Sunita's Goats: A Self-Help Group Chooses Its Lender
Sunita, a member of a 14-woman self-help group in a Bhagalpur village, wants ₹45,000 to buy 30 goats. In four years the group has built a common fund of ₹1,68,000 from ₹500 per member per month plus about ₹40,000 of interest earned by lending internally at 2 per cent a month. The village moneylender will give Sunita the money at 5 per cent a month. A bank has offered the group ₹3,00,000 at 11 per cent a year under the SHG-bank linkage programme, repayable over 36 monthly instalments, and the group may draw as much of it as it needs. Two other members want ₹25,000 each for their sons' weddings. The group has had two defaults in four years, ₹6,000 in all. On Sunday the group must decide three things: where Sunita should borrow, whether the group should draw the bank loan at all, and what rule it should adopt about wedding loans.
1. Calculate the yearly interest Sunita would pay the moneylender, the yearly interest the group would pay on a ₹45,000 bank draw, and the yearly interest Sunita would pay the group at the existing internal rate. On these figures, who should borrow from whom, and who carries the risk?
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Moneylender: 5 per cent a month is 60 per cent a year, so ₹45,000 costs about ₹27,000 a year in interest - more than half the principal, on an activity (goats) that will not return 60 per cent.
Bank: 11 per cent a year on ₹45,000 is about ₹4,950. Internal rate: 2 per cent a month is 24 per cent a year, so Sunita would pay the group about ₹10,800.
So Sunita should borrow from the group and the group should borrow from the bank: the group pays ₹4,950, receives ₹10,800, and keeps roughly ₹5,850 a year to enlarge its own fund, while Sunita pays less than half the moneylender's rate. The spread stays in the village instead of going to a lender.
Risk does not disappear - it moves. The group owes the bank whether or not Sunita repays, so the 14 women stand guarantee for her goats. That is why drawing only the amount needed matters: unused sanction costs nothing, but drawn money costs interest from the day it is taken.
2. Should the group lend for the two weddings? Use the default record and the difference between production and consumption loans, and propose a rule that is fair but keeps the fund safe.
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A wedding loan is a consumption loan: it creates no income stream, so repayment depends on future savings or another loan. Two defaults in four years, even small ones (₹6,000), show the group's screening is not perfect - and that record was built on production loans, which at least generate cash.
The group's corpus is the members' own savings, so the protection rule should be: production loans (goats, a sewing machine, a small shop) may use the share capital plus bank linkage, with a repayment schedule matched to the income (goats kid within a year). Consumption loans must come only from the interest earned, capped at, say, 10 per cent of the fund and ₹5,000 per member, so a wedding never eats the corpus. Anything larger must come from the member's own savings.
The fairness argument belongs in the answer: a blanket refusal pushes families back to the moneylender at 5 per cent a month, which is exactly what the group exists to prevent.