Improving loan appraisal and delinquency management: A microfinance perspective

1. Improving loan appraisal and delinquency management: A microfinance perspective Purpose of the slide Introduce the day while making sure of the participants’ well-being. Development Start no later than 8:00 regardless of the number of participants in the room. To rigorously respect the schedule from the start will send a clear signal to the participants regarding the rest of the program and the punctuality requirements. Welcome the group and congratulate the participants for their punctuality. Specify the following points: Well-being: Verify if they have a room to their liking and adequate service. If any problems are reported, make sure to inform the hotel management of said problems. Special instructions: If need be, specify the elements of logistics necessary to the proper functioning of the seminar. Ensure that all participants have the participant’s manual in hands (standard documentation without the material linked to the case studies, which will be progressively distributed as part of the activities). Length: A few seconds This slide should be displayed before the start of the seminar and throughout the arrival and settling of the participants. Purpose of the slide Introduce the day while making sure of the participants’ well-being. Development Start no later than 8:00 regardless of the number of participants in the room. To rigorously respect the schedule from the start will send a clear signal to the participants regarding the rest of the program and the punctuality requirements. Welcome the group and congratulate the participants for their punctuality. Specify the following points: Well-being: Verify if they have a room to their liking and adequate service. If any problems are reported, make sure to inform the hotel management of said problems. Special instructions: If need be, specify the elements of logistics necessary to the proper functioning of the seminar. Ensure that all participants have the participant’s manual in hands (standard documentation without the material linked to the case studies, which will be progressively distributed as part of the activities). Length: A few seconds This slide should be displayed before the start of the seminar and throughout the arrival and settling of the participants.

2. Développement international Desjardins (DID) www.did.qc.ca Not-for profit organization founded in 1970 Specialized in technical support and investment in microfinance sector Affiliated to the Desjardins Financial Group, a fully integrated network of 600 caisses populaires (credit unions) in Canada A pool of 50+ experts Active in more than 25 countries

3. Objectives of workshop Review best practices in loan appraisal and delinquency management Understand key features of micro finance and micro credit Propose methodology for new micro credit product development

4. BEST PRACTICES IN LOAN APPRAISAL AND DELINQUENCY MANAGEMENT: A « CHECKLIST »

5. LOAN MANAGEMENT PROCESS Loan application Validation of client information Assessment of repayment capacity Decision Guarantees Disbursement Monitoring delinquency Collection

6. LOAN APPLICATION The loan application is the base of the decision Get complete and reliable data Must be completed by the person who will analyze the application Establish trust through interviews with client Question client as often as necessary and use reformulation The 2 first minutes are the most important

7. VALIDATION OF CLIENT INFORMATION Existence and value of assets (real estate, car, savings, investments, household items, other) Existence and value of liabilities (loans, credit card, other debt) Important: always match assets with liabilities

8. VALIDATION OF CLIENT INFORMATION (cont’d) Willingness to reimburse: record with paying bills Residence status Employment status Income/sales (self-employed) Expenses

9. VALIDATION OF CLIENT INFORMATION (cont’d) For non salaried clients: document both personal and business situation Evaluate current not projected financial situation

10. ASSESSING REPAYMENT CAPACITY Ensure that net worth (assets minus liabilities) is positive Ensure that residual budget (income less expenses including loan repayment) is sufficient Determine the value and accumulation of shares and savings taken as collateral

11. DECISION PROCESS Compare financial ratios to the norms Blocked savings or shares (20%-33%) Guarantors (co-signatories) Authorization limits Concentration of overall loan portfolio Evaluation of overall risk

12. GUARANTEES Transfer blocked savings in a special account Register all guarantees before disbursement Inform guarantors about their responsibilities towards the loan

13. DISBURSEMENT Sign the contract with the borrower and the guarantor(s) Loan officers should never handle money Verify the use of funds (is the money being used as declared?)

14. CAUSES OF DELINQUENCY Bad product design Bad decision process Client with bad intentions Weak monitoring Slow collection process Bad economic conditions Bad political context

15. COSTS OF DELINQUENCY Reduces / delays interest income Affects liquidity management Affects staff motivation Raises doubt among good clients (possible contamination effect) Forces loan officers to spend time on bad loans instead of processing new loans Reduces profitability through higher loan provisions and losses

16. MONITORING OF DELINQUENCY Make Credit Manager responsible for loan collection Allocate each loan to a Loan Officer Allocate a period in the week for loan collection Monitor installments on regular (daily) basis In case of arrears, contact client immediately

17. COLLECTION (cont’d) Contact guarantors if situation is not settled rapidly Let client know that s/he is followed closely Keep written records of client contacts and commitments Implement sanctions and collection procedures as advertised

18. TO REMEMBER Quality must take precedence over quantity Repayment capacity must be key factor in loan appraisal Guarantees must not be a substitute for repayment capacity Borrower’s integrity must be doubtless Decisions must be free of influence Protecting member savings must come first

19. 2. KEY FEATURES OF MICROFINANCE

20. Key features of microfinance MICROFINANCE IS: The provision of financial services to economically active people who are excluded from the traditional banking system

21. Key features of microfinance FINANCIAL SERVICES: Credit Savings Insurance Transfer of funds ATM card Etc.

22.  Key features of microfinance  ECONOMICALLY ACTIVE PEOPLE: Salaried workers Self-employed who conduct income generating activities (informal sector) Micro and small enterprises (MSEs) from formal sector Smallholder farmers

23. Key features of microfinance INCLUSIVENESS: Low and middle income Marginalized groups: women and young people Geographic areas: rural communities

24.  Key features of microfinance  A microfinance institution (MFI) is: Any organization that offers micro finance services on a sustainable basis: bank subsidiary, postal bank, company, credit union, NGO, government-owned institution, donor-funded program, ROSCAs, village banks, etc.

