Self-Help Groups and Borrowing Cost An Empirical Study Addressing Endogeneity Problem

Restricted access to formal credit and high cost of borrowing from informal source is a familiar problem to the rural poor borrowers. In the recent years Self-Help Group (SHG) based microfinance programme in India has been functioning against this problem. Addressing the problem of endogeneity, this study has assessed the impact of the participation in SHG on access to formal credit and on borrowing cost. It has also examined whether the SHGs serve the disadvantaged section of people or not. In order to study the nature of accessibility to formal credit we have formulated a logit model. We have fitted a semi-log linear model for assessing the borrowing cost. A probit model has been applied to estimate the decision to participate in SHG. A test for endogeneity related with the participation in SHG has also been conducted. This empirical study is based on a set of primary data collected from 964 rural households residing in the district of Bankura in West Bengal, India. Empirical analysis demonstrates that participation in SHG accelerates the access to formal credit and reduces the borrowing cost for the disadvantaged section of people. It reveals the absence of endogeneity problem relating to the participation in SHG.