LOAN DELINQUENCY MANAGEMENT

WHAT IS DELINQUENCY?
• In delinquency, obligations have not been
discharged or activities have not occurred as per the
scheduled date or time

• Delinquency is a condition, that arises when an

activity or situation does not occur at its scheduled
(or expected) date i.e., it occurs later than expected

• A major condition for defining delinquency is the

presence of a pre-agreed schedule
WHAT IS DELINQUENCY?
 WHY DELIQUENCY?

• There are, broadly speaking, two reasons a

borrower fails to make a repayment:
• They do not have the money to make their
repayment - ABILITY
• They have the money available but fail to carry
out the repayment - WILLINGNESS
 COSTS OF DELINQUENCY

Delinquency is expensive for an MFI. It results in

✓ Slowing rotation of the portfolio
✓ Delaying earnings
✓ Increasing collection costs (visits, analysis, legal costs)
✓ Increasing loan loss provisions
✓ Causing the institution to lose credibility
✓ Leading to ever-increasing repayment problems
✓ Threatening long-term institutional viability
 The organization must pursue
three principal goals towards
controlling delinquency:
CONTROLLING
✓The reduction of losses due to
DELINQUENCY delinquency.
✓The reduction of losses due to
bankruptcy (insolvency) of the
borrower.
✓The protection of the MFB from
undue exposure to liability
CONTROLLING DELINQUENCY
CONTROLLING
DELINQUENCY
 Borrowers' Perceptions
Costs of On-time Payments

Pay interest and capital of

CONTROLLING current loan
DELINQUENCY Pay time and transportation
costs to make payments

Opportunity costs
 CONTROLLING DELINQUENCY
Borrowers' Perceptions Costs of Late or No payments

• 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 MFI services

• Hassle of frequent visits by loan officers

• Hassle of pressure from group members if a group loan

• Negative reputation among peers

CONTROLLING
DELINQUENCY

Right Perspective on the part of MFI

✓ Rescheduling and refinancing are not recommended.
✓ If used to reduce delinquency, rescheduling and refinancing can
spell disaster for the portfolio.
✓ Once clients discover they have the option of rescheduling,
they tend to stop paying.
✓Rescheduling and refinancing are measures to try to hide the
problem, not solve it.
CONTROLLING DELINQUENCY

✓Hiding the problem does not make it go away – these are

still late loan payments with all the associated costs however you
try to hide it.
✓ Hiding the problem from yourself as a manager means you
may end up with an even greater problem of delinquency. This
method should be used only as a last resort in justified cases
when well-meaning borrowers cannot pay
QUESTION:
✓Under which circumstances could rescheduling be used?
 KEY ELEMENTS OF
DELINQUENCY PREVENTION

✓Prevention is better than cure.

✓Understand the causes of the problem
before developing a solution.
✓ MFI’s image and philosophy. MFI should
differentiate themselves from the "give-
away” type of development programs that
may be familiar to its clients and create an
institutional culture in which late payments
are simply unacceptable.
 KEY ELEMENTS OF
DELINQUENCY PREVENTION
Methodology
✓ Borrower selection
✓ Loan size and terms. Base decisions on current capacity to
repay rather than on projections.
✓ Incentives – e.g e large follow-up loans, penalty fees for late
payments, and potential legal problems for not paying.
Information Systems
✓ Reliable, analytical, accurate and timely data
✓ Relevant detail for level of use (BOD, Management, Staff)
✓ Relevant and timely dissemination
✓ Cost-effective
 SUBPRIME LENDING

✓Subprime lending describes loans made to

risky borrowers who carry high interest rates.
In theory, the high interest rates of subprime
loans makes up for the risk that some
borrowers will fall into default.
✓Subprime loans tend to have a high chance
of becoming non-performing, both because
they're typically made to risky borrowers and
because they involve higher interest rates,
which makes them more costly and therefore
more difficult for borrowers to pay back.
 UNCONTROLLABLE
FACTORS
Natural Disasters:
Pandemics, earthquakes, fires,
floods, or drought can wreak havoc
on economies and the activities of
micro-entrepreneurs
 REGULATORY
FACTORS

Changes in government policies

• Crackdown on street vendors
• Additional taxation
• Import and export policy
 MACROECONOMIC FACTORS

Local, national and global macroeconomic factors

Even petty traders are often dependent on imported goods which are
subject to various macroeconomic fluctuations
 DELINQUENCY
CAUSES AND CONTROLS

✓ Accept that most delinquency is caused not by bad borrowers but by

MFIs that have not implemented an effective methodology or
appropriate product design.
✓ Create an image and philosophy that does not consider late payments
acceptable. The benefit of creating disciplined borrowers is critical to
the success of the microfinance institution.
✓ Clients must value the credit service. Loan products should suit
clients’ needs, the delivery process should be convenient, and clients
should be made to feel that the organization respects and cares about
them. Incentives won’t work if the clients do not value the access to the
credit.
 ✓ There are no bad borrowers only bad loans. Make
sure loan sizes and terms do not make repayment
difficult. Do not base loans on projections, base on
capacity to repay. Comply with the relevant Client
Protection Principles
CAUSES ✓ Establish an incentive system that uses both financial
and non-financial incentives to encourage on-time
AND repayments. For the borrower these can include larger
loans, follow up loans, interest rebates, and access to
CONTROLS training (or disincentives—penalty fees, no further
access to loans, collection of collateral, legal action.)
✓ Design an incentive system for the field staff/loan
officers that include on-time payments as an important
variable. An incentive system places the responsibility
for portfolio quality on the shoulders of the loan officers
who with support can best respond to repayment
problems. It can motivate officers to look for and
eliminate the causes of arrears.
 CAUSES AND CONTROLS

