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Loan Registration Chapters 4 to 7 Basix Finance, Operations Manual. Note: These chapters from the operations manual of Basix Finance in India cover the information that has to be obtained from a prospective borrower, the actual application process, the appraisal process and the procedures for sanctioning and disbursing the loans. The material includes not only the procedures, but a clear explanation of the reason why each step should be followed. The manual is not intended as a once and for all document, but is regularly revised as a result of field experience, and in close consultation with Basix' staff and agents. It is not suggested that the details of the Basix procedure should be adopted by other institutions; the purpose is mainly to illustrate the degree of detail which even a new and fairly small institution, with a total portfolio of under three million dollars as of the end of December 1999, and some 15,000 direct and indirect active clients, finds it useful to include in its operations manual. The Indian rupee is worth around two and a half US cents.

Countries: India Basix Finance, India. Operations Manual, Chapters 4 to 7, Loan Registration, Applications, Appraisal and Recommendation and Sanction. Chapter 4 Registration 4.0 Introduction Collecting all the financial and non financial information and building up a data base of the borrower and establishing the Identity of a borrower is a critical step in lending. This is done through a registration process. This is a one time process, done before taking the loan application from the party for the first time. 4.1

Rational for Registration

Collect unbiased information The general tendency of the borrowers is to give information as per the requirement of the loan, if the information is collected just before giving the loan. To prevent such biased information collection it is preferable to register a borrower well before he approaches BASIX for a loan by collecting all the particulars regarding the person his name, address, asset particulars and income particulars along with the details of the family members / partners etc. Prevent repeated collection of information Also since most of this information is permanent it need not be collected every time a borrower approaches for a loan. Thus minimising hassle for both the borrower and BASIX, by avoiding collection of the above information with every fresh application. Credit absorption capacity Apart from the economics of the project that is collected in the application which is used for appraisal and recommending the loan, the information about his other cash flows and asset particulars comes in handy to see whether the borrower has so much of credit absorption capacity. Impact Assessment To study the impact of our loans on the borrowers, the investors of BASIX would look for an impact study on our borrowers. The non financial information which is captured during the registration process would be a benchmark to assess the

impact on borrowers from BASIX, in terms of the changes in the asset ownership, income particulars and changes in the standards of living. Thus it becomes very important for us to capture these details accurately. It also aids us in doing a thorough appraisal of the party. 4.2 Borrower Identity Establishing the identity of the borrower is a critical step in the process of appraisal. Therefore, it is important to refer to the person who has introduced the new borrower, either an old borrower or a collaborator, in the appraisal. However, it is also important to document the process by which we have ascertained that - The borrower, indicated in our application form, loan documents, and whose other security documents are in our possession, is actually the person named therein; - The borrower is actually accessible in the address mentioned in the loan documents; and - The borrower is actually involved in the activity s/he is stating to be involved in. However, the extent to which documentation is required for identification of the borrower may vary depending upon the volume of the loan. Some of the steps to establish the identity of the borrower are as follows: * Loans to Self-Help Groups - A letter of introduction from the collaborating NGO or Governmental Department - A xerox copy of the Pass-Book of the Group, with the photographs of the office bearers (signatories) of the account. * Loans to Firms (including for On-lending through firms) A Copy of the - Partnership Deed/ Articles and Memorandum of Association, or - Bank Pass-Book in the name of the firm - Copy of the Sales Tax Return/ Market Yard Registration in the name of the firm, - Certified copy of the resolution of the board/ partners, authorising the person signing the documents to borrow from BASIX. * All Other Loans above Rs. 50,000/- A Copy of the - Land title deed of the person, along with a certificate from a revenue officer attesting the photograph and the signature on the photograph - Driving licence, where the photograph of the borrower is certified, or, - Banker's certificate attesting the photograph and signature of the person, or - Ration card with the photograph of the borrower, or - Electoral card with photograph and signature, or - Two borrowers of BASIX introducing the party, attesting her/his photograph and signature; - A statement from one staff of BASIX indicating how identity of the borrower was established (mention the individuals / offices contacted). * All Loans below Rs. 50,000/- Only a Certificate by one Officer of the Company and a Customer Service Agent affiliated to BASIX, attesting the signature/ LTI and the photograph of the borrower and stating that: - They have made enquiries about the person (from his neighbours, or some office bearers of panchayat/ local Co-op) to satisfy themselves that the person named is the person under consideration, - Her/his address is as has been given in the registration form with BASIX, and - S/he is involved in the activity as stated in the application form (i.e. s/he is a farmer/ shop-keeper, tailor or whatever s/he is known well as in the village).

