v/s
Individual Lending Model
What is a JLG?
Primary Security Unsecured loans with group Assets financed by the Bank
guarantee in case of term loan, PDCs,
etc.
Contact Point Verification Household and business place Business Contact Point Verification
verification done by field officer of (BCPV) of customer’s office or
BC factory premise and residence
RCPV of proprietor or main
partner/ director, with
photographs of Door no. of
property w the customer
Banks weren’t moving to rural areas as it wasn’t viable – hence BC was a good
solution
Banks have RBI regulations, hence they choose to work through BCs
Monitoring was done by a team from the bank that went to the field once in 6
months
KYC collection done by the BC on behalf of the bank – as well as all required
documents – approval should be with the bank
Each BC partner is given a sanction limit – e.g. – if there’s a 200 crore limit, they
can have their outstanding till that value
Annual review – financial review – part of a risk is borne by them, and a part by
the bank – risk collateral – in the form of FDs – they should have enough capital
to give, what are their plans, how are they planning to grow, etc.
Flexibility – banks didn’t touch the products, didn’t create products – BCs know
which product is to be given – it was their decision
In the BC model, banks do not have their own product, no data captured by
the bank – banks own the customers, own the data, monitor the branches and
claim the business
JLG process
As the groups are created, each individual fills an enrollment form and gets an enrollment
number
These forms are scanned by the BC and sent to the bank, along with credit bureau (CB)
reports and KYC’s
At the bank, the enrollment forms are uploaded on a software called iworks. Using iworks
and Ganaseva, they verify the data and match it with the forms, after which, the loan is
accepted or rejected.
They check KYC, DOB, customer name, pin code, mobile number, father name &
spouse’s name – if everything is ok, the loan is sanctioned
KYC (Know your customer) is used as identification – biometrics, adhaar card, pan card,
voter ID
After the loan is disbursed, repayment begins on a weekly / fortnightly / monthly basis in
the form of equated installments – this is also done by the BC
Individual Lending Process
BC partner will see which customers are eligible for IL – They will check the customers’ business –
minimum 3 years, 2 KYCs – compulsory adhaar
Filling the loan application form for the applicant and co-applicant, scanning it and then sending
it to the bank – bank credit officer verifies all documents, KYCs, CB report, etc. and then sanctions
the loan
Credit officer intimates the BC to execute the loan documents and informs CPU for creation of CIF
(customer information file) in Finacle (CBS)
Upon receiving executed loan documents and proper verification, credit officer requests CAD
team for loan account opening and disbursement into BC account
CAD (Credit Administrator) sanctions the loan amount to the BC account; the BC transfers the
loan amount to the customer’s account on the same day
Executing Loan Documents
o Proof of discussion and decisions between the bank, MFI and the customer
o Option to the customer to choose the loan amount, frequency and the
tenure
Key risk elements would be the absence of group guarantee for the
loans. This risk is being mitigated by taking guarantees of family
members / known persons with better net worth, who exert adequate
social pressure on the customer to repay.
The risks in these loans is also mitigated through higher levels of due
diligence by BC and Bank and stringent customer eligibility criteria.
Performance Security – In an event of default, bank can invoke the PS
arrangement with partners up to the agreed PS arrangement
RCU monitoring from Bank – The Risk Control Unit (RCU) monitoring will
continue with the same efficiency on the ground for these loans on lines of
the existing practice for microfinance loans. With the accounts being
directly maintained on Finacle, desk monitoring of the portfolio will be
further strengthened
Helps customers fit in society by interacting with Interest rates can be high
other members often
Helping each other pay – group mutuality Sometimes social pressure can have a negative
increases trust within the village / society impact – suicides – e.g. – AP Crisis
Customers face social pressure while paying / Limit on the number of MFIs each customer can
saving a certain amount and hence learn how to take a loan from
be regular and discipline
3 day CGT (Compulsory Group Training) – get Lack of trust in the MFI
them financial education – why saving is
important, terms and conditions, etc.
