NOTE 11: ON MICROCREDITS (Continued)
In the previous Note I started
to introduce some brief suggestions to strengthen the relationship between
debtors and creditors in the six points raised; (1) Trust (2) Sincerity, (3)
Discipline (4) Character, (5) The assessment of the creditor and (6) The
continuity of the relationship, now I will continue with some suggestions:
1.
Non-regulated MFIs should make
strategic alliances with regulated financial institutions to open and operate
savings accounts with customers with a credit agreement according to the
savings portfolio of the ONG’s clients.
2. Loan
Officers must be given training and empowerment to find appropriate solutions
for delinquent customers in their portfolio.
3. Messages
to encourage good payment should be added to materials permanently, to
reinforce good behavior.
4. The
presentation with the “duties and responsibilities of the debtor” should be
done before signing the credit.
5. Open
doors policy must be kept to analyze the problems of borrowers who have trouble
paying their loans.
6. To the
IMF the first in the paying line to collect, before others do.
7. Shield
for overindebtedness, by managing information sharing between local MFI.
8. Develop
financial education efforts, as a part of the Credit Officers duties.
Let us start with point No. 1, "Savings Deposits": all
countries required MFI to be supervised by the Banking Authorities to take
deposits from the public, this will not be the case of NGOs, which cannot
receive deposits from the public. The non-regulated Savings and Loan
Cooperatives can receive savings only from its members, either in the form of
equity, savings accounts and term deposits. The regulated Savings and Loan Cooperatives,
which are known as “Credit Unions”, are supervised by their Specialize or Official
Authorities or by the Banking Authorities and can receive deposits from the
public that are not members, but to receive credits these customers must become
members. As you can see, the more limited institutions are the NGOs, but there
are experiences: For example, Pro Mujer in Bolivia, created by Lynne Patterson
and Carmen Velasco (https://promujerblog.wordpress.com/tag/carmen-velasco/).
This institution reached a strategic alliance with FIE FFP (Today Banco FIE) to
provide access of its members to have savings accounts (http://promujer.org/what-we-do/),
generating loans for the NGO in the proportion of the savings received from Pro
Mujer’s members, for Pro Mujer to give loans to its affiliates. There are thus
solutions to financial services even when NGO are not regulated.
Moving on to point No. 2, "Train the Credit Officers to control
the underpayment." Default is more likely to arise during the period
of repayment of a credit (70%) than by failures in the assessment of the
applicant to approve them (30%). I will address first the failures in the
credit application. The first thing is to start not from the amount the applicant
has requested, but from what is his/her actual payment capacity. Traditionally
what is requested by the applicants is the starting point in a loan application,
but they have no idea of what their paying capacity is; what is worse, when it arises,
they become frustrated. I have never denied credit to anyone, but I have always
calculated first the real paying capacity, to offer the maximum credit that it can
be given, so that it can be paid back comfortably, if there is no
overindebtment. It is very simple, from the start and as an initial verbal
approach, the documents will come later, fill out a form with the fixed and
monthly income variables of the family group that acts as guarantor of the
loan. Apply a percentage of what should not exceed the monthly payment (I usually
apply less than 20% of the income), this would be the maximum monthly fee. Then
I calculate the factor for rate and term for a one unit of money and divide the
maximum payment by this factor (Four decimal places will do). The result is the
maximum loan amount the applicant can afford according to his/her income and that
will be the loan amount that I will offer: If it is accepted: Well, if not, the
applicant will reject the credit offer and leave. At this stage, no documents are
used because it also serves to see the honesty of the applicant. If he/she
accepts the credit offer and the documents are presented, the income is
significantly lower, it can be assumed a lack of transparency from the
beginning: Then what confidence there will be to learn the truth during the
period of payment (70%)?. Now let us aboard the risks that occur during the payback
period. It obeys a set of circumstances that put pressure on the Credit Officers
to meet the goals of bringing new credits: (a) The stability of their income, so
they must produce enough new business, (b) The competition from other
Microfinance Institutions (MFIs), (c) The credit conditions demanded by the
applicants and (d) The credit offers from the other MFI. In a competitive
market, there is a tendency to try to offer more financial advantages than to
better the ratio "price-value" of the financial products. What does
this means?: It is easier to offer the maximum terms for the loans and better
conditions than to add non-financial advantages to financial products to
improve their value. Take an example: If we add to the loans the possibility of
obtaining discounts on the inputs bought by Microentrepreneurs by negotiating
with suppliers; for example: Creating a virtual "Discount Club", it
is possible to improve these ratio by increasing the value while maintaining the
financial "price and conditions" of the loan equal. I developed these
services many times in various countries and have always found the distributors
or sellers very receptive when negotiating to promote their business among the
FMI customers in exchange for discounts. On the other hand, facilitating loan
payments and improving the response speed of approvals and disbursements makes
a difference to attract good payers. I think the most effective way to compete
is based on service. However, I have observed that the longer term of the loans
is always offered first, but there can be a problem: For example, to finance a
know inventory turnover of a Microentrepreneur with a longer term loan, can be
not only counterproductive, it can also fatal. If we know the time and rotation
of an inventory, it makes no sense to give longer terms for payback, because it
would also lengthening the time required by the debtor to renew its credit and
in the meantime: How it will be paid the following rotations of the inventory,
