Features Of SRFS Model

Though today SRFS transfers the loan amount directly to accounts of individual members and not one bulk loan to the SHG, the SHGs and other groups like the Community Managed Resource Centres still play a role.  They identify bankable members, assist them to utilise the full loan and exert pressure to repay. For these services SRFS provides them with an incentive taken from the interest that SRFS levies. Today the model of SRFS, therefore is not a full-fledged SHG or SHG-Bank Linkage model; it is a hybrid model. This has still helped to maintain a high level of collection efficiency. Even in periods (like during 2024) when the sector trend showed increasing defaults, SRFS’s gross NPAs was 0.44% against the trend in the sector where NPAs hovered around 10%.

SRFS however still fosters DIVERSITY and FLEXIBILITY in other ways as experience showed that the strategy of ‘one size fits all’ does not respond to the diversity of needs in the informal sector; hence SRFS introduced several innovations as described below.

Diversity in verticals:

SRFS promoted new verticals;

(i) The TADKAL vertical:

SRFS analysed the major vertical of its loan portfolio called General Purpose Loans. It emerged that it was a mixed bag of loans ranging from loans for small livelihood assets and agri inputs (like seeds, fertilisers and livestock) to loans for providing urgent credit to small businesses engaged in fast moving commodities and small manufacturing and service units. This latter group required quick loans of small amounts (Rs.10,000 to Rs.30,000) for a short period of 4-8 weeks, while loans for assets and agri inputs took at least 2 weeks to process. However, both categories had to go through the same approval process which took 2-3 weeks; this effectively excluded those clients who required loans quickly. SRFS decided to set up a separate vertical for these loans which were later called Tadkal loans. The clients of Tadkal loans are not members of SHGs neither do they have any relatives in SHGs whose credit performance in the SHG could be ascertained. Hence SRFS has to rely on the credit score of Credit Bureaux; SRFS also had to develop an appropriate extension strategy which included visits to clients and to train staff to process such loan requests.

(ii) The TIREN (Tiny Rural Entrepreneurs) vertical:

Alongside, demands were coming in for larger loans of Rs.2-3 lakh for livelihood activities. The SHGs were reluctant to take this risk under General Purpose Loans which averaged Rs.45,000 even after 20 years. SRFS believed that this demand had to be met. It decided to form another vertical dedicated to larger loans for tiny rural enterprises and to implement a pilot project to develop the systems and skills required. SRFS also set up a new “For-Profit” company called “TIREN Finance Pvt. Ltd.”, in June 2024 to which it may eventually transfer these larger loans provided the pilot proves to be successful; it will require different systems and skills to manage this vertical.

Many in this group of clients have relatives who are SHG members and who have a good record in borrowing and repaying loans to SHGs. SRFS assumed that since the family has a record of timely repayment, the client too would follow this culture. However, as the client is not a member of the SHG, the latter has no role in monitoring the use of the loan or in ensuring repayment. Hence SHGs receive no incentives from SRFS.

The added feature of this category of loans without partners is personal visits of SRFS staff both before extending the loan to assess the need for training in management and technical skills as well as regular visits after loans are extended to ensure utilisation and to help solve problems.   The costs of these extra support services like training and management skills are met from CSR funds of SRFS.   This helps to build personal and long-term relationships with clients which the SHGs had provided in the partnership model. It also gives SRFS advance warning if there are signs that the loan is under stress. These clients are also formed into Support Groups (4-5) who meet occasionally to exchange experiences and establish supportive linkages. An important feature of these loans is that they meet the full cost of the livelihood activity; the client does not need to approach other lenders; this in turn reduces the risk of SRFS.

Diversity in Tenures:

SRFS fosters diversity in Tenures which are fixed in response to the nature of the activity /asset and the cash flow. The General-Purpose Loan category which forms about 90% of the total loan portfolio consists of an average ticket size of Rs.45,000; all the loans have a tenure of 1 to 2 years. But SRFS realised that these loans are a mixed bag of purposes, including for acquiring small assets, agri inputs (seeds, fertilisers), livestock which are medium term loans (for these a tenure of 1 to 2 years is appropriate) as well as for loans to provide urgent cash to small businesses involved in commodity trading, manufacturing and services which have a quick turnover; these clients relied on short term credit from private sources available at exorbitant interest rates. These clients require loans to meet cash flow for a tenure of 6 to10 weeks as the product is marketed within a short period; they also return to SRFS for sequential loans; many have returned over 10 times.  These are called TADKAL loans. However, both categories had to undergo the same tenure for repayment.   The decision was taken to respond to this demand for these small loans with a short tenure of 6 to10 weeks. This also helps funds to rotate faster. These loans are managed by the Tadkal vertical. SRFS has initiated a pilot to test this initiative and to learn from the experience gained.

Diversity in Interest rates:

SRFS manages different interest rates.

The interest rate is:

• 22% on SRFS General-Purpose Loans; of this 2% is given as incentive/commission to SHGs, NGOs and CMRCs who are partners.
• 20% on WASH loans (Drinking Water and Sanitation)
• 18% to 22% on loans for tiny rural enterprises (TIREN loans); as these do not involve partners, no incentive is paid; they are larger loans of Rs.2-3 lakhs than General Purpose Loans.
• 14% on education loan called “Shikshan” loans; these loans are extended to children of SHG members.
• 16% to 17% on loans to Farmer Producer Organisations (FPOs) / companies – these are larger loans of around Rs.5 lakhs for short term up to 6 months.
• 9% on loans to Tribals; but in this case SRFS receives grants.
• The interest is calculated on Reducing Balance Method

Net Interest Margin (NIM):  In every case the NIM (difference between cost of credit from Banks and interest rate charged to clients) does not go above 10%. This is a policy decision and is strictly observed.

Flexibility in repayment:

General Purpose Loan – Have a tenure up to 24 months, with a moratorium of 30-60 days, during which period there is no repayment of principal or interest. Thereafter principal + interest is paid in equal monthly instalments.

Loans for tiny rural enterprises (TIREN loans) –The client can choose tenure of repayment between 1 and 3 years. After a moratorium of 60 days which is common to all, the client can choose repayment option of [a] Monthly principal + interest; [b]  Quarterly principal + interest

TADKAL loans

• Bullet payment: Weekly interest and last instalment will be of remaining interest and total principal.

• Equal Weekly Instalment (EWI): Principal plus interest

Note: No penalty is levied for pre-payment and delayed payment