Compulsory Group Training Tool

www.smartcampaign.org

November 2012, New Delhi, India

Introduction

The majority of microfinance institutions (MFI) in Asia adopt a Grameen-style lending methodology. Prior to obtaining credit, the Joint Liability Group (JLG) mem-bers typically undergoe a group-based customer education program, in India called Compulsory Group Training (CGT), that also acts as a screening mechanism for the MFI. Compulsory Group Trainings often take place over several days and engage participants with many dimensions of the lending process.

In the Indian context, a large percentage of microfinance clients are illiterate or semi-literate. Thus the CGT engages potential clients in previously unfamiliar ac-tivities – from learning to hold a pen to deciphering declining balance interest rates. In just under a week clients are informed about product features, terms and conditions, lending methodology, rights and responsibilities of clients, etc.

The Smart Campaign recognizes that, given the important role CGTs play in the early stages of MFI-client interaction, it is a critical channel for the application of the Client Protection Principles (CPPs). For instance, during the CGT women are cautioned against the perils of overindebtedness (CPP 2), are educated on pric-ing and data privacy (CPPs 3 & 6) as well as informed on mechanisms for grievance redressal (CPP 7).

Despite their functional prevalence across India, CGTs are not conducted in the same way from one financial institution to the next. Without structured guide-lines on how to incorporate client protection into the training, there is a risk that critical knowledge will not be transmitted to clients. This tool is aimed at filling the gap and providing institutions a broad framework to address all aspects of client protection that are relevant within a CGT. The Campaign envisages that the CGT tool will be especially helpful to the heads of MFI operations who can use it to identify gaps and strengthen practices. The Campaign also hopes that the guidelines contained in this tool will be implemented and innovated upon by financial institutions - thus moving them closer to adherence to the Responsible Finance Forum - Code of Conduct and the Smart Campaign Certification Program.

Objective of the Compulsory Group Training Tool

“Client Protection in Compulsory Group Training”1 is a tool2 that will give MFIs a more robust framework to incorporate client protection practices into their CGTs. The tool is most suited for institutions who employ the village banking methodology and the Grameen Style group methodology.

More specifically, the tool aspires to:

1. Develop guidelines and an outline for conducting a Compulsory Group Training that incorporates the Client Protection Principles 2. Illustrate a selection of ‘best CGT practices’ through examples provided by some of India’s leading institutions3.

Methodology for Developing this Tool

The Compulsory Group Training tool has been developed by the Smart Campaign with the input of Indian microfinance institutions including Ujjivan, Grameen Koota, SKS, Equitas and Swadhaar. The Smart Campaign also identified MFIs willing to share their exemplary CGT practices in an industry-wide knowledge sharing effort. Such knowledge sharing aimes to set standards and raise the level of practices on client protection during compulsory group trainings. In concert with the aforementioned group of MFIs, the Smart Campaign conducted a workshop to develop the tool. The workshop allowed the Smart Campaign to elicit feedback on the CGT framework as well as record some of the exemplary practices.

1 Special thanks to: Accion India, Hema Bansal, Amit Gupta, Tanwi Kumari, Aditya Mohan and Ujjivan, Equitas, SKS, Swadhaar and Grameen Koota and specifically IFC for funding the development of this tool.2 The Smart Campaign offers a wide range of tools for improving client protection practices among MFIs, networks, and investors. Among these are: “Smart Lending: Cli¬ent Protection in the Indi-vidual Loan Process;” and “Smart Savings: Client Protection in the Savings Process.” Visit www.smartcampaign.org to download these tools, at no cost. 3 Ujjivan, Grameen Koota, SKS, Equitas and Swadhaar.

Section I: Guidelines for Conducting Compulsory Group Training

Most Indian MFIs conduct CGTs over a period of three days with hourly sessions each day. In the majority of cases the loan officer leads the CGT, though in some cases they are delivered by front-end staff who are responsible for client acquisition. CGTs are generally conducted at the home of a potential client, or at a convenient public location. Most MFIs deliver CGTs verbally though some use flip charts or provide fliers and brochures. Overall it’s recommended that MFIs supplement presentations with pictorial communication to ensure that clients are able to comprehend and retain the large amount of information shared during a CGT.

Section I: Guidelines for Conducting a Compulsory Group Training (3-Day)

4The eligibility criteria for microfinance clients are decided by the RBI.

