1 preparing and analyzing client’s information. 2 important considerations in lending operations...

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Preparing and Analyzing Preparing and Analyzing Client’s InformationClient’s Information

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Important Considerations in Important Considerations in Lending Operations Lending Operations

RISK COST

SERVICE

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Profile of the Profile of the small and small and micromicro entrepreneurentrepreneur

Low educational levelsLow educational levels Small volume of operationsSmall volume of operations Rudimentary/obsolete equipmentRudimentary/obsolete equipment Few employees (0-9) mostly unpaid Few employees (0-9) mostly unpaid

family membersfamily members Family and business are entangledFamily and business are entangled Multiple income generation activitiesMultiple income generation activities

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Profile of the Profile of the small and small and micromicro entrepreneurentrepreneur

Basic or none business recordsBasic or none business records No marketable collateral to offerNo marketable collateral to offer No access to formal sources of credit/ No access to formal sources of credit/

no credit historyno credit history Active participation in informal sources Active participation in informal sources

of creditof credit Large, extended families Large, extended families Basic financial skillsBasic financial skills

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EnvironmentEnvironment

Most SME are not registered, Most SME are not registered, however, they have been in however, they have been in operations for many yearsoperations for many years

While SME may have property and While SME may have property and assets, most do not have property assets, most do not have property titles /ownership documentstitles /ownership documents

Registry of guarantees is Registry of guarantees is cumbersome, time and resource cumbersome, time and resource consuming. The cost is often too consuming. The cost is often too high for both client and lenderhigh for both client and lender

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EnvironmentEnvironment

Execution of guarantees through the Execution of guarantees through the legal system may take take a while.legal system may take take a while.

Contradictions in the legal system Contradictions in the legal system (e.g. creditors cannot seize a (e.g. creditors cannot seize a person’s means of production) person’s means of production) make executing guarantees very make executing guarantees very difficult. difficult.

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Character Based LendingCharacter Based Lending

In micro and small lending, loan analysis is In micro and small lending, loan analysis is based on based on CHARACTERCHARACTER rather than on rather than on collateral and business analysis.collateral and business analysis.

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Why not based on collateral?Why not based on collateral?

Most SME do not have marketable Most SME do not have marketable guarantee to offer (land, property, guarantee to offer (land, property, equipment). They use rudimentary/ equipment). They use rudimentary/ obsolete equipment of little or none obsolete equipment of little or none marketable value. marketable value.

For those who do, the value of the For those who do, the value of the guarantee or the cost of registering it far guarantee or the cost of registering it far exceeds the amount of the loanexceeds the amount of the loan

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Why not based on business Why not based on business analysis?analysis?

The micro and small entrepreneur rarely The micro and small entrepreneur rarely has financial statements and never has financial statements and never audited ones. audited ones.

For business analysis, the credit officer For business analysis, the credit officer would need to rely on information based would need to rely on information based on the client’s memory. The resulting on the client’s memory. The resulting financial data and analysis is at best financial data and analysis is at best questionable (little reliability)questionable (little reliability)

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What is Character Based What is Character Based Lending?Lending?

Character-based lending relies on Character-based lending relies on information on the client’sinformation on the client’s stabilitystability, , entrepreneurshipentrepreneurship reputationreputation, and , and repayment behaviorrepayment behavior

It also relies on information that neighbors It also relies on information that neighbors and peers have on the clientand peers have on the client

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Character based lending help us to Character based lending help us to reduce the reduce the RISKSRISKS and and COSTSCOSTS of of lending to a client unable to providelending to a client unable to provide Marketable collateralMarketable collateral Credit historyCredit history Reliable financial informationReliable financial information

What is Character Based What is Character Based Lending?Lending?

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To overcome these barriers we analyze To overcome these barriers we analyze four aspects of the client’s character:four aspects of the client’s character:

STABILITY:STABILITY: permanency, responsibility permanency, responsibility towards family and business,towards family and business,

ENTREPRENEURSHIP:ENTREPRENEURSHIP: experience, experience, knowledge of his market, ability to growknowledge of his market, ability to grow..

REPUTATION:REPUTATION: standing in the community, standing in the community, ties to community associations and other ties to community associations and other groups, accomplishmentsgroups, accomplishments

REPAYMENT BEHAVIOR:REPAYMENT BEHAVIOR: how well the how well the client meets his payment obligations of any client meets his payment obligations of any kind.kind.

