Avoiding Over-indebtedness

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This presentation on avoiding over-indebtedness was presented during the Microfinance Council of the Philippines Annual General Meeting entitled "Making a Difference: Multi-Stakeholder Action
Towards Responsible Microfinance" held in Manila on July 28-29, 2011.

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  • No of active borrowers = 246,579 Micro loan portfolio balance = over P2.1B
  • No of micro-depositors = 1,446,772 Total Amount of Deposit Balance – over P2.B
  • RBAP-MABS introduced Housing Microfinance and has been working with rural banks to conduct market research, develop, pilot, and rollout various housing microfinance products to their clients. More than 2,600 borrowers have received housing microfinance loans exceeding totaling more than PhP 80 Million.
  • OBOs/MBOs can now accept deposits and is designed to fit the capacity and serve the needs of basic sectors. Features of Micro-Deposit includes: Minimum maintaining balance not exceeding P100 Not subject to dormancy charges Only for individual clients whose ADB balance does not exceed P15k No frills account to address to basic deposit account and increase savings consciousness to the low-income population.
  • Incorporate credit investigation and background investigation Determine character/capacity to repay Payment history Visit to business Interview neighbors, other businesses, barangay, other creditors Incorporate cashflow lending approach Ensure that clients borrow within their means. We normally recommend a 25% adjusted debt capacity rate for first clients, gradually increasing to up to 50% based on good track record and good business performance Increases in loan size should be capped at no more than 30% from one cycle to the next Make sure client sees, his or her cashflow situation and is educated on responsible borrowing
  • These are some of the most common causes of over-indebtedness: The client is issued multiple loans at one or several institutions because: The institution lacks information on the client’s liabilities (e.g. non-existent credit bureaus), and /or Loan officers are incentivized to oversell credit products. Repayment schedules do not match clients’ business cycles (e.g. agriculture). The institution relies on guarantees as a substitute for adequate capacity analysis. Accidents, disease, or natural disasters.
  • Avoiding Over-indebtedness

