ACCOUNT OFFICER’S BASIC TRAINING Zero Tolerance Against Delinquency Alarm Signals The Cash Flow is prepared to be able to establish : How much a client can afford to pay, thus also determining the maximum loan amount, and; How frequently loan repayments should be scheduled. Correctly establishing the answer to these two questions can mean the success (full repayment of the loan) or failure (default of loan payments) of a microfinance loan. Therefore, the procedure for filling up the Cash Flow must be clearly understood by the Account Officer. To facilitate the filling up of data, in addition the cash flow form, worksheets are also provided so that Account Officers can breakdown information provided by the client, particularly if the client has multiple income sources.

Objectives Discuss “alarm signals” of delinquency Review steps to respond timely and effectively to prevent delinquency from escalating

STAGES OF DELINQUENCY HARDCORE PAR 1-7 DAYS PAR 8-30 DAYS PAR OVER 90 DAYS This slide is intended to provide the participants an appreciation on how easily could a PAR deteriorate from 1 day to hardcore without the proper monitoring Minor Risk, but needs to be watched Low Chance of Repayment LOST! Moderate Risk Serious Risk

FRAMEWORK PREVENTIVE PREVENTIVE STAGE 1-2 STAGE 3-4 STAGES 4-5 MINOR TO MODERATE RISK AS PAR AGING INCREASES SERIOUS RISK HARDENED UNCOLLECTIBLE Loan is 1-30 days past due Loan is 31- 90 days past due Loan is over 90 days past due (1) Loan Evaluation - character assessment - cash flow analysis (2) Loan Monitoring Actions: -Follow Delinquency Alarm Signals Collection/follow up by field staff, including AOs, supervisors and branch manager Attach assets Debit savings balances Collection by AOs/ BMs Atty.’s demand Write Offs Remedial Mgt Debt Recovery Legal options Collection agency Provisions 2% of outstanding balance of loans 20%:PAR 31-60 days 50%:PAR 61-90 days 100% on PAR over 90 days PREVENTIVE

Zero Tolerance against Delinquency Zero tolerance means NO LEVEL OF DELINQUENCY IS ACCEPTABLE! Bank takes steps once a client misses a payment. It is an institutional culture that defines the attitude of the bank management & staff towards loan delinquency. The bank will seriously pursue collect missed payments and past due accounts, whatever the cost, to to maintain the discipline of zero tolerance against loan delinquency. Review: Before starting the session, review the definition of “zero tolerance against delinquency.” How do participants define the concept of “zero tolerance?” Ask participants to share what practices they feel their has incorporated within lending practices that support this concept (for example: disciplined client selection tools, detailed cash flow analysis, monitoring of loans, MIS systems that produce reports that can detect missed payments and past due accounts by borrower and by loan use…)

PAR 1-30 days Delinquency Alarm Signals

Delinquency Alarm Signals : Alarm Signal No Delinquency Alarm Signals : Alarm Signal No. 1 - Payment is delayed one (1) day Actions to be Taken Account Officer MFU Supervisor Branch Manager Credit Committee Determine cause of non-payment Monitor & follow up action taken by AO to effect loan payment . Informs Supervisor and BM Collect from spouse/co-borrower Follows up loan payment and asks borrower to pay penalty fee within 24 hours of default Alarm Signal 1: A borrower misses a payment (one day overdue) Delinquency can be addresses by using the right tools to measure and assess missed payments or defaults. Reports (produced ideally by management information systems) are one effective way to detect defaults early on. The two primary MIS reports are: the PAR Aging Reports and Delinquency Report per AO. These reports should be produced by AOs regularly and reviewed by supervisors and branch managers. They are a useful tool to identify and analyze causes and trends in delinquency. AOs should be trained in how to produce and analyze these reports. Supervisors should be responsible for reviewing these reports. The AO should inform the Supervisor and Branch Manager immediately (even the 1st day) a borrower misses a payment. The AO should determine the cause of the missed payment and explore options to recover the payment within 24 hours or as soon as possible. The AO should apply a balance of courtesy and assertiveness in discussing the missed payment with the client and following up to recover payment as soon as possible. The account officer and not the client, should dictate the terms of payment. Review the table in the slide to discuss actions an AO, supervisor and branch manager should take when a missed payment occurs.

Delinquency Alarm Signals : Alarm Signal No Delinquency Alarm Signals : Alarm Signal No. 2 - Payment is delayed three (3) days Actions to be Taken Account Officer MFU Supervisor Branch Manager Credit Committee Collect from spouse/co-borrower and co-maker/s Supervisor accompanies AO during visit to client Monitor & follow up action taken by AO & Supervisor to effect loan payment Monitors progress of actions taken by MFU re: clients with delayed payments Reports clients with delayed payments during weekly CreCom meeting Verify if client and co-maker are real. Validate if the co-makers understand their liability and willing to pay. Verify reason of default Deliver 1st Warning Letter signed by the Supervisor Sign the 1st Warning Letter Alarm Signal 2: A borrower misses a payment (3 days over due) The strategies discussed in the previous slide (payment delayed one day) are also applied in the case of a payment that is 3 days overdue….the emphasis here is that the longer an account is overdue, the more difficult it may be to collect payment. The first recommendation is to pursue immediate collection of the loan…or to come up with a term of payment (date/time, for example, if a client is expecting some form of income to come in before paying the loan amortization). Note on the table presented in this slide the recommendation that the bank credit committee assume a monitoring function when payment is delayed at 3 days---PAR Aging Reports can be designed to report PAR at different time periods…and the MFU/bank management can incorporate processes to ensure that the Credit Committee receives these reports regularly so that they can monitor PAR Aging.

