2. Root Causes of Delinquency, Preventive and Remedial Measures
Managing Delinquency
Session 2:
Root Causes of Delinquency,
Preventive and Remedial Measures

3. P A R Causes of PAR EXTERNAL INTERNAL
Put on the last slide for the CASELETs: COPY 3

4. What causes PAR? ENVIRONMENT PEOPLE PROCESS PRODUCT/ POLICY
Natural Calamities
Lack of training
Incomplete loan documentation
Product not suited to the needs of the market
Bankruptcy
Weak supervision
Inadequate loan loss provisioning
“Copy and paste” product design
Economic
Slowdown
Deviation from policies and procedures
Put on the last slide for the CASELETTs: COPY
CIBI short-cut
Migration
Fraud

5. Strategies to Mitigate the Effect
Environment-related
Causes of PAR
Strategies to Mitigate the Effect
Remedial Measures
Area is hit by natural disasters like typhoon, floods, excessive rains and volcanic eruptions.
Prudent loan approval during typhoon season
Have a manual ready that spells out what to do when disaster strikes (what do we do with clients affected; what do we do keep the records safe. etc.)
Design a savings product specifically for loan payment when a client missed payments due to natural disaster
Determine if the clients have the capacity to pay
Loans can be restructured
Write off accounts for the clients no longer in the are and those without capacity to pay.
(Refer to Disaster Preparedness and Remedial Management Guidelines at

6. Preventive Strategies
People-related
Causes of PAR
Preventive Strategies
Remedial Measures
Lack of or inadequate training of staff
Provide necessary trainings and exposure before deploying field staff for the job. Having the know-how and skills make for more confident and productive field staff.
Conduct training needs assessment
Train AOs to improve their product skills; train Supervisors to improve their management & people skills
Institutionalize zero tolerance practices and discipline against loan delinquency
Teach AO to analyze their portfolio

7. Preventive Strategies
People-related
Causes of PAR
Preventive Strategies
Remedial Measures
MF Supervisors lack management and leadership skills
Promote people based on both technical and leadership skills
Observe how candidates for supervisory position perform their tasks in the field
Train supervisors for leadership, people management and report analysis.
Conduct training needs assessment
Train Supervisors to improve their product & people skills
Institutionalize zero tolerance practices and discipline against loan delinquency

8. Preventive Strategies
People-related
Causes of PAR
Preventive Strategies
Remedial Measures
Fast turnover of staff directly involved in MF operations:
Low compensation package
unrealistic targets set
new field staff are assigned to handle difficult accounts
Offer compensation package that is commensurate with AO’s role in generating income for the bank
Don’t assign new AOs to handle problematic accounts.
Implement standard targets Aos should be able to attain.
Example: Group lending
# of active borrowers:
# of new per month: 20 clients
# of centers: 12 centers
# of member per center: 25
PhP loan portfolio = determine on the basis of profitability
Conduct exit interviews of staff who are resigning to know reasons for leaving; gather their opinions on areas for improvement
Review position classification & compensation package for account officers vis a vis the minimum wage in the area. Raise AO basic wage higher than min. wage
Determine the loading per staff and adjust the load based on difficulty, distance and market in the area.

9. Preventive Strategies
People-related
Causes of PAR
Preventive Strategies
Remedial Measures
Deviation from policies and procedures because no one bothers to check!
(mostly from inadequate supervision)
Conduct monitoring through un-announced spot visit or temporary take over of an AO’s area of responsibility
Supervisor to conduct actual field validation especially of bigger loan amounts; define the loan size where supervisor validation is a MUST
Internal audit to provide regular audit checks and recommend improved processes and procedures.
Conduct fast and reliable compliance review or audit
Define & Implement corresponding sanctions for deviations in policies and procedures
Un-announced spot visits especially to branches and AOs with unusually high PAR

10. Preventive Strategies
People-related
Causes of PAR
Preventive Strategies
Remedial Measures
Fraud committed by bank staff and/or by borrowers
(details to be discussed in Fraud Management Workshop)
Ensure that basic internal controls are in place (such as making sure that collections for the day are accounted and remitted within the day)
MF Supervisors should monitor and supervise field staff activities through spot visits.
Internal audit should conduct regular reviews.
Adopt policy of reshuffling staff to avoid too much familiarity with the clients
Conduct audit checks and spot visits
Clearly define sanctions against fraud
Use low-cost SMS messaging to inform borrowers of payments received or not received on payment date; encourage clients to respond back

11. Preventive Strategies
Process-related
Causes of PAR
Preventive Strategies
Remedial Measures
Poor documentation are acceptable practice, such that loans with incomplete loan documentation are approved
Short-cuts in CIBI process
Conduct process audit and compliance review (MF supervisor/ Internal Audit)
Use updated document checklists
and process trackers to all loan applications to help identify the gaps.
Conduct process audit and compliance review

12. Preventive Strategies
Process-related
Causes of PAR
Preventive Strategies
Remedial Measures
Delays in implementing the alarm signals
Example: Step to apply savings to pay for missed payments is taken too late
Ensure timely implementation of alarm signals:
reviewing the list of delinquent accounts
monitoring the steps taken for each account in a tracker
PAR Classification sheet
PAR Calendar
PAR Visit report
Classify delinquent accounts as to age
Verify the causes for missed payments
List in a tracker the steps already taken to collect missed payments
Validate whether account is still collectible or not.
Supervisor or Internal Audit to validate this report.
Based from findings, decide the appropriate remedial measure

13. Preventive Strategies
Process-related
Causes of PAR
Preventive Strategies
Remedial Measures
Inadequate loan loss provisioning such that long overdue accounts could not be written off
Follow provisioning standard
Current %
1-30 days %
31-60 days %
61-90 days %
Above 90 days 100%
(BSP Circular 409)
Book adequate loan loss provision monthly
Classify and validate accounts that are already beyond 90 days and schedule for write off.

14. Process-related (affecting Group Lending)
Causes of PAR
Preventive Strategies
Remedial Measures
Practice of conducting follow-up collection that extends until late hours making Account Officers unproductive and burnt out, and harass & embarass clients
Implement standard time management for Account Officers.
Eliminate the “rescue” or “sit down” method of collection.
Implement zero tolerance practices and Alarm Signals – close follow up of clients.

15. Process-related (affecting Group Lending)
Causes of PAR
Preventive Strategies
Remedial Measures
“Tapal” or “abono” hides arrears.
These internal-arrears are not monitored by the bank.
Clients who are recipients of “abono” manage to get higher loan amount from the bank
Monitor actual repayment performance of members in group lending with a collection monitoring tool.
A member might have a record of 100% payment in the bank’s records, but actual payments maybe due to “abonohan” or “tapal” system
Supervisors should conduct actual field validation of member’s repayment performance during center meetings;
Enforce the recording & monitoring of internal arrears to avoid giving bigger loans to clients that have hidden delinquency.

16. Internal Arrears Monitoring Tool
Date of the Transaction: ___
Clients
Amount of Weekly Payment
Internal Arrears
NAME OF BORROWER
PRINCIPAL
INTEREST
SAVINGS
TOTAL
Balance, last week
This week
Prepared by : Center Treasurer
Noted by: Account Officer

17. Preventive Strategies
Product-related
Causes of PAR
Preventive Strategies
Remedial Measures
Loan product no longer responds to what the market wants
Do not copy loan product lock stock and barrel;
Design loan products based on market survey of market demand and preferences
Conduct a review of the existing loan product operations, policies and procedures
When offering group loan product, bank should have a plan and strategy for graduating clients to a transition or individual loan product.
Transition qualified clients

18. Thank you!