On Site Training and Mentoring OTM

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On Site Training and Mentoring (OTM)
Building on Capacity and Education to Expand
Microfinance Access A Presentation of Results and
Experiences from the Technical Assistance in
Enhancing Access of the Poor to Microfinance
Services in Frontier Areas (TA 4544) Implemented
by the NATIONAL ANTI-POVERTY COMMISSION Funded
by the ASIAN DEVELOPMENT BANK

• Presented by
• Eduardo N. De Castro, Domestic Microfinance
  Specialist
• SEAMEO-Innotech, Quezon City
• 22 September 2006

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(On Site Training and Mentoring OTM) Pearl
Hall, SEAMEO-INNOTECH Commonwealth Ave., Diliman,
Quezon City September 22, 2006 Presented
by Eduardo N. de Castro Domestic Microfinance
Specialist
NAPC-ADB Technical Assistance 4544 Enhancing
Access of the Poor to Microfinance Services in
Frontier Areas"
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Module Overview

• Phase 3 Background
• Selection Criteria
• OTM Point of Entry
• Approach to OTM
• PESO Standard
• General Findings
• Conclusion
• General Recommendations

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1. BACKGROUND

• There were 53 MFIs that participated in the
  nationwide survey on phase 1.
• From among them, NAPC selected 15 MFIs/branches
  for the OTM

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SELECTION CRITERIA

• The criteria were solely based on the information
  provided in the MFI survey results
• Acceptable level of outreach
• Portfolio quality
• Number of savers
• Governance
• Presence and potential to expand services in the
  frontier areas

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2. OTM POINT OF ENTRY

• PESO The uniform performance standards for all
  types of MFIs in the Philippines
• Portfolio Quality
• Efficiency
• Sustainability
• Outreach

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APPROACH TO OTM

• The selected MFIs were rated purely for their MF
  activities
• The results of the ratings determined the types
  of limited on site training and mentoring.
• OTM included, but not limited to, training on the
  use of PESO instrument, workshops, consultations
  with management and the MFU, branch visits,
  limited operations review, and field visits.

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PORTFOLIO QUALITY
1. Portfolio At Risk
STANDARD 5
2. Loan Loss Reserve Ratio
STANDARD 100 of the required
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EFFICIENCY
1. Administrative Efficiency
STANDARD 10 and below
2. Operational Self-Sufficiency
STANDARD Greater than 120
STANDARD Group Greater than or equal to
300 Individual Greater than or equal to 150
3. Loan Officer Productivity
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SUSTAINABILITY
1. Financial Self-Sufficiency
STANDARD Greater than 100
Adjusted Expenses Total Operating Expense
(Average Equity Average Fixed Asset x
Inflation Rate) (Market Interest Rate x
Average Total Liabilities) Actual Interest
Expense Other Implicit Costs. Other Implicit
Costs include those costs relevant to the conduct
of its business such as grants, rent free
building, donor paid technical advisor, or other
subsidized expenses
2. Loan Portfolio Profitability
STANDARD Greater than the inflation rate during
the period
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OUTREACH
1. Growth in Number of Clients
STANDARD 5
2. Growth in Loan Portfolio
STANDARD 5
3. Depth of Outreach
STANDARD Not Exceeding 20
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3. GENERAL FINDINGS

• 1. Loan Portfolio Quality
• Policies
• Client Selection
• CIBI
• Repayment Capacity
• Loan Terms Sizes
• Repeat Loans
• Outreach
• Approving Authority
• Loan Collection Monitoring
• Delinquency Management
• Supervision
• Training
• Natural Calamities

• 2. Sustainability
• Profitability
• Expansion
• Credit Pollution
• Other Factors

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Policies

• Client Selection
• For group loans under a modified grameen model,
  selection of borrowers lies solely on the
  recommendations of the members of the centers or
  groups.
• Target clients are not limited to enterprises
  that can generate daily/weekly income to match
  with weekly repayment frequency.

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Policies

• Credit Investigation / Background Investigation
  (CIBI)
• Reliance on the strong recommendations of centers
  
• No independent CIBI conducted by the MFIs to
  gather first hand information to track
• Multiple access to other borrowings
• Non existent microenterprises or dwindling income
  due to low sales
• Family problems that led to relocation,
  separation, close of businesses, etc.

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Policies

• Repayment Capacity
• Absence or insufficient client assessment tools
  to determine the repayment capacity that can be
  normally measured through cash flow analysis

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Policies

• Loan Terms Sizes
• Automatic step up lending
• Loan sizes beyond capacity of borrowers to pay
• Terms do not match with the size of the loan. Too
  long for smaller amounts, and possibly too short
  for higher amounts.

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Policies

• Repeat Loans
• Conditions for repeat loans not strictly
  implemented that are based on
• Repayment history
• Attendance to weekly center meetings
• Credit scoring
• CIBI
• Cash flow

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Policies

• Outreach
• Rapid expansion in providing credit to as many
  borrowers in pursuit of mandated targets (
  internal external) sacrificing control and
  portfolio quality

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Policies

• Approving Authority
• Too much dependence on the recommendations of the
  account/loan officers. Very rare that loan
  applications (new repeat) are disapproved or
  deferred for perceived risks.

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Loan Collection

• Loan collection not clearly established and
  enforced
• Laxity in collection leading to the collapse of
  credit disciplines that are emphasized during
  clients training and orientations.

