How to create Microfinance Group Loans

Introduction: Microfinance Group Loans

Microfinance Loans were introduced in order to help the poor section of society where banking facilities are not feasible and to provide funds whenever they are in need. These were initially provided to the individuals seeking a loan, but a new concept of Group Loan was introduced by “SKS MICROFINANCE” in which they offered loans to a group of women for their regular needs and for small household businesses like Achaar Making, Papad Making, etc. The loan was named “Mahila Group Loan”.

Later on, Group loans became quite popular among Microfinance Companies as the recovery rate is quite high and client retention is good as compared to individual loans.

A Microfinance Group loan can consist of any number of members, this group is also known as the Self-help group (SHG), and they all are solely and jointly liable for the amount received from the microfinance company.

Microfinance Group Loan must be created after some specific procedure and check; in this blog, we are trying to put light on those points:

THINGS TO KEEP IN MIND FOR MICROFINANCE GROUP LOAN

Providing Microfinance Group Loan is quite easy as there are a plethora of individuals and groups that are seeking loans, but in order to make it a sustainable business, recovery of loans must be extensive. Here are some factors that an MFI must consider while creating groups and approving loans to them.

Area Selection:

Area Selection plays a vital role in forecasting the disbursement of Microfinance Group loans and their recovery. Start off by listing the areas that are accessible to your Microfinance Company. You can select the areas having proper road connectivity which will help your loan officers to visit the area for loan-related activities. Create a microfinance group that belongs to the same area as it will aid in better recovery of loans while providing training or other such activities. Also, the members of a group must know each other personally as all individuals are solely or jointly liable for the receiving of the loan and its repayment. It is also advised to avoid providing loans to the same family members.

Nature of Individual:

Though one cannot guarantee nature as there is no such thing as a character certificate, still there are some ways to ensure you are providing a loan to a genuine person. It is advised to run a background check of members of a microfinance group, and find out whether they are involved in any police or legal cases and other such related activities. They don’t have political support or background as collecting EMIs from such individuals might prove to be quite tricky.

Living Standard:

Each member of a group must have a proper earning or source of income. This acts as a guarantee that the individual will be able to pay up the EMIs against the loan for which he/she has applied. In case an individual is dependent on any other individual, it is suggested not to provide any loan to them as again the collection might get delayed and there are highly likely chances of getting an NPA.

If an individual wants a loan for establishing a small business, we can analyze the business model and if found fruitful, we can offer a loan to those individuals. The main objective of Microfinance Group Loans is to increase the livelihood and living standard of the society.

Financial Literacy:

When selecting the group for Microfinance Group Loan, the financial literacy of each individual must be known. Financial literacy means that each person should know the concept of interest, EMI, and loan repayment, loan. In case of unawareness, proper training related to the above-mentioned points should be provided before handing over the loan amount.

CREATION OF GROUP FOR MICROFINANCE GROUP LOAN:

Collection of Documents

After ensuring that each of the above conditions is met, you can now create a Microfinance group consisting of ‘n’ number of individuals seeking for loan. It is mandatory to collect KYC documents like PAN Card, Aadhaar Card, Voter ID, Driving License, and other such related documents (that are pre-decided as per Microfinance Company’s norms).

It is advised to cross-verify all the collected documents with the official Government Websites and check whether they are genuine or not. From the documents collected for the group, select the profiles that seem to assure. This way, your recovery will go on smoothly as well.

Provide Training:

After the selection of individuals for a particular group, well-structured training must be provided in order to embed basic etiquette for loan application and repayment. The following points must be discussed in detail to avoid future conflicts or misunderstandings between Microfinance Company and loan seekers:

1) Company background – Make the individuals of the group know about the Microfinance Company’s mission, vision, and why they are offering loans to the customers. Create a healthy bond between the distributors and loan seekers.

2) Loan options available – On the basis of their KYCs, CIBIL score, etc, the various types of loan plans available for the customers must be made clear.

3) Liability of group members – Since each member act as a guarantor of the other member in a group, all of them must know about their responsibilities and liabilities towards the repayment of approved loans.

4) Rights of group members – They must also possess proper knowledge and information about their rights.

5) Action of the company in case of non-payment – During the training, the members of the group must know about the action taken by the Section 8 Microfinance Company in case of non-repayment of EMI and other such trivial information.

Disbursement of Loans

Once all the verification, training, etc, are completed, you can now decide on the date of disbursement of the loan to the group. The date and time for collection of EMI must be pre-decided in order to avoid future conflicts. Upon finalization, make sure you have a duly signed copy from all members of the group of the agreement as it will serve as the proof of loan application from the group.

Self-help group declaration is very important, in this joint liability of all members will be there. Each and every member of the group is liable for each other.

Check utilization of loans:

This is the final step and is to be conducted in order to ensure the right usage of the loan amount passed on to the members. After disbursement of the loan, it’s better to check the utilization of the loan by the borrower. If they use the amount on the objects specified on the loan form then mark this member in the good list, this will help you to create a group in the future.

Follow the above check-points to create an active Microfinance Group Loan and ensure a high recovery success rate.

Read this if you wish to Register your Microfinance Section 8 Company

Latest Update 2022: Regulatory Framework for Microfinance Loans, 2022