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STABILITYSTABILITY ENTREPRENEURSHIPENTREPRENEURSHIP

REPUTATIONREPUTATION REPAYMENTREPAYMENT

BEHAVIORBEHAVIOR

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BEHAVIORBEHAVIOR

RISKS

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BEHAVIORBEHAVIOR

RISKS

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Indicators on Client’s StabilityIndicators on Client’s Stability

1. 1. StabilityStability� MarriedMarried� Married with childrenMarried with children� Children attending schoolChildren attending school� Resident for over two years in the same Resident for over two years in the same

community community � Home ownerHome owner� Business in operations for over two yearsBusiness in operations for over two years� Business in the same location for over Business in the same location for over

two yearstwo years

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Indicators of EntrepreneurshipIndicators of Entrepreneurship

2. 2. EntrepreneurshipEntrepreneurship

� The applicant (and/or spouse) has The applicant (and/or spouse) has multiple businessesmultiple businesses

� The applicant has provided concrete The applicant has provided concrete examples of how the business has grown examples of how the business has grown since start upsince start up

• Diversification of products or servicesDiversification of products or services• Expansion in the number of clientsExpansion in the number of clients• Increasing productionIncreasing production• Increasing number of employeesIncreasing number of employees

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Indicators of Indicators of Entrepreneurship Entrepreneurship (cont’d)(cont’d)

� The applicant has provided clear explanation The applicant has provided clear explanation of plans for business expansion of plans for business expansion � The applicant has a clear vision of his market The applicant has a clear vision of his market and how to competeand how to compete� The applicant keeps financial recordsThe applicant keeps financial records� The applicant explains clearly how he is The applicant explains clearly how he is going to use the loangoing to use the loan� The business is located in a commercial area The business is located in a commercial area � The business has been in operation for many The business has been in operation for many yearsyears

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Indicators of ReputationIndicators of Reputation

3. 3. ReputationReputation

� The applicant belongs to and/or holds a The applicant belongs to and/or holds a position position

in a community association.in a community association.� The applicant has a good reputation as The applicant has a good reputation as

confirmed by CIBI with neighbors. confirmed by CIBI with neighbors. � The applicant has a good reputation as The applicant has a good reputation as

confirmed by CIBI with peersconfirmed by CIBI with peers

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4. 4. Repayment BehaviorRepayment Behavior

� The applicant has had loans from other The applicant has had loans from other sources.sources.

� Payments of any relevant loan/credit Payments of any relevant loan/credit have been paid on time as confirmed by have been paid on time as confirmed by payment receipts payment receipts

� The applicant has credit from suppliers.The applicant has credit from suppliers.� Payments to suppliers are made on time Payments to suppliers are made on time

as confirmed by last three receiptsas confirmed by last three receipts � Utility bills are paid on time as confirmed Utility bills are paid on time as confirmed

by last three receipts/payment slips. by last three receipts/payment slips.

Indicators of Good Repayment Indicators of Good Repayment BehaviorBehavior

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Indicators of Good Repayment Indicators of Good Repayment Behavior (cont’d)Behavior (cont’d)

� Rent is paid on due date as confirmed by last Rent is paid on due date as confirmed by last three receiptsthree receipts� School fees are paid on time as confirmed by School fees are paid on time as confirmed by last three receiptslast three receipts� The applicant has an active savings and/or The applicant has an active savings and/or checking account. checking account. � The last three bank statements show The last three bank statements show

increasing increasing balancesbalances

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RED FLAGS ........................RED FLAGS ........................

The applicant inquires about donor financingThe applicant inquires about donor financing The applicant provides contradictory The applicant provides contradictory

informationinformation The applicant does not have a clear The applicant does not have a clear

understanding of his market or businessunderstanding of his market or business The applicant does not provide a convincing The applicant does not provide a convincing

explanation about his need for a loanexplanation about his need for a loan The spouse contradicts the information The spouse contradicts the information

provided by applicantprovided by applicant The spouse refuse to sign collateral The spouse refuse to sign collateral

authorization authorization

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RED FLAGS ........................RED FLAGS ........................

History of violent behaviorHistory of violent behavior History of spouse/child abuseHistory of spouse/child abuse History of alcoholismHistory of alcoholism Spouse refuse to sign authorizationSpouse refuse to sign authorization References reluctant to express opinion on References reluctant to express opinion on

applicant. applicant. Applicant unable to provide receipts Applicant unable to provide receipts

supporting information.supporting information.

