NPAs of SHGs in India: Behavioural Aspects

This is in response to the article, “Performance of Self-help Groups in India” (EPW, 30 January 2021). This letter puts light on a few behavioural aspects of loan repayment behaviour of self-help groups (SHGs) in India. The article very neatly elaborates interesting facts about the non-performing assets (NPAs) of the SHGs in India and their dynamics. The Status of Microfinance Report (2019–20) published by the
National Bank for Agriculture and Rural Development (NABARD) reports that around 68.56% of total SHGs are located in south and eastern regions contributing 81.62% of total SHGs’ savings. They get 93.61% of total credits extended to SHGs with a remarkable credit quality with NPAs to total loans ratio less than 5%, while other regions have NPA ratio more than 10%, sometimes more than 40% in some Indian states. Why NPA ratio are high in some regions/states? The article lists few reasons provided in the report, Study on Non-performing Assets in Self-help Groups, published by Bankers Institute of Rural Development, an autonomous training institution promoted by NABARD. This letter reflects on some behavioural aspects behind this socially inefficient divergence in credit culture.

SHGs are located in particularly closed geographical locations and are mostly community-driven groups. When a SHG enjoys the benefit of getting easy and timely loans by maintaining a good credit culture, other SHGs also learn it and they also try to maintain a good credit culture to reap similar benefits—the favourable imitation effect. This effect spills over to other SHGs creating a larger geographical cluster of SHGs with a good credit culture over time. The opposite may also happen—the adverse imitation effect, for instance, if members of a SHG strategically default on the credit without facing any strong penalty from the bank’s side, others will also try to imitate it and strategically default, creating a similar geographical cluster of SHGs with a poor credit culture. Over time, this will lead to two kinds of clustered groups with good and poor credit cultures. This is evident from the data published in the article.