Designing a Housing Microfinance Loan Product

Lending Systems and Procedures

(Based on RBAP-MABS HMF Generic Manual)

1) Loan Promotion & Application

2) Client Selection(Loan Analysis)

3) Loan Approval

6) Loan Collection/Monitoring

5) Loan Release 4) Loan Documentation

The Microfinance Loan Process

• Marketing: AOs & bank officers/staff reach out to prospective borrowers

• Loan Application: Simple, one to two pages. • Loan Analysis: Based on client’s character and

cash flow • Loan Approval: Decentralized. • Loan Documentation & Disbursement: Fast loan

release • Follow-up & Collection: Strict adherence to zero

tolerance approach. Restructuring only allowed in exceptional cases

Loan Procedures: Points to Loan Procedures: Points to Bear in MindBear in Mind

Items MicroenterpriseLoan Product

HMF Traditional HousingLoan

Loan Application

Simple, single page Simple, single page One to two pages

Loan Analysis / Security

Character (CIBI) Business and

Household Cash flow

Character (CIBI)Business and

Household Cashflow

Collateral -REMCapital (counterpart)Capacity to Pay Condition of the

business andCharacter

Loan Approval Decentralized Decentralized Centralized

LoanDisbursement

Cash (one time) Cash (one time) Cash ( in tranches)

LoanMonitoringand Collection

Monitored and collected regularly (weekly, semi-month or monthly)

Monitored and collected regularly (weekly, semi-monthly or monthly)

Monitored and collected on a monthly basis

Loan Product Comparative Table

Lending Procedures:Lending Procedures:

PromotionPromotion

• Reach out to the communities and visit potential clients in their workplace (home, office or businesses).

• Organize orientation sessions at Barangays.• Entertain walk-in clients• Distribute brochures• Caravan/Road Show

Lending ProceduresLending Procedures

PromotionPromotion

• Due to increasing competition, AOs must adopt aggressive marketing strategies

• Promotion is not a substitute for high quality services

• The best and least expensive promotion a credit program could have is that of a satisfied client: Word of mouth

Lending ProceduresLending Procedures

PromotionPromotion

• How to find a market for the product:

– Existing bank clients

Incentive for good performance for group and or individual loan clients.

- New clients

Lodging/boarding houses near schools or business districts.

Lending Procedures:Lending Procedures:

Loan ApplicationLoan Application

• The loan application is simple (one page). The AO fills out the application with the client

• Most of the information in the application for first loans assess the client’s “character” [stability, entrepreneurship, reputation, and repayment behavior – (SERR)]

• Most of the information for repeat loans refers to repayment behavior regarding past loans as well as the trend in savings

Lending Procedures: Lending Procedures:

LOAN ANALYSIS-First LoanLOAN ANALYSIS-First Loan

• Character/Risk assessment: analysis of client’s Stability, Entrepreneurship, Reputation, and Repayment behavior (SERR in CIBI for first loan)

• Cash flow: repayment capacity based on all household income from business activities and others (including salaries, pensions and remittances).

Lending Procedures: Lending Procedures:

LOAN ANALYSIS-Repeat LoanLOAN ANALYSIS-Repeat Loan

Analysis of Repeat Loans are based on:

• Repayment behavior of previous loans• Results of monitoring visits to determine changes/ potential

problems in the client’s situation • Cash flow to determine repayment capacity and possible

increases in loan amounts

Lending Procedures:

LOAN ANALYSIS-Repeat Loan

A cash flow analysis may be done every other loan ONLY IF repeat loan amount is

1. the same or within 10% increase

2. not more than P25,000

3. loan term is 6 months or less, and

4. client has not made payments with delay of not more than 3 days.

If a borrower does not meet these qualifications, a cash flow analysis has to be done for every loan.

Strict adherence to the Zero Tolerance approach:

Banks must have well-defined collection policies that clearly guide AOs on appropriate actions to take.

THE ALARM SIGNALS.

• Alarm Signal No. 1: (delayed by 1 day) - AO contacts the client within 24 hours; Reports non-payment to Supervisor; Prepares memo to file; reports during weekly committee meeting.

Lending Procedures:Lending Procedures:

Loan CollectionLoan Collection

• Alarm Signal No. 2 (Delayed payment by 3 days) --AO and Supervisor delivers 1st collection letter signed by BM (cc: co-maker or co-borrower); Supervisor stresses importance of payments:

• ** eligibility for re-availments• ** avoidance of penalty fees/charges

• Alarm Signal Nol 3 (Delayed payment by 1 week)– BM accompanies the AO to the client and handles 2nd demand letter

Lending Procedures:Lending Procedures:

Loan CollectionLoan Collection

• BM stresses: (a) client will loose privilege to borrow again, and (b) bank will enforce VOS or CHM

• Alarm Signal No. 4 (delayed payment by 2 weeks) – AO delivers 3rd and final letter; BM visits borrower and stress that his/her name will be included in the negative data bank/blacklist

Lending Procedures:Lending Procedures:

Loan Collection Loan Collection

• Alarm Signal No. 5 (payment is delayed by 3 weeks) – Either the AO, Supervisor or the BM warns the borrower of legal action if unpaid within 1 week

• Alarm Signal No. 6 (payment is delayed by 4 weeks) – AO & Supervisor recommends to BM the debiting of O/B of loan from client’s contractual savings

• AO informs borrower of the debiting process• For unpaid balance, legal counsel takes over collection (extra-

judicial or judicial)

Loan CollectionLoan Collection

The MABS program is implemented by the of the Rural Bankers Association of the Philippines. It receives funding support from the U.S. Agency for International Development with oversight provided

by the Office of the President and the Mindanao Economic Development Council.

Rural Bankers Association of the Philippines

Mindanao Economic Development Council

Office of the President of the Philippines

U.S. Agency for International Development

The general contractor is Chemonics International, Inc.

These materials were made possible through the support provided by the U.S. Agency for International Development/Philippines under the terms of contract no. 492-C-00-98-0008-00. The opinions expressed herein are those of

the author(s) and do not necessarily reflect the views of the U.S. Agency for International Development.