Day 1

Topic 1: Introduction to the Company

o Mission, vision and values of the organization. o Background and history of the institution. o Legal framework of the institution and applicable regulatory issues. o Operational information: For example - geographic presence, number of clients etc.

CPP: Transparency

Topic 2: Eligibility Criteria including Client Documenta-

tion

o Eligible Loan purposes – if provided to self employed / income generating or for consumption as well (may be more colloquial language) o Requirements in terms of house ownership/stay. o Eligibility criteria for group formation (e.g. blood relatives cannot be part of same group, proximity of client households)o Explanation and Documentation required for Know Your Client (KYC) norms – address proof and ID proof: list of acceptable documentso KYC documents’ use and storage o Reserve Bank of India criteria for eligibility: Maximum household income of Rs. 10000 per month in urban areas and Rs. 5000 per month in rural areas. Members not to avail loans from more than 2 MFIs and total loan outstanding of not more than Rs. 50000. o Issues around over indebtedness and the fall-out of taking more loans than they can repay.

CPPs: Prevention of over-indebtedness, Privacy of client data

Topic 3: Joint Liability Group model

o Training of group members on being prudent in selection of group members based on their credit worthiness such as knowledge of the household, trust worthi-ness, honesty and reputation. o Sensitization of members on the need to know each other’s business and business income o Training of group members on conducting credit assessment of their group members.o Group guarantee concept.o Individual and group responsibilities. o Maintaining credit discipline and its impacts on group cohesion.

CPP: Prevention of over-indebtedness

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Topic 4: Credit Bureau

o What is a credit bureau? o Details of information sharing with the credit bureau. Defaulters with other MFIs or those who have taken more than 2 loans will not be eligible for taking fresh loans.

CPP:s Prevention of over-indebtedness, Privacy of Client Data

Day 2

Topic 1: Product Details (JLG and all other products)

o Loan Featureso Interest rates and the total amount a client pays for the loan product. o Processing Feeso Passbook explanation for diminishing interest rates, deducing the amount outstanding and amount paid till date. o Explanation of loan installment for weekly, fortnightly and monthly cycles. o Insurance product and its bene�ts. o Insurance premium: applicable amount. o Insurance coverage and exclusions. o Conditions for pre-closures and any penalties (if any). o Late payment penalties (if any)

CPP: Transparency

Topic 2: Perils of Over-indebtedness

o Education through real life stories on e�ect of over indebtedness on clients. o Objective guidelines on credit absorption capacity, pictorial explanation and communication on issues of over indebtedness.

CPP: Prevention of over-indebtedness

Topic 3: Member DOs and DONTs

o Explain that members should always insist on receipts / acknowledgement for any transactions. o Memberss should not pay any commissions to ring leaders or sta�. o Members should be regular in meetings and repayments.

- Some MFIs �ll in the loan application form during CGTs in front of the clients and hence �lling loan application forms are also included in CGTs.

CPP: Transparency

5Financial literacy can be optional depending on the size, resources and priority of the MFI.

Day 3

Topic 1: Financial Literacy (Optional depending on MFI

resources )

o Indicative examples of how to calculate household cash �ows.o What are high cost debts?o Money managemento Savings – power of small saving [can be demonstrated through projections]o Stories about issues of over indebtedness. [can also use aids for pictorial / audio-visual communication]o Educate clients about insurance as risk mitigating tool.

CPPs: Prevention of over-indebtedness and Transparency

Topic 2: Details of other [non-core] products

o Pricingo Terms and conditions / Eligibilityo Internal debt ceilings.o Pre closures, late payment penalty.

CPPs: Prevention of over-indebtedness, Transparency, Respon-sible Pricing

Topic 3: Data privacy

o Data sharing protocols. o Training the clients on keeping their information private and con�dential, the need for privacy and dangers of sharing data with unsuitable parties.o Not leaving passbooks in the custody of group leaders for long and checking if the entries are correct.

CPP: Privacy of client data

Topic 4: Grievance Redressal

o Right to complain.o Channels available example complaint box, toll –free number etc.,o Posters / branch display.o Situations / Occasions / Instances when mechanism can be used.o Escalation matrix and timelines for resolutions.

CPP: Mechanism for Complaint Resolution

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Section II: Exemplary Compulsory Group Training Practices

1. Brochures used as marketing and training material

Ujjivan provides comprehensive brochures to prospective clients that act as both marketing as well as training material for CGTs. Such materials are typically distributed on the first day of the CGT as a map or guideline on what the training will cover. The brochure enables a client to take informa-tion home and discuss it with his/her family and friends before taking a loan decision. Clients are required to bring the brochure each day to the CGT and Client Relationship Staff (CRS) trains the clients on various aspects through this information brochure.

