Designing a Crop-Linked Loan in a Rain-Fed Block
Dharashiv Agro Finance, an NBFC-MFI, proposes a 'Kisan Mitra' product for 1,850 small farmers in two rain-fed blocks: ₹60,000 per borrower at 26% per annum, with a single repayment of principal and interest at the end of nine months, after harvest. The loan officer argues that farmers receive cash only once a year and that forcing monthly instalments will push them to moneylenders charging 5% a month. Field data: 62% of the farmers grow soybean and 21% cotton; only 38% have assured irrigation; average household income is ₹1.9 lakh; median existing debt is ₹34,000 across two lenders; last season unseasonal rain cut soybean yield by 40% in one of the two blocks. The proposed loan is collateral-free and the branch plans to take a photocopy of the land record 'for comfort'. Collection would be in cash at the gram panchayat office.
1. Can Kisan Mitra be launched as designed under the RBI microfinance framework? Identify the rule, its rationale, and any other design features that are non-compliant.
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No, the bullet repayment is not permissible. A microfinance loan is a collateral-free loan to a household with annual income up to ₹3 lakh. For such loans the framework requires that repayment is not in bullet form and that instalments are payable at least monthly, with the borrower free to choose a shorter frequency (weekly or fortnightly). A single payment at month nine is a textbook bullet and is non-compliant regardless of how well it matches the crop cycle. The rationale is supervisory, not bureaucratic: a bullet makes the entire credit risk crystallise on one date that coincides with the exact shock - harvest failure, price crash - that the borrower is least able to absorb; it gives the lender no early-warning signal, no repayment track record, and no opportunity to cure a household before it defaults. A lender that collects monthly sees a problem in month three; a bullet lender sees it on the day the loan is already bad.
Other non-compliance. Taking a photocopy of land records as 'comfort' becomes security in substance and destroys the collateral-free character of the loan - a charge on land cannot be taken. The 26% must be disclosed as the all-in effective annual rate, with no processing fee, no security deposit and no prepayment penalty, and the client must be given a loan card and a one-page fact sheet in the local language.
What is allowed: less frequent collection than monthly is not, but collection at the doorstep, through a business correspondent, or by UPI are all permitted channels.
2. Redesign the repayment schedule so it is both compliant and cash-flow-friendly. Show the arithmetic for a ₹60,000 loan and state any assumption you make.
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Step 1 - size the loan before scheduling it. Soybean cost of cultivation is roughly ₹20,000–24,000 per acre; a ₹60,000 loan implies 2.5–3 acres, which most of these households do not cultivate. A realistic input need is ₹35,000–40,000 for 1.5 acres, released in two tranches (at sowing and after germination), which also removes the risk that the money is diverted to consumption or to repay another lender.
Step 2 - keep monthly frequency, vary the amount. For ₹60,000 at 26% reducing balance over 12 months, the level EMI is about ₹5,730 (monthly rate 2.1667%, 12 periods), total repayment ≈ ₹68,800. Replace the level EMI with a step-up within the monthly rule: months 1–5 at ₹3,400 (lean and sowing season, total ₹17,000) and months 6–12 at ₹7,400 (post-harvest and sale months, total ₹51,800). Total ₹68,800 - same interest, same tenure, monthly frequency intact, so the rule is satisfied while the instalment tracks the household's cash calendar.
Step 3 - align the calendar, don't just smooth it. Set the disbursement month so that the heavy instalments (months 6–12) fall in October–April, when soybean and cotton are sold. Add a stated policy that a second tranche is released only after the first two instalments are paid - a behavioural screen that costs nothing and surfaces problems early.
Assumption: interest is computed on the reducing balance; if the product is priced flat, the effective rate is roughly double the quoted rate and must be disclosed as such.
3. What safeguards would you insist on before the first disbursement in these two blocks?
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1. Household-level indebtedness, not borrower-level. Pull the credit bureau report for every adult in the household. With income of ₹1.9 lakh, monthly income is ₹15,833. The existing ₹34,000 over 18 months at 24% costs about ₹2,270 a month, or 14.3%. A new ₹5,730 EMI takes the total to ₹8,000, i.e. 50.5% - over the 50% cap before any emergency. Either resize the loan to about ₹45,000 or extend the tenure until the combined obligation is genuinely below 50%. This is the single most important safeguard, and it is arithmetic, not judgement.
2. Weather and block-level triggers. Do not disburse in a block officially declared drought- or flood-affected, and enrol every borrower in crop insurance under PMFBY. The 40% yield loss last season is evidence that this portfolio is a weather bet, so a board-approved restructuring policy - extension of tenure, not fresh lending - must exist before the first loan, not after the first default.
3. Documentation and conduct. Record the income assessment and the loan purpose on the loan card; no land documents; no processing fee; a written grievance route. Train staff that a joint-liability group guarantee is contractual recourse among members and is not security - and that it is never a licence to apply social pressure.
4. Concentration limits. Cap exposure to one block at, say, 15% of the branch book and to one crop at 40%, so a single weather event cannot take the branch below break-even.