Remedial / Delinquency Management for Microfinance Operations

1. Remedial / DelinquencyManagement for Microfinance Operations A Presentation for the Regional Roundtable Conference Luzon-Visayas MABS Participating Banks Pan Pacific Hotel-Manila 05 September 2003

2. Costs of Loan Delinquency • Postponed or lost income • Slower portfolio rotation – lower asset productivity • Lower staff morale • Higher costs of fighting delinquency • Diminished program image • Higher likelihood of default • Increased costs of loan loss reserves

3. Cause of Loan Delinquency • Loan delinquency is often the result of poorly designed loan products and delivery mechanisms. • Thus the challenges in a repayment crisis are: • Amending the current loan product and credit delivery system for better performance; • Rehabilitating substandard loan accounts back to current status; and • Minimize losses from doubtful accounts.

4. Essential Elements of Managing Loan Delinquency • The credit must be valued by the clients; • Clients must be screened carefully; • Field staff and clients must understand that late payments are not acceptable; • MFIs need accurate information systems: • Delinquency needs effective follow-up procedures; and • The consequences of loan default must be unappealing to the clients.

5. Remedial Process Flow Account Review Capacity Analysis Strategy Implementation Strategy Formulation

6. Specific Objectives Remedial ManagementProcess Flow Normal Management Account Review Capability Analysis • Determine Cause: • Loan Product defects • Program rollout defects Evaluate Weaknesses Evaluate Alternatives Possible Support Categorize Accounts Strategy Implementation Strategy Formulation • Monitoring • Reporting • Revisions • Shift Gears • What ought to be done • How to achieve it • Timeframe • Commitments Repayment Crisis

7. Steps to Take in a Delinquency Crisis (1)Account Review • Review credit policies and operations; • Evaluate loan officers adherence to sound methodology; • Determine extent of repayment crisis; • Assess performance of loan officers; • Categorize loans from poorest to most collectible; and • Assess the MIS.

8. Steps to Take in a Delinquency Crisis (2)Capacity Analysis • Review performance of newer versus older loans; • Review manpower requirements for undertaking rehabilitation of accounts; • Review staff skills; and • Identify alternatives for each type of remedial account.

9. Steps to Take in a Delinquency Crisis (3)Strategy Formulation • Design a performance based incentive scheme; • Design a remedial management plan; • Set-up a monitoring system and assign a task leader; • Undertake staff training and orientation; • Articulate the plan; • Lay out the reviewed policies and information requirements; and • Set time bounded targets and accountabilities.

10. Steps to Take in a Delinquency Crisis (4)Strategy Implementation • Promote strong growth both in amounts and number of clients; • Weed-out clients who have had poor records as they pay their loans; • Remove loan officers who continue to perform poorly or who drag down the entire concept; • Judiciously refinance/restructure meritorious cases; • Write-off the major number of accounts that are more than 6 months past due; and • Regular reporting of accomplishments and challenges to management.

11. Essential Elements in Preventing Delinquency • Instill credit discipline as part of institutional culture for both employees and clients; • Sound Credit Methodology; and • Effective information system

12. Adages in Remedial Management • Loan rarely become losses overnight; • A bad loan is always worse than you think it is; • Remedial measures must be fast; • What you measure is what you get.

13. Thank you .