Session 2:

Root Causes of Delinquency,

Preventive and Remedial Measures

P A RINTERNAL EXTERNAL

ENVIRONMENT

Migration

Natural Calamities

Bankruptcy

Economic Slowdown

PEOPLE

Lack of training

Fraud

Deviation from policies and procedures

PROCESS

Incomplete loan documentation

Inadequate loan loss

provisioning

CIBI short-cut

PRODUCT/POLICY

Product not suited to the needs of the

market

“Copy and paste” product

design

Weak supervision

Causes of PAR

Strategies to Mitigate the Effect

Remedial Measures

Area is hit by natural disasters like typhoon, floods, excessive rains and volcanic eruptions.

• Prudent loan approval during typhoon season

• Have a manual ready that spells out what to do when disaster strikes (what do we do with clients affected; what do we do keep the records safe. etc.)

• Design a savings product specifically for loan payment when a client missed payments due to natural disaster

• Determine if the clients have the capacity to pay

• Loans can be restructured • Write off accounts for the clients no longer in the are and those without capacity to pay.

(Refer to Disaster Preparedness and Remedial Management Guidelines at www.rbapmabs.org)

Causes of PAR

Preventive Strategies

Remedial Measures

Lack of or inadequate training of staff

• Provide necessary trainings and exposure before deploying field staff for the job. Having the know-how and skills make for more confident and productive field staff.

• Conduct training needs assessment

• Train AOs to improve their product skills; train Supervisors to improve their management & people skills

• Institutionalize zero tolerance practices and discipline against loan delinquency

• Teach AO to analyze their portfolio

Causes of PAR Preventive Strategies

Remedial Measures

MF Supervisors lack management and leadership skills

• Promote people based on both technical and leadership skills

• Observe how candidates for supervisory position perform their tasks in the field

• Train supervisors for leadership, people management and report analysis.

• Conduct training needs assessment

• Train Supervisors to improve their product & people skills

• Institutionalize zero tolerance practices and discipline against loan delinquency

Causes of PAR Preventive Strategies Remedial Measures

Fast turnover of staff directly involved in MF operations:

-Low compensation package

-unrealistic targets set

- new field staff are assigned to handle difficult accounts

•Offer compensation package that is commensurate with AO’s role in generating income for the bank

• Don’t assign new AOs to handle problematic accounts.

• Implement standard targets Aos should be able to attain. Example: Group lending # of active borrowers: 300-350 # of new per month: 20 clients# of centers: 12 centers# of member per center: 25PhP loan portfolio = determine on the basis of profitability

• Conduct exit interviews of staff who are resigning to know reasons for leaving; gather their opinions on areas for improvement• Review position classification & compensation package for account officers vis a vis the minimum wage in the area. Raise AO basic wage higher than min. wage• Determine the loading per staff and adjust the load based on difficulty, distance and market in the area.

Causes of PAR Preventive Strategies Remedial Measures

Deviation from policies and procedures because no one bothers to check!(mostly from inadequate supervision)

•Conduct monitoring through un-announced spot visit or temporary take over of an AO’s area of responsibility

• Supervisor to conduct actual field validation especially of bigger loan amounts; define the loan size where supervisor validation is a MUST

• Internal audit to provide regular audit checks and recommend improved processes and procedures.

• Conduct fast and reliable compliance review or audit

• Define & Implement corresponding sanctions for deviations in policies and procedures

•Un-announced spot visits especially to branches and AOs with unusually high PAR

Causes of PAR Preventive Strategies Remedial Measures

Fraud committed by bank staff and/or by borrowers

- (details to be discussed in Fraud Management Workshop)

• Ensure that basic internal controls are in place (such as making sure that collections for the day are accounted and remitted within the day)

• MF Supervisors should monitor and supervise field staff activities through spot visits.

• Internal audit should conduct regular reviews.

•Adopt policy of reshuffling staff to avoid too much familiarity with the clients

• Conduct audit checks and spot visits

•Clearly define sanctions against fraud

•Use low-cost SMS messaging to inform borrowers of payments received or not received on payment date; encourage clients to respond back

Causes of PAR

Preventive Strategies Remedial Measures

•Poor documentation are acceptable practice, such that loans with incomplete loan documentation are approved

• Short-cuts in CIBI process

• Conduct process audit and compliance review (MF supervisor/ Internal Audit)

• Use updated document checklists and process trackers to all loan applications to help identify the gaps.

•Conduct process audit and compliance review

Causes of PAR

Preventive Strategies

Remedial Measures

Delays in implementing the alarm signals

Example: Step to apply savings to pay for missed payments is taken too late

• Ensure timely implementation of alarm signals:

-reviewing the list of delinquent accounts

- monitoring the steps taken for each account in a tracker

PAR Classification sheet

PAR Calendar

PAR Visit report

• Classify delinquent accounts as to age

• Verify the causes for missed payments

• List in a tracker the steps already taken to collect missed payments

• Validate whether account is still collectible or not.

•Supervisor or Internal Audit to validate this report.

•Based from findings, decide the appropriate remedial measure

Causes of PAR Preventive Strategies

Remedial Measures

Inadequate loan loss provisioning such that long overdue accounts could not be written off

Follow provisioning standard

Current 1%1-30 days 2%31-60 days 20%61-90 days 50%Above 90 days 100%

(BSP Circular 409)

• Book adequate loan loss provision monthly

• Classify and validate accounts that are already beyond 90 days and schedule for write off.

Causes of PAR Preventive Strategies

Remedial Measures

Practice of conducting follow-up collection that extends until late hours making Account Officers unproductive and burnt out, and harass & embarass clients

Implement standard time management for Account Officers.

Eliminate the “rescue” or “sit down” method of collection.

Implement zero tolerance practices and Alarm Signals – close follow up of clients.

Causes of PAR Preventive Strategies

Remedial Measures

• “Tapal” or “abono” hides arrears.

• These internal-arrears are not monitored by the bank.

• Clients who are recipients of “abono” manage to get higher loan amount from the bank

• Monitor actual repayment performance of members in group lending with a collection monitoring tool.

A member might have a record of 100% payment in the bank’s records, but actual payments maybe due to “abonohan” or “tapal” system

• Supervisors should conduct actual field validation of member’s repayment performance during center meetings; •Enforce the recording & monitoring of internal arrears to avoid giving bigger loans to clients that have hidden delinquency.

Clients Amount of Weekly Payment Internal Arrears

NAME OF BORROWER PRINCIPAL INTEREST SAVINGS TOTAL

Balance, last week This week TOTAL

Prepared by : Center Treasurer

Noted by: Account Officer

Date of the Transaction: ___

Causes of PAR

Preventive Strategies Remedial Measures

Loan product no longer responds to what the market wants

• Do not copy loan product lock stock and barrel;

• Design loan products based on market survey of market demand and preferences

• Conduct a review of the existing loan product operations, policies and procedures

• When offering group loan product, bank should have a plan and strategy for graduating clients to a transition or individual loan product.

• Transition qualified clients