    1. 1. Avoiding Over-Indebtedness John V. Owens, RBAP-MABS Making a Difference: Multi-Stakeholder Action Towards Responsible Microfinance July 28-29, 2011
    2. 2. The USAID-supported RBAP- Microenterprise Access to Banking Services (MABS) Program provides technical assistance and training to rural banks in microfinance best practices. The program is designed to develop the capability of rural banks to profitably provide financial services (loans, deposits, insurance, money transfers and mobile banking) for microenterprise clients.
    3. 3. <ul><li>RBAP-MABS is working with 100 participating rural banks throughout the country with more than 1,000 bank branches and OBOs. </li></ul><ul><li>These banks are located in all three regions of the Philippines (Luzon, Visayas, and Mindanao) </li></ul>
    4. 6. Key Indicators As of May 2011 Cumulative No. of New Borrowers > 868,000 Cumulative Amount of Loans Disbursed > PhP 40 B Total No. of Micro-deposits > 1.45 M Total Volume of Micro-deposits > PhP 2 B
    5. 7. <ul><li>Technical Initiatives and Training in microfinance best practices through courses, workshops, one-on-one assistance, private sector providers, learning centers and distance learning program. </li></ul><ul><li>Technological Support : Enhancement of MIS Systems to support microfinance operations, mobile phone banking, microfinance performance monitoring system. </li></ul><ul><li>Products and Services : Microenterprise Loans, Micro-deposit services, Micro-Agri Loans, Housing Microfinance, Micro-insurance services, Mobile Phone Banking and Mobile Commerce Services. </li></ul><ul><li>Support RBAP to develop policy and regulatory advocacy for microfinance and support research and evaluation </li></ul><ul><li>International linkages . </li></ul>
    6. 8. <ul><li>Products and Services : </li></ul><ul><li>MICRO-AGRI LOANS </li></ul><ul><li>The MABS Approach to agricultural lending has been quite successful in reaching small farmers and reducing the risk to the banks. </li></ul><ul><li>MABS participating banks have reached over 22,000 small farmers with loans totaling more than PhP785 Million since 2004. </li></ul>
    7. 9. <ul><li>Products & Services : </li></ul><ul><li>MOBILE PHONE BANKING </li></ul><ul><li>RBAP-MABS program initiatives have enabled participating rural banks to offer mobile phone banking services. </li></ul><ul><li>Utilize GCASH platform to perform a full range of banking services and Smart Money for money transfer services. </li></ul><ul><li>Accredited more than 1000 rural banking units and benefited > 200,000 rural bank clients. </li></ul><ul><li>Processed over P11 Billion in mobile phone banking transactions using GCash. </li></ul>
    8. 10. <ul><li>Products & Services : </li></ul><ul><li>HOUSING MICROFINANCE </li></ul><ul><li>RBAP-MABS introduced Housing Microfinance to rural banks. </li></ul><ul><li>More than 2,500 borrowers have received housing microfinance loans exceeding totaling more than PhP 110 Million. </li></ul>
    9. 11. <ul><li>Products & Services : </li></ul><ul><li>MICROINSURANCE </li></ul><ul><li>In partnership with 11 insurance service providers to date, MABS is working with rural banks to ensure that there is improved access to insurance options (life, accident, hospitalization, property and crop). </li></ul><ul><li>RBAP has been working closely with concerned agencies on the regulatory issues and with insurance providers on product options that can be made available to rural bank clients. </li></ul><ul><li>Circular 683 </li></ul>
    10. 12. <ul><li>Products & Services : </li></ul><ul><li>Expand Micro-Deposit services </li></ul><ul><li>OBOs/MBOs can now accept deposits. </li></ul><ul><li>Features of Micro-Deposit include: </li></ul><ul><ul><li>Minimum maintaining balance not exceeding P100 </li></ul></ul><ul><ul><li>Not subject to dormancy charges </li></ul></ul><ul><ul><li>No frills account to address to basic deposit account and increase savings consciousness to the low-income population. </li></ul></ul>
    11. 13. How can MFIs promote avoidance of over-indebtedness?
    12. 14. <ul><li>Updated competitor analysis </li></ul><ul><li>Improved lending methodology </li></ul><ul><li>Use of credit reference checking </li></ul><ul><li>Effective MIS to manage loan portfolio </li></ul><ul><li>Follow and analyze delinquency alarm signals </li></ul>How can MFIs promote avoidance of over-indebtedness?
    13. 15. Competitor Analysis <ul><li>Track and regularly analyze competition in each market </li></ul><ul><ul><li>How does your institution compare to others in the market? </li></ul></ul><ul><ul><li>Do your competitors easily grant loans and what methodology do they use? </li></ul></ul><ul><li>Contact competitors to reach agreement on providing credit reference feedback in a timely manner </li></ul>
    14. 16. Good Credit Methodology <ul><li>Incorporate credit investigation and background investigation </li></ul><ul><ul><li>Determine character/capacity to repay </li></ul></ul><ul><ul><li>Payment history </li></ul></ul><ul><ul><li>Visit to business </li></ul></ul><ul><ul><li>Interview neighbors, nearby businesses, barangay officials, and other creditors </li></ul></ul><ul><li>Incorporate cashflow lending approach </li></ul><ul><li>Educate clients on responsible borrowing </li></ul>
    15. 17. Use of Credit Reference Checking <ul><li>Important to check with: </li></ul><ul><ul><li>Other creditors </li></ul></ul><ul><ul><li>Suppliers </li></ul></ul><ul><ul><li>Informal lenders </li></ul></ul><ul><ul><li>Client’s utility payment records </li></ul></ul><ul><ul><li>Informal lenders payment cards </li></ul></ul><ul><ul><li>Local or national credit bureaus </li></ul></ul><ul><li>Push for the active use of a shared credit bureau for all institutions – BAP-CB </li></ul>
    16. 18. Effective MIS to Manage Loan Portfolio <ul><li>Invest and upgrade automated MIS </li></ul><ul><li>Should be able to track aging portfolio-at- </li></ul><ul><li>risk for all loans by: </li></ul><ul><ul><li>Account officer </li></ul></ul><ul><ul><li>Center </li></ul></ul><ul><ul><li>Branch </li></ul></ul><ul><li>Reports should be available for AO, </li></ul><ul><li>Supervisor, Branch Manager, </li></ul><ul><li>GM, and Board </li></ul>
    17. 19. Follow and Analyze Delinquency Alarm Signals <ul><li>Ensure that you have appropriate and immediate response system for delinquent loans </li></ul><ul><li>Analyze by product, account officer, </li></ul><ul><li>center (if any), branch </li></ul><ul><li>Conduct interviews with clients and track over-indebtedness warning signs </li></ul><ul><li>Ensure carrot and stick approach to encourage clients to borrow properly </li></ul><ul><li>Educate clients and staff </li></ul>
    18. 20. Identifying the Causes of Over-indebtedness Multiple loans Poorly designed repayment schedules Inadequate capacity analysis Unpredictable events <ul><li>Accidents, disease, or natural disasters </li></ul><ul><li>The institution relies on guarantees as a substitute for adequate capacity analysis </li></ul><ul><li>Repayment schedule does not match the client’s business cycles (e.g., agriculture) </li></ul><ul><li>Multiple loans are issued to client, by one or more institutions, due to: </li></ul><ul><ul><li>Lack of information on the client’s liabilities </li></ul></ul><ul><ul><li>Loan officers are incentivized to oversell credit products </li></ul></ul>http:// www.smartcampaign.org
    19. 21. In Summary…
    20. 22. <ul><li>MARAMING SALAMAT! </li></ul>Websites www.rbapmabs.org www.mobilephonebanking.rbap.org YouTube: www.youtube.com/RBAPMABS Facebook: MABS Phil Twitter: RBAPMABS LinkedIn: Microenterprise Access to Banking Services

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