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Reference ChecksReference Checks

Verifying references is a key step in character Verifying references is a key step in character based lending. Main sources are:based lending. Main sources are:

CreditorsCreditors SuppliersSuppliers LandlordLandlord Business & residential neighborsBusiness & residential neighbors Public market administrator/market Public market administrator/market

supervisorsupervisor Vendors association Vendors association Barangay officialsBarangay officials

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Reference checks with Creditors, Reference checks with Creditors, Suppliers and landlordSuppliers and landlord : :

> How long has the relationship been How long has the relationship been between creditor/ supplier/landlord and between creditor/ supplier/landlord and the applicant?the applicant?

> How often does the applicant place How often does the applicant place orders?orders?

> What amounts?What amounts?> Has the supplier provided credit to the Has the supplier provided credit to the

applicant?applicant?> How much ? On what terms? ___How much ? On what terms? ___> Does the applicant pay on time?Does the applicant pay on time?> What is the supplier’s opinion on the What is the supplier’s opinion on the

applicant?applicant?

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ReferenceReference Checks Checks With Business NeighborsWith Business Neighbors

> How long have you known the applicant?How long have you known the applicant?> How long the applicant has been engaged in How long the applicant has been engaged in

his/her present business?his/her present business?> What reputation does s/he have as a What reputation does s/he have as a

businessman? neighbor?businessman? neighbor?> Is s/he known to have any problems with Is s/he known to have any problems with

debtors? Family? alcohol? Violence?debtors? Family? alcohol? Violence?> Would s/he be willing to guarantee a loan by Would s/he be willing to guarantee a loan by

the applicant if ever?the applicant if ever?

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ReferenceReference Checks Checks With Residential NeighborsWith Residential Neighbors

> How long have you known the applicant?How long have you known the applicant?> What he/she knows of the applicant and his/her family – What he/she knows of the applicant and his/her family –

how long have they been residing in the community, what how long have they been residing in the community, what the family’s sources of income are, who the members of the family’s sources of income are, who the members of the applicant’s household are, and the occupation of the applicant’s household are, and the occupation of household members? household members?

> How other regards the applicant and his/her family-How other regards the applicant and his/her family-whether they are liked and well-respected in the whether they are liked and well-respected in the community or not?community or not?

> Is s/he known to have any problems with debtors? Family? Is s/he known to have any problems with debtors? Family? alcohol? Violence?alcohol? Violence?

> Would s/he be willing to guarantee a loan by the applicant Would s/he be willing to guarantee a loan by the applicant if ever?if ever?

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ReferenceReference Checks With Co-Maker Checks With Co-Maker

> Ask the information required in the co-maker’s Ask the information required in the co-maker’s statement.statement.

> Ask if his/her spouse knows about the loan Ask if his/her spouse knows about the loan application and his/her role as a co-maker.application and his/her role as a co-maker.

> Ask if you can talk with his/her spouse about Ask if you can talk with his/her spouse about the loan so you can also explain to the spouse the loan so you can also explain to the spouse the bank policy on loan delinquency and the the bank policy on loan delinquency and the responsibilities of a co-maker.responsibilities of a co-maker.

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ReferenceReference Checks With Checks With Barangay OfficialBarangay Official

> What he/she knows of the applicant.What he/she knows of the applicant.> How other regard the applicant and his/her How other regard the applicant and his/her

familyfamily> Whether or not the applicant is known to Whether or not the applicant is known to

occasionally borrow money from others and occasionally borrow money from others and reliable the applicant is repaying borrowed reliable the applicant is repaying borrowed amountsamounts

> Whether or not complaints has been filed with Whether or not complaints has been filed with the barangay office against the applicant or the barangay office against the applicant or any member of his/her family and the nature any member of his/her family and the nature of the complaint.of the complaint.

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Analysis of Repeat LoansAnalysis of Repeat Loans

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Analysis of repeat loans is based on Analysis of repeat loans is based on the the REPAYMENT BEHAVIORREPAYMENT BEHAVIOR of past of past loans.loans.

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Important MIS reports needed for Important MIS reports needed for repeat loan analysis:repeat loan analysis:

1. Client Status Report (current loan)1. Client Status Report (current loan)

2. Client Status Report (previous 2. Client Status Report (previous loans)loans)

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Factors to consider when analyzing Factors to consider when analyzing repeat loans:repeat loans:

1. Repayment rate: 100% on-time full 1. Repayment rate: 100% on-time full repayment is highly desired; repayment repayment is highly desired; repayment rate not less than 60% but no late rate not less than 60% but no late payment for more than 3 days can still payment for more than 3 days can still be accepted but with certain conditions.be accepted but with certain conditions.

