Guidelines for Financing Joint Liability Groups of Tenant Farmers
Innovations such as the SHG-Bank linkage programme have proved to be successful in providing financial services from the formal banking sector to asset-less or very poor. This is also in line with RBI's policy of "financial inclusion". In order to develop effective credit products for mid segment clients having access to productive assets, NABARD had piloted the project during 2004-05 in 8 states of the country through 13 RRBs through the mechanism of joint liability approach. These select banks during 2004-05 have promoted 285 JLGs and extended bank finance of Rs 4.48 crores. In the second year of the project i.e. 2005-06, banks have disbursed Rs 6.79 crores to 488 JLGs.
Besides the above pilot project, another pilot programme was launched in Andhra Pradesh during 2004-05 through group based lending programme aimed exclusively at small and marginal farmers. The Government of Andhra Pradesh through its Agriculture Department primarily designed this initiative by promoting Rythu Mithra Groups (RMGs) on the SHG model. During 2005-06, banks have extended finance of Rs.131.78 crore to 12,468 RMGs. RMGs are also expected to serve as a conduit for technology transfer, facilitate access to market information and market, assist in carrying out activities like soil testing, training, health camps, assess input requirements, etc., to its members.
NABARD has played a primary role in preparing the guidelines for credit linking these groups, drafting and sharing the documents to be used by financing institutions. Further, it has undertaken sample studies to identify gaps in the functioning of the RMGs and also designed, funded and also conducted training and capacity building initiatives for different stakeholders in pilot project districts.
The results of the above programmes have demonstrated that the JLG approach can be successfully adopted by banks to reach clients like tenant farmers, share croppers, oral lessees, farmers with small land holdings without proper land
records etc. The formal banking system has rarely been able to provide credit to tenant farmers on account of their inability to offer collaterals. However, the mechanism of JLG would enable banks to extend credit on the basis of mutual guarantee provided by the members of JLG. It would also reduce transaction costs of both banks and borrowers and help in loan recovery.
Based on the experience gained in implementation of the pilot project, a Scheme for financing JLGs of tenant farmers and oral lessees is evolved for implementation by all the commercial banks including RRBs. The salient features of the Scheme are as under:
The scheme aims at the following objectives.
i) To augment flow of credit to tenant farmers1 cultivating land either as oral lessees or sharecroppers and small farmers who do not have proper title of their land holding through formation and financing of JLGs.
ii) To extend collateral free loans to target clients through JLG mechanism
iii) To build mutual trust and confidence between banks and tenant farmers
3.General features of JLG
A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to10 individuals coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. The JLG members would offer a joint undertaking to the bank that enables them to avail loans. The JLG members are expected to engage in similar type of economic activities like crop production. The management of the JLG is to be kept simple with little or no financial administration within the group.
Tenant -Any person who holds land under another person's name and pays rent to such other person on account of the use of land is called a tenant i.e. Tenant is a person who has taken the lease and is liable to pay rent for the piece of land.
Oral lessees - The term refers to tenancy without legal sanction and permission or without any written agreement.
Sharecroppers - Tenants who pay rent to landlords by way of sharing crops grown (in lieu of rent by cash) may be called sharecroppers
4.Criteria for selection of JLG members
JLGs can be formed primarily consisting of tenant farmers and small farmers cultivating land without possessing proper title of their land.
ô€‚¾ Members should be of similar socio economic status and background carrying out farming activities and who agree to function as a joint liability group.
ô€‚¾ The groups must be organised by the likeminded farmers and not imposed by the bank or others.
ô€‚¾ The members should be residing in the same village/ area and should know and trust each other well enough to take up joint liability for group/ individual loans.
ô€‚¾ The members should be engaged in agricultural activity for a continuous period of not less than 1 year within the area of operations of the bank branch.
ô€‚¾ The group members should not be a defaulter to any other formal financial institution.
ô€‚¾ JLG should not be formed with members of the same family and more than one person from the same family should not be included in the JLG.
ô€‚¾ There is a need for a very active member of the group to ensure leadership role and ensure the activities of the JLG. The selection of a good /able/active leader for the JLG is an essential need which will ultimately benefit all the JLG members. However, care should be taken to ensure that benami loans are not cornered by the group leader.
5.Size of the JLG
The group should be formed preferably with 4 to 10 members to enable the group members to offer mutual guarantee. While informal group of upto 20 members could also be considered, such large groups are found to be not effective in fulfilling mutual guarantee obligations in the case of farmers. Therefore, smaller groups of farmers (4-10 members) are recommended for effective functioning of JLG.
6. Formation of JLGs
Banks may initially form JLGs by using their own staff wherever feasible. Banks may also engage business facilitators like NGOs and other individual rural volunteers to assist banks in promoting the concept and formation of groups.
On formation of JLGs, the bank officials need to discuss with the JLG members the bank’s regulations, lending procedures, services etc. The principles of self-help and group strength need to be emphasized. Group cohesion has to be ensured. Adequate emphasis should be placed on the roles, expectations and functions of the group/members & the benefits of group dynamics.
