Skills for Microcredit Field Staff National Rural Support Programme Delinquency Management (Delinquency, Causes, Prevention)

Delinquency Management

Definition of Delinquency Delinquency is………. …the situation that occurs when loan payments are past due. …a delinquent loan (or loan in arrears) is a loan on which payments are past due (Cal meadow). …also referred as arrears or late payments, measures the percentage of loan portfolio at risk (Gemini).   …delinquent payments in arrears are loan payments which are past due, delinquent loans are loans on which any payments are past due (SEEP).

Delinquency Management Goals Delinquency Management ANALYSING THE CAUSES OF DELINQUENCY APPRECIATING THE COSTS OF DELINQUENCY TO THE INSTITUTION CONTROLLING DELINQUENCY DEVELOPING AN INSTITUTIONAL ACTION PLAN TO ADDRESS DELINQUENCY

Levels Of Delinquency Client Level MFI Level Macro-Economic Level

Causes Of Delinquency Client Level MFI Level Husband (main earner) Absconds Sickness/Ill health of customer Business failure MFI Level Poor loan design and products Poor staff training Poor client screening Poor loan appraisal system Weak incentives for staff No effective sanctions over late payments Over empathy

Causes Of Delinquency Macro-Economic Level Inadequate or weak peer pressure Bad loan tracking system Staff/Customer turnover Becoming too large too quickly Fraud Macro-Economic Level Bad credit culture Political interference Poor Government policy Seasonality Natural disasters

Preventing & Managing Delinquency by Lender “MFI” Key Features: Attitude and commitment towards getting the money back. Create an image that does not consider late payments acceptable “A Zero Tolerance Policy”. Loan products & delivery process should meet client needs “Service must be valued”. There are no bad borrowers only bad loans. Develop effective screening mechanism. An incentive system for staff – clear responsibility. That way This way

Preventing & Managing Delinquency by Lender “MFI” That way This way Ensure that borrower should not develop the perception of, benefits of late payments and costs of on time payments. Accurate and timely MIS. Undertake analysis of portfolio quality, determine trends & segregate information. Also look beyond the indicators. Clear follow-up policy if payments are late. Consequence of loan default should be sufficiently unappealing.

Borrower’s Perceptions (Benefits) On Time Repayment Late or No Payment Probability of immediate larger follow up loans development of positive credit history positive reputation among peers access to training, savings or other program services access to advice from credit officers award or prizes for timely repayment lower interest on second/third loans interest rebate lower expenses if interest payments not made Maintain capital (or portion) from loan in business or use for other purposes. fewer or no trips to financial institution to make payments (lower transaction costs) lower transaction costs of attending meetings and other activities of lending institution May not have to repay at all, if there is a low cost to default.

Borrower’s Perceptions (Costs) On Time Repayment Late or No Payment Pay interest and capital of current loan Pay time and transportation costs to make payments Opportunity Costs Late fees for late payments delay future loans or loss of access to future loans possible legal action and costs possible loss of collateral loss of access to other program services hassle of frequent visits by loan officers hassle of pressure from group members if group loan negative reputation among peers

Uncontrollable Factors in Delinquency Management Natural Disasters Earthquakes, fires, floods, drought wreak havoc on economies and the activities of micro-entrepreneurs Changes in Government Policy A crack down on street vendors, a new tax Individual Crisis An illness or death that throws the household into a dire economic situation State of local, national and world economies & relations Even petty traders are often dependent on imported goods

Steps To be Taken to control “Delinquency Crises” Review credit policies and operations (their compliance with basic principles and methodology) Evaluate how credit officers are operating in the field (identify deviations) Design an incentive system to steer performance Separate portfolio, (Bad loans from average and good loans). Review effectiveness of information system Outline reviewed policies, procedures to staff Set deadlines and communicate to team. Remove credit officers who continue poor performance.