if these have been covered with a loan with a longer repayment period?. The
problem is that the Credit Officers are trained on financial issues but they
are not trained in professional selling of what they offer. Selling consist: First,
to detect the needs of customers and to show them the best choice or
"tailored suit" of financial products that satisfies these needs. According
to my experience, the defaulting of a loan is due to five factors: (a) The
intention of paying irregularly even not paying the loan, which it had to be detected
in the application phase. (b)The external factors of overindebtedness; which can
be controlled by creating a mini-credit bureau, even with a small group of
MFIs, because experience dictates that debtors always resort to the same kind
of institutions. (c) The relative importance of the institution, that places it
at the top of mind of the debtor, when paying back. (d) The specific or
exceptional situations in which the good payers may also fall in indebtness and
(e) The lack of education and financial literacy. We will analyze and propose solutions
"The intention of paying as they
wish". There are people who live on credit, in the absence of a credit
bureau or failing to access to know defaulters in other MFIs, the only way to
detect them is by credit-structured interviews to detect inconsistencies in the
application stage. Usually deception is associated with emotional stress, this
is manifested by microgestures, strange attitudes, voice changes, etc., this
implies that Credit Officers must learn to identify these and look for
inconsistencies in the information submitted by applicants. On the other hand,
a good sales person must be very observant to detect the needs of its current
and potential customers, so this ability will also be helpful to a Credit
Officer to evaluate loan applicants. If a group of MFIs in any area agree to
exchange information on their bad payers, it is very easy to control a great
part of the local overindebtment. One of the institutions becomes the monitor,
receiving spreadsheets from the other MFI, listing their defaulters,
consolidates the list adding its own returns it with all defaulters to each MFI
in a spreadsheet ordered by the ID document number, which allows them to know
who is indebted in another MFI. In fact, this system, has been mounted
frequently and it is not necessary to know all the details of defaulter’s
loans. To know the debtors ID, the number of installments in default, the
amount of each installment of each credit in an MFI, is enough because the idea
is for others MFI not give him/her loans until the debtor disappears from the default
worksheet. The next item is the "relative
importance of the institution", debtors establish a mental hierarchy
in the sequence of how they will payback their debts, this means that the IMF
should "remember" its debtors the maturity of the first installment,
to ensure that the they internalize and add mentally the payment to the scheme of
their mental hierarchies. In this sense, the comparative advantages of
non-financial nature that the debtor values in an MFI play a very important
role: (a) The quality and service excellence of the customer service. (b) The
speed of approval and disbursement of the loans. (c) The advice and guidance
received from the Credit Officer and (d) The non financial benefits he/she gets
for free from the IMF. None of these reasons are financial. The reality is that
it is harder for the competition to catch up in these areas, than to make
adjustments on the financial issues to be competitive. Therefore, any MFI can
be more competitive: For example, if it includes a free life insurance,
disability and accident policy for the outstanding balance of the loans. This
benefit could make the difference in non-performing loans placing the MFI in a
stronger market position and more if the insurance is conditioned to be applied
only to loans that are current at the moment of the sinister. The next point is
"The exceptional situations of underpayment
of good payers"; the reality is that there is a 70% chance that a loan
comes in default, even in the case of good payers if the credit has been given
in the right terms. However, even if they occur, immediate response of the Credit
Officer will be necessary and empowering this employee is a must, to negotiate
a recovery process in which helping the good payer is crucial. If the
Microenterpriser gets sick, he/she will leave someone to run the business meanwhile,
so it is essential that the Credit Officer reaches an agreement directly with
the temporary person in charge of the business and maintain regular contact
with the original debtor. First, to ask for his/her health and second to maintain
contact and inform him/her of any rule’s change by the temporary person in
charge that affects the MFI. Ultimately, the real owner is the one who has the
authority to instruct the temporary in charge to act correctly. On the other hand,
once the debtor rejoins work, if there are still any delayed payments, the Credit
Officer should have the authority to agree with the debtor to carry on a recovery
plan of the dues in default: For example, weekly installments that cover the
next fee and offset some more money to recover the due payment. Finally, the
aspect of "financial
education", generally it is assumed in many MFI that debtors know
about finance and that is not true, it
is a very wrong assumption, so that Credit Officers must become “financial
educators” to the debtors in order for them to manage better their money and
therefore pay their dues on time. Because the more the customers know about
finances, the better they will control their payments. I usually suggest to the
MFI that before the applicant signs a loan it has to see a presentation with an
electronic slides on "the rights and duties of a debtor", few credit
customers read the contract. You will be surprised how many times an applicant
decides after watching the presentation not to take the responsibility for a
loan, if he/she want to have a good image with the MFI or may reduce the
original loan amount, to lower the fee and be more comfortable. It is a misconception
that an increased knowledge of finances, make harder the relationship of the debtors
with the MFI, it is the opposite.
Last but not least, remember
that a healthy loan portfolio is the sum of the credits granted and monitored
well. Statistics only show what is happening in a portfolio these do not solve
the risks mentioned here that are related with human behavior, not with
finances.
