have focused on the financial measures, MYRADA provides a
number of other measures.
9. India’s National Bank for Agriculture and Rural Development
(NABARD) stipulates a higher 1: 4 ratio. Both the NABARD and the MYRADA
guidelines are available on Hari Srinivasan’s fascinating website:
http://www.gdrc.org/icm/.
10. The MicroBanking Standards Project [http://www.microbanking-
mbb.org/] provides a number of measures intended primarily at the MCI level.
With my focus on SHGs, I have attempted a short list of measures that capture
size, viability, and lending activity.
11. These MCI measures are comparable to those in the “Microfinance defi-
nitions draft for comment,” in the website http://www.microrate.com/. What is
called “Surplus” in this paper is referred to as “Retained Earnings” in the draft
definitions.
12. I would like to downplay default by members. I would hate to mislead
any reader into associating default positively with good performance.
13. These results are not in the table.

Volume 5 Number 1 13
Journal of Microfinance

References
Adams, D. W. (1984). Are the arguments for cheap agricultural credit sound? In
Adams, D. W., Graham, D. H., & Von Pischke, J. D. (Eds.) Undermining
rural development with cheap credit. Boulder, Colorado: Westview Press.
Fernandez, A. P. (1994). The MYRADA experience: Alternate management systems
for savings and credit. Bangalore: MYRADA.
M-CRIL [Micro-Credit Ratings and Guarantees India Ltd.]. (2001). The M-CRIL
report, 2000: Performance of rated MFIs in South Asia. Gurgaon, India.
Peck, C. R. & Rosenberg, R. (2000). Regulating microfinance: The options.
Small Enterprise Development, 11(4), 4–23.
Rosenberg, R. (1996). Microcredit interest rates. CGAP Occasional Paper No. 1.
Rutherford, S. (2000.) The poor and their money. New Delhi: Oxford University
Press.
Von Pischke, J. D. (1991). Finance at the frontier: Debt capacity and the role of
credit in the private economy. Washington: The World Bank.
Woolcock, M. J. V. (1999). Learning from failures in microfinance: What unsuc-
cessful cases tell us about how group-based programs work. American
Journal of Economics and Sociology, 58(1), 17–42.

14 Volume 5 Number 1
Table 1. Input Definitions and Base-Case Values
Item
No. Item Definition Value Dimension
I01 Members: Number Number of members in SHG, throughout the plan period. 20 No.
I02 Members: Monthly Savings Average monthly savings per member 40 Rs
I03 SHG: Savings rate Percentage of total funds saved with the MCI 10.0% %
I04 SHG: Savings-intrate to members Interest rate [annual] paid on members’ savings by SHG 5.0% %
I05 SHG: Loan cycle Scheduled repayment period [months] of loan by SHG to members 10 Months
I06 SHG: Borrowing multiplier from MCI Multiplier of common fund [member savings plus surplus]that SHG can borrow from the MCI 2.0 Times
I07 SHG: Loan-intrate to members Interest rate [annual] paid on borrowings from SHG by members 20.0% %
I08 SHG: Self-financing cycle Number of loan-cycles over which SHG lends to members without borrowing from the MCI 2.0 No.
I09 SHG: Operating cost SHG annual operating cost as a percentage of the common fund, at year-end 4.0% %
I10 Members: Savings regularity Percentage of scheduled savings by members deposited 95.0% %
I11 Members: Loan delinquency Percentage of loan disbursed to members, whose repayment is delayed 5.0% %
I12 Members: Loan default Percentage of loan disbursed to members, in default [should be less than item I12] 1.0% %
I13 MCI: Fixed Assets Fixed assets of MCI 100000 Rs
Table 1 Cont’d.
Item
No. Item Definition Value Dimension

I14 MCI: Borrowing multiplier from outside Multiplier of net worth [capital plus surplus] that MCI can borrow 1.0 Times
I15 MCI: Minimum investment Minimum investment that MCI must maintain as a percentage of borrowings and deposits 20.0% %
I16 MCI: Cash Minimum cash that MCI must maintain as a percentage of borrowing and deposits 5.0% %
I17 MCI: Borrowing-intrate from outside Interest rate [annual] paid on borrowings from outside by MCI 10.0% %
I18 MCI: Savings-intrate to SHG Interest rate [annual] paid on savings of SHGs by MCI 5.0% %
I19 MCI: Investment-intrate Interest rate [annual] earned on investments by MCI 9.0% %
I20 MCI: Loan-intrate to SHG Interest rate [annual] paid on borrowings from the MCI by SHGs 15.0% %
I21 MCI: Operating cost MCI annual operating cost as a percentage of total borrowing and SHG savings, at year-end 4.0% %
I22 MCI: Loan cycle Scheduled repayment period [months] of loan by the MCI to SHGs 10 Months
I23 SHG: Loan delinquency Percentage of loan disbursed to SHGs by the MCI, whose repayment is delayed 5.0% %
I24 SHG: Loan default Percentage of loan disbursed to SHGs by the MCI, in default [should be less than item I23] 1.0% %
I25 MCI: SHG addition Number of SHGs added annually 100 No.
Table 2. Output Definitions
Item No. Item Definition
O1 SHG funds Total assets of SHG
Measure of size
O2 SHG surplus Cumulative profits earned and retained (corresponds to reserves in standard accounting parlance)
Measure of cumulative operating performance
O3 SHG surplus/common fund The common fund is member savings plus surplus
The common fund is a measure of the members’ stake in the SHG
The SHG surplus/common fund is a measure of the proportion of this stake from operating surplus
O4 SHG loans disbursed to members Cumulative value of loans disbursed to members
Measure of absolute cumulative lending performance
O5 SHG common fund rotation Loans disbursed in a period divided by the average common fund
Measure of relative periodic lending performance
O6 MCI total assets Total assets of MCI
Measure of size
O7 MCI surplus Cumulative profits earned and retained (corresponds to reserves in standard accounting parlance)
Measure of cumulative operating performance
O8 MCI capital Capital
Measure of capital requirement
O9 MCI return on equity MCI surplus divided by MCI equity (capital plus surplus)
Measure of return on capital employed
Table 3. Sensitivity Analysis

