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The Grameen Generalised System
GGS has been built around one prime loan product - called Basic Loan. In addition, there are two other loan products : 1) the housing loan, and 2) the higher education loan which run parallel to the basic loan. All borrowers start with a basic loan (in Bangla we call it "Shohoj" or "Easy" loan). Most of the borrowers will continue with this basic loan, cycle after cycle, without any difficulty, and meet all their credit needs in the most satisfactory manner. But life does not proceed smoothly for any human being, let alone the poor women. It is likely that some borrowers will run into serious problems, and face difficulties, somewhere along the cycles of loans, in repaying the basic loan according to its repayment schedule. For them GGS has a very convenient arrangement. In GGS, basic loan comes with an exit option. It offers an alternative route to any borrower who needs it, without making her feel guilty about failing to fulfill the requirement of the basic loan. This alternative route is provided through "Flexible Loan". In Bangla, we call it "Chukti" i.e. "contract" or "Renegotiated" loan, because the bank, the group, and the borrower have to go through a process of renegotiation to arrive at a new contract with a fresh repayment schedule for a borrower entering into the flexible loan.
Flexible loan is simply a rescheduled basic loan, with its own set of separate rules. I have been describing the basic loan as "Grameen micro-credit highway". As long as the borrower keeps her schedule, she moves forward uninterrupted with ease and comfort on the micro-credit highway. She can pick up speed according to the rules of the highway. If she drives well she can shift to higher and higher gear. In other words, on the Grameen highway, a borrower can routinely upgrade her loan size at each cycle of loan. This is done on the basis of
predetermined rules. She knows ahead of time how much enhancement in loan size is coming, and can plan her activities accordingly. But if a borrower faces engine trouble (business slow-down or failure, sickness, family problems, accidents, thefts, natural disaster, etc.) and cannot keep up with the highway speed, she has to quit the highway and take an exit on to a detour called a "flexible loan" or "flexi-loan". This detour will allow her a slower speed consistent with her situation. Now she can reduce the installment size that she can afford to pay, by extending the loan period. Taking a detour, however, does not in any way imply that she has changed the objective of her journey. She still proceeds with the same objective, but only through a winding narrow road for a while. Her immediate goal is to overcome her problems and take as short a detour as possible to get back to the highway quickly. A borrower may be lucky and succeed in getting back to the highway (i.e. the basic loan) quickly, or she may have sustained problems and the best she can do is to move from one detour to the next (i.e. moving from one flexi-loan to the next flexi-loan, working out an easier repayment schedule than the previous one), delaying the re-entry into the highway.
One big disincentive for a borrower to take the flexi-loan detour is that the moment she exits from the basic loan highway, her loan ceiling, that she has built over years, gets wiped out. When she'll re-enter the highway after completing her detour, her loan ceiling will have to be re-constructed. This will be nearer to her entry-level loan ceiling than the loan ceiling she enjoyed immediately before going into the flexi-loan.
Flexi-loan is not an independent loan. It is only a temporary detour from the basic loan. A borrower will always make efforts to re-enter the basic loan, because under flexi-loan a borrower can only work within a non-expansionary loop - that is, a borrower can borrow, only the same amount or less, cycle after cycle. Given this unattractive feature of flexi-loan, a borrower would be working hard to get back to the highway to enjoy its facilities. Flexi-loan works as a shoe-horn to get a borrower back to the highway. As soon as the initial amount of flexi-loan is repaid fully, the borrower re-enters the highway. She carries with her all the new loans she took while she was on flexi-loan. It normally takes six months to two years to get back to the highway. That's not a bad deal for a borrower who would otherwise be almost marked for expulsion from the system. Under GGS the borrower continues to remain a valued client all through the process of going in and out of flexi-loan. But there is a cost factor attached to this. Every time a borrower takes the exit from the highway the bank will be required to make 50 per cent provision against the amount of flexi-loan. This is an additional cost to the bank. The bank staff will try to bring this cost to the minimum by designing the basic loan creatively to best fit the borrower's credit need and cash flow. GGS offers this option. This was not available in GCS. Because of this feature of GGS, if experience tells us that the risk of a flexi-loan becoming overdue is very small, we can reduce the percentage of provisioning. If the percentage of flexi-loan is rather small, say, less than 5 per cent, of the total outstanding loan, even 50 per cent provisioning will not show up as a big item of expenditure, compared to the usual alternative of making provisions in a system without flexi-loan.
If a borrower cannot stay on the highway (i.e. cannot repay the basic loan installments as per schedule), there is now no need for the bank to trigger actions to mobilise the group and the centre pressure on her to avert an immediate danger for the group. By providing exit route for borrowers GGS has changed the situation dramatically. Now both the bank and the borrowers can be free from all tension - no more chasing of the problem-borrowers or defaulters. Nobody needs to look at anyone with suspicion. Group solidarity is used for forward-looking joint-actions for building things for the future, rather than for the unpleasant task of putting unfriendly pressure on a friend.
If a borrower fails to repay the basic loan and is unwilling to go into the flexi-loan, she becomes a willing defaulter. If a borrower takes the flexi-loan option and tries again and again to repay the money, but still does not succeed, she becomes an unwilling defaulter. Any amount of flexi-loan which does not get paid back within two years it becomes overdue, and 100 per cent provision is made for that amount. Amount that does not get paid back in three years, becomes bad debt, and is written off entirely.
Under GGS loans are written off as a part of financial prudence, but the amount is neither forgotten nor forgiven. GGS treats all written-off loans as recoverable loans. My guess is, under GGS, nearly 90 per cent of written-off loans and interest will ultimately be recovered, because the borrowers will pay them back, in their own interest, as and when opportunity arises. Poor people always need money. Their interest is to keep the door to money open. If this door shuts down for any reason, they'll do their best to reopen it - if that option is available. GGS provides this option.
There are many exciting features in GGS, but I think removing tension from micro-credit and permanently establishing full dignity to the poor borrowers, are the two most important features of them all. Tension-free microcredit is a great gift of GGS. Now both sides in the micro-credit system, the lender and the borrowers, can enjoy micro-credit, rather than having occasional nightmares created by one for the other.
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