Does the Loan Mela Pay for Itself?
During a kharif loan mela, a regional rural bank branch received 240 applications across two products: Kisan Credit Card (KCC) crop loans and SHG joint-liability loans. One in five applications failed scrutiny and was rejected; the rest were sanctioned. Among the sanctioned files, KCC and SHG loans were in the ratio 5:3. The average KCC ticket was Rs.80,000 at 7% simple interest per year; the average SHG ticket was Rs.1,20,000 at 11% per year. The branch charges a processing fee of 0.5% of the KCC amount and 1% of the SHG amount, collected upfront. Internal cost of processing, covering field verification, documentation and follow-up, is a flat Rs.1,200 per sanctioned file, whichever the product. Interest is computed for a full year on the sanctioned amount, and no repayment is assumed in year one. The branch head wants to know whether the mela pays for itself at the processing stage, before any interest spread is counted, and what would have to change if it does not.
1. Compute the total sanctioned amount and the expected first-year interest income from the mela.
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Sanctioned files. Rejections = 1/5 × 240 = 48, so sanctions = 192. KCC : SHG = 5 : 3 over 8 parts ⇒ KCC = 5/8 × 192 = 120 files; SHG = 3/8 × 192 = 72 files.
Sanctioned amount.
- KCC: 120 × Rs.80,000 = Rs.96,00,000
- SHG: 72 × Rs.1,20,000 = Rs.86,40,000
- Total = Rs.1,82,40,000
First-year interest.
- KCC: 7% of Rs.96,00,000 = Rs.6,72,000
- SHG: 11% of Rs.86,40,000 = Rs.9,50,400
- Total = Rs.16,22,400
Note the ratio trap: 5:3 applies to the sanctioned 192 files, not to the 240 applications. Applying it to 240 gives 150 and 90, which is wrong on both counts and would inflate every downstream figure.
2. Work out the net result at the processing stage alone, ignoring interest spread.
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Fee income.
- KCC: 0.5% × Rs.96,00,000 = Rs.48,000
- SHG: 1% × Rs.86,40,000 = Rs.86,400
- Total fee = Rs.1,34,400
Processing cost. 192 files × Rs.1,200 = Rs.2,30,400
Net = Rs.1,34,400 − Rs.2,30,400 = −Rs.96,000.
The mela loses money on processing before a rupee of interest spread is counted. Per file, the average fee works out to Rs.1,34,400 ÷ 192 = Rs.700 against a cost of Rs.1,200, a shortfall of Rs.500 per file. The loss is not random: it is driven by the KCC-heavy mix, where the fee is only Rs.400 per file (0.5% of Rs.80,000) against the same Rs.1,200 cost.
3. What must change for the processing stage to break even? Test whether changing the product mix alone can do it.
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Per-file fee by product: KCC = 0.5% × 80,000 = Rs.400; SHG = 1% × 1,20,000 = Rs.1,200.
Mix-only test. Let x = number of SHG files out of 192; KCC = 192 − x. 400(192 − x) + 1,200x ≥ 2,30,400 76,800 + 800x ≥ 2,30,400 ⇒ 800x ≥ 1,53,600 ⇒ x ≥ 192.
So break-even requires 100% SHG files - every single file would have to be an SHG loan, which is neither the product mix the mela was designed for nor feasible in a kharif crop season. Mix alone cannot fix it.
Alternative fixes, computed at the current 120:72 mix:
- A flat fee on sanctioned amount: Rs.2,30,400 ÷ Rs.1,82,40,000 = 1.263%, i.e. roughly 1.26% instead of the present blended ~0.74%.
- Or cut processing cost to Rs.1,34,400 ÷ 192 = Rs.700 per file, a 42% reduction.
The judgement to record: the fee schedule, not the customer mix, is the lever. The cheapest realistic option is a modest across-the-board fee increase combined with group-based SHG documentation, which lowers the per-file cost without touching KCC pricing.