Dear all,
the discussion should also mention
1) Concerning write-offs: a) the administrative write-off, that is removing the loan from the balance sheet and moving it to extracomptable accounts, and b) the final write-off, that is removing the loan from all books and halting any collection efforts. Selling the loans to loan collectors should have in mind whether the debtors are not willing to pay (ok) or not capable to pay (better not). The (M)FI should always have in mind that write-offs are part of the business and in most cases a result of a wrong analysis. Administrative write-offs have to consider regulatory issues (if applicable) and internal procedures and policies (impact on profit!).
2) Concerning collateral: Smart Campaign recommends: Does the financial institution have a maximum ratio(collateral value/loan amount )? (should be <200%)
I challenge this, because it does not sound realistic and I recommend: The creditor should take all collateral, without limit. Reason: There are other creditors that advance loans just based on collateral without being concerned with the repayment capacity. This has a negative impact on the first loan.
For example
Loan application $ 1,000, collateral available: a lot with a modest building, market value $ 10,000, fire sale value $ 5,000.
The < 200% rule would mean that the value of the collateral is far too high for such a small loan.
The loan officer could say: "We have a policy that the collateral value should not be more than twice the loan amount. You have to take a $ 2,500 loan, minimum!"
It is not a good idea to split the plot into smaller pieces in order to hand over to the bank a certificate of a plot with a value approximately twice the loan amount.
Result: if other collateral is not available,
a) the loan is not collateralized, or
b) no loan is extended.
This solution a) is not dangerous for the creditor, solution b) hurts the potential borrower (and also the creditor because of the lost business opportunity).
The problem is that the value of the only bankable collateral is much higher than the loan asked for and this collateral (land and building) is not divisible.
What is wrong to take a collateral the value of which is more than 2 or 3 times higher than the loan? I often hear borrowers complaining that their collateral is manifold higher than the loan amount. Does the borrower not t r u s t the bank? Does the borrower intend to retain collateral for a loan with another institution without consent of the first borrower?) In fact, the ratio collateral to loan amount increases continuously during loan repayment so that the maximum <200% suggestion is almost meaningless.
Moreover, the bank p r o t e c t s the borrower from over-indebtedness, when taking all collateral!
If the MFI would not take the land and building as collateral, the borrower might use this collateral for another loan. The total loan service of both loans might exceed the repayment capacity. Therefore I advice the (M)FIs to take all collateral they can obtain in the first instance..
Thank you for your interest,
Wolfram Hiemann
From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] On Behalf Of Hsu Ming-Yee
Sent: Montag, 10. Juni 2013 12:08
To: MicrofinancePractice@yahoogroups.com
Subject: Re: [MFP] Re: seeking advice on two client protection measures on which Smart Campaign provides no guidance
Thank you for your inputs Awais.
I have checked with the Cambodian colleagues at my MFI. The second prakas you refer to, the prakas that classifies loans into five categories, is applicable to banks, not to MFIs. For MFIs, all restructured loans need to be classified as sub-standard.
What I am interested in is not so much how problem loans are treated legally or how MFIs collect these loans, but whether there are examples of MFIs, in Cambodia or elsewhere, that forsake hopeless loans definitively and whether there are MFIs that do not use a client's home as collateral and what their experience is. Some people at the MFI I work for are concerned that forsaking a loan may lead to other clients following suit in default and that excluding a client's home from collateral may lessen the pressure on him/her to repay, lead to more problem loans and also lessen business opportunities and it will reduce the pool of potential clients who can post enough collateral. I would be keen to hear about the experience of other MFIs.
Thank you. Kind greetings.
Dear Hsu Ming-Yee,
There are regulations issued by the National Bank of Cambodia on loan/asset classification (I am sure you know)which provide guiedance on forsake a loan after a certain period. The regulation "PARAKAS on loan classification and provisioning applicable to specialized banks for rural credit and licensed MFIs No-B-7-02-186-Prokor" advise MFIs to classify loan into four categogries i.e. standard, sub-standard, doubtful and loss - this is how to treat loans in the books of MFIs. Then another regulation "PARAKAS on asset classification and provisioning in banking and financial institutions" define renegotiated loan/restructured loan/refinanced loan. This PARAKAS classify loans into five categories and also has defined these categories in a better way as comapre to the PARAKS for MFIs. For example, if FI sees an opportunity to collect a loan then it can not be classified as a loss. My understanding based on both PARAKAS is that if MFI wants to continue follow-up then there should be some agreement between MFI and client - qualifying it as a restructured loan. The agreement will support that MFI does not harass client but help client to maintain credit discipline. Refinancing is another option to be considered for such clients. I hope that your MFI considers loan restructuring (refinancing) a positive practice. This whole debate is covered under the principle of preventing over-indebtedness.
You may also like to analyze this issue under the principle 5 # Fair and respectful treatment of clients. In mmany MFIs (also true for Cambodia), the long-term bad debts (which you have pointed out) are handeled by the special department which receive incentives on the collection of such loans. Some times the practices of these special departments are ruthless, putting extreme pressure on clients for repayments and seizing the opportunity of loan re-negotiation or re-financing from clients.
