Basic Microfinance Definitions and Best Practices WELCOME TO THE SESSION ON MICROFINANCE BEST PRACTICES. The preceding speaker explained what the RBAP-MABS program is all about. In the next hour we will discuss the practices that have contributed to the success of MFIs in the Philippines and other parts of the world. However, before we do this, let’s do first things first: Define basic terms we will be using and establish a common understanding of the different methodologies being used in microfinance. After this, we will proceed to discuss the sound practices and principles in microfinance. Rev.vers.Fin 8/12

Session Objectives Establish a common understanding of the basic terms in microfinance Understand the elements that comprise best practices and principles in microfinance and why these are important. Read the slide. Rev.vers.Fin 8/12

Definitions Microenterprise Clients Typically self employed, low income entrepreneurs Include non-agri and agri businesses 4 of 10 households depend to some extent on income from non-agri microenterprise Microfinance Services Small scale loan and deposit services Remittance services Micro insurance 1st bullet: Microenterprise is defined in terms of number of employees – less than 10. Other definitions use net worth and other financial data. POINT OUT THAT BASED ON BSP DEFINITION, A MICROENTERPRISE IS ONE WITH A NETWORTH OF PhP150,000 OR LESS. Using number of employees is the simplest way, however. 2nd bullet: Microfinance is not just about offering microcredit products. It is also about generating deposits – that is, voluntary deposits. It is also about offering other financial services, such as microinsurance, or remittance service. On savings, most microcredit products we know of integrate a required savings (forced/contractual) from clients – either in terms of a fixed amount or a percentage of every amortization payment. The questions is: should this forced savings be considered savings? Strictly speaking, it is not savings because it is not voluntary, there are usually restrictions on withdrawals, and such funds are used more for the benefit of the bank as guarantee for the payment of loans. In certain cases, to buy equity shares in the institution. In order to qualify as microdeposits or microcredit, we use definitions based on maximum size of deposits and loans. POINT OUT THAT THE MAXIMUM AMOUNT OF CREDIT UNDER THE OFFICIAL DEFINITION OF BSP FOR MICROFINANCE IS PhP 150,000. Based on experience with rural banks, however, loans start with much less than this, usually between PhP3,000 and PhP10,000. Rev.vers.Fin 8/12

Definitions Microfinance loans, per BSP basic guidelines Loans are PhP150,000 and smaller Clients after 2 years can be given up to PhP300,000 Term of not more than 1 year, except some products of housing loan Loans to microenterprises and other low income groups Loans to basic sectors such as agriculture, fishery Present definition excludes loans whose payments are deducted from the source, such Salary loans, pension loans, LGU/bgy loan products and other variants Micro deposits are deposits with outstanding balance of PhP15,000 or below 1st bullet: Point out that BSP’s guidelines since early 2000 have been changing lately to broaden the scope of products and services that banks can offer their microfinance clients. Hence, lending to small farmers, fisherfolk, and micro housing have been approved. 2nd bullet: Emphasize that BSP guidelines specifically excludes salary loans and other variants of this loan product whose payments are deducted or taken from source of income. 3rd bullet: Microfinance is not just about offering microcredit products. It is also about generating deposits – that is, voluntary deposits. Most microcredit products we know of integrate a required savings (mandatory/contractual) from clients – either in terms of a fixed amount or a percentage of every amortization payment. The questions is: should this forced savings be considered savings? Strictly speaking, it is not savings because it is not voluntary, there are usually restrictions on withdrawals, and such funds are used more as guarantee for the payment of loans. In certain cases (as in cooperative banks) to buy equity shares in the institution. In order to qualify as microdeposits or microcredit, we use definitions based on maximum size of deposits and loans. POINT OUT THAT THE MAXIMUM AMOUNT OF CREDIT UNDER THE OFFICIAL DEFINITION OF BSP FOR MICROFINANCE IS PhP 150,000. Based on experience with rural banks, however, loans start with much less than this, usually between PhP3,000 and PhP10,000. Rev.vers.Fin 8/12

Profiling the Micro Business Owner Non-agri Microentreprenuer Small Farmer ver. 04/09 Rev.vers.Fin 8/12

