A Self-Help Group's ₹4.8 Lakh and a Too-Good Offer
Fourteen women in a village near Beed have run a self-help group for six years. Savings and a bank linkage loan have built a corpus of ₹4,80,000. The bank charges 7% and requires the group to keep ₹40,000 un-lent as a reserve at all times. The group's repayment record is clean. Three proposals are before the next meeting. (i) A mini dal mill costing ₹3,60,000, with expected net receipts of ₹9,000 a month before paying an operator ₹3,000 a month. (ii) Internal loans to members at 2% a month to buy buffaloes; eleven members have asked for ₹25,000 each. (iii) A local financier offers to take ₹3,00,000 for eight months and return ₹4,20,000, saying he has a government contract and a surety. The by-laws require a two-thirds majority for any loan above ₹1,00,000. Six members want the mill; the meeting must decide the whole ₹4,80,000.
1. Calculate the mill's annual net surplus and payback, and compare it with the return on internal lending. What does the comparison not tell you?
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The mill earns ₹9,000 a month gross and pays the operator ₹3,000, leaving ₹6,000 a month, or ₹72,000 a year. On a cost of ₹3,60,000 the simple payback is 3,60,000 ÷ 72,000 = 5 years, a return of about 20% a year before maintenance, power fluctuations, spare parts and depreciation. That 20% comfortably beats the 7% bank rate, but a mill also carries a risk that the group cannot diversify away: if the machine breaks or demand falls, the whole corpus is locked in one asset.
Internal lending: the reserve rule leaves ₹4,40,000, but only ₹2,75,000 was requested. At 2% a month that is ₹5,500 a month, or ₹66,000 a year, a return of about 24% on the amount lent, spread across eleven borrowers, which is genuine diversification.
The arithmetic therefore does not settle the choice. It says nothing about default risk on buffalo loans, the mortality of animals, the operator's reliability, or the fact that the mill serves only the group while internal loans serve eleven households directly.
2. Evaluate the financier's offer. What is the annualised return, and what should the group check before touching it?
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₹3,00,000 becomes ₹4,20,000 in eight months, a gain of ₹1,20,000, which is 40% in eight months. Annualised simply, 40% × 12/8 = 60% a year, and with compounding it is higher still. No ordinary trading contract pays 60% secured; a rate that high is either unsecured risk the group has not been told about, or it is being paid out of later investors' money.
Checks before any money moves: is the entity authorised to accept deposits or run an investment scheme at all? A self-help group may lend its own funds to its own members; it is not a bank and cannot place members' savings with an unregistered financier as an investment. Ask for the contract in writing, the surety's identity and solvency, the government work order, and evidence of past repayments. If any of these is refused, the answer is no. If the scheme looks like a promise of assured high returns from an unregulated collector, it falls in the category that the Banning of Unregulated Deposit Schemes Act, 2019 exists to stop.
3. Assume the meeting votes. What decision would you recommend, and what conditions must accompany it?
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Recommend a split, not an all-in bet.
First, reject the financier outright; the annualised 60% fails any reasonable test and the group's duty is to protect savings, not to chase returns.
Second, keep the ₹40,000 reserve untouched - that is a rule, not a preference.
Third, fund the buffalo loans, because ₹2,75,000 is within the remaining corpus, it is spread across eleven borrowers, and the return is higher than the mill's. Attach conditions: a written note for each member, a repayment schedule, a rule that a defaulting member cannot borrow again, and a small insurance or contingency margin per animal.
The mill should not be financed with the entire remaining corpus in one step; if members want it, they should reapply after a year, with the operator's costs written down, at least three quotations for the machine, and an agreed market for the dal. On procedure, the ₹3,60,000 mill is above ₹1,00,000, so a two-thirds majority of fourteen, i.e. at least ten votes, is needed - six is not enough, and this should be recorded in the minutes.