A joint liability group in a drought block: the 50% repayment cap
Sunita, a member of a six-woman joint liability group, applies for ₹80,000 over 24 months at 22% at the Osmanabad branch of a small finance bank. Her household's monthly income is ₹19,500 from dairy, agricultural labour and a small cotton plot, in a block that has had three deficient monsoons. She already repays two microfinance loans with monthly instalments of ₹3,200 and ₹2,400, and a gold loan from another bank with an instalment of ₹1,800. The proposed instalment works out to about ₹4,150 a month. The branch's board-approved policy permits a maximum of three lenders per borrower and caps total repayment obligations at 50% of monthly household income. The field officer's incentive is linked to collection efficiency and to disbursement volume. Separately, one member of the same group migrated three months ago and has not paid two instalments; the field officer is asking the remaining five members to clear her dues so that the group's record stays clean.
1. Using the 50% repayment-to-income cap, compute the maximum instalment and the maximum loan that may be sanctioned to Sunita, and state your decision.
Read the worked answer
Step 1 - compute the cap. 50% of ₹19,500 = ₹9,750 a month as the ceiling on all repayment obligations of the household, across every lender, not just this bank.
Step 2 - existing obligations. ₹3,200 + ₹2,400 + ₹1,800 = ₹7,400 a month, i.e. 37.9% of income already committed.
Step 3 - headroom. ₹9,750 − ₹7,400 = ₹2,350 a month available for the new loan.
Step 4 - maximum principal. At 22% a year over 24 months, the annuity factor for ₹1 of EMI is about 19.28, so ₹2,350 × 19.28 ≈ ₹45,300. A loan of ₹80,000 requiring ₹4,150 would take total obligations to ₹11,550, or 59.2% of income - a clear breach of the cap and of the bank's policy.
Additional breaches. The gold loan is with another bank and the two microfinance loans with other lenders, so sanctioning here creates the fourth active lender relationship, breaching the three-lender limit in the board policy.
Decision. Do not sanction ₹80,000. The defensible options are: (a) sanction up to about ₹45,000 with a 24-month tenor, provided the two microfinance loans are near closure and can be documented; or (b) ask Sunita to close or reschedule one existing facility and reapply. Reduce the income figure first if dairy income is seasonal - a conservative 80% haircut on declared income of that sort would reduce the cap to ₹7,800 and the headroom to ₹400, in which case the honest answer is that she cannot be lent to now.
Warning sign. Three deficient monsoons in a cotton block is an area-level stress signal; the branch should reassess concentration in that block, not just this borrower.
2. The field officer asks the remaining five members to pay the migrated member's overdue instalments. Assess this instruction.
Read the worked answer
The instruction is not defensible as a collection practice and must be withdrawn.
Legal position. Group lending rests on mutual assurance and peer support, not on joint and several liability in law. Unless the group members have signed as guarantors or co-borrowers in the documentation, the bank has no legal claim on them for another member's instalment. Pressing them to pay creates a liability the contract does not create, and if the field officer implies consequences for their own access to credit, it becomes coercion.
Regulatory position. The microfinance directions require a board-approved recovery policy and expressly prohibit coercive recovery practices, including any pressure exercised through the group. Recovery through the group must be limited to persuasion and support; the borrower's own liability, and her family's, is what the bank can enforce - through lawful means, not through the neighbours.
Practical position. The migrated member is traceable: the bank has her KYC, her address, her mobile number and the gold loan or microfinance footprint that would show her new location. The correct route is to contact her directly, offer a restructuring or a revised schedule if she has genuine hardship, and, if she has simply absconded, classify the account appropriately and provide for it. Two instalments on a small ticket do not justify social pressure on five women who are current payers.
The underlying cause. The field officer is measured on collection efficiency and disbursement volume, and the cheapest way to protect that measure is to extract money from the group. That incentive design is the real fault. Group-level collection targets should be reviewed, with a clear prohibition on recovering one member's dues from another and a whistle-blowing route for borrowers to report coercion.
3. What must the sanction note record about income assessment and about pricing disclosure under the microfinance directions, and why does it matter for this file?
Read the worked answer
Income assessment. The directions require the bank to assess the household income of a microfinance borrower, not merely to accept a declared figure, and to define 'household' in its board policy. The note must record: the sources and amounts of income (dairy, labour, crop), the basis of verification (passbook, milk-society statement, wage slip, field visit by two officers), the haircut applied to volatile income, the household size and existing debt across all lenders with each lender named, and the computed repayment-to-income ratio before and after the proposed loan. For Sunita, the note must show ₹19,500 of income, ₹7,400 of existing instalments, and the ratio after sanction - or the file is not auditable.
Pricing and disclosure. The microfinance directions require the interest rate to be board-approved and disclosed to the borrower in a standard factsheet, in the local language, showing the all-inclusive annualised rate, all fees and charges, the repayment schedule, and the fact that there is no collateral and no penalty for prepayment. For a 22% nominal rate, the customer must see the effective annual cost including any processing fee, not just the flat number quoted verbally.
Why it matters here. The file has several vulnerabilities at once: a stress-prone income stream, three existing lenders, an incentive-linked field officer, and a group with one account already in arrears. If the note records only a declared income and an EMI, the bank cannot demonstrate compliance with the 50% cap to an auditor, and it will have no defence if Sunita later complains to the Ombudsman or a supervisory inspection samples the file. A properly documented note is also the only way to show that the reduced sanction was a credit decision, not an arbitrary one.