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Loan Monitoring

• No follow up activities to ensure that loans
  granted are not diverted that can be verified
  through random ocular visits and loan utilization
  checks.
• Inadequate management information system (MIS) to
  track vital information of the loans ( loan list,
  loan delinquency, portfolio at risk, repayment
  history, etc.)
• MIS not updated

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Delinquency Management

• Failure to monitor and immediately act on the
  earliest signs of delinquency
• Group guarantees not enforced to the fullest
• Absence of delinquency plan to address early
  signs of delinquency as well as remedial measures
  for long outstanding uncollected accounts

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Supervision

• Lack of focus on supervision and monitoring of
  account/loan officers due to lack of training on
  basic supervision.

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Training

• Absence or lack of adequate training of
  account/loan officers to properly implement the
  MF programs
• Lack of understanding of MF best practices and
  principles to distinguish it from the other
  regular loan programs of the MFIs

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Calamities Emergencies

• Typhoons
• Floods
• Death or Sickness in the family
• Policy changes of national and local governments
  leading to dislocation or permanent closures of
  businesses

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Profitability

• Factors affecting loan portfolio profitability
• High PAR decreases income potential but increases
  loan loss provision
• High costs (direct indirect) for some MFIs
  curtailing plans to expand

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Expansion

• Factors affecting expansion in frontier areas
• Peace and order situation
• Low business opportunities due to less economic
  activities
• Lack of basic infrastructures (roads, bridges,
  transport, communication facilities, etc.)

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Credit Pollution
High delinquency is also attributed to the
absence of any facility for the sharing of credit
information (negative list) for all financial
institutions to verify multiple credit exposures.
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Other Factors

• Absence of other measures to mitigate risks
• Health insurance to address sickness not only to
  the borrower but also to other immediate members
  of the family
• Other forms of savings designed to cover for
  unexpected expenses that affects repayment

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4. CONCLUSION

• Maintaining acceptable level of PAR remains
  elusive for most of the MFIs.
• High PAR is mostly triggered by the lack or
  insufficient basic policies and procedures in
  measuring clients ability to repay the loan
• In some cases, implementation of policies are
  disregarded and to some extent ignored.
• Most MFIs have mixed clients that generate daily,
  weekly, monthly, and seasonal income but the
  frequency of repayment remains weekly.

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4. CONCLUSION

• The lack or poor CIBI, to capture first hand
  information for new and repeat loan borrowers,
  resulted to surprises when delinquency starts to
  appear. Reasons like closure or no business
  sickness family problems etc. became common
• Close monitoring of accounts are not strictly
  adhered due to the absence of an MIS that do not
  track vital data to generate the required
  information.
• For some MFIs, repayment records are not updated
  to ensure sufficient responses to address certain
  adverse conditions that affects portfolio quality.

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4. CONCLUSION

• Training and supervision play a significant role
  in the success of the program.
• Supervisors are not equipped with essential tools
  of basic supervision in order to provide guidance
  and direction to their subordinates.
• Standard trainings are not consistently
  maintained as additional account/loan officers
  are hired for expansion. The absence of a
  structured training allows the transfer of the
  technology to deteriorate, just like in a message
  relay exercise.

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4. CONCLUSION

• . High costs in managing the MF loan programs
  compared to the expected income (due to smaller
  loan size) prevented the MFIs from expanding to
  more remote areas
• Others seem to be sustainable since the required
  loan loss provision to cover for risks are not
  adequately provided.

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5. GENERAL RECOMMENDATIONS

• Review and revise the product manual to consider
  changes that will strengthen the resolve to
  maintain high portfolio quality
• Match the loan size with loan term for the
  borrowers to be able to pay. Extending the loan
  term of smaller amount does not necessarily
  convert into affordability, but more on
  increasing the risk of not being paid at all.
• Avoid granting loans to microenterprises that do
  not generate daily of weekly sales if repayment
  frequency is weekly.
• Design a new product that will match repayment
  frequency with the sales or income that comes
  monthly or beyond so as not confuse the
  account/loan officers in treating the same with
  the original MF program.

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5. GENERAL RECOMMENDATIONS

• CIBI should be improved to be able to gain the
  upper hand in gathering first hand information
  that will validate the recommendations of the
  centers/groups (group lending), and/or the
  information disclosed in the application forms
  (individual lending).
• Explore the possibility of measuring the
  repayment capacity through cash flow analysis.
  The analysis should be adequate enough to
  determine the amount of loan to be granted for
  the borrowers to afford to pay.

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5. GENERAL RECOMMENDATIONS

• Institute varied delinquency management measures.
  
• Delinquency strategy is different for early
  signs. For long outstanding delinquent accounts,
  a more rigid and aggressive remedial management
  measures are needed. The costs (revealed
  concealed) are far greater than the income that
  can be generated from the delinquent portfolio.
• MIS plays a critical and very important role in
  making sure that the MFI can act in a swift and
  decisive manner.

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5. GENERAL RECOMMENDATIONS

• Provide essential supervision courses for newly
  designated supervisors.
• In most cases, especially for MFIs that are
  expanding farther from their servicing branches,
  the success of the program depends on the quality
  of supervision. It includes the ability of the
  supervisors to lead, plan, organize, monitor, and
  institute adequate controls.
• As part of their supervisory functions, train
  them to become trainers of new account/loan
  officers to keep the MF program always at the
  highest level of implementation.

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5. GENERAL RECOMMENDATIONS

• Design and provide a comprehensive training
  course that will contain the training syllabus,
  classroom training, on the job training, training
  checkpoints, and evaluation.
• Exercise care and prudence in expanding to areas.
  The provision of MF credit services should always
  be market driven as opposed to supply driven.