The persons/ offices contacted for establishing the identity of the borrower must be mentioned in the certificate. - The Certificate will not be necessary if any one of the following documents are available and enclosed: - Land document with attested photograph. - Banker/ a local Co-operative/ a Panchayat attesting the photograph and the signature of the person. - Copy of the ration card with the photograph of the borrower - A certificate from one of the collaborators of BASIX, with whom the collaboration has been approved by the head-office, attesting the photograph and the signature of the person. * Loans to On-Lenders (if in the name of the individual) - Banker's certificate attesting the photograph and the signature of the person, or - Copy of the ration card with the photograph of the borrower, or - Electoral card with photograph and signature and - A certificate from one staff of BASIX indicating how identity of the borrower was established (mention the individuals / offices contacted) and attesting the photograph and signature of the borrower. 4.3 No Overdue letter From the service bank, Co-operative society, any other bank present in the area no-overdue letter should be obtained. 4.4 Types of Registration Based on the type of borrower there are different registration forms to be filled up 1. 2. 3. 4. 5.

Individual Borrower Firms On Lender Self-Help Groups Federation of SHGs

4.4.1 Individual borrower When the loan is given to an individual (except for on-lending), all the particulars regarding his occupation, address, asset particulars, particulars of present sources of credit and his family details etc are to be collected. Also the person who is introducing the borrower (if any) to BASIX Should sign. Eg: Loans given to farmers for crop with joint liability group, general stores (kirana), hotels, dairy, repair shops etc. 4.4.2 Firms When a firm is seeking a loan (except for On-lending) from BASIX all the details of the firm like Nature of the firm, Partners/Directors as applicable, Financial statements ( Balance sheet, P& L a/c), Partnership deed, MOA/AOA , Income tax returns etc. should be collected. 4.4.3 On Lender Irrespective of whether the borrower is an individual or firm, when the loan is sought for on-lending purpose, the party has to be registered in the On-lender registration form. Apart from the details of the individual/ firm (as the case may be) other details like his experience in the business (on-lending, trading, etc) should be collected. 4.4.4 Self Help Groups

When the applicant is a self help group (registered / unregistered) the group has to be registered as a self help group. Details of the group members, gender, savings, sources of funds, the lending history among themselves, the activities they take up are to be filled up. 4.4.5 Federation of Self Help Groups If the applicant is a Village organisation / Federation of self help Groups (registered/ unregistered) the group has to be registered as a Federation of Self help Group. All he details of the groups that are part of the federation, their savings, their activities, role of the federation etc. should be filled up. Note: Repeat loans to defaulters or their family members should be avoided. There are possibilities of re registration by the defaulters themselves or their family members if the borrower contact is improper. Proper documentation of the regular field visits by the Customer Service Agent and the Executives would help us in avoiding such defaulters from getting a repeat loan under all circumstances, and help us to keep defaults low. Chapter 5 Application 5.0 Introduction After the registration process is completed the concerned CSA/ FX should have a preliminary talk with the existing borrowers/ neighbours, if found satisfactory should take the application from the party. All the details of the economics of the project as explained by the party should be captured. 5.1 Rational for Application Form Every borrower seeking credit facility from BASIX is required to fill up a prescribed application from. Standard application forms have been developed and made available to the units. Based on the loan amount applied and the products, the relevant application form should be filled in. The prescribed application form gives at one place all the information about the economics of the project. This allows the appraising officer to do a systematic appraisal of the loan proposal submitted by the borrower. Once the borrower fills up the prescribed form it is necessary to check the form to ensure that all the information required is filled up. Unit Head should ensure that full information in respect of each of the items in the prescribed form is given. If after reading the form it is felt that some additional information is required, the party should be asked to furnish the same either separately or by making addition in the form itself. As the executive or the appraising officer is transferable hence the incoming officer would have no difficulty if a completed form with relevant documents is available. ALL INFO COLLECTED MUST GET RECORDED ON THE FORM OR ON ATTACHED SHEETS OF PAPERS It is preferable to have the loan applications filled up by the borrower in his/her own handwriting. In case of illiterate borrower or where the borrower is not filling up the application in his /her own handwriting, the concerned staff/ CSA should explain the borrower the contents of the form and take a declaration from the borrower to that extent. From the statutory auditors point of view and also if required for any reason in the court of law, it becomes essential to prove that the borrower has sought some money for a certain purpose from BASIX, based on which BASIX has done due dilligence as per the credit guidelines.

