Portfolio Management in Inclusive Finance BPI Direct BanKo - - PowerPoint PPT Presentation

Portfolio Management in Inclusive Finance

BPI Direct BanKo

Inclusive Finance

• Encompasses improving the range, quality and

availability of financial services to the underserved and the financially excluded

Stein, Peer, “Inclusive Finance,” Korea-World bank High Level Conference on Post Crisis Growth and Development, p. 10, June 4, 2010

Microfinance

• “Provision of a broad range of financial

services such as deposits, loans, payment services, money

transfers and insurance products

• to the poor and low-income households,
• for their microenterprises and small businesses
• to enable them to raise their income levels and

improve their living standards”

BSP, 2001

Microfinance Market Segments by Regulation

• Banks – up to 300,000 microenterprise loans
• NGOs – up to 150,000 microenterprise loans
• Housing – up to 450,000 housing loans
• “Meso”-enterprise – 300,000 to PhP1M

BSP Circular Microfinance NGO Act Classification of mass affordable housing

Microfinance in PH Today

• Over 2,000 industry players composed of

NGOs, cooperatives, financing companies, rural banks and thrift banks

– 4.24M borrowers – 4.93M depositors

Microfinance in PH Today

• Highest number of active borrowers

– ASA Philippines - single institution – CARD – group of companies

Top 10 MFIs in PH

Institution ASA Ph CARD NGO CARD Bank NWTF TSKI Pagasa TSPI PR Bank ARDCI KMBI

10 players comprise 88% market share

Actual Market Segments

Market Segment Market Share (Portfolio) Market Share (Clients) Micro Tier 1 <50,000 74% 97.2% Micro Tier 2 50,000 – <300,000 21% 2.7% Meso 300,000 – 1 million 5% 0.1%

Challenges in Microfinance

• High interest rate to clients

– high transaction costs – high loan losses due to disasters

• Tough competition in the market:

– Saturation in areas – Staff turnover

• Frequent occurrence of natural disasters
• Impact of climate change

Market Competition

• Philippine MF industry is considered to be near

the mature stage characterized by high competition

– About 5 – 19 MFIs compete in one barangay – Entry of commercial banks in MF – Clients have multiple borrowings – Fast growth rate of leading MFIs in the Philippines

• Penetration rate is estimated at 80%

Opportunities in Microfinance

• Continuous economic growth of the country
• Diversification of needs of clients:

– Microhousing - Water, Sanitation, Hygiene – Education – Microinvestments

• High government support for growth and

capacity development of MSMEs

• Availability of technology – mobile money

platforms

Awareness of Access Points

• Filipino adults are most

aware of:

– banks (98.3%) – pawnshops (95.7%) – ATMs (93.5%)

• Low awareness:

– microfinance NGOs (30.5%) – e-money agents (25.6%) – NSSLAs (13.6%)

National Baseline Survey on Financial Inclusion, Bangko Sentral ng Pilipinas

National Loan Usage

• 47.1% of Filipinos

borrow money

– Family and friends – 61.9% – Informal – 10.1% – Financing/Lending companies – 12% – Cooperatives – 10.5% – Microfinance – 9.9% – Banks 4%

National Baseline Survey on Financial Inclusion, Bangko Sentral ng Pilipinas

Loan Features Sought

• Interest rate (57.5%)
• Loan amount (41.7%)
• Period to pay for the

loans (35.0%)

• Ease of loan application

(33.1%)

• Reputation of the credit

institution or lender (24.5%)

• Amortization (14.9%)
• Collateral (14.3%)
• Fees and other charges

(11.4%)

• Processing time (11.0%)

National Baseline Survey on Financial Inclusion, Bangko Sentral ng Pilipinas

PROFILE OF MICROCREDIT CLIENTS

Demographics

2010 2016 Female 96% 90% Age 39 44 Married 85% 82% Elementary graduate 33% 22% High school graduate 51% 53%

Credit Experience

2010 2016 Loan cycle 3 4 Membership (months) 10 23 Loan amount 5,461 7,233 Multiple loans 30.9% 72.3%

