For this microfinancier, it’s Grameen Bank 2001 redux

At a rickety two-storey building near Magadi Road in Bangalore, 20 women have gathered to pay their monthly loan installments.

They have taken loans from a microfinance institution for starting tailoring business, bangle shops and beauty parlours, and are divided into four groups of five each on the basis of their mutual trust and consent.

Till recently, if a woman was unable to pay her installment due to various reasons like increased expenditure for the month etc, her group members would pay on her behalf, and she, in turn, would repay them later.

But since July, the group members are not liable for the defaulting member. Each member is responsible for making her own payment on time, with her husband acting as guarantor.

The joint liability system, where the group was responsible for the defaulting member is gradually making way for the Grameen II model, where the individual is responsible for repayment.

The joint liability model in microfinance has proven to be effective as the group is liable and ensures that the borrower pays on time, says Jaynee Shah, analyst with Avendus Capital.

“But often applying social pressure through group guarantee, one of the pillars of the Grameen Bank model, becomes a burden on the members and creates distress and humiliation for the defaulting member,” says an industry expert.

Ujjivan Financial Services, a Bangalore-based microfinance institution, is piloting a ‘My Loan’ scheme wherein financial liability is not borne by the group, a methodology practiced by the Bangladesh-based Grameen Bank in 2001.

Samit Ghosh, MD, Ujjivan, says the reason for trying out this scheme stems from the realisation that as the loan cycle increases, installments rise and group members find it difficult to bear the repayment amount of the defaulting member, along with their own amounts.

“The group gets aggressive with the defaulting member. We are piloting with the My Loan scheme, where we identify good customers and train them and explain the reasons for removing joint liability and seek their consent,” says Ghosh.

This scheme only applies to members who have already completed two loan cycles and the loan sizes are upwards of Rs15,000.

“It is not for small-ticket loans. We also ask the husband to sign as a guarantor so that he can pay if his wife is unable to,” says Ghosh, adding that the scheme is being piloted in 16 centres in Bangalore, Kolkata, Pune, New Delhi and would go on for another two to three months to get a feedback.

“Our aim is to roll it out across our 300 branches in the next two years,” adds Ghosh. This is much better as everybody is responsible for their own payments, says Fatima M, a customer from the Magadi Road centre, however adding in the same vein that as My Loan also involves the husband’s sign, there are chances the husbands can siphon off the loan money. Ghosh says in case the husband creates turmoil, the branch manager has the authority to wave off the guarantee of the husband. “The intention of including the husband is to make the family aware as the loan amounts are big.”