A related lending policy, also practiced by the Grameen Bank as well as other institutions, is stepped lending: starting borrowers with very small loans and gradually increasing the amounts as a function of the borrower's repayment record.
When should groups be used?
— When communities have strong group cohesiveness.
— When . . . start-up transaction costs are high.
— When individuals can obtain information about each other at a lower cost than the bank can.
— When individuals do not have collateral.
Guidelines for more effective use of groups:
— Focus on small, homogeneous groups that will assume some responsibility for supervising their funds.
— Impose penalties (such as prohibiting access to further loans while an individual is in default) and provide incentives (such as promising a higher future loan amount to those who repay on time).
— Institute sequential lending (to allow groups to screen out bad risks).
Risks associated with using groups:
— Risk of poor records and lack of contract enforcement.
— Risk of corruption and control by a powerful nucleus or leader within the group.
— Risk of covariance because of similar production activities.
— Risk of spending excessive time and money to form viable groups.
— Risk that departure of a group leader may jeopardize group viability.
— Risk of potential free-riders. (This risk can be reduced if the group can impose penalties on individuals.)
In the KUPEDES program of the BRI Unit Desa system, future loan eligibility is precisely established according to repayment performance on the current loan. If all payments are made on time, then the borrower is eligible for a 100% increase in the loan amount. If the final payment is on time but one or two installments are late, then the allowable increase in loan amount is 50%. If the final payment is on time but three or more installments are late, then no increase in the amount is permitted, although a new loan may be taken out. If the final payment is late but paid within two months of the due date, then any new loan must be 50 % smaller than the current one. If the final payment is more than two months late, then no new loan is allowed.134
Another approach is to give the borrower who repays the entire loan early a rebate on part of the accumulated interest paid.
Additional techniques to enhance loan recovery rates include the following approaches, which are especially suited to the situation of poor borrowers:
(1) Requiring frequent payments on loan balances, often weekly. This helps maintain the loan repayment among the client's priorities. [However, this is an obvious example of a technique that is not applicable for the majority of agricultural loans.]
(2) Monitor frequently the situation of the client, for example, with weekly visits to his or her farm or place of work.
(3) Immediate visits to the borrower in cases of delays in payments. This requires an information system which gives updated information to the day, as is the case with BancoSol in Bolivia.
(4) Locating lenders 'close to the borrowers' places of work'.135
An alternative establishing an office close to the borrowers is to employ mobile banking:
The National Agricultural Bank of Morocco doubled its banking network by opening seasonal banking windows in existing local offices of the Ministry of Agriculture. Several rural financial intermediaries have employed agents who regularly visit villages by motorcycle or on foot to provide financial services.136
A useful role that technical assistance for rural financial institutions can play is to make them aware of these optional approaches and also to assist them to develop adequate management information systems so that problems in the loan portfolio and in lending policies are detected on a timely basis.
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