5.2 Types of Application Forms As per the present credit policy the following are the different applications which are classified either on the basis of amount or on the purpose for which the loan is sought. These applications need to be filled up after the relevant registration form is filled up 1. 2. 3. 4. 5. 6. 7.

Small Loans Agri- Investment Loans Agri- Allied Loans Growth Micro & Small Enterprises On lender Self-Help Group Federation of Self-Help Group

5.2.1 Small Loans (Limit specified as per the credit policy of the year 19992000) This application is to be filled up for all the loans which are below Rs 50,000/- (Except for On -lending, Self help Group and Federation of Self Help Groups). The concerned CSA has to fill up the application in English/ local language, capturing all the economics of the activity and other sources of income as stated by the borrower. Also, the other information obtained about the borrower should be recorded. Eg: Crop Loans, Agri Investment Loans, Agri Allied loans, Non farm Micro enterprises loans should be filled in this application. 5.2.2 Agri Investment Loans This application has to be filled up only for any Agri Investment loan proposals irrespective of the type of borrower (individual/ firm) which are above Rs 50,000/-. The concerned executive should fill up the application form, the proposed activity (land levelling, agri-implements, Agri equipments, machinery etc) and the incremental benefit arising out of it as expected by the borrower should be recorded. Also things like - availability of electricity connection, waterlifting permission, after sales service available etc should be captured from the borrower. 5.2.3 Agri- Allied Loans This application is meant for all the agri-allied activity loan proposals irrespective of the type of the borrower (individual/ firm) which are above Rs 50,000/-. The concerned executive should fill up the application form, the proposed activity dairy, poultry, piggery, fish ponds etc. and the details regarding the particulars of the livestock, capital expenses, working capital expenses, his existing liabilities, loan required from BASIX. Also the other information about the borrower should be recorded. 5.2.4 Growth Micro & Small Enterprises (Limit specified as per the credit policy of the year 1999-2000) All the loans above Rs 50,000/- (Except on-lending and loans to Self-Help Groups), for activities like manufacturing or trade/ services should be filled up in this form. Particulars related to the financial status of the firm (Balance Sheet, P& L A/c should be collected). The estimated working capital, term loan requirement by the individual/ firm should be captured as requested by the applicant. 5.2.5 On- Lender When the loan is for on-lending purpose, irrespective of the amount of loan this application is to be used. The details regarding his contact levels with the farmers, his areas of operation, number of farmers with whom he has contact, his

other liabilities, financial state of business (Balance Sheet, P& L A/c), details of security offered, guarantor/ co-obligant details should be obtained). 5.2.6 Self Help Group / Federation of Self Help groups When the group is applying for a loan, irrespective of the amount of loan based on the respective category either the SHG or the federation of SHG is to be used. Details regarding the savings of the groups, sources of funds, the lending history amongst themselves should be recorded. Also based on the individual requirement of loans and for the proposed activities of the member/ groups the requirement of loan amount be taken as stated by the groups or federation of group. 5.2.7 General Purpose Individual (Limit specified in the credit policy of the year 1999-2000) is a loan for amount less than Rs 10,000/- to repeat borrowers or individuals introduced by them with no end-use restrictions. This should not exceed 5% of the total Loan disbursements. The application forms of Small loans can be used for giving loans of this purpose. The appraisal section consisting of the economics of the project and the pre and post finance figures need not be filled in. They need to be cancelled.

