Answer 2: Joint Liability

GK primarily rely on non-traditional methods of guarantee. Unlike the asking for tangible assets such as
collateral, GK follows the Joint Liability (JL) mechanism where borrowers informally provide guarantee
towards the loan repayment. Now if GK wishes to expand its operations to various geographies or
extended services, the JL method may fail. Assurance of repayment of loans is difficult in new markets
where informal relationship building is difficult in initial phases. However if GK extends its product line
to existing markets, the customers have already maintained healthy relationships with the firm as well
as their peers, reducing the chances of default and making JL mechanism a success.

Management of credit risk through JL in the new operating model of GK must involve having appropriate
credit policies, approval processes, loan portfolio monitoring, collection and remedial management,
provisioning policies and an overall architecture for managing credit risk. Since GK ensures strong
personal connections specially with families and women members, JL can succeed. However if the credit
quality of borrowers deteriorate, it may have an adverse effect on business. In addition proper
monitoring and forecasting could be introduced in the business model to anticipate future economic
growth or downturns, which could minimize the loss due to NPAs.

What does the competetive structure entail? All the competitors listed in the case are getting to be
banks. Is that an oppurtunity or a problem for GK?

Q4. How should udaya position GK for the future and where should it head given the folling ecosysytem
changes?

a. The largest Micro finance institution were getting to be banks or were being taken over by banks as
SPV, Including players like bharat Finance inclusion ltd.

B. There was talk that the Urban Co-operative banks would also be converted into small finance banks
(and thereby wuld have priority sector and rural obligation) and they would be coming into the space

C. The political risk and standalone maicrofinance institutions (as in case of Andhra Pradesh) had not
abated, and ifact could be heightned given that the other players were"regulated" banks

D. On te positive side , RBI has recently suggested to the banks that they ca reach the unreached
genment better.

segment**

Unreached segment Better*

Banks may not be a great competition for GK because they target a different segment of customers. The
middle and upper income levels of the pyramid would often go to a bank. But GK and other NBFC target
the lower segment of the society who do not have sufficient collateral to provide. This segment is even
different from the ones that may go to a moneylender who would threaten them later. GK lies at the
thin line of formal and informal lending solution wherein they supply loans in a formal structure but the
repayment happens on a personal one-to-one basis. The borrowers, mainly involving women work
towards their livelihood to repay the loans they take for small jobs. The diverse credit products that GK
offers caters to all life-cycle needs of a customer that may be never catered by a bank or a money
lender. These include income generation and access to water, sanitation, education, health care, home
repairs, emergency services, energy efficient cook stove etc. These services bind the customer to GK and
eliminate competitors in entering the space that GK has captured. Thus, for a competitor to enter this
segment, it should master the entire portfolio of credit products that GK offers along with the strong
relationship building with the customers.

4c) Udaya should position GK as an entire-portfolio-credit-provider. Services such as income generation

and access to water, sanitation, education, health care, home repairs, emergency, energy efficient cook
stove etc. are not provided by regulated banks. Also, GK should focus on strengthening their already
existing people management skills where personal relationship is used towards ensuring loan
repayment. The target customer of GK should remain women along with small children, both male and
female, aged from 0-5 years for their education and health services. This target segment is often missed
by the formal political banks where the man is often seen as the bread earner and owns a bank account.

4d) The announcement by RBI may sound good but operationally extending services to the unreached
segment of the country may not work in the favour of big banks. In lieu of targeting the unreached, they
may lose out on the growing middle class population that is susceptible to turn to a bank rather than a
NBFC. The banking structure in India is made in coherence with the income level groups. Any change in
the target population for either a big bank or an NBFC (going to the poor or to the rich, respectively)
may back-fire on their already established networks and services. Big banks cannot suddenly expand
their credit services to basic products like meals and health at rates so low that they may go bankrupt. If
they really want to dive into such intervention, a thorough cost-benefit analysis needs to be done in
order to launch services at low rates to lower sections of the society bearing in mind the losses that may
be incurred due to defaults and non-compliance.
Answer 5

Udaya should go for a hydrid business model

a) Expand to geographies that may be similar to existing ones but provide the volumes by
increasing the customer base. This would help GK to incur revenues by using the same skill set
to different areas.
b) Expand the credit service portfolio beyond the existing ones to attract better customers and
ensure repayment at the same time. This would help GK to diversify and eliminate competition
in the form of banks, other formal institutions and NBFC who cannot diversify like that.

Since the goals of GK is to transform and uplift the lives of poor and low-income families with micro-
finance and other development services, they should stick to their agenda with a diversified yet
deep portfolio of services as well as products. GK should at the same time be a sustainable, friendly
and trusted provider of affordable and need-based services.

These financial services have to be provided at lower rates of interest which would be taken care by the
Joint Liability mechanisms followed by GK. Increasing rates would mean that GK may also function as a
bank and not cater to the segment they initially started from. These interest rates may incur costs for
initial months but as time passes and volumes of customers increase, GK would soon be among the top
microfinance institutions in India.