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,
Isabelle Barrès
> 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.
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> The two measures are:
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> 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."
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> Many thanks!
>
> Mingyee
>
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