SHG
Item INPUT INPUT Funds
No. Item base new O1
Panel A
I07 SHG: Loan-intrate to members 20% 21% 19.00%
I20 MCI: Loan-intrate to SHG 15% 14% 13.54%
I04 SHG: Savings-intrate to members 5% 4% 4.27%
I18 MCI: Savings-intrate to SHG 5% 6% 2.04%
I06 SHG: Borrowing multiplier from MCI 2.00 2.10 5.81%
I14 MCI: Borrowing multiplier from outside 1.00 1.10 0.00%
I03 SHG: Savings rate 10% 9% 2.44%
I10 Members: Savings regularity 95% 96% 1.05%
I05 SHG: Loan cycle 10 11 2.65%
I08 SHG: Self-financing cycle 2 3 -2.56%
I09 SHG: Operating cost 4% 3% 6.94%
I21 MCI: Operating cost 4% 3% 0.00%
I11 Members: Loan delinquency 5% 4% 0.71%
I12 Members: Loan default 1% 0% 51.85%
I23 SHG: Loan delinquency 5% 4% -0.37%
I24 SHG: Loan default 1% 0% -25.20%
Panel B
I07 SHG: Loan-intrate to members 20% 21.00% 19.00%
I20 MCI: Loan-intrate to SHG 15% 13.62% 19.20%
I04 SHG: Savings-intrate to members 5% 1.13% 16.51%
I06 SHG: Borrowing multiplier from MCI 2.00 2.25 14.95%
I03 SHG: Savings rate 10% 5.6% 11.23%
I05 SHG: Loan cycle 10 8 -7.38%
I09 SHG: Operating cost 4% 1.47% 18.62%
I12 Members: Loan default 1% 0.57% 19.42%
I24 SHG: Loan default 1% 1.56% 18.74%
Panel C
I07 SHG: Loan-intrate to members 20% 30% 529.01%
I06 SHG: Borrowing multiplier from MCI 2 3 69.33%
Note: Columns O1 to O8 indicate the percentage change over the base case value,
column O9 indicates the change from the base case return on net worth (Years 6 to
10) of 8.10%.
 SHG SHG SHG
surplus/ loan dis- common MCI
SHG common bursed to fund total MCI MCI MCI
Item surplus fund members rotation assets surplus capital ROE
no. O2 O3 O4 O5 O6 O7 O8 O9

I07 32.11% 11.02% 12.89% 0.56% 15.07% 9.27% 15.29% -0.15%

I20 22.89% 8.23% 9.16% 0.41% 10.74% -16.54% 12.97% -1.78%
I04 7.21% 2.82% 3.34% 0.08% 3.72% 2.75% 3.75% -0.03%
I18 3.45% 1.38% 1.45% 0.06% 1.66% -2.31% 1.97% -0.27%
I06 4.05% 1.61% 5.02% 3.41% 6.98% 6.41% 7.26% -0.03%
I14 0.00% 0.00% 0.00% 0.00% 0.60% -7.99% -3.81% -0.29%
I03 4.12% 1.64% 2.81% 1.19% 1.77% 1.98% 3.33% -0.07%
I10 1.05% 0.00% 1.05% 0.00% 1.05% 1.06% 1.05% 0.00%
I05 4.48% 1.78% -6.37% -7.59% 1.95% -0.89% 1.99% -0.06%
I08 -4.32% -1.81% -4.18% 0.02% -2.69% -7.02% -2.68% -0.12%
I09 11.74% 4.48% 4.88% 0.21% 5.62% 3.66% 5.69% -0.05%
I21 0.00% 0.00% 0.00% 0.00% 0.00% 17.07% -1.42% 1.29%
I11 1.20% 0.49% 0.74% 0.27% 0.57% 0.36% 0.58% -0.01%
I12 87.65% 23.57% 33.34% 0.23% 40.64% 24.78% 41.27% -0.34%
I23 -0.62% -0.26% -0.25% -0.01% -0.30% 0.44% -0.35% 0.05%
I24 -42.61% -23.26% -18.17% -0.92% -20.88% 29.02% -24.58% 4.17%

I07 32.11% 11.02% 12.89% 0.56% 15.07% 9.27% 15.29% -0.15%

I20 32.46% 11.12% 12.92% 0.57% 15.17% -23.53% 18.35% -2.45%
I04 27.90% 9.78% 12.93% 0.28% 14.41% 10.66% 14.53% -0.09%
I06 10.32% 3.97% 12.82% 8.54% 17.89% 16.30% 18.63% -0.07%
I03 18.98% 6.97% 12.92% 5.25% 8.06% 9.00% 15.41% -0.28%
I05 -12.47% -5.50% 15.03% 20.18% -5.72% -0.04% -5.82% 0.13%
I09 31.48% 10.84% 12.94% 0.52% 14.95% 9.60% 15.16% -0.14%
I12 32.82% 11.23% 12.87% 0.09% 15.53% 9.80% 15.76% -0.15%
I24 31.67% 10.90% 12.82% 0.54% 14.94% -22.45% 17.97% -2.36%

I07 894.24% 58.06% 291.50% 5.52% 358.92% 168.15% 368.11% -1.59%

I06 45.64% 14.68% 57.27% 34.36% 81.43% 70.95% 84.95% -0.25%