INSTRUCTIONS 1.Print these slides on acetate 2.During the exercise flash these acetate slides to process the responses of the group/s. 3.These acetates

INSTRUCTIONS1. Print these slides on acetate

2. During the exercise flash these acetate slides to process the responses of the group/s.

3. These acetates are already your discussion materials for the Microfinance Best Practices & Principles session

LOAN LOAN POLICY POLICY AREAAREA

PRACTICES &PRACTICES &

PRINCIPLESPRINCIPLES

OBJECTIVOBJECTIVE IN E IN

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1. Client Selection

Clearly defined client group • Well-defined eligibility criteria for a loan product stated in a manual to standardize practice among MFU staff.

Client selection based on character assessment and repayment capacity, not collateral Individual’s reputation in the community and the business cashflow are more important than traditional collateral.

•Reduce Risk•Improve Customer Service•Reduce Cost





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2. Loan Purpose

Additional working capital for existing business rather than start up business•Initial loans are generally for short-term working capital as opposed to fixed assets. •Loans for fixed asset are provided only after lending to the same client for at least one year.

Reduce Risk




OBJECTIVE OBJECTIVE IN IN

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4. Loan Term

Short-term, from 3 to 6 months Micro-enterprise operations are characterized by fast rotation of business/goods, hence, working capital has a fast turnover 3 to 6 months loan term is not too short nor too long to extend credit to a client who lacks credit history•Term of the loan can be increased gradually as the client becomes known to the bank, but look carefully at potential business risks to supplies, production and sales in giving longer loan term.

Reduce Risk





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5. Frequency of Payment

Small and frequent amortization payments

Weekly for new clients; semi-monthly or monthly for mature, valued clients who have established a good repayment record Easier for clients to payFrequency of payment should be balanced against the cost of collecting these payments.Transition clients with long and good track record from weekly to semi-monthly or monthly payments.

Reduce Risk

Quality Service





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6. Interest Rate Charge sufficient interest rate to cover all cost and provide good profit Bank’s microfinance operation is a business, not a charitable serviceMicrofinance loans are small with frequent installment payments, hence, the transactions costs are higher than regular commercial loans.Microenterprise clients are willing to pay higher rates for a good service. Interest rate charged by the bank is substantially less than the 8%-10% monthly from informal lenders

Reduce Risk

Quality Service





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7. Security for the Loan

Focus on Character rather than hard collateral for micro loans Low-income households have little, or no assets Use soft collateral or collateral substitute such as co-maker; serialized assets, stock inventory, savings hold-outSoft collateral is secondary and only for its psychological effect on the client

Reduce Risk

Quality Service

LOAN LOAN FEATURFEATUR

ESES


PRINCIPLESPRINCIPLESOBJECTIVE OBJECTIVE

IN IN

LENDINGLENDING

8. Savings Client-friendly design Low opening amount and maintaining balance; small regular deposits; deposit services are therefore accessible.Transition mature clients with good repayment record from mandatory to voluntary savings

Reduce Risk

Quality Service

Procedure/ Procedure/ PolicyPolicy

Best Practice / Best Practice / PrinciplePrinciple

RationaleRationale

1. Bank Philosophy and Image

Provide high quality, appropriate and friendly service to micro-entrepreneurs - Clients should feel welcome in the bank - Rapid access - Simple procedures - Frequent contact with the client

Microfinance operations is a business, not a charitable service Bank has clear objectives for its microfinance operation

Quality Service

Viability and sustainability of operations


Best Practice / PrincipleBest Practice / Principle RationaleRationale

2. Loan Disbursement

and Monitoring

Decentralize loan approval at the branch-level credit committeeAccount officers are responsible for loans they have recommended for approval Clearly defined geographic areas assigned to account officers to avoid overlaps and competition for clients among AOs.Frequent contact with clients Closely monitor delinquent accounts and apply measures as indicated in the delinquency alarm signals

Minimize Cost Quality Service

ProcedureProcedure/ Policy/ Policy


3. Zero Tolerance against Delinquency

Loans with payments delayed by just one (1) day are considered delinquent, and bank staff takes step immediately to collect. Portfolio at Risk (PAR), not past due, define portfolio quality Pursue delinquent clients, whatever the cost, to establish and maintain zero tolerance The culture of zero tolerance, or strict credit discipline, should start with top management and communicated to the staff and clients “DELINQUENCY ALARM SIGNALS” are consistently followed

Reduce risk Minimize cost

ProcedureProcedure/ Policy/ Policy


RationaleRationale

4. Management Information System (MIS)

Automated MIS is key to tracking the performance of the microfinance portfolio At a minimum, should be able to track missed payments, account officers responsible for their collection, and portfolio at risk with aging MIS report should show the performance of each account officerMIS reports are tools for monitoring by top and middle level management & supervisors

Reduce risk



5. Loan Loss

Provisioning

Adequate provisioning is a sound banking practice to cushion probable losses Provide loan loss provision based on BSP requirements (BSP Circular 409) Current Loans 1% 1 – 30 days 2% 31 – 60 days/restructured once 20% 61 – 90 days 50% More than 90 days/ restructured twice 100%

Promote portfolio quality



RationaleRationale

6. Internal Control

Pick-up collection of loan payments (a valued service demanded by microfinance clients) could lead to internal control problems Bank should be able to track missed payments through MIS MFU Supervisor should verify cases of delayed/non-payment of installments immediately when they occur Other checkpoints: - Loan review & approval by Credit Committee - Regular random check of clients by MFU Supervisor or audit personnel

Reduce risks





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3. Loan Amount

Start loans small and increase gradually •Small initial loan mitigates lending risk to a client who does not have any bank record yet•Allows the bank time to slowly get to know the client’s “real debt” capacity and reduces the risk for the bank as well as the debt burden of the client.•Be conservative in analyzing client’s cash flow; initial loan payments should not exceed 25-35% of the client’s net income; •Loan amount can increase overtime based on successful repayment and improvements in the cashflow, but not more than 30%, as the bank gets to know the client’s business better.

•Reduce Risk•Improve Service to Client by avoiding debt overburden

Documents

INSTRUCTIONS 1.Print these slides on acetate 2.During the exercise flash these acetate slides to process the responses of the group/s. 3.These acetates