Livelihood

2010 2016 Trading, vending 89.5% 64.2% Service 12.5% 14.8% Manufacturing 11.9% 6.5% Farming 2.7% 6.8% Fishing 2.5% 3.6% Animal raising 1.8% 6.1%

Loan Utilization

2010 2016 Income generating activity 96.7% 94.6% Food 70.7% 53.5% Kept for emergency 46.9% 37.0% School 43.1% 50.6% Clothes/HH items/bills 21.1% 44.5% Pay other debts 6.6% 20.7% Extend credit 16.3% 2.8% HH improvement 13.1% 17.1% Celebration 4.6% 6.1%

INNOVATIONS AND TRENDS

LOANS

Features Microfinance Clients Like Least about MFI

2010 2016 Guarantee / Group Liability 6.9% 0.7% Loan Amount Too Small 4.6% 2.6% Problematic Group Dynamics 3.9% 0.0% High Interest Rate 1.1% 0.2% Pre-deductions 0.4% 11.0%

Missing Middle Needs

Needs Clients Potential Funding 49% 29% Expansion 19% 10% Fixed Assets 10% 14% Manpower 9% 15% Product Diversity 5% 11% Suppliers

• 13%

Promotions

• 14%

Rapisura, “Market Research on SME Clients and Non- Clients of CARDSME ,” July 2016

Top Likes and Dislikes (Missing Middle)

Top Likes

Friendly staff 41% Efficient 40% Low interest 19% Good policies 10% Few requirements 10%

Top Dislikes

High interest 13% Inefficient 12% Many requirements 11%

Rapisura, “Market Research on SME Clients and Non- Clients of CARDSME ,” July 2016

GOOD DEBT VERSUS BAD DEBT

Vince Rapisura @vincerapisura vincerapisura

DELINQUENCY MANAGEMENT

Quality of Loan Portfolio

• What is Outstanding Loan Portfolio?

– Principal amount of loan balances outstanding

• Why is portfolio quality important to an MFI?

– Features of an outstanding loan portfolio

• Largest asset
• Generates income (interest)
• Main product demanded by clients

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Quality of Loan Portfolio

• Only ratios with portfolio outstanding in the

formula (numerator or denominator) measure the quality of portfolio.

– Past Due Rate – PAR Ratio – Annual Loan Loss Rate

• Repayment rate does not measure the risk of

potential losses.

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

What is Delinquency?

• A delinquent loan (or loan in arrears) is a loan on

which payments are past due.

– Calmeadow

• Delinquent loans are loans on which any payments

are past due.

– SEEP

• Situation that occurs when loan payments are past

due

• Also referred to as arrears or late payments,

measures the percentage of a loan portfolio at risk

– USAID

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Causes of Delinquency

• Make a list of three causes of loan delinquency
• Organize the causes into three categories

including external, client, and MFI

• Decide which category is most responsible for

delinquency

Causes of Delinquency

• Ultimately the MFI itself is responsible for

delinquency (even when the proximate cause seems external to the MFI).

• There are many stakeholders in delinquency, but
• nly the MFI can do something about it.

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Causes of Delinquency

• The MFI

– Sets its own principles – Promotes its own repayment culture – Instills credit discipline in staff and borrowers – Must plan for events beyond its control

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

What is Default?

• Default occurs when a borrower cannot or will

not repay his or her loan and the MFI no longer expects to receive repayment1

– The MFI may continue its collection efforts

• BSP Circular 409

– A loan is declared in default when the borrower has stopped payment for more than 90 days

1 Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Default Amount

• The default amount depends on how much is
• utstanding when the borrower stops making

payments.

– Amounts that will have to be written off or counted as loan loss may be different from the defaulted amount depending on the ability of the MFI to collect any collateral or on a guarantee.