The Microentrepreneur Low educational level Limited marketable collaterals to offer Few employees (0-9), Usually family members Basic or no business records Small volume of operations Basic financial skills Limited access to formal sources of credit / No credit history Rudimentary / obsolete equipment There are certain characteristics of microentrepreneur which should be instructive to know. Note to speaker: Ask each participant to give at least two (2) characteristics that typically describe a micro entrepreneur. Click one by one to show the characteristics of a micro entrepreneur. Most microentrepreneurs have low educational level, some are even illiterate. Most of them have no marketable collaterals to offer, limiting their access even to formal loan products that require collateral requirements. Examples of this are land, property and equipment. And you’ll find that most of them have basic or no business record. They don’t have financial statements, much more an audited one. Most of the financial information given by the microentreprenuers are based on memory. Because of their low educational background, most of them have very basic financial skills. The records they keep are very elementary. Given the constraints I just mentioned, the micro entreprenuers have very limited access to formal sources of credit. And because most of them have very limited access to formal credit, they actively participate in informal sources of credit. Microentrepreneurs usually have large families that include not only the children but extended families as well. Majority of the microentrepreneurs do not only rely on one source of income, they are also involved in multi-income generation activities. In the lives of microentrepreneurs, there is no clear delineation between family and and business activities. They are most of the time, if not always, considered as one. When there’s no food on the table, the easiest and fastest way to find one is to get from the business, say for example, from the sari-sari store. The equipment used by microentreprenuers in the business are usually very basic and Obsolete. They don’t have the latest equipment that is fast, performs better and provides volume. Because of the small size of their businesses, their volume of operations is also small. Because they have small businesses, the microentrepreneurs have few employees, some even don’t have any at all and if they have, these are usually members of the family. Family and business are considered as one Active participation in informal sources of credit Multiple income-generation activities Large, extended families ver. 04/09

PROFILE OF A SMALL FARMER and the FARM Business Small scale production Low educational level Business subject to external risks No marketable collaterals to offer Product subject to price & market risks Active participation in informal sources of credit Few employees Usually family members No access to formal sources of credit / No credit history Rudimentary / obsolete equipment Large, extended families Multiple income-generation activities Rev.ver. Fin 08/21/12

Credit Methodologies Group lending (Grameen-like and solidarity lending) Individual lending READ BULLETS. THEN POINT OUT THE BASIC CHARACTERISTICS OF EACH ONE. Emphasize that Grameen-like Lending evolved during the 80s in Bangladesh. It had been copied, modified, re-modified in other countries including the Philippines. There are notable “replicators” of Grameen-like lending in the Philippines. There is a variant of this, called ASA-lending methodology, where group liability is removed, thus, loan liability is the responsibility of the of the individual borrower; however, borrowers still must belong to a group and/or center that meets during the scheduled collection time. ASK PARTICIPANTS IF THEY KNOW OF ANY BANK OR ORGANIZATION THAT USES GROUP LENDING METHODOLOGY. THEN POINT OUT: The main features of group lending are the formation of groups of 5 usually poor women, and the joint guarantee to pay the loan of any member who misses a payment. The group guarantee serves as the soft collateral for loans that are usually very small to begin with. Groups of 5 are then federated at the local level into a center, which meets weekly at the clients’ location for collection, accepting loan applications, and, in some cases, for training. Solidarity lending is a variant of the group lending model (developed by ACCION International in Latin America). Loans are made to individual members in groups of 4 to 7 members who cross-guarantee each other’s loans to replace traditional collateral. Access to subsequent loan is dependent on successful repayment by all group members. Payments are weekly at the lender’s office. This methodology is often used in urban areas. EX. TSPI – solidarity lending for tricycle operators in urban locale. Individual lending is the approach that we have encouraged our partner banks to use. In contrast to the group lending methodology which assumes that “one size fits all” in view of the uniform amount of loan each group member receives, loan under individual lending approach is based on a careful CIBI, analysis of character of loan applicant, and cash flow. This cash flow-based lending methodology determines the amount of loan to give a client on the basis of repayment capacity. These different methodologies have evolved over time, partly as a reaction against the traditional banking approach, partly as a rejection of the subsidized lending era that many countries in the developing world experienced in the 60’s up to the 80’s. POINT OUT: These methodologies, are partly the result of lessons from the informal lenders, who service loans quickly, who collect payments at their clients’ place of business, and who, often, do not require hard collateral from their clients. ver. 04/09 Rev.vers.Fin 8/12

