Causes of Delinquency: Lessons from MABS Field Visits

1. Causes of Delinquency: Lessons from MABS Field Visits MABS Regional Roundtable Meeting of Mindanao Participating Banks October 26, 2005 Grand Regal Hotel, Davao City

2. The Field Visits: • Field visits between May and August 2005 by MABS technical staff* • 20 participating banks in Luzon,Visayas and Mindanao • 2 to 5 day visits involved operations review and workshops focusing on delinquency problems • Carried out credit folder review; • Focus group discussions with senior officers, managers, supervisors and account officers; • Visits to MF clients *COP, DCOP, Regional Managers/Coordinators, Banking & MF Specialist

3. Summary of Findings/Observations I. Deviation from Loan Product Policies & Procedures II. Misguided use of loan restructuring policy III. Problems in organizational structure and personnel policies IV. Lack of, or inadequate training V. No systematic plan in carrying out expansion

4. I. Deviation from loan product policies & procedures A. Non-compliance to lending policies and procedures B. Delinquency Alarm Signals are not implemented/ followed • Lack of, or weak supervision and monitoring D. Fraud

5. A. Non-compliance to policies • Lack of, or inadequate cash flow analysis • No proper CIBI • Automatic step-up lending by as much as 300% increase from previous loan amount • Lack of analysis of clients historical performances (repayment record, savings balances) • Risk profile of clients are not properly analyzed • Security or collateral becomes primary consideration in credit evaluation and approval

6. Loan term is extended for a longer period of time to accommodate larger loan amount (exceeding 50% of the net worth of business) • Poor client orientation • Co-borrower and Co-maker’s capacity and liability/ responsibility are not given proper emphasis • Excessive penalties imposed on clients encourage non-repayment

7. B. Delinquency Alarm Signals are not implemented/ followed • Failure of account officers, supervisors, branch managers to impose remedies at the earliest sign of delinquencies • Failure to send notices and demand letters to borrowers, co-borrowers and co-makers • Security agreements are not enforced • Failure to proceed to the next courses of actions to enforce repayments (seeking settlements at the barangay courts, foreclosures, filing of legal cases).

8. C. Lack of or Weak Supervision and Monitoring • Credit committee meetings are not held anymore or have become infrequent • Some supervisors are not familiar with the MFU products • Lack of supervision and control in order to maintain portfolio quality through random client visits and other monitoring strategies • Some banks do not even have supervisors to support branch managers in reviewing/ validating the work of account officers

9. D. Fraud • Account officers and supervisors not remitting or misusing collections • Account officers and supervisors withdrawing savings of clients • Account officers and supervisors entering into a “loan-sharing” scheme with clients • Account officers and supervisors incurring debt from clients

10. II. Abuse of loan restructuring policy • Restructuring loan accounts in violation of bank policy (conditions for restructuring) • Unlimited number of times loan accounts were restructured • Undocumented restructuring of accounts • No proper authorization and approval of restructured accounts • Loan repayments changed to lump sum payments at maturity • Restructured loans are not properly tagged in MIS

11. III. Problems in organizational structure/personnel policies • Implementation, approval and monitoring are centralized in the head office • Branch managers have no responsibility over the implementation of the microfinance operation • Absence of supervisors to support branch managers • Absence of product manager for multi-branch banks

12. No proper turn-over of responsibilities between an outgoing and incoming account officers; or when senior account officers/supervisors are promoted to higher positions • No transition plan for transferring accounts • Account officers’ employment status is evaluated against unrealistic targets

13. IV. Lack of Training • No formal program in place for training newly-hired account officers; limited to on-the job training. • Refresher course training for old account officers is not also in place. • Branch managers are not provided training but given responsibility to implement microfinance loan product.

14. V. No systematic plan for expansion • Lack of or no market research for branch or geographic expansion; tendency to use “shotgun approach” to expansion • Lack of or inadequate training for MF staff • Some banks have expanded in areas that are very far from the bank/branch • Some banks have put up field offices without putting in place strong internal control measures

15. Framework for Managing Delinquency HIGH PAR Delinquency Causes 1. Non-Compliance/deviation from policies and procedures 2. Delinquency alarm signals not followed 3. Lack of or weak supervision and monitoring 4. Abuse of loan restructuring policy 5. Lack of or inadequate staff training 6. Problems in organizational structure personnel policies 7. No systematic planning for expansion LOW PAR LENDING is primarily about managing risk. A bank will experience a low or high PAR depending on how it manages RISKS. Risk Management Plan 1. Strong Credit Methodology (Client eligibility criteria, CIBI, Cash Flow Analysis, Borrowers Risk Profile Analysis) 2. Solid program image and credit culture (Delinquency alarm signals implemented) 3. Good monitoring and management information

16. Changing Corporate Culture “ It is impossible to change organizations which do not accept the danger of their present ways of doing things… …Organizations only change, and people will only change, when they accept in their hearts that change must occur.” Sir John Harvey-Jones (Making it Happen -1988)