The majority of KAS Foundation’s microcredit clients in Orissa and Chhattisgarh are linked to dairy enterprises and tend to have variable income flows through the year. Despite this, they were expected to adhere to the monthly repayment schedule. Development workers in the field had started to receive reports about distress borrowings resorted to by many poor clients.

When CMF decided to design an appropriate dairy loan product which would have in built flexibility, it began by organising a month long focus-group discussion and market research among the dairy clients of KAS Foundation. By the end of the process two innovative products which could offer relief to the dairy workers were recommended.

The first product, Dairy Research Advance Payment (DRAP), is now implemented among 50 Self Help Groups (SHGs). Clients need to repay two principal installments and one interest installment in the first six months. By the end of six months, as clients have already repaid six additional principal installments, they have an opportunity to skip any six principal installments in the remaining tenure of 18 months. While designing this product, there was no attempt to link “use of loan” with “repayment liability”. Therefore assumptions are that (i) repayment will come from “household income” and not from “asset purchased with loan” alone and (ii) clients should have enough disposable income in the first six months because every cattle has a lactation phase of 6-9 months just after purchase.

The second product, Dairy Research Coupon Based (DRCB), has also been implemented among 50 SHGs. At the time of disbursement, clients are given a booklet containing 24 coupons representing the monthly principal installments and 24 coupons representing the monthly interest installments. In the first three months, clients need to make mandatory payment of the principal and the interest per month. After the third month, clients have to make mandatory payments of interest installments per month. After the third month, the client can lag behind two principal installment obligations at any time during the loan tenure. In this case the client avails the flexibility option first and then makes up for skipped principal installments in the way that credit card users function.

Thus far, 150 groups have been provided with different loan products and a baseline survey of 130 groups has been completed. After the baseline survey, CMF intends to have a short survey of each household on a quarterly basis to look into their income flows and investigate the possible reasons for skipping of principal installments in certain months. This will be followed by two more surveys. One will take place after a year and another at the end of the loan tenure in order to gauge the impact of flexible loan repayment schedule in terms of ease of repayment and also increased disposable income for undertaking other livelihood activities. Findings of this research project will be available by the end of the year 2008.