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Credit Management

Solomon Kagaba

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Definition
Credit management is the whole process and systems through which the MFIs lending operations strive to:
Offer services which meet the demands of the clients; Operate as efficiently as possible by minimizing costs; Charge interest rates and fees, which are sufficient to cover all costs. Motivate clients to repay loans as per agreed terms; Achieve sustainability of operations through high degree of efficiency exercised.

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Stages of credit process

Stage 1: Pre-loan Involves the lender screening the applicant and is done mainly to assess his/her creditworthy. In microfinance, screening is done at the household and business in order to assess and determine the ability and willingness to pay. The clients character plays a big role in recovery It is at this stage that the Credit Officer after attaining, assessing and evaluating the information advises whether to grant a loan or not.

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Stages of credit process

Stage2: Loan disbursement If the Credit Officer has positively recommended the application, loan disbursement follows. This is a critical stage in that it involves exchange of instruments and control. The MFI should ensure all conditions are fulfilled; loan agreement, collateral, guarantors commitment, proper recording in the books of accounts. etc

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Stages of credit process

Stage3: Post-loan Once the loan has been disbursed, the borrowers interest in the lender reduces unlike in pre-loan. The lender must therefore take all possible ways to ensure recovery of the loan and its interest. Incentives like access to bigger loans can be provided for on-time (carrot) and penalties (sticks) to ensure proper delinquency management.

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Major Concepts in credit management

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Credit and Savings Policies

The lending approach
Characteristics of the lending approaches Client eligibility criteria

Loan characteristics
Loan size Loan period Security Grace period

Market policies
Interest and fees Costs Write off policies

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Credit and Savings Policies

Sustainability policies
Operational and financial self-sufficiency Operational efficiency Outreach Portfolio quality management

The loan process

Application, Appraisal and Approval Disbursement Monitoring and Repayment

Risk management
Delinquency management Fraud management Client preparation Management information system

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Loan Appraisal
The systematic evaluation of the loan applicant to determine whether to grant the loan or not and if so how much. It involves determining in advance the various lending parameters likely to affect the successful recovery of the loan. Assessment is done of the clients willingness and his/her ability to repay the loan i.e. repayment capacity as per the agreed terms without the MFI having to enforce recovery.

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Elements of the loan appraisal process in microfinance include:

Business aspects including financial performance, the market, management capability etc Character issues including the clients credit history, household stability and support as well attitude towards credit repayment .

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Field staff
Training clients/groups Appraising groups Technical support Record keeping Follow-up

Group
Endorsing applications Maintaining borrower records Organizing meetings Collecting forming

Loan Appraisal

Guarantor
Assessing the clients ability to pay Guaranteeing the loan Attending meetings and training Assessing the character of the client Monitoring the

Client
Writes application Identifies the enterprise Makes savings Identifies guarantors Maintain business records Monitors other group

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Portfolio Quality management

Portfolio is the total outstanding loan principal owed by the borrowers that the MFI expects to receive. The aggregate of the loans and other advances that are outstanding from borrowers of the MFI.

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The Portfolio for MFIs in nutshell: The largest asset It generates income for the MFI i.e. interest and fees; A product most demanded by clients; It is the reason for the MFIs existence; It is the machine of production for the MFI.

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Portfolio Quality Measure

1.

Portfolio in Arrears (Delinquency) = Amount in arrears Total Portfolio Outstanding

2.

Portfolio at Risk (PAR)

= Total outstanding balance of loans with arrears Total loan portfolio

3.

Repayment Rate

Payments received during period Amount due and past due during period

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Delinquency
Delinquency is a situation that occurs when loans are past due. A delinquent loan therefore is one that is in arrears one day late. Delinquency affects the quality of the portfolio.

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Types of Delinquents
Willing but unable to pay Willing and able to pay but lacking in discipline Unwilling but able to pay

MFIs need different strategies and techniques to deal with these categories. No single approach can be used

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Causes of delinquency
Lack of, or failure to implement loan policies and procedures Incompetence; Board, staff, committees ( should we include supervisors?) Poor appraisal and monitoring Insufficient collateral Poor sensitisation of clients on policies, products Poorly conceived products Natural causes; death, calamities,

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Prevention of delinquency
Sensitisation of clients Clear credit policies Strong measures for late payments and default ( e.g fines) Client rating system Strengthen the security system( guarantee, compulsory savings and collateral etc) Incentive package for on-time repayment

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Dealing with delinquency

Soft policies e.g polite reminders Community/peer pressure Attach savings ( client, guarantors and group) Confiscate the collateral Consider rescheduling, restructuring or refinancing Apply legal process ( last resort) Write off

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Monitoring performance
Portfolio quality Operational and Financial self sufficiency Outreach Growth

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Solomon Kagaba 0772-629658 skagaba@snvworld.org solomonkagaba@yahoo.co.uk Proscovia Babyale pbabyale@snvworld.org proshika2001@yahoo.com 0772858801