25.  Key features of microfinance  MFIs can be classified according to: Size Mission and ideology Collect savings or not Regulated or not Commercial or not for profit Ownership Sources of funding

26. Key features of microfinance Sustainability is : the capacity to offer a product over a long period of time on a profitable basis even when the donors or funding agencies are gone Experience has shown that it is possible to earn a profit while targeting poor clients

27.  Key features of microfinance  Microfinance can be profitable if: The product is well designed and appropriately priced The institution is well organized The procedures are simple and straightforward (automaticity) The number of loans is large (1,000+)

28.  Key features of microfinance  The government role is important in promoting microfinance sector development through: i) establishment of an enhancing legal and regulatory framework ii) adoption of prudential norms and ratios specific to the sector iii) proper registration, monitoring and supervision of MFIs

29. Best practices in micro credit (1) PURPOSE AND LOAN AMOUNT Working capital for MSE and IGA No start-ups Attention: money is fungible Loan amounts up to US$5,000 Sequential (repeat) loans starting with small amounts Graduation of 25%-50% per cycle

30. Best practices in micro credit (2) PRODUCT DESIGN Short term: 3 to 12 months Installments: weekly, monthly, lump sum, grace period High interest rates (18%-36% flat or linear) Processing fees (2%-5%) Penalties on arrears

31. Best practices in micro credit (3) PRICING Interest rates are high because: The risk is higher (no collateral) The processing cost is about the same as for a big loan but earnings are a lot less For microfinance clients, getting access to credit is more important than the cost Alternative sources of credit are very expensive

32. Best practices in micro credit (4) GROUP LENDING (SOLIDARITY LOANS) For small loan amounts (= $500) Loan managed as one loan at MFI level Group size: 3-5 members Auto selection of group members Loan disbursed at same time and in same loan amount to each member Each member has own activity / source of income Each member is responsible for the entire loan

33. Best practices in micro credit (5) GUARANTEES No or limited collateral (inventories) Blocked savings (10%-50%) Group solidarity/Peer pressure Auto selection Graduation (possibility of larger loan) Character Cash flow analysis (for amounts = $2,000) Basic education package

34. Best practices in micro credit (6) Need to have loan officers working in the field: Sensitize and enroll new clients Verify that clients conduct IGA Verify reputation of clients Visit clients regularly Inform clients in arrears immediately

35. Best practices in micro credit (7) CLIENTS / LOAN OFFICER RATIO Salary advances: 500-1,000 Village banking: 500+ Group lending in urban areas: 300-500 Individual lending (IGA): 200-400 Individual lending (MSEs): 100-200 Individual lending (SMEs): 50-100

36. Best practices in micro credit (8) RETENTION RATE The proportion of current borrowers who take a repeat loan and stay in the program (must be > 80%) A new client is more costly to manage than an existing client Important for clients to build a track record and graduate to larger loan amounts

37. Best practices in micro credit (9) INCENTIVE PAY SCHEMES Motivate staff Direct efforts toward key portfolio objectives (no. clients, disbursements, PAR30) Promote balance between quality and quantity of loans Share profits with performing employees Allocate portfolio between loan officers and evaluate individual performance

38. Conclusion NEED FOR ORGANIZATIONAL CHANGE: Non collateral-based lending New « class » of members Group lending Client education Smaller loan amounts Shorter loan terms Higher interest rates

39. NEED FOR ORGANIZATIONAL CHANGE (CONT’D): Lack of purpose (fungible money) Repeat loans Quick processing / Automaticity Proximity services Allocation to Loan Officers MIS adjustments Close monitoring Additional resources for lending

40. 3. METHODOLOGY FOR NEW MICRO CREDIT PRODUCT DEVELOPMENT

41. WORK IN SUB-GROUPS Organize in 4-5 sub-groups Sub-group should divide into CU and MFI participants from different countries Each sub-group must designate a rapporteur Use Worksheet Report out to plenary session

42. SUB-GROUP WORK GUIDE FOR DISCUSSIONS You have been designated as the Microfinance Program Manager in your institution. Your general mandate is “to set up a new microfinance product which will increase the outreach and improve the financial performance of our institution.” QUESTION TO BE ADDRESSED: What should be the various steps/tasks to be undertaken in order to fulfill your mandate?

43. STEPS IN PRODUCT DEVELOPMENT (1) Secure Board and senior management commitment to new product Carry out supply & demand market survey Conduct strategic planning: market niche, target clients, geographic areas, outlets Define product design: group/individual, loan amounts, loan term, interest rate, processing fee, guarantees, etc. Set performance objectives

44. STEPS IN PRODUCT DEVELOPMENT (2) Develop financial projections for the next 2-3 years Elaborate policies and procedures Make MIS adjustments Prepare marketing materials Train staff Conduct pilot test and re-evaluate Full roll-out