Group Lending Loans given to groups – that is, either to individuals who are members of a group and guarantee each other’s loans, or to groups that then make subloans to members. Under this system, would-be borrowers form groups (usually 5 members) and each member agrees to guarantee the loans of others in the group If any one individual member defaults on his or her loan, the other members of the group are required to cover the short fall. ver. 04/09 Rev.vers.Fin 8/12

Individual Lending Loans are given to individuals based on their debt payment capacity and assure lending institutions with some level of security. Loans are guaranteed by some form of collateral (soft or substitute collateral) or a co-signer. Clients are screened by credit checks and character references. Loan size and terms are tailored to business needs. Rev.vers.Fin 8/12

MF Best Practices: Context Reducing RISK Minimizing COST Providing Fast & Quality SERVICE Lending is primarily about managing your risk. However, there are two other major objectives that should be considered when designing a product or when changing or introducing new policies and procedures that adhere to best practices. These are to minimize the cost to the bank (as well as to the client) and improve the way the bank services its clients. There are, therefore, questions you should ask when you are designing a new product or you plan to change a particular policy or procedure in an existing loan product. Click to the next chart. Rev.vers.Fin 8/12

Framework in Formulating Lending Policies and Procedures When formulating and assessing whether a policy or procedure is appropriate or not, ask the following questions: “Will the policy or procedure….. Increase or reduce my risk of lending to this particular client? Increase or reduce my cost of lending to this particular client? Improve and speed up customer service?” LET ME GIVE A CONCRETE EXAMPLE OF WHY ASKING THESE QUESTIONS ARE IMPORTANT: TAKE THE POLICY OF HAVING CLIENTS PAY DAILY AND PICKING UP THE DAILY PAYMENTS. What is the impact of daily and pick-up collection to my cost? my customer service? And to lending risk? Let us take customer service first: Daily pick-up collection is a service that clients value because it is convenient for them, and for some, but not all clients, they prefer paying very small amortizations because tiny payments are less bothersome to them. Let us look at the risk reduction angle next: Going to the client and picking up payments daily is also considered by some banks as a way to reduce the risk of lending. HOWEVER, THERE ARE DOWNSIDES TO DAILY PICK UP COLLECTION. It’s very costly for the bank; account officers will only be able to handle up to 60 clients; therefore, productivity in terms of number of clients and portfolio volume would be very low. This will impact in turn on the profitability of the product to the bank. SO, IF YOUR MICROFINANCE LOAN PRODUCT STILL OFFERS DAILY PICK UP COLLECTION TO CLIENTS, consider shifting clients to weekly, or even monthly, collection. You can also ask some of your old time good paying clients to come to the bank to pay weekly. You can offer them a slightly lower interest rate to compensate for the cost they will incur and to motivate them to deliver their payments to the bank. Rev.vers.Fin 8/12

Microfinance Best Practices and Principles BEFORE CLICKING THE NEXT CHART ON MICROFINANCE BEST PRACTICES: ASK at least two participants: “What do we mean by microfinance best practices and principles?” Allow for a 3-5 minute discussion. (Thank the trainees for sharing their ideas. Always find something positive or correct in the points raised or ideas shared by the trainees, even if these may be completely off the topic or issue being discussed. Never say directly that the trainee is wrong.) Proceed to the next slide. ver. 04/09 Rev.vers.Fin 8/12

Microfinance Best Practices The practices that MFIs follow in providing financial services to low-income clients that have led to success and profit. Best practices should be reflected from product design stage to implementation to monitoring. Best practices and principles, therefore, are the common practices, policies and principles followed by successful MFIs, not just in the Philippines, but all over the world -- in providing financial services to low-income households. ver. 04/09 Rev.vers.Fin 8/12