The brochure includes information on:

(1) Brief introduction to Ujjivan(2) Overview of different products offered by Ujjivan(3) Insurance details(4) Do’s and don’ts for clients(5) Credit Bureau details(6) Perils of Over Indebtedness(7) Grievance redressal mechanism

Why Information Brochures are a best practice

Ujjivan uses simple and fun pictures to communicate strong messages about products, process and their company. The pictures along with verbal instruction by Customer Relationship Staff offers multiple levels of communication to clients and is more effective than the industry norm of simply verbal instruction. Through this combination, product information on loan size, interest rates, frequency of repayments and suggested loan uses is reinforced and clearer. CRS and other staff communicating with the help of the brochure find it easier to interact with clients and also there is a lower change of information gaps compared to just verbal training. Members also find the brochure useful as they can display it in their homes and get family buy-in on the loans they are taking from Ujjivan.

Ujjivan is able to modify the brochure on a regular basis and it is tailored and translated for regional context and relevance. The cost per-unit of the brochure is relatively low because of the scale of business.

2. Use of visual aids to explain grievance feedback mechanisms and the use of credit bureaus

Keeping adult learning techniques in mind during the CGT, Swadhaar uses visual aids like flipcharts to explain different aspects of the loan product, processes and feedback mechanisms to its clients. These client education flipcharts are prepared by Swadhaar’s non-profit partner Swadhaar FinAccess (SFA). SFA’s activities are focused primarily on Financial Education for low-income urban households.

Below is an example of flipchart used by Swadhaar:

A) Grievance feedback mechanismThe Loan Officer (LO) uses this flipchart to explain to the client that they have multiple options to register their feedback as well as any complaints. (1) Toll Free Numbers that are printed on the ID Card. (The LO points out where the Toll Free number is located on the ID card.) 2) Suggestion Boxes that are put in the branches. LO shows them what the suggestion boxes look like and where they are located in the branches. The LO also informs clients that they can give their suggestions on the slips provided in the branches and put them in the box. 3) If the matter is urgent, the LO informs the clients that they can also register their complaints verbally with the branch manager at the branch. LO also informs the clients about not hesitating while addressing their concerns or queries to the branch manager as the branch manager is there to help them with any problems they have. 4) The LO also informs the clients in order to renew their loan, clients must conduct a ‘Customer Feedback Survey’ and all second or third loan cycle clients must provide their feedback in the survey form. If they are not provided this form they need to ask the LO. The LO also shows the clients what the survey form looks like and educates the clients on the importance of giving their feedback.

Swadhaar’s experience suggests that clients are able to retain the information more effectively when it is provided in pictorial form during CGTs.

Swadhaar

B) Credit Bureau The Loan Officer uses this flipchart to explain to the clients what a credit bureau is and how the information that Swadhaar collects will be shared with the credit bureau. He explains the credit bureau procedure to the clients and emphasizes that this is a service used by all MFIs. Therefore all of the client’s loans from different organizations will show up as part of the credit bureau data. For example if a woman is a member of 3 different groups and has already borrowed from 3 MFIs the report from the credit bureau will show her existing debt and her next loan will be declined. This image is used to explain impor-tant policies to the clients and also emphasize the importance of giving correct informa-tion to the Loan Officer as this will be cross checked through the Credit Bureau report.

Why visual aids are a best practice

The use of visual aids like flipcharts aims to help clients, particularly those who are illiterate, to better grasp and retain the information about the loans and loan process. Using the flipcharts also helps standardize the training material and maintain consistency of information flow between the Loan Officer and clients. It also facilitates a more engaging and interactive discussion with clients.

3. Training Borrowers on Overindebtedness and Interest Rates Using Multiple Channels In order to help clients understand problems associated with overindebtedness and explain the concept of diminishing interest rates, on Days 2 & 3 of the CGT, SKS uses pictures, stories and currency games to help them understand the concepts.

A. Training on borrowing and capacity to repay: During the CGT, SKS uses pictorial flipcharts to train clients not to borrow more than their capacities.

After showing the first picture SKS staff discussed how “Tarabai” knows her responsi-bilities very well and hence has borrowed from only 2 sources. She is therefore able to manage her two loans by balancing her family life, so her path of life is green and happy. And on the contrary Meerabai has taken loans (burden) beyond her capacity to repay and hence is finding it difficult to manage her family and her life has become full of thorns and stones.

