The role of Joint Liability groups (JLG) in delivering microfinance services

A Joint Liability Group (JLG) is usually an informal group of 4-10 people who seek loans based on a mutual guarantee. The loans are typically used for agriculture or related operations. This group of borrowers includes farmers, rural workers, and tenants. Each member of a JLG is equally liable for the timely repayment of the loan. MFI does not require any financial administration. The JLG model focuses on providing financial services to poor people; hence, standardization and discipline are important. The model suggests weekly meetings for frequent client interaction to reduce credit risk. The meeting is conducted by the bank (Microfinance Institution). The meetings are conducted for carrying out financial transactions only. The meetings are conducted systematically in a short time and other social issues are not discussed. Flat interest is charged again for making the system standardized. In a flat rate system, the installment size of repayment remains small for all weeks and hence is convenient and easier to explain. Also, it is easy to break the loan installment into the principal and interest component.

 In urban areas, the group method primarily involves a group of individuals, which becomes the basic unit of operation for the MFIs.  The model, particularly in urban areas, comprises preferably 4 to 10 individuals coming together to avail bank loans either singly or through the group mechanism against mutual guarantee. They share responsibility (“liability”) and stand as a guarantee for each other. There is a Group Leader in such Joint Liability Groups (JLGs); many MFIs prefer such groups in urban business areas. Such JLGs do not hold periodic meetings. Typically members are shopkeepers from the same locality. The JLG members are expected to engage in similar types of economic activities like crop production, non-farm activity, etc. The management of the JLG is to be kept simple with little or no financial administration within the group. These forms of JLGs are somewhere between Group and Individual lending methods. While lending in such JLGs is to individual members small JLGs still provide some sort of comfort to the MFIs. Also, collection can be done from a single point, generally from the Group leader rather than going to each individual. As in urban areas, shopkeepers do not have time to hold meetings, these JLGs do not meet. JLGs can be promoted by business facilitators/correspondents, NGOs, farmers’ clubs, farmers’ federations, Panchayati raj institutions, agricultural universities, bank branches, PACS, cooperative societies, individuals, mFIs, and many others.

Individual Method:

 In the Individual lending method, MFIs provide loans to an individual based on his/her creditworthiness. Individual lending is more prevalent with clients who generally need bigger-sized loans and can produce a guarantee and generate enough comfort for the MFI. MFIs generally base their decision on personal knowledge of the client, his/her reputation among peers and society, prospective borrower’s income sources, and business position. MFIs also ask for individual guarantors or take postdated cheques from clients. Individual guarantors come from friends or relatives well known to the borrower and who are ready to take liability for repaying the loan.

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