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Analysis of Repeat LoansAnalysis of Repeat LoansCLIENT CLASSIFICATION AA A B C D

% INCREASE IN LOAN AMOUNT Up to 30% Up to 20% Up to 10% No Increase No Loan

A. LOAN REPAYMENT HISTORY REPAYMENT RATE

100% 90% 80% Below 70% But Below 60%

Not Less than

60%

Weekly Amortizations

2 months - 8 installments 8 7 6





Note: Note: Note:

But no missed payment



exceeding 3 days. Other-



wise, no increase.

wise, no increase. wise, no loan.

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100% 90% 80% Below 70% But Below 60%

Not Less than

60%

Semi-monthly

2 months – 4 installments 4 3





Note: Note: Note:

But no missed payment exceeding 3 days.


But no missed payments exceeding 3 days.

Otherwise, no increase.



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100% Below 50%

Monthly






Note: Note:





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LOAN REPAYMENT HISTORY

(To be supported by MIS Generated Client Status Reports - Current & Previous)

LOAN AMOUNT NO. OF PAID ON PAID IN ARREARS CREDIT

AMORTIZATIONS DUE DATE

1 -7 days late

8 - 15 days late

16 - 30 days late

Over 31 days late

CLASSIFICATION

3rd Loan

14,000 12 2 2 1 1 6 C

2nd Loan

12,000 12 11 6 B

1st Loan

10,000 12 11 1 AA

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What does repayment problem tell us?What does repayment problem tell us?


Payments over 7 days past due indicate that the Payments over 7 days past due indicate that the loan amount is too large loan amount is too large

Partial payments indicate that the loan amount is Partial payments indicate that the loan amount is too large too large

A steady decline in the number of installments A steady decline in the number of installments paid on time could mean the loan amount is paid on time could mean the loan amount is becoming too large becoming too large

A sharp drop in savings balances could meanA sharp drop in savings balances could mean liquidity problemsliquidity problems

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2. Business conditions2. Business conditions Inventory is growing, same or decreasingInventory is growing, same or decreasing Number of workers is increasing, same or decreasingNumber of workers is increasing, same or decreasing Business days/hours are increasing, same or decreasingBusiness days/hours are increasing, same or decreasing Trade area is expanding, same or decreasingTrade area is expanding, same or decreasing Business assets are increasing, same or decreasingBusiness assets are increasing, same or decreasing

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3. Household conditions3. Household conditions No problem with other household income sourcesNo problem with other household income sources

No illness/hospitalization of a household memberNo illness/hospitalization of a household member

No family problemNo family problem

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4. Seasonal Trends4. Seasonal Trends

- Performance of specific types of micro-- Performance of specific types of micro-

enterprise in the community (i.e. fish vendors, enterprise in the community (i.e. fish vendors,

carinderia, school canteens, retail stores, light carinderia, school canteens, retail stores, light craft craft

manufacturing, services)manufacturing, services)

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5. Sectoral Trends5. Sectoral Trends

- Performance of the major sources of household - Performance of the major sources of household income (i.e. crop/poultry & livestock farming, income (i.e. crop/poultry & livestock farming, fishing, factories, etc.)fishing, factories, etc.)

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6. Other Indicators6. Other Indicators

- Change in Borrower’s attitude- Change in Borrower’s attitude

- Change in Borrower’s lifestyle- Change in Borrower’s lifestyle

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Conditions that must be met for cash flow Conditions that must be met for cash flow analysis not to be required:analysis not to be required:

1. 100% on-time full repayment1. 100% on-time full repayment

2. Loan term is less than 6 months2. Loan term is less than 6 months

3. Requested increase is not higher than 10%.3. Requested increase is not higher than 10%.

4. Requested loan amount is still within the loan 4. Requested loan amount is still within the loan entitlement in the previous cash flow analysis entitlement in the previous cash flow analysis done on the client.done on the client.

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So how much should the increase be So how much should the increase be after all factors have been after all factors have been considered?considered?

As a general rule, the increase should be no As a general rule, the increase should be no more than 30% of the previous loan for more than 30% of the previous loan for clients with 100% on time full repayment clients with 100% on time full repayment (based on Client Classification), subject (based on Client Classification), subject still to cash flow analysis.still to cash flow analysis.

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The Supervisor’s Creed!!!The Supervisor’s Creed!!!

It is my solemn responsibility to It is my solemn responsibility to validate and evaluate all loan validate and evaluate all loan accounts the passes my judgment, accounts the passes my judgment, neglecting this responsibility is like neglecting this responsibility is like poking a GUN in my head!poking a GUN in my head!

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1 preparing and analyzing client’s information. 2 important considerations in lending operations...

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