Download - Designing a Housing Microfinance Loan Product Features of the Housing Microfinance Loan Product (in Generic Manual)

Designing a Housing Microfinance Loan Product

Features of the Housing Microfinance Loan Product

(in Generic Manual)

OutlineOutline1. A Review – Best Practices & Principles2. Objective Framework in Lending3. Assessment of Policies & Procedures 4. Loan Terms and Conditions5. Eligibility Criteria6. Loan Purpose, Amount & Value7. Loan Terms8. Loan Repayment9. Appropriate Risk Management10. Interest Rates, Fees & Charges11. Savings Component

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A Review: Microfinance Best Practices & A Review: Microfinance Best Practices & PrinciplesPrinciples

• The 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 loans

3. Facilitate enterprising poor people

access to credit

OBJECTIVE FRAMEWORK IN LENDINGOBJECTIVE FRAMEWORK IN LENDING

RISKRISK

COSTCOSTSERVICESERVICE

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USING THE FRAMEWORK: ASSESS LENDING USING THE FRAMEWORK: ASSESS LENDING POLICIES AND PROCEDURESPOLICIES AND PROCEDURES

When 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 CONDITIONS

• Loan Product Objectives• Eligibility Criteria• Loan Purpose• Loan Amount• Loan Terms• Loan Repayment• Loan Guarantees• Interest, Penalties and Charges• Other Term & Condition: Savings

HMF Loan Terms & Conditions:HMF Loan Terms & Conditions:

Eligibility CriteriaEligibility Criteria

First time Borrowers: Existing Microfinance clients Borrower’s business at least two years in operation. Multiple, regular sources of income other than the main

business A resident in the community for at least two years 18-65 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


Eligibility CriteriaEligibility Criteria

Repeat 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.


Loan PurposeLoan 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.


Loan AmountsLoan Amounts• Loan amounts start small and scale up as the client develops a

credit history with the bank• Incremental loan amounts to support incremental home repair

or building• Per 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.

A. Capacity to pay based on household cashflow analysisB. Up to 90% of the appraised value in case of REM but can be lower.C. Acceptable valuation in cases of usufruct, leases, etc.


Loan ValueLoan Value


Loan TermsLoan Terms

• Determined by cashflow. The shorter term, the better, subject to the Bank’s credit policies– BSP’s Circular 678 allows for a maximum of 5 years for home

improvements/repairs and up to 15 years for construction or acquisition

– MABS recommends shorter maximum term/s• No grace periods

Why Short Term ?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? _________________________________________________________________


Loan RepaymentLoan Repayment

• Weekly, semi-monthly, monthly installment of capital and interest (frequent amortization)

• With savings component• Loan payments should not exceed a reasonable percentage of

clients’ income as determined by cash flow analysis.

Why frequent payments?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.


Appropriate Risk Appropriate Risk ManagementManagement

For House Construction and House & Lot Acquisitions- secure tenure instruments to be used as collateral (see Annex “A” of Generic Manual) for loans over P150,000.00

Opening of savings account shall be required for clients with no existing savings account Adequate loan monitoring, collection, control, provisioning which is to be included in the

bank’s HMF manual A lien or mortgage over the house and/or lot to be financed Mortgage 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______).


Interest RatesInterest 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.


Fees and chargesFees and charges

Fees 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.).


Savings ComponentsSavings Components

Savings 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.

Items MicroenterpriseLoan Product

MAP HMF

Client Eligibility Microenterprenuers Small farmers with farm and other sources of income

Loan Purpose Working CapitalSmall Fixed Assets

Working CapitalSmall fixed Assets

Loan Amount P3,0000-P50,000 – FLP3,000-P150,000 – RL

Determined based on cashflow

P3,000-P50,000 –FLP3,000-P150,000 – RL

Determined based on cashflow

Loan Term 3 months up to 12 months 3 months to 12 months

Loan Interest Penalty andOther Charges

Monthly Interest Rate Ranging from 2-3% monthly

Monthly Interest Rate Ranging from 2-3% monthly

Loan Repayment

Weekly, semi-monthly, and monthly

• Weekly, semi-monthly, and monthly• Amortized-Partial Balloon

Loan Guarantee Substitute collateral, serialized assets, co-makers, real estate

Substitute collateral, serialized assets, co-maker, real estate

QUESTIONS?END OF PRESENTATION

Download - Designing a Housing Microfinance Loan Product Features of the Housing Microfinance Loan Product (in Generic Manual)

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