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

Dear Mingyee,

I reproduce below the policy of Equitas Microfinance based in India on dealing with problem loans sensitively. This is covered in the Microfinance India - State of the Sector Report 2011. I hope this is useful.

Best regards

Srinivasan

Client Friendly Repayment Practice

Policy Statement: Equitas will stand by the following principles:

1. Credit discipline – The credit discipline among members will be encouraged and facilitated.

2. Empathy – Equitas will empathize with the members in case any of them have a problem repaying their instalments, understand the problem and thereafter take suitable steps in line with the unique situation of the member.

3. Flexible support – Where appropriate, Equitas will facilitate reasonable flexibility in repayment for members who are unable to repay due to genuine reasons. In extreme situations of permanent impairment in the ability of the member to continue her repayment, Equitas would take a call to give a much longer time frame to repay as well as absorb part of the loan outstanding as a write off, such decisions being done at the Area Manager level and above

Proposed Approach:

1. If the member has an outstanding overdue prior to the date of the waiver-triggering incident, she will not be eligible for any waiver as per this policy.

2. Issues impacting repayment will be classified as short-term or long-term.

a. Short-term - Any issue due to which a member is temporarily unable to service her instalments for a month or less will be considered a short-term issue. However, if such temporary reasons impact more than 5 members in a centre, then it will be treated as a long-term issue.

b. Long-term – Any issue due to which a member is unable to service her instalments for more than a month, the problem will be treated as a long-term problem.

3. In case of a short-term issue, the other members in the centre will be encouraged to pitch in, as per the joint liability group norms. In such situations the rest of the members of the group would be encouraged to pay the instalment and collect it from the affected member in the next couple of weeks.

4. In case of a long-term issue, the staff are empowered to provide relief to the members, as per the table below:

Scenario	Classification	Field staff response
Migration	1. If the member has either moved to her native place due to pregnancy OR if the member has moved to another place, but is expected to return within a month; it will be treated as a short-term issue. 2. If the member has moved to another place and is not expected to return within a month or her shifting was sudden and the rest of the group does not have an idea of where she has moved, it will be treated as a long-term issue.	1. In case of short-term issue, the RO should encourage the other members to pitch in. 2. In case of long-term issue, the Migration Policy will apply. This should be approved by the Business Head. Under this policy, the staff would discuss with the rest of the centre and exercise discretion to provide some support to the centre. The support could be in the form of either: a. waiving upto 50% of the loan outstanding while the rest of the 50% is repaid by the group members by an equal contribution in lump-sum OR b. waiving the last half of the instalments. (For example, if the migrated member had 18 instalments due; the centre will pay for the first 9 instalments and the rest will be waived off)
Natural disaster (Floods, fire etc) or Demolition of house by government authorities	RO will consult with the BM to assess the damage due to the natural disaster as either short or long-term impact depending on how long the member will take to get back to her routine life including her ability to earn her normal daily/weekly income.	1. In case of short-term issue, the RO should encourage the other members to pitch in. 2. In case of long-term issue, the RO should inform the BM. The BM may meet the centre members and exercise his discretion on allowing the member to postpone payment of 2 fortnightly instalments within the loan tenure. The BM should file a report on the same day in pre-defined format and submit it to Operations. 3. The BM may recommend CM's approval to provide greater relief to the member. The CM, if satisfied after a visit, may postpone 4 fortnight instalment with a loan tenure extension of 2 months. Such extension would carry no additional interest
Death (spouse or child)	N.A	Currently Equitas does not offer an option to members to take life insurance for spouse. In such instances, BM should visit the member and file a report. The member will continue to pay the subsequent instalments in full till the Death Certificate is handed over to the branch. After this date of submission of DC, the member will be required to pay at every centre meeting 50% of the EFI due for that centre meeting. Equitas proposes to offer spouse life insurance to members on an optional basis for disbursements from January 2011 onwards. Subsequent to this, wherever a member has chosen to take life insurance for the spouse, then the principle outstanding would be deducted from the insurance claim amount and the remaining would be paid to the member. If the member has not chosen to avail of the spouse insurance option, then the member will not be eligible for the waiver policy. In case of death of member's minor child (less than 18 years of age), the BM may authorize deferment of 2 instalments. Thereafter on submission of death certificate, only 75% of the instalment amount needs to be paid for the remaining centre meetings.
Accident or Chronic Illness (member, spouse or income-earning son/daughter)	This clause will apply only if the person affected is not expected to get back to normal earning capacity for a continuous period exceeding 6 months because of this accident or chronic illness. Any illness or accident preceding the date of loan disbursement will not be considered for this waiver.	Area Manager to conduct physical verification and, if satisfied, recommend write-off of the loan.

From: Hsu Ming-Yee <mingyee0706@yahoo.fr>
To: "MicrofinancePractice@yahoogroups.com" <MicrofinancePractice@yahoogroups.com>
Sent: Monday, 10 June 2013 3:38 PM
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 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

+92 (0) 300 4356 255

Skype:mawaisq

To: MicrofinancePractice@yahoogroups.com
From: rizzi.alexandra@yahoo.com
Date: Fri, 7 Jun 2013 15:26:21 +0000
Subject: [MFP] Re: seeking advice on two client protection measures on which Smart Campaign provides no guidance

This message is posted on behalf of Isabelle Barres, director of the Smart Campaign

----------------------

Dear Hsu Ming-Yee,

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

--- In MicrofinancePractice@yahoogroups.com, Hsu Ming-Yee wrote:

>
> 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.
> Â Â Â 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 otherÂ 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

> Â Â Â 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 clientâ€™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
>

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