• SEEP

1 Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Costs of Delinquency / Default

• Delinquency is expensive for an MFI.
• It affects a program by…

– Postponed or lost income – Slower portfolio rotation, which lowers asset productivity – Lower staff morale – Higher costs of fighting delinquency – Diminished program image – Higher likelihood of default – Increased cost of loan loss reserve

Controlling Delinquency, Microenterprise Development Brief, Number 31, September 1995, USAID

Cost of Default Formulas

Replacement Cost = Lost Principal (+ Interest) Revenue per loan (Number of Loans/Sales units needed to ‘replace’ lost principal or sales)

Based on Yatsco, Diana, Replacing Defaulted Customer: The Hidden Cost of Default, Credit and Financial Management Review, 2003

Financial Impact

• f Delinquency and Default
• Loan loss provision (provision for bad debts)

reduces surplus.

• The institution loses non-recoverable portion of
• utstanding loan.
• Written-off loans require de-capitalization of

the institution.

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Past Due Rate

amount past due

• utstanding portfolio
• Also called “Arrears Rate”
• How common place is non-repayment?
• Measures amount of loan principal that is due

but not paid

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Portfolio at Risk by Age

Outstanding Balance of Loans with Overdue Payments Outstanding Portfolio

• The probability of incurring loan losses if all

borrowers default

• Portfolio aging separates more risky loans form

those that are less risky.

• The longer a loan goes unpaid, the higher the risk

it will never be paid.

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Portfolio at Risk by Age

MFI A MFI B Total PAR 17% 17% 31-60 12% 4% 61-90 3% 6% >90 2% 7% Which MFI is better?

Portfolio Quality Maintenance: Waging War on Delinquency, Asian Development Bank Management Information Systems for Microfinance Institutions: A Handbook; Pamphlet: Sample Report Formats CGAP

Annual Loan Loss Rate

amount of loans written off as unrecoverable average outstanding portfolio

• Annual cost of default which must be balanced

by higher interest income

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Portfolio at Risk

Outstanding Portfolio Balances of Loans with Arrears Intensive Collection Portfolio Growth Remedial Management

Important Points to Remember

• Delinquency occurs when one loan payment is

missed on due date.

• Zero percent delinquency is an attainable and a

reasonable goal but requires the commitment of the institution.

• Acceptance of a delinquency level above zero

percent is the decision of the institution itself and is a decision that has its own costs.

Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Workshop

• 1. Mistakes in Area Selection
• 2. How to Select Area Properly
• 3. Mistakes in Client Selection
• 4. How to Select Properly
• 5. What to Ask Character References

AREA SELECTION

Common Mistakes in Area Selection

• Taking short cuts in client selection procedure

to meet targets

• Expansion in sparsely populated areas
• Expansion in barangays with over indebted

clients

• Lending out in urban areas and poblacion with

too many existing MFIs

Common Mistakes in Area Selection

• Entering high risk areas such as purely

agricultural community just to meet target

• Operating in barangays that are not cooperative

in terms of settlements

• Entering areas without mobile signal
• Formation of groups in disaster prone areas

Managing Area Selection

• BM prepares area map and demographic data of

working area and prepare plan

– Make a boundary plan for each LO

• Display demographic profile in the branch

– Gather secondary data on socio-economic condition

• f the area under consideration

Managing Area Selection

• Choose areas with high economic activities
• Consider area with high population density

– Secure latest NSO Census of population from the Municipal Planning Office

• Prioritize area with high incidence of poverty
• Identify areas with relatively low literacy rates
• Identify areas with relatively high unemployment
• Consider health and malnutrition status

Managing Area Selection

• Identify areas with few creditors

– Coordinate with staff of other MFIs in the same area

• Identify areas with accessible roads and adequate

transport

– Lower priority on areas that make movement and mobility of staff more difficult and costly