State Government Departments like Agriculture Department also could form JLGs of tenant farmers and small farmers not having clear land title. The JLGs of such eligible farmers can also serve as a conduit for technology transfer, facilitating common access to market information; for training and technology dissemination in activities like soil testing, training, health camps and assessing input requirements.
7.Savings by JLG
The JLG is intended primarily to be a credit group. Therefore, savings by the JLG members is voluntary. All the JLG members may be encouraged to open an individual "no frills" account. However, if the JLG chooses to undertake savings as well as credit operations through the group mechanism, such groups should open a savings account in the name of JLG with atleast two members being authorised to operate the account on behalf of the group.
8. JLG Models
Banks can finance JLG by adopting any of the two models.
Model A – Financing Individuals in the Group: The JLG would normally consist of 4 to 10 individuals. The group would be eligible for accessing separate individual loans from the financing bank. All members would jointly execute one inter-se document (making each one jointly and severally liable for repayment of all loans taken by all individuals in the group). The financing bank could assess
the credit requirement, depending on the crops to be cultivated, available cultivable land and credit absorption capacity of the individual. However, there has to be mutual agreement and consensus among all members about the amount of individual debt liability that will be created.
Model B – Financing the Group: The JLG would consist preferably of 4 to 10 individuals and function as one borrowing unit. The group would be eligible for accessing one loan, which could be combined credit requirement of all its members. The credit assessment of the group could be based on the available cultivable area by each member of the JLG. All members would jointly execute the document and own the debt liability jointly and severally. JLG is mainly a credit product. But if the members want to save through the group, banks can open saving account in the name of the JLG to be operated by two members of the group as decided through a resolution by the JLG.
9.Critical factors in JLG approach
The success of JLG concept depends on several factors. However, following factors are critical;
ô€‚¾ The concept depends heavily on mutual trust within the groups and on peer pressure for the repayment of loans.
ô€‚¾ The quality of group leadership is critically important for the sustainability of the group.
ô€‚¾ The JLG exists only for the single purpose of expediting certain categories of loans. Generally they are not multifunctional groups.
10.Credit Assessment Model A;
The JLG would prepare a credit plan for its individual members and an aggregate of that is submitted to the banks. Banks may evolve simple loan application for this purpose. The individual members of JLG would be eligible for bank loan after the bank verifies the individual members’ credentials.
JLGs that undertake savings apart from credit are required to maintain books of accounts. They may also be graded by banks on the basis of performance parameters. However, the quantum of credit need not be linked to groups' savings as in the case of SHGs. The credit requirements for the group may be worked out based on combined credit plan needs of individual members.
11. Purposes of credit
The finance to JLG is expected to be a flexible credit product addressing the credit requirements of its members including crop production, consumption, marketing and other productive purposes.
12. Type of loan Banks may consider cash credit, short-term loan or term loan depending upon the purpose of loan.
13.Loan limit Considering that the loan to be granted is against the mutual guarantee offered by the group, maximum amount of loan may be restricted to Rs. 50,000 per individual both under Models A & B.
14. Rate of interest
Banks may decide the rate of interest to be charged to JLGs. However, banks may consider providing incentives for prompt repayment to JLGs, as applicable.
15. Margin and Security Norms
No collaterals may be insisted upon by the banks against their loans to JLGs. It may however, be ensured that the mutual guarantees offered by the JLG members are kept on record. Margin as per the usual norms may be applied.
16.Documents Model A:
The documents to be obtained include Introduction form, application cum appraisal form, mutual guarantee & DPN. Set of specimen forms of each of these is enclosed. Banks may make use of the forms with suitable modifications if necessary.
Documents as applicable to SHGs may be adopted.
17.Separate window for financing JLGs In pursuance of Union Budget 2006-07 announcements, banks may open a separate window for JLGs of tenant farmers and ensure that a certain proportion of the total credit is extended to them.
18.Credit to JLGs to form normal business activity under Priority Sector
As the programme is intended to benefit farmers cultivating lands who may not have adequate collateral to offer to avail of bank loan in their individual capacity, lending to JLGs may be treated as direct agricultural advances under priority sector advances segment.
Banks may include lending to JLGs in their corporate plan and also in the training schedule of officers/staff.
19.Personal accident insurance Banks may consider covering individual members of JLG under personal accident insurance.
20. Crop insurance scheme National Agricultural Insurance Scheme (NAIS) i.e. Rashtriya Krishi Bima Yojana- of Agriculture Insurance Company of India extends crop insurance cover to all farmers including tenant farmers, sharecroppers growing notified crops in the country.
Hence banks may work out the premium payable by the JLG members availing of crop loan and pay the same to the insurance company as per the normal terms & conditions
21. Monitoring and Review
Banks may closely monitor the programme regularly at various levels and at regular intervals. A progress report may be sent to RBI and NABARD in the prescribed format on a half yearly basis as on 30 September and 31 March each year so as to reach within 20 days of the half year to which the report relate.
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