Regards
Awais
This message is posted on behalf of Isabelle Barres, director of the Smart Campaign
First, my apologies for not responding. We never received the emails and are checking on that.
I have included specific responses to your questions below, in italics. Also, please note that we have recently updated our assessment tool to incorporate these more detailed guidelines and will continue to add to the guidelines as clarification is needed.
If you have further questions, please do not hesitate to contact me directly at ibarres@accion.org. Thanks again for your feedback,
>
> Dear colleagues,
>
> I work as Head of Operations at a microfinance institution in Cambodia. Last month, I sent four e-mails to the Smart Campaign to seek its guidance on two measures to protect clients which I wanted to introduce to the MFI I work for. Unfortunately, I have not got any reply, so now I turn to this forum for advice.
>
> The two measures are:
>
> 1) Forsake a loan after a certain period of time of being overdue, say five years, if there is no realistic prospect of recovering the remaining due amount.
>    The purpose is not to burden the client with an "eternal" loan and give him/her the chance to a new start. This is not the same as write off. At the MFI I work for and other Cambodian MFIs I know of, written-off clients continue to be pursued for repayment. I have not found any material on the Smart Campaign website as to whether forsaking a hopeless loan is part of the Client Protection Principles.
Response from Smart Campaign:
The purpose of continuing to pursue repayment after a loan has been written off is to reinforce good repayment discipline. That being said, if there is willingness but inability to repay after a long period and this is creating undue stress for the client, it is perfectly acceptable for an MFI to decide to stop the collection process and allow the client to have a fresh start (especially in the absence of bankruptcy laws in many countries). We are currently doing some research on "What happens to clients after they default" and this will inform our thinking about clearer guidelines on the topic. Please let us know if you would like to be involved in this research on post-default, as it could bring some valuable perspectives on practices in Cambodia.
> 2) Avoid taking a client's residence (home and land) as collateral
>    The client should not fear eviction from his/her home if he/she defaults on a loan, as this fear could drive the client to extraordinary measures to remain on schedule (some members of this group might remember my posting in January 2012 about a client whose daughter prostitutes herself so that her parents would not fear losing their home). I have only found in the Guidance document to the Client Protection Principles, page 25, under Principle five "fair and respectful treatment of clients": "Collateral that is critical to a client’s daily survival or that is substantially
> in excess of the value of the loan is not acceptable...".The document however does not specify whether the client's residence is considered crucial to his/her survival.
Responsefrom Smart Campaign:
Wecurrently have 3 standards related to collateral.
1. Indicator 1.1.2: "The financial institution has a policy describing acceptable pledges of collateral; Has clear guidelines for how collateral is registered and valued."
2. Indicator no. 5.2.3: "The financial institution's policy guarantees that clients receive a fair price for any confiscated assets; Has procedures to ensure that collateral seizing is respectful of clients' rights; Offers an explanation of the role of guarantors. In case collateral is kept in the financial institution premises, procedures are in place to ensure its security."
3. Indicator no. 5.7.2: "[group lending]The FI informs clients about procedures about collateral seizing."
Your question refers to the first indicator: Indicator 1.1.2: "The financial institution has a policy describing acceptable pledges of collateral; Has clear guidelines for how collateral is registered and valued."
Our general guidelines are:
· The financial institution defines registration procedures for collateral
· The financial institution indicates a list of assets that cannot be accepted as collateral, or that cannot be seized in case of default, because they would deprive borrowers of their basic survival capacity, including business assets ("Basic survival capacity" refers to goods that are necessary for day to day living. Examples include clothing,housewares required to feed a household; telephone; bed; radiators)
· The financial institution defines how collateral is valued (ex., based on market prices, resale value)
· The fees related to the collateral sales are clearlyexplained to the client before the sale, are within normal ranges compared topeers, and the difference between the value of the asset and the outstandingbalance is reasonable
More detailed guidelines that are assessed are:
· Does the financial institution's collateral policy indicate a list of assets that cannot be accepted as collateral or seized in case of default because they would deprive clients of their basic survival capacity? (should be `yes')
· Are the fees related to collateral sales commensuratewith the cost you incur when seizing and selling the assets? (should be `yes')
· Is the valuation process done by people who have a goodmarket knowledge? [Are they trained/experienced to value assets?] (should be`yes', by experience or by professionals)
· Does the financial institution have a maximum ratio(collateral value/loan amount )? (should be <200%)
In regards to what is `acceptable collateral' that – in case of seizing – would not lead the client to drastic measures such as the one you describe, we believe that this needs to be defined by the MFI and handled on a case by case basis. Real estate may be acceptable collateral in the case of larger loans,and what we would examine is whether the MFI enforces seizing collateral in the case of default, and whether it would – in case of seizing real estate – ensure that the client would still have a roof over his/her head. We recently discussed this indicator in our technical committee and believe that we need to come up with more guidelines on how real estate would be valued and seized. For example: "The seizing of a house should not result in people being homeless. The MFI should design its processes in order for people to not become homeless as a result."
> I would be grateful for advice from group members, whether these two measures are part of Client Protection Principles, whether other MFIs practice them, and if yes what their experience is.
>
> Many thanks!
>
> Mingyee
>