After showing these pictures SKS staff asks clients what would happen to them if they borrowed more than their capacity?

SKS expects that members would generally be able to tell you the answers and if they are not able than the staff can guide by asking questions like, will the children continue to go to school? Will the family members have enough food to eat? And when there is not enough food to eat, will they be happy and healthy? In the end SKS staff generally asks for real life examples from participants who have faced simi-lar difficulties.

Why training on repayment capacity is a best practice?

The microfinance market in India has become highly competitive, which has given clients the opportunity to choose from an array of different financial service providers. As a majority of the clients are illiterate with highly demanding life cycle needs, it is difficult for them to make financial choices based on their capac-ity to pay. Hence, raising awareness on the dangers of multiple borrowing amongst clients in the form of posters, charts and stories creates an awareness for the clients. Through a repetitive storyline, SKS tries to instill its clients with the notion that knowing their capacity to repay is crucial before taking on a loan.

B. Explaining Diminishing Balance to a Client

Practitioners have found that it is extremely difficult for clients to understand the difference between flat and diminishing balance interest rates. In order to help clients learn the concept of diminishing interest rates, SKS uses an actual money game during CGTs to help clients understand the concept. While there is no stan-dardized approach, this ‘SKS method’ can be innovatively adapted to explain the concept by improvising during implementation.

Example: Loan amount of Rs. 10000 and installment of Rs. 225 for 50 weeks.Sangham Manager (SM) explains to clients that all loans are provided on interest calculations using the diminishing balance method. For an interest rate of 24.55 %, for weekly installments, two things happen at the same time:

1) On each installment amount, principal amount will increase on weekly basis and interest amount will decrease. 2) Though installment amount remains the same every week, interest rate is only paid on the principal amount.

Illustration: 1st Week

In our example, in the first week for an installment of Rs. 225, Rs. 178 goes as principal and Rs. 47 as interest.

The interest amount has reduced in the second week from Rs. 47 to Rs. 46 because; you have paid Rs. 178 towards your principle in the first week. And in the second week you now get to pay more towards your installment hence in second week you paid Rs. 179 as principal.

Illustration: 2nd Week

Why is this game to describe reducing balance a best practice?

It is important for clients to know the concept of flat interest rate vis-a-vis a reducing balance interest rate. Flat rates usually look lower than reducing balance rates and the normal human tendency is to opt for a rate that is lower because it seems to suggest that the burden on a borrower will be less, which is not true. Declining balance is a more client friendly method and as the interest component is reduced after each repayment. It is a good practice because the money game helps the client understand the passbook better (as passbook shows break up of principal versus interest amount) and it builds more clarity and trust for the lending institution.

Illustration: 48th week

Illustration: 50th week

In the 48th week, a client pays Rs. 3 towards the interest and Rs. 222 as principal.

In the last installment a client will be paying only 1 Re toward interest rate and Rs.224 as principal.

Through the example we can clearly see that the interest rates reduces with each installment and so clients end up paying less interest through diminishing interest rates.

4. Explaining pre-closures

Information on pre-closures is not always communicated clearly by many MFIs, however Equitas provides clear guidelines to its staff on how to explain the pre-closures on Day 2 of the CGT.

Pre-Closure

o Members can choose to pre-close the loan any time during the loan tenure. o Pre-closure of loan can be done only at a branch office. o Members are requested not to make pre-closures anywhere other than a branch office. o For pre-closures, members are required to visit the branch along with the center leader carrying their passbook. o There are no pre-closure charges.o Clients will be required to pay the interest due till the date they do the pre-closures and will need to repay the full principal outstanding amount. For ex-ample, if the member has paid her last installment on the 10th of a month and if she wants to pre-close on the 14th then the interim interest applicable will be for 4 days. o Members doing the pre-closure are required to collect the receipt for the amount immediately after making payments. o Members are requested to keep their passbooks safe.

Why communicating about Pre-Closure in CGT is a best practice?

It is important for the clients to know about all terms and conditions prior to taking a loan. Equitas follows a very transpar-ent mechanism for imparting details related to pre-closure of loans in CGT. This helps the institution to control fraud related to pre-closures at the field level and also creates strong buy-in amongst clients for their transparent communication about product features.

5. Educating clients on achieving their financial goals

Equitas uses a standard question & answer approach to educate clients on financial literacy during CGTs.

