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D?veloppement international Desjardins (DID) www.did.qc.ca. Not-for profit organization founded in 1970Specialized in technical support and investment in microfinance sectorAffiliated to the Desjardins Financial Group, a fully integrated network of 600 caisses populaires (credit unions) in Ca
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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