Chapter 6 Appraisal 6.0 Introduction After the loan application is taken the concerned executive should appraise the loan by visiting the field/ project site and making an assessment of the risks associated involved in lending to the party. 6.1

Rationale for Appraisal

To justify the amount that can be given to a borrower for a particular purpose one needs to ascertain * How much is the cost of the project * How much finance the applicant requires * How much is the applicant demanding * The return on investment is sufficient to pay the interest and repay principal. ( financial appraisal) * Intentions of the borrower to repay ( counter party risk assessment) * The said loan would aid in achieving the missions and objectives of the organisation. 6.2 BASIX context In 1. 2. 3. 4.

the context of BASIX operations, it involves Assessment of Credit Risk Assessment of Cash flow Assessment of Security Assessment of its Livelihood implications

Assessment of Risk There are four type of risks that need to be assessed: 1. Project Risk : Soundness of the business (project) proposed by the borrower.

2. Counter party Risk : Credibility of the party in the market/ village 3. Industry risk : Status of the industry to which the proposed activity belongs 4. Concentration risk : Are many of our loans affected by a single factor outside our control Project Risk Some of the aspects should be verified: 1) Availability of Inputs - Raw Material - Supplementary Material - Plants and Machinery - Technology, Know -how - Power, Water, storage space and other infrastructure. - Capital requirement 2 -

Market Conditions Demand Competition Sales & Distribution channels Physical access to market: Transport, storage Barriers to entry for new units Statutory requirements: Patents, License, Tax, Registrations etc

1. Availability of required skilled personnel 2. Financial viability of the project - Cost of material, labour, overheads - Revenues from the project 3. Acceptability of risk levels - Vulnerability of business cycles - Technological changes - Competition from substitutes - Government Controls - Vulnerability to factors beyond control Counter party Risk Appraisal Three aspects of the borrower need to be appraised 1. Past experience of the borrower 2. Credibility of the borrower in the market/ village 3. Net worth of the borrower Industry Risk Appraisal Credit risks involved in financing the industry needs to be assessed. Eg: Poultry, Cotton Seed - Overall risks associated with the industry Credit Concentration Risk There are several dimensions, which can increase the concentration risk. Credit concentration needs to be appraised on: 1. Geographical Concentration - High amounts deployed in a concentrated geographical area. 2. Industry concentration - Financing a large portfolio to the same industry. 3. Related party concentration Assessment of Cash Flow Even when a project is viable and is remunerative, it may not have adequate cash-flows to service the loan amount at the desired time periods. Three dimensions need to be assessed: 1. Advances required for supply of inputs/ credit available for them. 2. Working capital tied up in production and processing

3. Sales - period of sales, credit sales, time required for realisation. Assessment of Security 1. How secure is the loan from the assets created out of the loan. (primary security) 2. Collateral - How marketable is the security kept as a collateral. Some of the following are realisable in the order of liquidity - Bank deposits - NSC, KVP etc - Shares and Debentures of reputed companies - Vehicles - Urban/ Semi urban property - Roadside property - Agricultural lands. 6.3

Investment (Lending) Guidelines: Social and Economic Criteria

6.3.1 Assessment of Livelihood Impact It is the Company's goal to ensure that a majority of its loan portfolio will be to the rural farmers and non-farm enterprises who generate wage employment for rural asset poor households (those holding no land or less than 1 hectare of land). The Company will give preference to those activities, which generate a higher level of employment, either in the form of wage employment or family and selfemployment. The Company will be sensitive to environmental effects of the activities financed by it and in case certain economic activities are seem to have very adverse environmental consequences, these will not be financed. The Company will be sensitive to social effects of the activities financed by it and will be refrained from financing any economic activity which is broadly accepted to be deleterious to the social good, such as production of narcotics, arms and ammunition, prostitution and so on. The Company will adopt Indian standards and not international norms for assessing what is considered environmentally and socially undesirable economic activity. 6.3.2 Impact on the employment (Wage/ Self) potential The loan appraisal should indicate whether the loan has potential to generate/support additional livelihoods. 6.3.3 Impact on Gender The loans should indicate whether the loan has positive or adverse impact on the following: 1. Women entrepreneurs ( and empowerment) 2. Women employment 6.3.4 Impact on Environment Whether the activity has any adverse impact on environment like water and air pollution. 6.4

