Finacle Blog:Group Lending: Strength in Numbers

Group lending, in which a loan is made out to a group whose members act as guarantors for each other, is the foundation of microfinance the world over. Hinged on enforcing fiscal discipline through peer pressure, its efficacy is reflected in a high repayment rate of 95% to 98%, a target that mainstream lending can only aspire to at present.

Broadly, group lending follows either the Self Help Group (SHG) model or the Grameen one. In the former, a bank or NGO facilitates the creation of a 15 to 20 member group to lend to. This group is largely self-regulated. Dr Mohammed Yunus pioneered the Grameen model in Bangladesh, wherein a microfinance institution creates, monitors and services groups of 5 people. Regardless of the model, servicing institutions graduate to issuing individual loans once borrowers prove their repayment capability.

One the group is registered, lending is practiced in several variants - to individual loan accounts, savings-linked individual loan accounts or individual savings-linked group loan accounts, to name a few. In the first of these, group members are given individual loan accounts, into which disbursements are made, and any default in repayment by one member is compensated by the others. In the second variant, individual members are made to open no-frills savings accounts with the financing institution, and after six months or so, are encouraged to lend to each other. Once the bank is satisfied about the group's intent and capability, it issues loans to individual members, after linking their loan and savings accounts. In case of default, the savings account is debited first, failing which the remaining group members have to make up the shortfall. A spinoff of this model is the creation of a single loan account for the entire group, linked to the individual savings accounts of its members.

There may be other variations too since there is no uniformity of law or practice in the area of microfinance across different countries. That being said, group lending is the heart of microfinance and any participating entity must understand it thoroughly before making an entry. Detailed data capture and analysis, creation of the right groups, scheduling and tracking both individual and group repayment are therefore of utmost importance.

You can read the article Group Lending - The "Trusted" Lending Model for the Microfinance Industry to get a more indepth perpective.