Best Practices are reflected in: Bank philosophy and image Client selection Loan policies Disbursement procedures, monitoring and adequacy of internal control Client incentives Culture of zero tolerance MIS Loan-loss provisioning Read the slide. ver. 04/09 Rev.vers.Fin 8/12

Bank Philosophy and Image Bank must be clear about its objectives for microfinance Microfinance must be seen as a profitable business, not a charitable, service of the bank Bank must be able to provide high quality, appropriate, and friendly service to its microfinance clients Clients feel welcome in the bank Rapid access, simple procedures Frequent contact with clients (Read the title of the slide. Read each of the bullets. Then, emphasize the following points after reading each paragraph.) Clarity of objectives and institutional buy-in The first question a bank should ask itself when planning to introduce microfinance is: WHAT ARE OUR OBJECTIVES? These objectives should be clearly spelled out and understood by everyone at the top, with commitments from the board and management. Profitable business, not charity or government-funded program The bank must look at microfinance, primarily, as a profitable business, not as a social service. Clients must also understand that microfinance is a financial service and not a government funded loan or some charity that the bank is providing. Otherwise, the people in the bank will not be serious about loan collection, and clients will not be serious about repayment. There is nothing to be ashamed about being able to make a profit out of lending to the microenterprise sector (or the poor, if you will). A bank must make profit in order to continue the services that it provides to the sector, or it will go out of business. Banks usually charge much less than the usual 10 percent that informal lenders charge. Reliability and quality of service are key The image and philosophy of the bank define what the bank is all about to the public that it serves. Successful institutions provide good quality services that are reliable and timely. Microfinance clients should be served promptly and with respect, just like other, wealthier clients. Clients need to see that this is a long-term relationship with the bank Well-run financial institutions develop a long-term financial service relationship with their clients that continues throughout the life of the client and his/her family. We are not talking about disbursing one or two loans, but about starting a process of providing full financial services of credit and savings to clients for the rest of their lives. IN OTHER WORDS, TRY TO KEEP THE CLIENTS. Rev.vers.Fin 8/12

Client Selection Clearly defined client group Clearly defined geographic areas assigned to account officers Client selection based on rigorous assessment of character and repayment capacity, not collateral (After reading the title of slide, emphasize that: “Client selection is another key factor in the success of providing credit”. Then, stress the following points after reading each paragraph.) Clearly defined client group A clearly defined target market such as owners of non-agricultural businesses with at least one year experience who have lived and worked in the community for at least 3 years would be an example of a target market. Doing market research is the first step in defining a bank’s target clients. Market research will allow the bank to design market-oriented products. This is in contrast to the product-oriented tendency where the clients are made to fit the product, and disregards what the clients like and look for in a product. As much as possible, banks should avoid lending to start-up businesses. PAUSE AND ASK THE QUESTION: Why do you think this is a prudent thing to do? CALL on at least 2 volunteers to answer. THEN point out that: The rate of failure among start-up businesses is high. It is believed that 9 out of 10 new businesses fail. Clearly-defined geographic areas assigned to credit officers It is generally much easier to assign geographic zones to account officers to improve follow-up and the efficiency of the staff. Trying to cover too large a geographic area with too few staff generally leads to inefficiency and difficulties with regard to proper supervision. Client selection based on character assessment and repayment capacity, not collateral The individual’s reputation in the community and the cash flow of the business are more important than traditional collateral. Examining a potential client’s character and their repayment capacity is crucial. Proper client selection should be based on thorough credit investigation and background investigation (CI/BI) and analysis of the client’s debt repayment capacity or cash flow. Over-reliance on collateral, on the other hand, can lead to improper client selection. Collateral tends to create a false sense of security in the lender. However, foreclosed properties can fluctuate in value and be difficult to sell when the economy slows. Rev.vers.Fin 8/12

