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

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

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

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 www.rbapmabs.org)

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

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

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: 300-350 # 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.

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

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

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

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

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% 1-30 days 2% 31-60 days 20% 61-90 days 50% 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.

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.

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.

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

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

Thank you!