Turn-around time is very less as it happens online Loan sanction valid for only 30 days
today – aadhar eKYC
Pros and cons of IL– customer’s point of view
Pros Cons
Larger loans – ticket size to run businesses Business vintage of 3 years required
Education and knowledge on how to spend / save Completion of a JLG loan cycle required
money
Helping reduce poverty as encouraging upcoming Time taken is long as compared to JLG
businesses
Digitization and development of rural areas ID proofs required – some customers may not have
PAN card, etc.
Business to run for future generations High number of restricted profiles – many people
may not be eligible
The only entity in a microfinance process that works on the Performance security – agreement with bank
field as well as the bank – external and internal In case of default by the customer, BC may have to pay the
agreed PS to Bank either the overdue amount or the full
outstanding amount
Helping rural areas develop, providing financial Large number of customers to verify
literacy and other required training to rural based
customers
Interest earned on loans RBI decided what could be the pricing, who
could be the consumers, product size
Larger portfolio size in terms of amount and account Banks have many RBI regulations to follow, hence
it is difficult to work
Pros and cons of IL – Banks’ point of view
Pros Cons
Reach out to the rural and semi-urban entrepreneurs KYC tampering by BC or customer
Leverage on BC partners – Performance security RBI decided what could be the pricing, who could be
where even if a customer defaults, the BC is the consumers, product size
responsible for 1-2% of total disbursed amount
The proposed loan accounts are booked in our bank Banks have many RBI regulations to follow, hence it is
(SB/CA) and hence our CASA is expected to improve difficult to work
in locations where our bank branches are present.
Cross selling – Opportunities on insurance (through There is no social pressure, so the customer can be a
credit shield insurance on loans), MF, Deposits, credit willful defaulter
cards, POS, other loans, through Banks’ distribution
network, etc. will also improve
Recommendations
The JLG and the IL both have pros and cons, however, according to me, the IL
is more beneficial for the bank for the following reasons:
o The IL comes with a processing fee of 1-2% which can be an additional earning,
which doesn't exist in a JLG
o The IL model is for larger ticket sizes - loans of Rs. 50,000 to 1 lac – hence the
interest earned through IL is also higher than that earned through the JLG
The dominant rationale behind this growing support was clear: the
perceived need to provide the poor in Latin America with the hope of a
way out of their grinding poverty, and maybe even some small successes
too, but all to be achieved in such a way that it did not jeopardize in any
way the business elites that traditionally ruled these countries and who
reflexively supported US government foreign policy in Latin America at
virtually every turn.
In the early 1980’s, loan programs in Latin America using individual
methodologies looked for ways in which aspects of the Grameen model could
be incorporated into their programs. The result was the Latin American
Solidarity Group model.
The Latin American solidarity group model chose to retain loan approval and
administration, using the already-existing operational systems developed for
individual lending.
o For example, credit officers perform an analysis of each client’s loan request
(though this analysis is significantly less extensive than in the case of an
individual loan) and visit all group members at their place of business prior to
fund disbursement. Group formation is simply a loan guarantee mechanism—
groups do not become a part of the institutional structure of the bank.
Evolution of Micro-finance in Bolivia
o Those who never had access to funds other than informal ones (family,
friends, etc.)
o Scope and diversity of financial services offered to clients and the assisted
market segments was considerably enlarged
Stage III: Entrance into the market of consumption credit institutions.
o This credit supply led many people to obtain credit in different financial
institutions for amounts much larger than their real payment possibilities.
Stage IV: The current crisis
o Decrease in the levels of sales in most micro and small companies, due
mainly to a reduced capacity for internal consumption
Priority Lending
Unbanked population who are given loans (agriculture loans, microfinance loans)
Could also be people in urban areas and have access but may not have collateral
Financial literary – customers may find it intimidating and may not approach it in rural
areas