Offer Services that Fit the Preferences of Microenterprise Clients Start loans small and short term Increase loan sizes of repeat loans based on successful repayment and improvements in the client’s cash flow Unrestrained use of loan Be conservative in analyzing the client’s cash flow when determining how much to lend Focus on customer friendly approach Read title of the slide. Then, emphasize the following points after reading each paragraph.) Start loans small and increase lending based on successful repayment and improvements in the client’s cash flow The step lending approach of starting out with smaller, short-term loans generally less than 6 months and usually less than 4 months (for first time borrowers) is a sound approach. Increase the amount and term of the loans gradually as the client becomes known to the bank. Be conservative in analyzing the client’s cash flow when determining how much to lend We generally recommend that, for first-time borrowers, loan payments should not exceed 25-35% of the client’s net income. This cash flow adjustment factor (25-35%) can increase overtime as the bank gets to know the client’s business better. This allows the bank time to slowly get to know the client’s “real debt capacity” and reduces the risk for the bank and the debt burden of the client. Look at potential risks to supply, production and sales It is also important to look at potential business risks, such as any potential risk to supplies (fish vending being dependent on good fishing - what happens when the weather is bad and fish are scarce?); production (who operates the business when the client is sick or away? This is very important for businesses like tricycles and small retail shops); sales or customers (what happens when there is more competition, a new store opening up across the street, or temporary closing of the public market?). ver. 04/09 Rev.vers.Fin 8/12

Streamline Operations to Reduce Administrative Costs Standardize and simplify product documentation and procedures A simple product design will be easier for the clients to understand and staff to implement Product manual is a must to standardize operations, improve efficiency, and minimize staff mistakes Maintain inexpensive offices close to borrowers Select staff from the local communities Read title of the slide. Then, emphasize the following points after reading each paragraph.) As a rule, the paperwork and other requirements for the clients should be minimal. Standardization is needed for uniformity of implementation and internal control purposes. ver. 04/09 Rev.vers.Fin 8/12

Disbursement and Monitoring Make Account Officers responsible for loans they have recommended for approval Decentralize loan approval through a branch-level credit committee MFU staff presents and defends his/her loan recommendation to a credit committee. Practice transparency – disclose to clients charges/fees and effective rates (Read title of slide. The, stress the following points after reading each paragraph.) Make Account Officers responsible for loans they have recommended for approval. The disbursement and monitoring approach followed by successful financial institutions providing small loans make their account officers responsible for recommending and approving loans. Here, the account officers perform the following functions: conduct the CI, recommend the loan, and do loan follow-up, including collection. This level of accountability reduces the risk of late payment. AOs become more careful in recommending loans for approval if they know that they will be made directly responsible for collection, if any of the loans they have recommended become delinquent. However, there is a caveat here. Because of the non-separation of responsibilities through collection, it is important that the bank policies and procedures are well defined and standardized with internal control strongly built in. Here, too, having a functioning management information system that can track and report loans daily is most essential. Involve the MFU staff in the loan approval process Successful MFIs decentralize their loan approval in their branches through a branch-level credit committee made up of AOs and their supervisor, instead of the branch manager alone. Additional information about the loan applicant can be provided by other members of the microfinance unit and made known to the branch manager, if they are involved in evaluating the loan applications. Decentralization, however, must be implemented with adequate internal control. •Practice transparency – disclose to clients charges/fees and effective rate This is the right thing to do! Banks are mandated under the truth of lending act ( Republic Act No. 3765) to disclose finance charges in connection with the extension of credit. The goal is to prevent lack of disclosure in easily understood manner of all the applicable costs, leading to uninformed use of credit to the detriment of the client. Amidst stiff competition in the market, a sizeable percentage of MF clients are becoming increasingly aware of the charges they are paying whether they are disclosed or not. It's also part of treating your customers fairly. After all, the client will eventually go somewhere where there is clarity provided. Successful MFIs had proven that earning clients’ trust through honesty and transparency is eventually reflected in high client retention. ver. 04/09 Rev.vers.Fin 8/12