✓ Ensure that from the borrowers’ perspective the benefits of on-

time repayment and costs of late repayment far outweigh the
benefits of late repayment and costs of on-time repayment.
✓ Develop systems that provide information to field workers that
enable them to conduct effective and timely follow-up of loans and
to manage their portfolios efficiently. The easier it is for the field
staff to figure out whose payments are due and when, who is late
and by how much, the more time they can spend with borrowers.
✓ Develop a portfolio information system that enables
management to conduct timely and useful analysis of portfolio
quality, determine trends in the portfolio over time, and identify
possible causes of delinquency.
 ✓ Effective delinquency follow-up
procedures are needed. Develop policy
that lists the steps one takes when a loan
becomes past due. Examples included
CAUSES activating the group to follow up, visiting
clients, holding frequent staff meetings to
AND discuss problem loans, etc.
✓ Establish a target level of acceptable
CONTROLS delinquency based on thorough
understanding of the costs and effects of
delinquency on the MFI. Establish prudent
impairment loss allowance and write off
policies.
 • Know your borrowers & borrowers
business
• Maintain close contact with your
borrowers
• Have accurate management information
syst.
• Provide appropriate credit products
SUCCESSFUL • Offer competitive rates and terms
COLLECTIONS • Smaller loans to new borrowers
• Be diligent about collecting delinquent
loans
• Require adequate insurance where
necessary
• Do not threaten delinquent borrowers
• How do you treat early payoff request?
 ✓Appropriate product design and
delivery channels
RELEVANCE ✓Prevention of over-indebtedness
✓Transparency (e.g. pricing explanation
OF THE to customers)
✓Responsible pricing
SMART ✓Fair and respectful treatment of
clients
CAMPAIGN ✓Privacy of client data
✓Mechanism for complaint resolution.
 • Financial institutions should rapidly
modify their credit strategy, both to
manage exposure and ensure the
effectiveness of providing support and
solutions to customers in delinquency.
STRENGTHENING • In the face of economic uncertainty,
CREDIT LINE many lenders are already undertaking
MANAGEMENT active portfolio and balance-sheet
management, eliminating
underperforming products, and reducing
their portfolio-risk exposure.
• A key aspect of Credit Management is
Loan Monitoring AFTER Disbursement.
This must be strengthened.
 • Collections’ strategies will also need to
change at operational levels. As physical
collections operations shudder, automated
non-human messaging can be introduced
in place of human day-to-day customer
contact.
• Effective account analytics and
STRATEGY segmentation will be essential to tailor the
MODIFICATION contact strategy to customer preferences
and identify opportunities to accelerate
assistance for distressed customers.
• Institutionalize Credit Scoring Models and
Psychometric Modelling into the Client
Screening Process
• Institutionalize Loan Monitoring, with
Credit Officers writing Situation Reports
when they visit high risk or high loan
customers
 CRITICAL ELEMENTS OF
DELIQUENCY MANAGEMENT

▪ The credit service must be valued by clients

▪ Clients must be screened carefully – using the 5 Cs of credit
▪ Not all MFBs are your competition – stratify the market
▪ Field staff and clients must understand that late payments are not
acceptable
▪ MFIs need accurate and timely management information systems
▪ Delinquency needs effective follow-up procedures
▪ The consequences of loan default must be sufficiently unappealing to
clients
 Analyze the origin of the
deteriorating portfolio quality
(specific sectors/sub-sectors
impacted by the crisis, lack of follow-
up and contact with the clients,
EFFECTIVE bankruptcy of the clients)

RISKS
Check if temporary liquidity
MITIGATION problems of the clients can be solved
or mitigated by loan rescheduling or
MEASURES other forms of financial support
(bridge loans, temporary overdrafts).
By doing so viable businesses will be
safeguarded
 • Find digital solutions to facilitate
EFFECTIVE repayment given the social distancing
requirements, and stay in touch with
RISKS clients (SMS-banking, opening e-wallets)
• Motivate your loan officers so that they
MITIGATION concentrate on portfolio quality for the
clients which continue to operate (food
(cont’d) stores, pharmacies, etc.) and keep contact
with the clients impacted by the crises to
propose them some concrete solutions
that will support them.
 ADDITIONAL
MITIGATION MEASURES
• Take measures to manage crucial human resources, including
loan officers (e.g. take measures to prevent the transmission of
the disease, grant administrative leave, adapt the portfolio per
loan officer, provide extra pay) - Check the consequences on
your institution’s liquidity
• Check if loan portfolio deterioration does not breach
investment covenants. If so, communicate this to your financial
partners
• Adapt your strategy to safeguard business continuity (focus on
less risky activities, decrease the number of credits and/or the
average loan size, work on digital solutions).
 MANAGING A
DELINQUENCY CRISIS
• Review credit policies and operations
• Evaluate loan officers’ compliance culture
• Design incentive and penalty systems facilitate compliance
• Move poorest loans to specialized collections dept
• Judiciously refinance some clients who have a genuine potential to
repay
• Set deadline for improving performance and reward achievement.
• Review the performance of new versus old loans after about six months
under new policies.
• Move out clients who have had poor records as they pay off their loans.
• Remove loan officers who continue to perform poorly or who drag
down the entire concept.
THANK YOU