1. What is a financial goal?

For a family, a financial goal could be a:

a) Plan for reaching a certain monthly income level for the family. b) Plan for any important occasion in the family like education/marriage of children.

2. How to reach a financial goal?

a) Loan is given to you to invest in the business to increase your income; hence you need to use it in the business intelligently. b) You need to avoid unnecessary expenditures. c) If you are borrowing from money lenders and paying high interest rates you can save by replacing these with low interest loans like us. d) If you are able to increase your income and reduce your expenses it will result in savings. e) The money thus saved can be deposited in any Banks or Post Office! In case you have savings we will be glad to offer you advisory services to help you invest your savings in a safe place where you can get interest. f) If you continue to make such planning you will definitely achieve your financial goal.

You also should remember that the money you earn is hard earned savings and so you must stay away from people who offer fraudulent schemes.

o See that you don’t pay any commission for procuring higher loans. o Also don’t pay any commissions to people who come with offering government housing schemes or loans. o Be careful if someone comes and promises you to double your money. Example asks you to pay Rs. 5000 now and promises you Rs. 10000 in the next six months. o Don’t invest your money in non-recognized chit funds as the money is not safe and anyone can take your money and run off.

Why providing financial literacy in CGT is a best practice?

Equitas, currently runs Financial literacy program more as a service than a business. It strives on building long term relationship with its client and so, through financial literacy sessions, it aims to build clients understanding about “managing money wisely” and help them to get to grips with their finances. The session continuously focuses on 2-3 key messages which are to avoid money lenders, to increase income and reduce expense and for planning to achieve financial goals.

6. Group Formation using the Member Basic Data Form (MBDF):

The process of joining Grameen Koota as a client requires that prospective members are informed regarding:

a. Organizational details of Grameen Kootab. Criteria for group formationc. Roles and responsibilities of group members

After the above is communicated, members are introduced to the process of filling the MBDF and informed about its importance.

The MBDF consists of different data-points to be entered by the field staff:

1) Poverty indicators: Housing index and socio-economic indicators2) Family Details: Number of family members, occupation, education and income details3) Asset ownership: Land, livestock etc.4) Outside borrowings / group membership

Filling the form

Where: At the prospective group member’s houses. When: All the group members should be present when this information is being gathered. Interaction: At each members house all the family members should be included in conversation during information gathering. Information: Husbands and elders in the house should be informed about Grameen Koota’s rules and regulation in brief.

A member’s MBDF is filled at her household, in the presence of family members. This is done in order to ensure that the field staff can validate information pro-vided through other family members. Also, through the MBDF process the staffs take the family into confidence prior to loan disbursement.

As the MBDF filling process is conducted , it also provides an opportunity for all group members to gather detailed demographic and economic information about fellow members’ families. Thus at the time of loan application members are equipped with exhaustive information through which they can understand the socio-economic condition of others in the group and extend financial guarantees judiciously.

Also, the field staff provides the following advice to members through the cash flow analysis process:

1) Regular expenses such as food, transportation, housing, loan repayments should be met through recurring expenses such as wages, business income, rental income or fixed deposits.2) Periodic expenses such as festival celebrations or social occasions must be planned for in advance and financed through savings or credit. 3) Unpredictable expenses such as accidents, medical expenses can be managed by selling assets like livestock or land.4) Reduce liabilities such as loans and other borrowings, and plan for building assets.

While field staff are able to ascertain the ability of the member to absorb credit through the process, the cash flow analysis also helps sensitize members to their income and expenditure patterns. This improves financial literacy amongst member households as most of them are semi-literate and seldom maintain formal accounts at both their household and business (if self-employed).

Why doing cash flow analysis in CGT is a best practice?

Cash flow analysis exercises assist joint-liability groups members in making informed and objective decisions on potential member’s absorption capacity. Cash flow analysis captures and communicates a household’s income and expenses to the joint-liability group and centre.

Tool Conclusion

Even before products are sold, CGTs provide an opportunity for MFIs to engage with prospective clients or members at a deep level. Hence, if CGTs are conducted prudently, MFIs will be able to educate their clients on product features, processes and the negative effects of over borrowing. The three day CGT guideline framed by the Smart Campaign with input from leading institutions such as Ujjjivan, Equitas, SKS, Grameen Koota and Swadhaar will help the sector design more client-focused and inclusive CGTs. This tool also aims to incorporate and share exemplary CGT practices in the hopes of raising the standards of practice in India and where relevant, beyond.