Investment (Lending) Guidelines: Financial Criteria

In terms of financial factors, the Company will try to focus on those activities which have a higher underlying rate of return for the borrowers. In addition, the risk factors related to the project will be taken into account. Further,

activities which generate steady and relatively quicker cash flows will be preferred. The Company will normally lend to individual farmers with Joint Liability Groups (JLGs), and commercial intermediaries (Trader Franchise Agents - TFAs) such as input suppliers and produce buyers. The Company will make direct loans to non-farm enterprises, and to those farmers who have graduated after taking and repaying multiple loans as members of JLGs or through TFAs. In such a case they would be expected to bring at least 25 percent of the project cost from their own funds, as their equity. The specific criteria used to approve a particular loan will be the following: * Credit history of the borrower (in case the borrower comes to the Company for the first time, then credit history with existing other lenders such as commercial banks, regional rural banks, cooperative credit societies, informal lenders and traders will be taken into account. The referee of the borrower should have a good standing with the Company). * In case the borrower is an onlender (Commission agent, Seed Production Organiser, fertiliser delaer etc.) suitable collateral will be sought, supplemented by third party assurances (such as authorisation for direct deduction of loan from produce purchased by an agro-processing company for farmers, and a marketing company for non-farm enterprises). * Risk levels of the underlying economic activity both in terms of adequate return on investment and timely cashflows. 6.5

Risk assessment of Joint Liability Group

1. Group size and homogeneity - preference for crafts persons groups engaged in the same activity or to farmers growing the same crop. 2. Prior experience of joint working such as common buying of inputs or common marketing or transportation of inputs or outputs. 3. Experience of dealing with external financial or commercial bodies

6.6

Risk assessment of On Lender

1. Statutory status (proprietorship/partnership/company) 2. Annual turnover, assets, networth, growth on the basis of audited statements 3. Credibility in the market, on the basis of discussions with peers, bankers, suppliers 4. Businesses undertaken - growth and profitability, cashflow cycle 5. Number and type of customers dealt with - customer retention, growth, profile 6. Services offered - to what extent they facilitate credit disbursement and recovery 7. Terms under which services are offered - explicit and implicit/concealed charges 8. Records and book keeping - willingness to disclose sub-loan data 9. Collateral security - land, property, bank deposits, adequacy of collateral 10. Other factors based on specific region/commodity/customer profile 6.7

Quick Check List

1. Experience in Activity 2. Availability of Input ( Raw Material) / Marketing arrangements 3. Other sources of Credit

4. 5. 6. 7. 8. 9. 6.8

Performance of the present business Cash flow Analysis and fixing repayment schedule accordingly Cross checking with he competitors an suppliers on the information provided Information on the borrower personal details from his neighborhood. Details of the guarantor/ co-obligant Legal disputes on the borrower/ firm (if any) Pre Sanction Documentation checking

The executive should check up whether the pre sanction documents are complete in all regards before it is presented to the loan committee. Chapter 7 Recommendation & Sanction 7.0 Recommendation The appraising officer must record the recommendations/ analysis of the proposal. Generally while making the recommendations/remarks the following are to be considered and documented * Honesty, Integrity and credit worthiness of the borrower * Net worth of the borrower/firm/SHG * Outside borrowings * Financial condition of the sister concerns (if applicable) * Technical & managerial competence * Infrastructure facilities * Marketability of products * Profitability of operations * Financial requirements of the borrower and basis for calculation * Promoters contribution * What securities are offered by the party? * The terms and conditions on which loan can be sanctioned i.e amount of loan, rate of interest , security etc. All the loan proposals in BASIX would be sanctioned through a loan committee. 7.1

