While there was a common belief that it was rather risky to extend a loan to the underprivileged as there could be nothing done in case they don’t repay, the microfinance model introduced by Muhammad Yunus proved the belief wrong. SHG and JLGs are an evolution of that concept.
In a JLG, the borrowers from the same background form a group to request a loan for income generating activities from financial institutions using Group mechanism with the concept of joint or individual guarantee for fellow group members.
This mutual guarantee concept makes the JLG model successful since the member of the Group keep an eye on each other and ensure that the borrowed money is utilized properly for the purpose stated while borrowing.
The peer pressure, credit discipline instilled in the Group as a part of their training and the cluster based Group approach mitigates the risk factor involved enabling the subsistence of life in the rural area.
The Process Involved
Business Correspondents, MFIs, NBFC, Banks, NGOs, Cooperative Societies and other financial or non-profit institutions help individuals in the rural area to form a JLG and rise loan for income generating activities.
The representatives of the above-mentioned institutions will take measures to visit a village, meet people and help them form informal groups after ensuring that they fulfill certain prerequisites.
- The Group should be made of 4-10 people
- The members should be from similar socio-economic background associated with comparable income generating activities who consent to function as a group
- The Group should be formed by like minded folks out of genuine interest and not out of compulsion inflicted by representatives of financial institutions.
- The members should be residents of the same village/street, and there should be mutual trust among the members
- The Group members must be engaged in incoming generating activity for a constant period of at least one year.
- The members of the group should not have any previous loan defaults.
- JLG could not be formed with members of the same family. Only one member per family could be a part of a Group.
- A member who is most active or able should be selected as the leader of the Group to ensure proper functioning.
Once a Group is formed based on the above criteria, the promotional institutions will ensure that the Group members act as a JLG by following a set protocol.
- Conduct frequent Group Meetings which must be attended by all members
- All members should actively participate in all activities and meetings
- The principles of group strength have to be emphasized accordingly, and a group cohesion should be ensured.
- JLGs could also serve as a channel for technology transfer which facilitates shared access to market information and offers relevant training programs.
- The training program must build empathy and understanding creating a responsive lending environment
- It should improve the interaction between the member and create an interdependent environment
JLGs will undergo an appraisal test similar to that of SHGs but it would be more of a formal interaction with members to deduce the mutual trust and guarantee. The questions would be more focused around:
- Income Sources of Members
- Involvement in Income generation activities
- Structure of Group
- Importance of attending Group meetings
- Genuine interest in being a part of JLG
- Understanding the concept of group guarantee
- Agreeing to use the loan only towards economic activities
Once a Group successfully qualifies in the appraisal test they would be deemed ready to apply for a loan. Before the representatives take the Group members to a financial institution to initiate a loan process they’ll conduct random house or business unit verifications to ensure the authenticity of loan claims.
JLGs are a credit based models which are formed with an intention to obtain a loan for socio economic activities, in India, there are two specific models for applying loans through JLGs.
Model A- Financing the individuals in a Group
Each member of a JLG group is eligible to avail an individual loan from the financial institution. The members would need to execute an inter-se document jointly (which makes each member of the group liable for repayment of all loans taken by individual members of Group).
The financial institution would then assess the genuine of credit requirement, consider the agreement and consensus of the members of the Group and verify the credentials of that particular member before offering an individual loan.
Model B- Financing the entire Group
Seeing as how the major role of a JLG is to operate as a single borrowing unit, the group as a whole would be eligible to avail one loan which could be used to fulfil the credit requirement of all the members. Credit assessment of the Group would be based on the evaluation of their income generating activities.
All members would need to execute a joint document and agree to own the liability of this debt jointly or offer an individual guarantee for each other. Though JLG is a credit model, the members are encouraged to open an individual”No Frills Account.”
It depends entirely on the choice of the JLG. If they decide to undertake savings in addition to credit operations, the Group would initiate a savings account for the JLG with two specific members given the authorization to access it on behalf of the Group.
If a JLG undertakes savings with the credit plan they would be required to maintain the book of accounts and the grading would be based on a few performance parameters. But, unlike SHGs the quantum of credit will not be linked to the Group’s savings account. The requirement is worked out on the credit needs of individual members only.
There is no need for collaterals to be submitted against JLG loans. However, it is necessary to present an introduction form, an application/appraisal form, the joint liability agreement and Demand Promissory Note (DPN) for individual claims and documents similar to SHGs for group loan.
Nature of Loans
- The loans offered to JLG’s would be a flexible credit option that addresses the credit requirements of the Group members
- Financial Institutions conduct a thorough credit assessment to prevent over or under financing.
- Agencies use relevant assessment methods for rating JLGs.
- Financial institutions may offer cash credit, short-term loan or long term loan depending on its purpose.
- As the loans are granted against the mutual guarantee offered by Group members, the maximum amount of loans are restricted to INR 50000 per individual under both models.
- The financial institutions would fix the rate of interest. However, the lending institutions are encouraged to provide incentives for timely repayment of loans by JLGs as applicable.
Once the loans are disbursed the repayments are expected to be made during the Group meetings. The inherent peer pressure in JLGs ensure that the loans are utilized properly, and the repayments are made promptly.
In case an individual fails to repay the loan the responsibility would fall collectively on the shoulders of all Group members in case of mutual liability and on a specific person in the case of individual guarantee.
The financial institutions would keep a close eye on the functioning and repayment aspects of JLGs. The loan/field officers from financial institutions are required to keep a harmonious and close relationship with the Leader of the JLG and its member to make them reliable borrowers.
Challenges faced by Financial Institutions
While MFIs focus primarily on microloans and Group loans there are other financial institutions which offer loans for SHGs in addition to other loan products like personal loans asset based loans, working capital loans etc. Though Microloan software seems to be the perfect option for MFIs when an institution offers other loan products they end up using two different software to manage their loan portfolio which ends up being too time-consuming.
Since most of the Group members don’t have former credit history verifying their credit-worthiness and identity becomes a hassle without an integrated e-kyc solution.
As institutions turn towards legacy systems for micro-loan products they may end up searching other solutions to take care of mandatory functionalities like central portfolio management, accounting functionalities, reporting structure, fund management aspects, Managing Non-performing assets causing additional hassle.
Several financial institutions have a problem with collection aspect when it comes to JLGs and SHGs since most of them are located in rural area. The lack of official branches of the institution in such areas makes them hugely dependent on Business Correspondents or Field Officers.
Owing to the distance and location issues the repayments may not reach the lending agencies right on the date of collection. So, the repayments will not reflect on the account problems causing more operational issues.
Finabile – An Absolute Solution for JLG loan Software
Finabile is devised to ease down the operational challenges and inject automation into the workflow of JLG loan software. JLG loan software flexible, user-friendly reports in various formats like pdf. It provides an optimal functioning environment to financial institutions that offer JLG loan software with the following features:
- Finabile is a one stop solution which could configure several loan products in a jiffy saving a lot of time and effort. Lending institutions could either choose to use the default loan products or customize the existing ones to fit their needs.
- The inbuilt accounting module enables real-time accounting and offers a dynamic way to configure the accounting functionalities as per business needs leading to more transparency in the loan workflow.
- Our independent modules for Group loans and the intuitive document management system reduce the operational complexities altogether.
- Seamless integration with third party applications for identity verification improves the overall operational efficiency and simplifies the verification process.
- Our mobility solution empowers the field agents to work efficiently, the offline synchronization feature of the mobile app makes sure that all the data is collected appropriately and integrated with the core application once the device receives network connectivity.
Schedule a demo to know more about our unified core JLG loan software