Disbursement and Monitoring Maintain regular contact with clients Delinquency “alarm signals” for effective follow-up procedures Peformance-based staff incentive scheme (Read title of slide. The, stress the following points after reading each paragraph Continuous contact with clients Regular contact with the clients should be maintained by the AOs. This practice not only enable the AOs to regularly monitor the condition of the client’s business; it also strengthens bank-client relationship. Delinquency alarm signals Having delinquency alarm signals is a basic ingredient of the ZERO TOLERANCE culture and practices successful banks observe. “Alarm signals” are used to follow-up and increase pressure on problem clients. These include immediate follow-up the day a payment is missed or at least the following morning, also, follow-up visits by the supervisor and manager when payments are missed by 3 days and 7 days, respectively. Peformance-based staff incentive scheme Successful MFIs also provide monetary incentives to their staff based on their individual performance. Performance is usually measured in terms of the number of accounts supervised by the AO, size of the AO’s loan portfolio, and the quality of their respective loan portfolio, which is normally measured by the portfolio-at-risk (PAR) ratio. ver. 04/09 Rev.vers.Fin 8/12

Charge Full-Cost Interest Rates and Fees Small loans with frequent payments have higher transaction costs; charge interest rate on declining balance of the loan Microfinance clients are willing to pay higher rates in return for good service. Practice transparency in pricing; inform clients of the true cost of the loan. Follow BSP guidelines on pricing In time, as banks build scale, interest rates should come down ver. 04/09 Rev.vers.Fin 8/12

Motivate Clients to Repay Reward clients who pay on time, through: Interest rebates Bigger repeat loan and/or longer terms Fast servicing of repeat loans Impose a reasonable penalty charge for late payments Joint liability with co-borrowers/co-makers (Read the entire slide. Then summarize by emphasizing the following.) Successful MFIs provide incentives to enhance the chances of on-time repayments. These can be by way of providing larger repeat loans (depending on their debt capacity) and rebates on interest rates or fees as a reward for timely repayment. Based on experience, one of the best motivations for clients to keep a good repayment record is the assurance of a next loan that can be borrowed immediately after paying off the previous loan. On the other hand, late payments are also penalized by imposing penalty charges for late installment payments. Such penalty should not be too low that it does not serve as a deterrent; it should also not be too high that it totally discourages the client to settle late payments, and the bank staff to enforce. ver. 04/09 Rev.vers.Fin 8/12

Zero Tolerance of Loan Delinquency Loans with payments delayed by just one (1) day are considered delinquent Portfolio at risk (PAR), not past due ratio, defines portfolio quality (Read the title of the slide. Then, ask the trainees what they they think a culture of zero tolerance is all about. Listen to a few ideas, then emphasize the following points after reading each paragraph.) Loans with payments delayed by just 1 day is considered delinquent Zero tolerance means that no level of loan delinquency, even how small, is acceptable. The most important aspect of the culture of zero tolerance is that the entire loan is considered to be delinquent even if an installment payment is delayed by just 1 day. This is referred to as portfolio at risk or PAR. This means the bank staff initiates action as soon as a payment is missed instead of waiting for a loan to reach past due maturity. The bank must be willing to pursue delinquent clients, in some cases, whatever the cost to establish and maintain zero tolerance The bank should be willing to show it can be tough in running after delinquent accounts, even to the point of filing cases against selected delinquent borrowers in court, however costly, if only to stress the point that the bank is serious about collecting on delinquent accounts. The culture of zero tolerance should start with the top management Clients should not be expected to acquire a strong credit discipline if the AOs tolerate delayed payments. And AOs should not be expected to be strict with their clients in loan collection if the top management, itself, tolerates delayed payments. The top management should be blamed if loan delinquency becomes widespread due to a break-down in credit discipline. ver. 04/09 Rev.vers.Fin 8/12

Zero Tolerance of Loan Delinquency Bank staff takes immediate step to collect from client or find out reason when a payment is missed Willingness to pursue delinquent clients, in some cases, whatever the cost to establish and maintain zero tolerance practices The culture and discipline of zero tolerance must start with top management and be communicated down to the staff and clients. The bank must be willing to pursue delinquent clients, in some cases, whatever the cost to establish and maintain zero tolerance The bank should be willing to show it can be tough in running after delinquent accounts, even to the point of filing cases against selected delinquent borrowers in court, however costly, if only to stress the point that the bank is serious about collecting on delinquent accounts. The culture of zero tolerance should start with the top management Clients should not be expected to acquire a strong credit discipline if the AOs tolerate delayed payments. And AOs should not be expected to be strict with their clients in loan collection if the top management, itself, tolerates delayed payments. The top management should be blamed if loan delinquency becomes widespread due to a break-down in credit discipline. ver. 04/09 Rev.vers.Fin 8/12

