Designing a Housing Microfinance Loan Product Features of the Housing Microfinance Loan Product (in Generic Manual)
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Designing a Housing Microfinance Loan ProductFeatures of the Housing Microfinance Loan Product(in Generic Manual)
OutlineA Review Best Practices & PrinciplesObjective Framework in LendingAssessment of Policies & Procedures Loan Terms and ConditionsEligibility CriteriaLoan Purpose, Amount & ValueLoan TermsLoan RepaymentAppropriate Risk ManagementInterest Rates, Fees & ChargesSavings Component
*A Review: Microfinance Best Practices & PrinciplesThe practices that MFIs follow in providing financial services to low-income clients that have led to success and profit.
Best practices should be reflected from product design stage to implementation, to monitoring, up to collection.
1. Minimize the risks of lending to a client who has no or limited credit history, no business information and no marketable collateral to offer 2. Minimize the risks associated with high dependence of repayment on future income ( crop success or failure)4. Reduce costs of small loans3. Facilitate enterprising poor people access to credit
OBJECTIVE FRAMEWORK IN LENDING
*USING THE FRAMEWORK: ASSESS LENDING POLICIES AND PROCEDURESWhen assessing whether a policy or procedure is appropriate or not, ask the following questions: Will the policy or procedure..
Increase or reduce my risk of lending to this particular client?Increase or reduce my cost of lending to this particular client?Improve and speed up customer service?
NOTE: The amount of the first loan is not necessarily tailored around what the client needs, but around what the institution is willing to risk with a borrower who offers no collateral, no reliable information, no credit history.
Housing Microfinance loan ProductLOAN TERMS AND CONDITIONSLoan Product ObjectivesEligibility CriteriaLoan PurposeLoan AmountLoan TermsLoan RepaymentLoan GuaranteesInterest, Penalties and ChargesOther Term & Condition: Savings
HMF Loan Terms & Conditions:Eligibility CriteriaFirst time Borrowers:Existing Microfinance clientsBorrowers business at least two years in operation.Multiple, regular sources of income other than the main businessA resident in the community for at least two years18-65 years of age No past due accounts with the bank, other banks and/or other creditors/suppliers (qualify)Clear from cases at the Barangay or Court Willingness to pay in frequent installments of capital and interest
HMF Loan Terms & Conditions:Eligibility CriteriaRepeat borrowers:All installments from previous loan made on time or with a delay of not more than three days.
An AO should provide justification for recommending a repeat loan with less than 100% on-time repayment rate.
HMF Loan Terms & Conditions:Loan Purpose
Loans can be used to finance Home Construction, Home and/or lot acquisition, lot acquisition intended for housing cum business, and home improvement/repairs.
HMF Loan Terms & Conditions:Loan AmountsLoan amounts start small and scale up as the client develops a credit history with the bankIncremental loan amounts to support incremental home repair or buildingPer BSP: Up to P150,000 for home improvement/repairs; Up to P300,000 for house construction and/or lot acquisition but these all depend on the risk appetite of bank.Loan increases are not automatic but determined by repayment behavior and cash flow.
Capacity to pay based on household cashflow analysisUp to 90% of the appraised value in case of REM but can be lower.Acceptable valuation in cases of usufruct, leases, etc.
HMF Loan Terms & Conditions:Loan Value
HMF Loan Terms & Conditions:Loan Terms
Determined by cashflow. The shorter term, the better, subject to the Banks credit policies BSPs Circular 678 allows for a maximum of 5 years for home improvements/repairs and up to 15 years for construction or acquisitionMABS recommends shorter maximum term/sNo grace periods
Why Short Term ?Most micro borrowers have quick cashflow turn around .The incentives to repayment such as expectation of another loan, only works in short-term loans.Business and family are intertwined; problems in the family affect repayment. The longer the term, the greater the risk.Others? _________________________________________________________________
HMF Loan Terms & Conditions:Loan RepaymentWeekly, semi-monthly, monthly installment of capital and interest (frequent amortization)With savings componentLoan payments should not exceed a reasonable percentage of clients income as determined by cash flow analysis.
Why frequent payments?The risks involved in microfinance lending are largely mitigated by regular payments of principal and interest.