Rational for Sanction through loan committee

* Sharing of different view points (learning fora) * Avoid preference of individuals to particular borrowers * To formalise the sanctioning process and thereby ensure control and have checks and balances at one point. After the proposal is sanctioned, the terms and conditions of sanctions should be conveyed. (As in the context of BASIX this may be a bit impractical we may have it optional for loans upto Rs 50,000/- and compulsory for loans above Rs 50,000/-). The sanction letter indicates name & Address of the party, constitution of business, names and address of the guarantor, type of loan given, security offered, general terms and conditions for loan, repayment period etc. A duly signed sanction letter should be sent to the party and acceptance of the party should be obtained the acceptance received from the party should be kept on file. This has legal significance since a contract of loan is entered into with the party.

7.2

Various Loan Committees

BASIX presently has four Loan committees where loans can be sanctioned. These are based on the value/purpose for which loans can be sanctioned. 1. 2. 3. 4.

Unit Loan Committee Regional Loan Committee Head Office Loan Committee MDs Decision

based on the loan amount and the type of the loan it would be sanctioned/ rejected/ or ask the concerned unit to rework on the details. 7.2.1 Unit Loan Committee Sanctioning Limits: All loans upto Rs 50,000/- and repeat SHG loans upto Rs 2,00,000/The Unit Loan Committee comprises of 1. Unit Head (Chair of the loan committee) 2. Unit Executive/ Field Executives of the unit (Atleast two) 3. Customer Service Agents of the unit (Optional) The following will be the optional invitees - Subject matter specialist / Technical consultant - Local collaborator/ Agri business firm All loan proposals (for all the loan products) would have to be discussed in this committee. However, this committee has loan sanctioning powers for all loan products where the loan amount is less than or equal to Rs 50,000/- and for repeat General Purpose Loans where the loan amount is less than Rs 2,00,000/-. The concerned Executive/CSA are supposed to present the loan proposal to the committee and defend the proposal, if the committee is satisfied with the proposal the loan gets sanctioned. If the committee is not satisfied with the details presented by the concerned Executive/ CSA the committee can either ask the executive to rework on the proposal or reject if it feels that it is not a financially viable proposition. All loans, which are otherwise satisfactory to the committee, but recommended loan amounts above the sanctioning limits of the Unit Loan committee should be recommended to the Regional Loan Committee. 7.2.2 Regional Loan Committee Sanctioning Limits: All loans above Rs 50,000/- and upto Rs 2,00,000/The Regional loan committee comprises of 1. Vice President in charge of the Region, or one of the other VPs duly appointed for the purpose in the absence of the VP in charge of the region Chair of the Regional Loan Committee 2. Unit Heads whose proposals are under discussions and 3. All Unit/ Field Executive whose proposals are under discussions. The following will be the optional invitees: - Subject Matter Specialist / Technical consultant Loan proposals recommended by the Unit loan committees, would come to the Regional Loan Committee. The Unit Manager and the executive would present the argument and defend the proposal in the credit committee. If the committee is satisfied with the proposal it sanctions the loans for loans up to Rs 2,00,000/-.

7.2.3 Head Office Loan Committee Sanctioning Limits: All loans above Rs 2,00,000/- and upto Rs 5,00,000/The Head Office loan committee comprises of 1. Any two the three Vice Presidents 2. Unit Head whose loan proposals are under consideration 3. Unit/ Field Executive, whose proposals are under consideration Loan proposals above Rs 2,00,000/- recommended by the Regional loan committee would come to the Head Office Loan Committee. If the committee is satisfied with the proposal it sanctions it. If it is not satisfied with the details presented by the concerned unit head/ executive the committee can either ask the UM/Executive to rework on the proposal or reject it. 7.2.4 MDs Decision Sanctioning Limits: All loans above Rs 5,00,000/Loan proposals above Rs 5,00,000/- recommended by the Head Office Loan Committee would be put up to the Managing Director for his approval. * Note The proceedings of all the loan committees are to be minuted properly and duly signed by the chair of the committee. These minutes should be filed in the Loan Committee Minutes file with the respective Unit Office and a copy of the same should be sent to the Head Office on a regular basis. After the proposal has been sanctioned, the terms and conditions