Management Information System Critical for tracking the performance of the microfinance loan portfolio. At a minimum, should be able to track missed payments, the account officers responsible for their collection, and the portfolio at risk (PAR). Should be able to show the performance of each account officer. (Read the title of the slide. Then, stress the following points after reading each paragraph.) Critical for tracking the performance of the microfinance loan portfolio The MIS should provide accurate and timely reports to management on the performance and status of the microfinance loan portfolio. The most critical information needed include the total number of borrowers, total amount of outstanding loans, the PAR ratio, and the income generated from the portfolio. Should be able to track missed payments and the AOs responsible for their collection A good MIS is critical for controlling loan delinquency. It should be able to track missed payments and the AOs responsible for their collection so that appropriate actions to collect the payment can be instituted immediately . Should be able to show the performance of each AO A good MIS should be also be able to track the performance of each AO. This is needed especially when the bank wants to implement an incentive scheme to reward good-performing AOs. ver. 04/09 Rev.vers.Fin 8/12

Adequate Loan-Loss Provisioning and Loan Write-off Should be based on the aging of the portfolio at risk (PAR). Follow BSP guidelines. Example Age Loan Portfolio LLP (%)* LLP (PhP) Current Loans 1% PAR 1-30 days 2% PAR 31-60 days/or Restructured once 25% PAR 61-90 days PAR 61-90 days 50% PAR Over 90 days/or Restructured twice 100% *Based on BSP Circular 409 Read the slide. Provide for possible loan losses monthly. Clean up portfolio of bad loans quarterly or every semester Writing off 2% to 3% of portfolio is good practice when delinquency happens. ver. 04/09 Rev.vers.Fin 8/12

Adequate Internal Control Pick-up collection of loan payments, a most valued service demanded by microfinance clients, can lead to internal control problems and incidences of fraud. At a minimum, banks should be able to track missed installment payments, through their MIS. A microfinance supervisor should also verify cases of delayed or non-payment of installments immediately when they occur. Other check points include: loan review and approval by a credit committee and regular random check of clients by supervisor or audit personnel. Bullet 1. Although valued as a service by clients, picking up collection can lead to some major fraud problems and/or risk to the field staff especially when the place assigned to the staff is far and remote. Bullet 2. Tracking missed payments is only possible when bank has an automated functional MIS with a reporting module for microfinance. Bullet 3. Verification of missed payment on the day it is missed is a key function of the supervisor. ver. 04/09 Rev.vers.Fin 8/12

Savings Products Low minimum balance requirements. Regular deposits and higher daily balances are encouraged by increasing interest rates or rewarding those with higher balances. High quality client service. Standardize & simplify product documentation and procedures. The key to providing access to microsavings is looking at costs. Successful microfinance institutions that offer savings usually have low minimum balance requirements, however they know their break-even targets and set interest rates or provide raffles to encourage the growth of savings balances to meet these targets. A raffle that is based on encouraging clients to maintain larger balances is an example of this such as the rural bank of Talisayan’s “Double Your Deposit” raffle. Simple savings procedures with pick-up services (combined with loan payments) also helps clients to save more. A good example of this can be observed at the Cooperative Bank of Bukidnon which has done exceptionally well at promoting regular savings contributions along with loan payments. ver. 04/09 Rev.vers.Fin 8/12

Keys to Success in Microfinance Strong institutional commitment – with CHAMPIONS at board & sr. mngt level and at mid-mngt level Demand- andmarket-oriented savings and loan products Good client service Good client selection process Sufficient interest rates to cover costs Zero tolerance of loan delinquency Good functioning MIS Adequate loan-loss provisioning Adequate internal control measures (This slide summarizes the slide previously presented. Just read the slide.) Rev.vers.Fin 8/12