SHG loan appraisal where the grading and member-overdue gates fail
An SHG of 13 women, 'Nari Shakti', formed 26 months ago and linked to your branch, applies for a term loan of ₹1,80,000 to buy a bulk milk chiller and cans. Records available: group savings corpus ₹78,000; internal lending outstanding ₹55,000; one member's internal loan of ₹12,000 is overdue by four months; the last two gradings were 'B' (irregular meetings, cash book not updated for three months); 3 of the 13 members have an overdue in other SHGs recorded in the branch's SHG register; and 2 members are 45 days overdue on a joint liability group loan with your own branch. Your bank's board policy for SHG lending states: maximum loan four times the group's savings corpus; loans only to groups graded 'A' in the last two consecutive gradings; members with any overdue in any group excluded from the loan; 24 monthly instalments at 12% p.a. on reducing balance; first dose limited to 60% of the sanctioned limit until 12 instalments are repaid.
1. Compute the maximum admissible amount under policy and state whether ₹1,80,000 can be sanctioned as requested. Show every step.
Read the worked answer
Step 1, arithmetic ceiling: 4 × ₹78,000 = ₹3,12,000. The request of ₹1,80,000 is inside the ceiling, so the arithmetic alone would clear it. This is where a weak appraisal stops.
Step 2, grading gate: policy requires 'A' in the last two consecutive gradings. The last two are 'B'. The group is therefore not eligible for any loan today, whatever the quantum.
Step 3, member-overdue gate: 3 members are overdue in other SHGs and 2 members are 45 days overdue on a JLG loan. Those 5 names must be checked against each other and against the SHG register; if they are five different women, eligible members fall to 8, and if one name overlaps, to 9.
Conclusion: ₹1,80,000 cannot be sanctioned. The file is not a rejection forever - it is a deferral with a rectification list. Any later sanction stays within ₹3,12,000 and is sized on the requirement and repayment capacity of the eligible members only.
2. The group leader argues that the ₹12,000 overdue is 'the group's own money, not the bank's' and should not affect the bank's decision. Respond, using the panchsutra logic of SHG-bank linkage.
Read the worked answer
The argument fails, and for a specific reason. The bank is not lending against the chiller; it is lending against the discipline of the group, because the group is the only security. The panchsutra - regular meetings, regular savings, internal lending, timely repayment, and proper book-keeping - exists precisely to measure that discipline before public money goes in.
An internal loan overdue by four months means one member has stopped paying and the group has not enforced collection. If the group cannot recover ₹12,000 from its own neighbour, the branch has no reason to believe it will recover ₹1,80,000 from her. Add three members with external overdues and two with a JLG default and the group is already showing a repayment culture problem, not a temporary cash-flow problem.
Cross-subsidy is the other risk: lending to a group that includes defaulters lets them benefit from public funds while their own dues stay unpaid. Hence the policy exclusion. Give the leader the rectification list in writing: clear the internal overdue, update the cash book, restore fortnightly meetings, obtain 'A' in two successive gradings, and clear the JLG overdues.
3. Assume the group rectifies everything and a sanction of ₹1,00,000 is later approved. Compute the EMI at 12% p.a. reducing balance over 24 months and state what you must verify about repayment capacity before release.
Read the worked answer
EMI = P × r × (1+r)^n / [(1+r)^n − 1], where P = 1,00,000, r = 0.12/12 = 0.01, n = 24. (1.01)^24 = 1.26973. EMI = 1,00,000 × 0.01 × 1.26973 / 0.26973 = 1,269.73 / 0.26973 ≈ ₹4,707 per month.
First dose under policy: 60% of ₹1,00,000 = ₹60,000 until 12 instalments are repaid, so the release is staged and the risk is halved.
Capacity check before release: the milk chiller must generate a net monthly surplus - after feed, transport, electricity and the society's deduction at the milk route - comfortably above ₹4,707 plus a margin for the lean season, when milk yield falls. Verify the group's cash book and bank statements for at least six months, confirm the milk society's payment record, check that the chiller's running cost is built into the projection, and confirm the internal accounts are current. Sanction on the need of the eligible members, not on the 4× formula, and keep the 24-instalment schedule synced with the milk cycle rather than with festival months.