Delinquency Alarm Signals : Alarm Signal No Delinquency Alarm Signals : Alarm Signal No. 3 - Payment is delayed one (1) week Actions to be Taken Account Officer MFU Supervisor Branch Manager Credit Committee Collect from spouse/co-borrower and co-maker/s Monitor & follow up action taken by AO to effect loan payment Monitor & follow up action taken by AO & Supervisor to effect loan payment Monitors progress of actions taken by MFU re: clients with delayed payments Reports clients with delayed payments during weekly CreCom meeting If non-payment is caused by disasters affecting the business or household, serious illness or death of immediate family, Supervisor may recommend restructuring. Deliver 2nd Warning Letter signed by the Manager Sign 2nd notice Review the table for actions to be take at ALARM SIGNAL 3: a payment is delayed for a week. Note: Warning letter is sent by the Branch Manager Branch Manager/Supervisor discuss strategies such as scheduling payment to provide flexibility to the borrower to make the payment.

Delinquency Alarm Signals : Alarm Signal No Delinquency Alarm Signals : Alarm Signal No. 4 - Payment is delayed two (2) weeks Actions to be Taken Account Officer MFU Supervisor Branch Manager Credit Committee Collect from spouse/co-borrower and co-maker/s Monitor & follow up action taken by AO to effect loan payment Monitor & follow up action taken by AO & Supervisor to effect loan payment Monitors progress of actions taken by MFU re: clients with delayed payments Reports clients with delayed payments during weekly CreCom meeting Follow-up recommendation on restructuring, if any BM accompanies AO during visit to client BM considers re-scheduling payment, based on supervisor verification of reason for default. Deliver 3rd Warning Letter signed by the BM BM signs the 3rd warning letter Review the table for actions to be take at ALARM SIGNAL 4: a payment is delayed for 2 weeks. Note: Credit committee regularly receives reports to monitor PAR. Visits made by supervisor(s) with AOs to follow up on missed payment. Branch Manager/supervisor become directly involved to symbolized importance of recovering the payment. Note list of “drastic measures”

Delinquency Alarm Signals : Alarm Signal No Delinquency Alarm Signals : Alarm Signal No. 5 - Payment is delayed three (3) weeks Actions to be Taken Account Officer MFU Supervisor Branch Manager Credit Committee Collect from spouse/co-borrower and co-maker/s Monitor & follow up action taken by AO to effect loan payment Monitor & follow up action taken by AO & Supervisor to effect loan payment Monitors progress of actions taken by MFU re: clients with delayed payments Reports clients with delayed payments during weekly CreCom meeting Advise borrower to go to the bank to withdraw from the contractual savings to effect payment Review the table for actions to be take at ALARM SIGNAL 5: a payment is delayed for 3 weeks.

Delinquency Alarm Signals : Alarm Signal No Delinquency Alarm Signals : Alarm Signal No. 6 - Payment is delayed four (4) weeks Actions to be Taken Account Officer MFU Supervisor Branch Manager Credit Committee Enforce the voluntary offer to surrender Monitor & follow up action taken by AO to effect loan payment Monitor & follow up action taken by AO & Supervisor to effect loan payment Monitors progress of actions taken by MFU re: clients with delayed payments Reports clients with delayed payments during weekly CreCom meeting Review the table for actions to be take at ALARM SIGNAL 5: a payment is delayed for 3 weeks.

NOTE : What is a Voluntary Offer to Surrender? A document signifying the intent of the borrower to surrender any of his/her valuable item(s) on a specified period in case he/she fails to forward the full payment of the loan on an agreed date. The bank can sell the item(s) in case the borrower fails to pay the loan 5-10 days after surrendering the item(s). Not a legal document, but binding. The ACT only becomes legal once the borrower signs an Authority to Sell; Surrendering the item(s) does not extinguish the loan; loan is considered paid once the bank receives cash in payment for the loan Explain to the participants the legal status of a Voluntary Offer to Surrender. This document is not legal unless it is signed by the borrower during the time she is surrendering the items (chattels) to the bank representative, in this case, the AOs. It is a common practice that when a borrower signs her documents during the processing of her loan, one of the documents she signs is the VOS. When the borrower completes her payment on the cycle of the loan this document she signs (VOS) is therefore void. The bank should not use the old document (VOS) signed by the borrower for her succeeding loan. It is therefore appropriate that when there is a signed VOS at hand, the bank should let the borrower signs the document a second time when the borrower ultimately surrenders her chattel/s during a collection problem. Take note that the owner should present a certificate of ownership or official receipt of purchaseNot the usual procedure but nonetheless a binding legal document. Surrendering the item(s) does not extinguish the loan; loan is considered paid once the bank receives cash from the proceeds of the sale in payment for the loan. The essence of securing payment through this technique lies on the Authority to Sell that the client signs; Banks cannot just pull-out personal belongings from the client. Banks should not ask the client to sign such agreement on the time the loan is being applied for.

Action on Agreement Borrower Action Bank Option Borrower surrenders item/s specified in VOS Keep visiting client/remind about loan payment Have borrower sign Authority to Sell, then sell item/s

PAR 31 to 90 days Continued Visit by Supervisor &/or Manager Compile necessary documentations on actions/steps taken by the MFU Refer case to bank’s legal department/counsel Send demand letter(s) from the bank’s lawyer

TO SUMMARIZE......

Delinquent Borrowers can be Classified into 3 Categories: Borrower forgot to pay Borrower not able to pay Borrower not willing to pay

How to handle Delinquency Bank Action Borrower forgot to pay Frequent visit and reminder Borrower not able to pay Supportive measures or Debt Recovery Program: Extension of payment Payment arrangement schemes Shared payment with co-makers Borrower not willing to pay TAKE LEGAL ACTION

REMEMBER: Constant follow-up is one of the keys to preventing and remedying delinquency.

TDK Tutok, Dikit, Kulit

Thank you!