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Joint Liability Group (JLG)

v/s
Individual Lending Model
What is a JLG?

 A JLG consists of an informal group of 4-10 individuals (maximum


20) who are engaged in similar business / occupation, formed with
the purpose of availing loan through the group mechanism against
mutual guarantee.

 Credit group with no savings required

 Although they are groups, lending is done directly to the individuals


of that group
What is individual lending?

 Individual lending occurs because there is a restricted loan


amount of Rs. 50,000 in a JLG. Hence, if someone wants a
larger loan, it can be through individual lending

 For an individual to be sanctioned a loan under individual


lending, he will have had to completed at least 1 loan cycle
with any MFI
Differences between a JLG & IL
Parameters JLG loans Individual loans guaranteed
by family members

Client type Group of women borrowers Individuals who graduated


cross guaranteeing each from JLG loans of the MFI
other’s liability

Loan size Up to Rs. 50,000 Rs. 50,000 to 1 lac

Repayment frequency Weekly / monthly / fortnightly Monthly

Collection mode Cash Bank ECS mandate

Tenor 12-24 months 12-36 months

EMI capping Depending on the household EMI amount not to be >50% of


income analysis done by the the monthly Average Gross
field officer Surplus
Parameters JLG loans Individual loans guaranteed
by family members

Primary Security Unsecured loans with group Assets financed by the Bank
guarantee in case of term loan, PDCs,
etc.

Margin NA 25% by the customer

Pricing Interest rate – As per RBI Interest rate – between 26-


guidelines, between 26-30% 30%
depending on the margin
compliances of the MFI

Processing fee – NIL Processing fee – up to 2%

IT interface Ganaseva Finacle

Credit Bureau HiMark and EquiFax CIBIL, HiMark and EquiFax,


MFI and consumer
Parameters JLG loans Individual loans guaranteed by
family members

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

Formats will be provided by the


bank. Details shall include scope
of activity witnessed, amount of
stocks seen, no. of employees,
etc.

Min 2 years at same business


address

Min 1 year at the residence


address given – deviation may be
considered if BCPV is satisfactory
or mitigated by other checks like
positive neighbors enquiry or field
visit.
Parameters JLG loans Individual loans guaranteed
by family members

Telephone verification NA To be done by BC and shall


mandatorily cover 100% of all
cases.

Reference checks NA 3 mandatory reference checks


shall be taken:
 Neighbors who are not
relatives of the customer
 Regular buyer of products
or services dealt in by the
customer
 Regular supplier of raw
materials or other products
regularly dealt in by the
customer
Business Correspondent (BC)
 A business correspondent (BC) is a means through which a bank can reach out to
customers who do not have access to a bank branch - to microfinance

 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

 BCs / MFIs are experts – easier to use them

 Bank was monitoring it from risk perspective – registration, etc.

 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

 The CB report is essential as it shows defaulters, delays in payment, etc.

 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

 BC goes to the customer to execute the loan agreement – terms and


conditions and other relevant documents - third party present as a witness that
the field officer has made the customer understand everything properly

 PDC’s (Post-dated cheques) collected on behalf of IndusInd (Appraisal loan –


sanction letter)

 DPN (demand promissory note) – signed by customer as an agreement


 Documentation:

o Proof of discussion and decisions between the bank, MFI and the customer

o In microfinance, documents collected are: enrollment form, application form,


acknowledgment, sanction letter (should have all the loan terms and
conditions including tenures, loan amount, charges, etc.)

o Customer should have copy of sanction letter, repayment schedule, etc.

o DPN – demand promissory note

o Vernacular language – explained clearly by the field staff

o Option to the customer to choose the loan amount, frequency and the
tenure

o All the documents with KYC


Risks & mitigates in a JLG

 Credit – KYC tampering, negative clients, multiple lending, credit


assessment
o Addressing the risk – strengthening of credit bureau, direct account
disbursements, UIDAI (Unique Identification Authority of India) made
mandatory (97% accounts have UIDAI)

 External – Competition, high penetration, negative incidences, excess


growth
o Addressing the risk – Increasing efficiency, choosing customers wisely,
economies of scale
 Operational – monitoring lapses, system failure, process lapses, negative
areas
o Addressing the risk – strengthening of internal systems & teams – RCU,
increased communication, monitoring and evaluating at regular
intervals

 Financial – Low liquidity, low equity leverage, interest risk


o Addressing the risk – Limiting loans, buying insurance, saving money
Risks & mitigates in Individual Lending

 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

 Customer eligibility – Those who have completed at least 1 loan cycle


with any MFI or 80% of the tenor with the BC in question. Tax Return (RTR)
on existing loan liabilities would be obtained. New customers without any
loan track with any MFI not eligible for any loans, Deviation on this is
allowed only on strong recommendations from the Business Head and
Credit Head of BC-MFI.
Pros and cons of JLG – customer’s point of view
Pros Cons

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.

