Kisan Credit Card or Joint Liability Group Loan: Costing a ₹2 Lakh Borrowing
A paddy farmer in Janjgir-Champa who owns 2 hectares asks the branch to finance ₹2,00,000 for a pump set and field levelling. Two options are on the desk. Option K: a Kisan Credit Card limit of ₹2,00,000 at 7% per annum on the amount drawn, simple interest, no processing fee, with the 3% prompt-repayment incentive credited only if the entire amount is repaid by the due date; penal interest of 2% per annum is charged on any overdue amount. Option J: a joint liability group loan of ₹2,00,000 at 11% per annum on a reducing balance, repayable in 12 equal monthly instalments, with a 2% processing fee deducted from the disbursement - so he receives ₹1,96,000 but pays instalments on ₹2,00,000. His harvest and sale fall in November and December, and the KCC is to be closed at 12 months. The branch must put a written recommendation on file, including a view on what happens if the harvest is delayed by a month or two.
1. Compute the total cost of each option assuming on-time repayment and recommend one, showing the arithmetic.
Read the worked answer
Option K - KCC. Simple interest on ₹2,00,000 at 7% for 12 months = ₹14,000. The 3% incentive = ₹6,000, credited only on prompt repayment. Net cost = ₹8,000. There is no processing fee, so the full ₹2,00,000 is available and the effective cost is 8,000 ÷ 2,00,000 = 4.0%.
Option J - JLG. EMI on ₹2,00,000 at 11% p.a. reducing balance, 12 instalments. Monthly rate r = 11/12 = 0.0091667; (1+r)^12 = 1.11572. EMI = 2,00,000 × 0.0091667 × 1.11572 ÷ 0.11572 ≈ ₹17,675. Total repayment ≈ 17,675 × 12 = ₹2,12,100. Interest ≈ ₹12,100. Add the processing fee of 2% = ₹4,000, deducted upfront, so total cost ≈ ₹16,100. Note the second sting: he repays on ₹2,00,000 but received ₹1,96,000, so the effective cost is 16,100 ÷ 1,96,000 ≈ 8.2%, not 8.05%.
Recommendation: Option K, cheaper by about ₹8,100, roughly half the cost of Option J, and it additionally leaves a revolving limit he can draw on for the next season after review rather than a fresh application.
Condition attached to the recommendation: the ₹8,000 figure is contingent on repayment by the due date. The moment repayment slips, the ₹6,000 incentive is lost and the comparison base becomes ₹14,000, not ₹8,000. The recommendation is therefore honest only if it says 'KCC, provided repayment discipline is monitored', not 'KCC, the cheaper loan'.
2. How late can the KCC repayment be before the group loan would have been the cheaper choice?
Read the worked answer
Set up the delayed-KCC cost. Let the delay beyond the due date be d years.
- Interest at 7% on ₹2,00,000 for (1 + d) years = 14,000 × (1 + d) = 14,000 + 14,000d.
- The 3% incentive is forfeited entirely, however short the delay - this is the point most candidates miss. So the base is already ₹14,000 before any penalty.
- Penal interest at 2% p.a. on the overdue ₹2,00,000 for d years = 4,000d.
Total = 14,000 + 18,000d.
Compare with Option J's ₹16,100: 14,000 + 18,000d = 16,100 → d = 2,100 ÷ 18,000 = 0.1167 years ≈ 42–43 days.
Interpretation. A delay of a week or a fortnight costs him roughly ₹350–₹700 and the KCC is still cheaper. Once the delay passes about six weeks - very plausible when paddy procurement payments slip - the JLG would have been the cheaper product. The margin in favour of the KCC is therefore not ₹8,100 of comfort; the incentive structure converts a six-week delay into a reversal.
What the branch should do with this number: fix the KCC due date after the expected sale date rather than at the anniversary of disbursement, and set a follow-up call at 45 days before the due date. Aligning the due date to the harvest cycle is free; a penalty is not.
3. Beyond cost, what would you record in the appraisal note before sanctioning, and which factor is most likely to break the plan?
Read the worked answer
Record four things.
- The cost comparison as computed, with the ₹8,100 margin and the 43-day sensitivity, so a reviewing officer sees the recommendation is conditional and not a slogan.
- Cash-flow timing. Repayment capacity arrives in November–December, but the KCC falls due 12 months after disbursement. If disbursement is in June, the due date is June - six months after the money came in, which is exactly when it has been spent. Either shift the due date to January–February or build in a mid-term instalment.
- The product conditions, in the farmer's language. That the 3% is an incentive credited after repayment, not a discount at disbursement; that penal interest runs on the overdue amount; that crop insurance linkage is available with the KCC and reduces the risk of a crop failure turning into an overdue.
- The JLG's hidden cost, so the file does not read as if the branch ignored it: ₹4,000 deducted upfront means he starts ₹4,000 short of the pump set's price.
Most likely to break the plan: weather, not arithmetic. This is the rice belt; a late monsoon or unseasonal rain in October shifts the sale to January, the due date passes, the incentive is lost and the penal clause starts. Crop insurance linkage and a due date set after the sale - not after disbursement - are the two controls that protect both the farmer and the branch's recovery figures.