Microfinance Practice: Re: [MFP] Re: seeking advice on two client protection measures on which Smart Campaign provides no guidance

Adding collaterals in micro finance products is a roadmap towards ultimate integration with banking sector but this also results in exclusion of people without collaterals from micro finance.

Sent from my iPad

On 26-Jun-2013, at 11:24 AM, souren ghosal <souren_ghosal@yahoo.com> wrote:

I think collaterals should not be sought after by MFIs as these institutions should lend on the basis of trust and confidence on borrowers rather than on collaterals.
Dr.S.N.Ghosal

From: w.hiemann <w.hiemann@berlin.de>
To: MicrofinancePractice@yahoogroups.com
Sent: Tuesday, 25 June 2013 1:20 AM
Subject: RE: [MFP] Re: seeking advice on two client protection measures on which Smart Campaign provides no guidance

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.

Mingyee

From: Muhammad Awais <mawaisq@hotmail.com>
To: "MicrofinancePractice@yahoogroups.com" <microfinancepractice@yahoogroups.com>
Sent: Saturday, June 8, 2013 8:39 PM
Subject: RE: [MFP] Re: seeking advice on two client protection measures on which Smart Campaign provides no guidance

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