Development of rural areas Limit of Rs. 50,000 can be taken as a loan

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

Teaches customer how to be regular and discipline Limit of 1 lacs on loans


through the EMI

Creates a sense of independence and individuality Personal details given

PDC acts as a deterrent for the customer, it is


mandatory for the customer to have a savings
account and provide transaction report
Pros and cons of JLG & IL – BC’s point of view
Pros Cons
BCs know which product is to be given – it is their decision Many responsibilities:
- KYC
- CB report
- Loan disbursement and repayment
- Attending center meetings
- Knowing customers on a personal level
- Working on the field everyday
- Handling large amounts of money
- Etc.

Interacting with people from underprivileged backgrounds KYC tampering by customer


and understanding their lives

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

Gaining recognition in a number of large, well-known Checking customer details:


banks - All documents, formalities, etc. – can be difficult
Pros and cons of JLG – Banks’ point of view
Pros Cons

Gaining access to a wide range of customers – KYC tampering by BC or customer


increasing their customer base, recognition

Helping rural areas develop, providing financial Large number of customers to verify
literacy and other required training to rural based
customers

Most risks can be mitigated – RCU Blind trust in BC

Documenting everything – proof Customers can become defaulters

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

Most risks can be mitigated – RCU Blind trust in BC

Interest earned on loans Customers can become defaulters

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

o Cross selling – Opportunities on insurance (through credit shield insurance on


loans), MF, Deposits, credit cards, POS, other loans, through Banks’ distribution
network, etc. will also improve

o Current account savings account is also expected to improve through the IL


model in locations where the bank branches are present
Evolution of the IL Model in Latin America

 Largely thanks to extensive US government funding and technical assistance


programs, a good number of microfinance programs got underway in Latin
America from the 1970s onwards.

 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

 Stage I: The beginning of micro-credit with NGOs

o 1980s – 1st initiatives to create NGOs as a way to offer access to credit

o Those who never had access to funds other than informal ones (family,
friends, etc.)

o Main objective was the achievement of coverage in low income social


sectors.

o Self-sustainability wasn’t important – resources came from donations


and subsidized funds.
 Stage II: Formalization of microfinance institutions

o Creation of BancoSol – 1992 – marks the beginning of the “formalization”

o Creation of Private Financial Funds (FFP) as financial intermediaries


specialized in providing services to micro & small borrowers.

o Increase in coverage, both in number of clients assisted and in volume of


financed resources

o Economies of scale – lower ROI, increased efficiency

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 Entrance of exclusively profit oriented private institutions that are mainly


dedicated to consumption credit

o Aggressive policies to win markets – incentive mechanisms for staff that


promoted growth of the portfolio without concern for its quality, getting higher
levels of overdue loans than the “traditional” micro finance institutions entities.

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

o Income generating capacity diminished, which had consequences of


increase in levels of delinquency in the financial institutions’ portfolios.

o Small borrowers' associations were created in several departments of the


country.
 Their activities consisted mainly of the adoption of measures to exert pressure
on financial institutions and on the Government.
Other Micro-finance aspects I covered in my internship

Priority Lending
 Unbanked population who are given loans (agriculture loans, microfinance loans)

 Population that doesn’t have easy access to banks

 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

 Banks may choose to do priority sector in urban areas

 RBI gives target products (water, sanitation, etc.)

 Rural infrastructure development fund


Frequency in microfinance
 How often the bank collects the loan

 Gap between 2 installments

 Repayment schedule (RS) shows installments, principled amount, interest and


total EI

 EMI – Equated Monthly Installment

 Principal increases and interest decreases in installments – principal is lowest


when interest is highest, and principal is highest and interest is lowest

 Monitorium – difference between loan disbursement and first installment


THANK YOU