INSTRUCTIONS 1.Print these slides on acetate 2.During the exercise flash these acetate slides to process the responses of the group/s. 3.These acetates are already your discussion materials for the Microfinance Best Practices & Principles session

LOAN POLICY AREA PRACTICES & PRINCIPLES OBJECTIV E IN LENDING 1. Client Selection Clearly defined client group Well-defined eligibility criteria for a loan product stated in a manual to standardize practice among MFU staff. Client selection based on character assessment and repayment capacity, not collateral  Individual’s reputation in the community and the business cashflow are more important than traditional collateral. Reduce Risk Improve Customer Service Reduce Cost

LOAN POLICY AREA PRACTICES & PRINCIPLES OBJECTIV E IN LENDING 2. Loan Purpose Additional working capital for existing business rather than start up business Initial loans are generally for short-term working capital as opposed to fixed assets. Loans for fixed asset are provided only after lending to the same client for at least one year. Reduce Risk

LOAN POLICY AREA PRACTICES & PRINCIPLES OBJECTIVE IN LENDING 4. Loan Term Short-term, from 3 to 6 months  Micro-enterprise operations are characterized by fast rotation of business/goods, hence, working capital has a fast turnover  3 to 6 months loan term is not too short nor too long to extend credit to a client who lacks credit history Term of the loan can be increased gradually as the client becomes known to the bank, but look carefully at potential business risks to supplies, production and sales in giving longer loan term. Reduce Risk

LOAN POLICY AREA PRACTICES & PRINCIPLES OBJECTIVE IN LENDING 5. Frequency of Payment Small and frequent amortization payments  Weekly for new clients; semi-monthly or monthly for mature, valued clients who have established a good repayment record  Easier for clients to pay  Frequency of payment should be balanced against the cost of collecting these payments.  Transition clients with long and good track record from weekly to semi- monthly or monthly payments. Reduce Risk Quality Service

LOAN POLICY AREA PRACTICES & PRINCIPLES OBJECTIVE IN LENDING 6. Interest Rate Charge sufficient interest rate to cover all cost and provide good profit  Bank’s microfinance operation is a business, not a charitable service  Microfinance loans are small with frequent installment payments, hence, the transactions costs are higher than regular commercial loans.  Microenterprise clients are willing to pay higher rates for a good service.  Interest rate charged by the bank is substantially less than the 8%-10% monthly from informal lenders Reduce Risk Quality Service

LOAN POLICY AREA PRACTICES & PRINCIPLES OBJECTIV E IN LENDING 7. Security for the Loan Focus on Character rather than hard collateral for micro loans  Low-income households have little, or no assets  Use soft collateral or collateral substitute such as co-maker; serialized assets, stock inventory, savings hold-out  Soft collateral is secondary and only for its psychological effect on the client Reduce Risk Quality Service

LOAN FEATURES PRACTICES & PRINCIPLES OBJECTIVE IN LENDING 8. Savings Client-friendly design  Low opening amount and maintaining balance; small regular deposits; deposit services are therefore accessible.  Transition mature clients with good repayment record from mandatory to voluntary savings Reduce Risk Quality Service

Procedure/ Policy Best Practice / Principle Rationale 1. Bank Philosophy and Image  Provide high quality, appropriate and friendly service to micro-entrepreneurs - Clients should feel welcome in the bank - Rapid access - Simple procedures - Frequent contact with the client  Microfinance operations is a business, not a charitable service  Bank has clear objectives for its microfinance operation  Quality Service  Viability and sustainability of operations

Procedure/ Policy Best Practice / Principle Rationale 2. Loan Disbursement and Monitoring  Decentralize loan approval at the branch-level credit committee  Account officers are responsible for loans they have recommended for approval  Clearly defined geographic areas assigned to account officers to avoid overlaps and competition for clients among AOs.  Frequent contact with clients  Closely monitor delinquent accounts and apply measures as indicated in the delinquency alarm signals  Minimize Cost  Quality Service

Procedure / Policy Best Practice / Principle Rationale 3. Zero Tolerance against Delinquency Loans with payments delayed by just one (1) day are considered delinquent, and bank staff takes step immediately to collect.  Portfolio at Risk (PAR), not past due, define portfolio quality  Pursue delinquent clients, whatever the cost, to establish and maintain zero tolerance  The culture of zero tolerance, or strict credit discipline, should start with top management and communicated to the staff and clients  “DELINQUENCY ALARM SIGNALS” are consistently followed  Reduce risk  Minimize cost

Procedure / Policy Best Practice / Principle Rationale 4. Management Information System (MIS) Automated MIS is key to tracking the performance of the microfinance portfolio  At a minimum, should be able to track missed payments, account officers responsible for their collection, and portfolio at risk with aging  MIS report should show the performance of each account officer  MIS reports are tools for monitoring by top and middle level management & supervisors  Reduce risk

Procedure/ Policy Best Practice / Principle Rationale 5. Loan Loss Provisioning  Adequate provisioning is a sound banking practice to cushion probable losses  Provide loan loss provision based on BSP requirements (BSP Circular 409) Current Loans 1% 1 – 30 days 2% 31 – 60 days/restructured once 20% 61 – 90 days 50% More than 90 days/ restructured twice 100%  Promote portfolio quality

Procedure/ Policy Best Practice / Principle Rationale 6. Internal Control  Pick-up collection of loan payments (a valued service demanded by microfinance clients) could lead to internal control problems  Bank should be able to track missed payments through MIS  MFU Supervisor should verify cases of delayed/non-payment of installments immediately when they occur  Other checkpoints: - Loan review & approval by Credit Committee - Regular random check of clients by MFU Supervisor or audit personnel  Reduce risks

LOAN POLICY AREA PRACTICES & PRINCIPLES OBJECTIV E IN LENDING 3. Loan Amount Start loans small and increase gradually Small initial loan mitigates lending risk to a client who does not have any bank record yet Allows the bank time to slowly get to know the client’s “real debt” capacity and reduces the risk for the bank as well as the debt burden of the client. Be conservative in analyzing client’s cash flow; initial loan payments should not exceed 25-35% of the client’s net income; Loan amount can increase overtime based on successful repayment and improvements in the cashflow, but not more than 30%, as the bank gets to know the client’s business better. Reduce Risk Improve Service to Client by avoiding debt overburden