Most micro borrowers are involved in several income generating activities, usually off-farm, that ensure a steady income flow for the household.
HMF Loan Terms & Conditions:Appropriate Risk ManagementFor House Construction and House & Lot Acquisitions- secure tenure instruments to be used as collateral (see Annex A of Generic Manual) for loans over P150,000.00Opening of savings account shall be required for clients with no existing savings accountAdequate loan monitoring, collection, control, provisioning which is to be included in the banks HMF manualA lien or mortgage over the house and/or lot to be financedMortgage Redemption Insurance (MRI) shall be required to cover against death for loan amounts exceeding P______.Additional risk cover may be availed from government guarantee programs (for loans exceeding amount P______).
HMF Loan Terms & Conditions:Interest Rates
The interest rate must reflect competition, administrative costs, costs of capital, and loan loss reserves. Interest rates and other charges should be revised periodically and adjusted according to inflation and/or the cost of capital.HMF interest rate on loans with term exceeding 6 mos/ 12 mos should be on declining balance.
HMF Loan Terms & Conditions:Fees and chargesFees and other charges can function like interest rates in providing revenue to the banks.
They can be proportional to the size of the loan or fixed, and they can be collected in advance or repeatedly (e.g. at renewal monthly) while a loan is outstanding. They may appear more acceptable to the borrower if they are linked to specific loan services (e.g. preparation of documents, inspection, etc.).
HMF Loan Terms & Conditions:Savings ComponentsSavings as a feature to attract clients to get a HMF loan.Require clients to open a savings account to facilitate loan release and loan payment.Encourage clients to escrow at least 10% of loan principal in their savings account Establish client-friendly withdrawal policies (such as maintaining equivalent of 30% of principal in savings account with clients able to withdraw the rest anytime)Encourage clients to save 20%-30% of their net income proceeds in savings and use built-up savings as collateral in place of a co-maker.
ItemsMicroenterpriseLoan ProductMAPHMFClient EligibilityMicroenterprenuers Small farmers with farm and other sources of incomeLoan PurposeWorking CapitalSmall Fixed AssetsWorking CapitalSmall fixed AssetsLoan AmountP3,0000-P50,000 FLP3,000-P150,000 RL
Determined based on cashflowP3,000-P50,000 FLP3,000-P150,000 RL
Determined based on cashflowLoan Term3 months up to 12 months3 months to 12 monthsLoan Interest Penalty andOther ChargesMonthly Interest Rate Ranging from 2-3% monthlyMonthly Interest Rate Ranging from 2-3% monthlyLoan RepaymentWeekly, semi-monthly, and monthly Weekly, semi-monthly, and monthly Amortized-Partial BalloonLoan GuaranteeSubstitute collateral, serialized assets, co-makers, real estateSubstitute collateral, serialized assets, co-maker, real estate
QUESTIONS?END OF PRESENTATION
***Objectives in lending framework. Every loan policy and procedure is built around three objectives.
Facilitating the farmers access to credit (rapid disbursement; simple procedures; innovative guarantees)Minimizing the risks of lending to a client that has no credit history, questionable business information and no marketable collateral to offerMinimizing the risks associated with high dependency on crop success/failure for repaymentReducing costs associated to small loans
*************Why crop insurance is optional:Crop insurance does not cover farmerswhose farms are located in riverbed, lakebed marshland, shoreline or riverbankwho do not have effective irrigation and drainage systemsMAP loans are regularly paid, reducing the risks of non-collection of loanMAP Loans are granted to a variety of farm and agricultural activities that do not necessarily require insuranceCrop insurance premium adds to the total finance charges that a client paysCrop insurance, if required by the bank, should only supplement the basis for granting the loan, that is the clients character and cash flow.
***More similarities than differences between MAP and MEP. Differences highlighted in red. Major differences between MAP and MEPTrade area/target marketLoan purposeMode of payment..Then discuss, fill-up the boxes for HMF
Major differences between MAP using MABS Approach and traditional agri loan: determination of the loan amount in the latter is based on per hectare cost of production (or per unit cost of production), not on cashflow; and payment is lumpsum which is subject to a lot of risks calamities, pests and diseases, price risks, etc.