A credit society, a defaulting miller and a women's group
A primary agricultural credit society (PACS) in a drought-prone taluq has 640 members. Deposits are ₹18 lakh, borrowings from the district central cooperative bank ₹30 lakh, and loans outstanding ₹42 lakh. One rice miller has defaulted on ₹9 lakh for 14 months; the society's cash on hand is ₹1.2 lakh. A 14-member women's self-help group, all landless labourers and tailors, asks for ₹3.5 lakh to buy two sewing machines and a small flour mill. A microfinance company has offered the same amount at 24% reducing balance; the society's board can lend at 11%. The secretary says the group has no collateral and 'women's groups are risky'. The group's record shows 18 months of ₹200 weekly savings with no missed deposit, and one member's son works as a tailor in Bengaluru. Recovering the miller's loan through court would take three to four years.
1. Assess the society's liquidity and asset quality. Can it lend ₹3.5 lakh, and is collateral the right test of this group?
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Liquidity: cash ₹1.2 lakh against a request of ₹3.5 lakh - the society cannot disburse the full amount from the till. It must wait for recoveries or draw from the district central cooperative bank, which will itself look at repayment record.
Asset quality: ₹9 lakh is 9 ÷ 42 ≈ 21% of the loan book in one defaulted account, and it is concentrated in a single borrower. That is a warning sign, not a small irregularity. Lending more while this sits unresolved weakens the society.
Is collateral the right test? No. The group has saved ₹200 × 14 = ₹2,800 a week for 18 months, roughly ₹2.2 lakh in cumulative deposits - a demonstrated repayment habit, which is exactly what a lender needs to observe. Group guarantee, peer pressure, weekly collection on the savings day and a phased disbursement (₹1.2 lakh, then more after two months of repayment) substitute for mortgaged land. The secretary's blanket statement that 'women's groups are risky' is contradicted by the only evidence available. The real risk in this balance sheet is the miller, not the tailors.
2. Compare the cost of the microfinance loan with the society's loan. What would you recommend, and on what conditions?
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Rough annual interest, flat comparison:
- Microfinance: 24% of ₹3,50,000 = ₹84,000
- Society: 11% of ₹3,50,000 = ₹38,500
- Difference ≈ ₹45,500, which is nearly the price of one sewing machine.
Reducing-balance calculation lowers both absolute figures, but the ratio stays above 2:1, so the direction of the answer does not change.
Recommendation: lend through the society at 11%, but not as a single cheque. Conditions:
- Disburse in two tranches, the second after four weeks of regular repayment.
- Keep weekly collection on the existing savings day so repayment uses an established habit.
- Record a group guarantee and a simple internal agreement among the 14 members.
- Link the loan to a buyer or market for the flour and tailoring work, since repayment depends on sales, not on goodwill.
- Report the loan to the board monthly.
The judgement: the cheaper loan is also the safer one if it is structured around the group's actual strength - regular small repayments - rather than copied from a collateral-based lending model.
3. What should the society do about the miller's ₹9 lakh default, and what rule should prevent a repeat?
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Doing nothing is the costliest option because the account will age and the society's own borrowing capacity will shrink.
Immediate steps:
- Send a written demand and file a recovery suit or use the cooperative recovery process at once - delay weakens both the legal position and the evidence.
- Negotiate a one-time settlement in parallel; a discounted lump sum today may beat a decree after four years.
- Make a provision in the books so the surplus is not overstated and members are not misled.
- Stop all further lending to the miller and to connected persons until the account is cleared.
- Report the account to the district central cooperative bank, since the society's own borrowing depends on its recovery record.
Preventive rule: fix a board-approved exposure limit, for example no single borrower above 10% of the loan book, and require two signatories plus security above that limit. The ₹9 lakh default is 21% of outstanding loans - a concentration failure, not merely a bad borrower. Diversification across many small borrowers is the cooperative's real protection.