I can't see there is a lot of interest in this question so I thought, I answer it myself with what I found out. Maybe someone will find this useful.
The only issue with having 1000+ customer groups is the confusion in managing their prices. You can always develop a custom module that will help you manage the prices or use custom import profile etc.
Having 1000 customer groups will not affect performance on a live website as long as it's cached. Magento's default cache is simply file based, meaning that database query results (and other things such as design assets) are saved in a minified manner in root/var/cache. However, when using other cache like memcache or Redis the performance decrease is very little/none so you probably won't notice any difference in performance.
From a customer perceptive they still have to login and Magento has to check the customers database table for their credentials. Magento pulls their Customer group(s) at the same time so it's still one process. Magento will not loop through all customer groups but will load it in one query.
You may experience slower performance when managing through admin but again this is normal. Same as when you have 6000 products as opposed to 100.
Another issue with the customer group pricing will be slow to re-index but again this is part of the job of Magento and it is there so that the admin may feel the difference but the user does not.
In conclusion, the is nothing to worry about the performance point of view, however, management will be the only concern.
I hope someone finds this useful.