BAAC experience with joint-liability lending

by Paul Lightfoot

BAAC, the Bank for Agriculture and Agricultural Cooperatives, is a state enterprise bank which was set up in 1966. At that time very few Thai farmers had land title documents which would be considered acceptable as security for bank loans. Consequently it was clear from the start that some other basis of security would have to be found if the bank was going to make significant inroads into the rural credit market, which at that time consisted almost exclusively of private money-lenders of various kinds. BAAC adopted joint-liability as its principal basis of loan security, following the use of the concept on a small-scale by the commercial Bangkok Bank for a few years in the early 1960s. Joint-liability has been at the heart of BAAC's operations ever since. Without it, the bank would not have been able to find enough acceptable farmer-clients to expand the size of its clientele as it has done.

A basic requirement for joint-liability security for BAAC loans is that the farmers concerned, after passing BAAC's basic eligibility criteria, form themselves into groups of people who know and trust each other. These groups may vary in size from a minimum of 5 to a maximum of 30 farmers, according to the bank's regulations; in practice most groups consist of 12-15 farmers, and provided they pass the bank's basic eligibility criteria the membership is decided by the farmers themselves and not by the bank. Each year the group members who want to borrow for seasonal production costs sign a contract in which they accept liability not only for their own individual loans, but also for the loans borrowed by other members of their group. Hence the term 'joint-liability'. In the very small number of cases where joint-liability borrowers are taken to the courts for non-repayment, the whole group will be involved in the court action.

The groups formed by the farmers are not legal entities, and cannot borrow or enter into contracts as groups. The loans are made by BAAC to individual farmers, not to the group collectively. The amounts borrowed by each person depend on his or her individual needs, up to a maximum of 50,000 Baht (US$ 2,000) which can be borrowed with this form of security. The groups exist only insofar as their individual members are legally bound to each other and to BAAC as the result of signing a joint-liability contract. The legal commitment ceases once the loans are repaid. Therefore joint-liability groups are conceptually quite different from cooperatives and farmer associations, which are permanent, legal bodies and which borrow on a wholesale basis from BAAC for their own institutional development and for on-lending to members.

The concept of joint-liability depends heavily on the establishment and maintenance of good, trusting relationships between group members, and between them and the bank. Therefore the security of the system rests on systematic supervision by field staff who are able to visit client farmers in their homes and at their farms.

To borrow under joint-liability a farmer must be able to join a group of at least five members. Consequently this form of lending is not appropriate to individual farmers who may be scattered in ones and twos in many different villages. Moreover the group members are supposed to follow similar production schedules, so that they can easily keep track of each other's production activities and cash flow. And joint liability loans are normally available for no more than 50,000 baht, which tends to restrict this type of lending to relatively small-scale farmers.

Disbursements (in million baht, 25 baht = US$1) and on-time repayment rates (percent of matured principal) for joint-liability loans for the three most recent financial years have been:

1991       B 16,199      89%
1992       B 18,625      90%
1993       B 24,028      89%

Note that these are on-time repayment rates. Most of the remainder is repaid late, the bank writes off much less than 1 percent of its disbursements.

The bank has no way to measure directly the administrative costs for joint-liability loans. However the system is inherently expensive, because loans are relatively small, and success depends on frequent contact between borrowers and the bank's field officers. Typically field officers visit clients' homes or farms at least twice during the course of each loan, as well as issuing repayment warning notices and making supplementary visits to farmers with loans in arrears. One of the bank's goals is to have experienced group leaders take more responsibility for some aspects of loan administration.


From the above, the importance of joint-liability loans to the bank needs little further comment: joint-liability loans make up a large proportion of BAAC's lending, and they are repaid more reliably than is true for loans based on any other form of security. A number of questions arise, including the issue of whether or not BAAC should try to extend their joint-liability groups' sense of common purpose and common interest to other fields, such as the acquisition of improved technical knowledge and crop marketing. For present purposes we will restrict ourselves to considering why it is that joint-liability groups have been successful from BAAC's point of view.

From BAAC's experience the success of the joint-liability concept has depended on several factors.

First, responsibility for each loan lies unambiguously with individual clients, and not with the group as a whole. The bank's experience shows that lending to groups collectively tends to result in high rates of default. Within Thai rural society it seems that an individual will accept responsibility for maintaining an asset and repaying a loan for it only if he or she is the sole owner. If responsibility is shared, all too often the result is that no-one will accept responsibility.

Second, the concept depends heavily on mutual trust within the groups, and on peer-pressure for the repayment of loans. Therefore the groups must be organised and approved by the villagers themselves, not imposed by the bank. This also implies that the groups must be fairly small in size, so that the farmers concerned do genuinely know each other. In practice some groups have established their own eligibility criteria, which can be more strict than the criteria applied by the bank itself. There are cases of groups who will not admit new members unless they have an NS.3 land title document, which is not a BAAC requirement. But there is no limit to the number of groups which can be formed within one village, so farmers excluded in this can form their own group with their own entry requirements.

Third, a related issue, the farmers must be involved in and can only borrow for similar types of production. The bank will not normally lend on the basis of joint-liability for activities which are not related to the production of the farmers' main annual crop. Joint-liability loans are given for the production of more than one crop, where all group members produce the same combination of crops. It is common for farmers in the Northeastern region, for example, to take a single "main crop" loan for the combined production costs of rice and cassava. However, joint-liability contracts are not normally given for term loans (there are exceptions to this) or for certain types of short term loans, where only one or two individual farmers rather than the group as a whole are involved. BAAC has other kinds of non-mortgage loan security for cases like these.

Fourth, the quality of group leadership is critically important for the success of the concept, particularly in terms of loan repayment. Clients can usually repay their BAAC loans only at a branch office, and group leaders will often arrange transportation and shepherd the whole group directly to the repayment desk of the branch to ensure that they all honour their commitments.

Fifth, the groups exist only for the single purpose of expediting certain categories of BAAC loans; they are not multi-function groups, and have no role in savings promotion, extension, the purchase of inputs, post-harvest or marketing activities. There are cases of groups cooperating informally in these other fields, but BAAC makes no special effort to encourage the extension of the groups' functions.

Sixth, the success of the groups depends heavily on good, trusting and clearly understood relationships between the groups and the bank itself. The farmers have come to understand that by generally acting in a responsible way with respect to their loans, including repaying on time, they can expect to borrow from BAAC the next year. The combination of a close association with the bank's field officers and the peer-pressures from other group members has resulted in a sense of discipline with respect to financial matters, without which the bank could not operate as effectively as it does.

Finally, it is important to stress once again that the farmers involved in joint- liability borrowing are relatively small-scale farmers, who borrow relatively small amounts. While branch managers are often reluctant to extend loans to small-scale farmers, within BAAC as well as in other agricultural banks, the fact is that the smaller-scale farmers among BAAC's existing clientele tend to repay their loans more reliably than large-scale farmers. The likeliest reason for this is that the small-scale farmers have only the choice of borrowing from BAAC at about 1 percent per month or from private money- lenders at interest rates as high as 10 percent per month; it is therefore critically important to them to maintain a good repayment record, so as to ensure that they will be able to borrow in future years. Larger-scale farmers, who have more resources of their own and who may be able to borrow from commercial banks, have a less powerful incentive to repay.

BAAC 469 Nakorn Swan Rd. Dusit Bangkok 10300 Thailand Tel.: (66-2) 280 0180 Fax: (66-2) 280 0442

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