• Consider provinces that are adjacent to existing
• perations

Managing Area Selection

• Consider peace and order situation in certain

provinces

• Consider hometown where most staff come

from

• Prioritize provinces referred by known

benefactors and partners

CLIENT SELECTION

Common Mistakes in Client Selection

• Enrollment of non-target clients or relatively

well off clients

• Enrollment of clients that are residing too far

from the group

• Enrollment of clients who are already

borrowing from too many MFIs

• Enrollment of an uncooperative client or an

influential client who might dominate the group

Common Mistakes in Client Selection

• Enrollment of more than one client per family
• Enrollment of unhealthy clients
• Enrollment of people without any source of

income

• Enrollment of migratory or transitory

individuals

Best Practice in Lending

• Based on character and cash flow
• Not based on business analysis and collateral

Gomez, Areliz, Powerpoint Presentation - 2005

Character-Based Lending

• Examines the credit worthiness of a borrower

by examining her/his mental and ethical traits

Derived from the Webster dictionary and integrated to credit worthiness

Character-Based Lending

• Stability and Responsibility

– Personal history demonstrating ability to handle and

• vercome obstacles to achieve objectives

– Demonstrate ability to sustain an effort

Loan Criteria as described in Women’s Venture Fund Website, www.womensventurefund.org

Character-Based Lending

• Entrepreneurship

– Understanding of business – Understanding markets and clients – Ability of business to carry out a loan

Loan Criteria as decribed in Women’s Venture Fund Website, www.womensventurefund.org

Character-Based Lending

• Repayment Behavior

– Degree to which applicant is currently encumbered – Commitment to lending guidelines and obligations

Loan Criteria as decribed in Women’s Venture Fund Website, www.womensventurefund.org

Character-Based Lending

• Reputation in the Community

– Recommendation from suppliers or trade references – Recommendation from neighbors and colleagues

Interviews with various management staff of microfinance institutions on how they determine the reputation of a client

Cash Flow Analysis

• Assesses the applicant’s capacity to pay
• Determines the loan amount that should be

extended to the client

• Based on present cash flow
• Considers low and high seasons
• Repayment based on timing of cash flow

Based on interviews and organizational appraisal of SEDPI to Rural Banks and cooperatives

Why Cash Flow Lending?

• Collateral is not a primary consideration
• Micro-entrepreneurs do not keep business

records - business records are at best questionable

• Cash Flow Lending Best Practice1

– 35% adjusted debt capacity rate – 25% to 35% increase in loan amount for subsequent loans

1 Based on interviews and organizational appraisal of SEDPI to Rural Banks and cooperatives

CI / BI

• A thorough CI / BI can prevent delinquency

problems

CI/BI Core Components

• Application analysis
• Cash flow analysis
• Interview / Field visit to clients’ neighbors,

trade partners, co-makers, etc.

Based on interviews, operations manual and organizational appraisal of SEDPI to rural banks, cooperatives, non-government organizations and private lending companies

Application Analysis

• Basis for determining whether the applicant

meets the basic eligibility criteria

• For repeat clients, assesses business growth,

market conditions, and repayment behavior

Loan Amount

• Character, credit and

background checks are prioritized for first two loan cycles over business performance analysis

• Rigorous and detailed

cash flow analysis done

• nly when loan amount

reaches PhP50,000

Monitoring and Collection

• Joint field work – at least twice a week
• Short interval control
• “Pay and go” payment scheme
• Monthly group meetings instead of weekly
• Highly automated – use of tablets

Managing Delinquency Due To Errors in Client and Area Selection

• The AO must enforce co-makership
• AO, co-maker and fellow group members visit

the client

• AO should immediately inform the BM of the

delinquency

• Branch Manager should immediately follow up

with the clients on the same day of the delinquency or within the week of the collection

Managing Delinquency Due To Errors in Client and Area Selection

• If the client wasn’t able to pay within the week,

the BM should inform the Area Manager to assist in the follow up

• In cases of severe delinquency, the Area

Manager must inform the head office to form a special group to address the problem

IN DELINQUENCY MANAGEMENT, PREVENTION IS BETTER THAN CURE

Website www.sedpi.com Telefax +632-433-8795 Office Address Unit 303, Loyola Heights Condominium 23 Dela Rosa Street, Loyola Heights Quezon City

Vince Rapisura @vincerapisura vincerapisura