MABS APPROACH TO AGRICULTURAL MICROFINANCE

Module 2, Session 1MAP Loan Features:Loan Terms and Conditions

Designed After the MABS Approach to Microfinance

Session ObjectivesSession ObjectivesBy the end of the session, the participants are By the end of the session, the participants are

expected to:expected to:

• Understand the rationale behind the micro agri loan product terms and conditions

• Use the generic loan features as guide in writing the bank’s MAP loan terms and conditions

Micro Agri loan ProductLOAN TERMS AND CONDITIONS

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

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Eligibility CriteriaEligibility Criteria

First time Borrowers: Farming business at least two years in operation. Multiple, regular sources of income other than the

farm 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 Clear from cases at the Barangay or Court Willingness to pay in frequent installments of

capital and interest

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

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.

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Loan PurposeLoan Purpose

• Loans can be packaged for different farm and farm-related enterprises - crops, livestock raising, on-farm income generating implements.

• Farm loans could be combined with off-farm activities

• Loans can be used to finance working capital, purchase of farm animal, and/or farm tools and small equipment. However, first loans are granted only for working capital purposes and should not be more than 6 months.

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Loan AmountsLoan Amounts

• Loan amounts start small and scale up as the client develops a credit history with the bank

First Borrower - P5,000 to 50,000Repeat Borrower - P5,000 – 150,000(Up to 30% increases over previous loan to a maximum of P150,000)

• Loan increases are not automatic but

determined by repayment capacity and cash flow.

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Loan AmountsLoan Amounts

A small initial loan amount serves several purposes:

• It reduces the risk involved in providing a loan with no collateral while allowing the Account Officers to develop knowledge on the client and his character.

• It reduces the need for expensive business check ups and loan analysis while enabling a fast loan disbursement, a key to successful lending.

NOTE: The amount of the first loan

is not necessarily tailored around what the client needs,

but around the client’s capacity to pay, and what the

institution is willing to risk with a farmer who has no

collateral, no reliable information, no credit history.

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Loan TermsLoan Terms

• Determined by crop/project maturity, three to six months for first loan and a maximum of 12 months for repeat loans

•  No grace periods

Why Short Term ?Why Short Term ?

• Most farmers are involved in short term crops (rice, corn, coconut, bananas) .

• The incentives to repayment, such as expectation of another loan, works well in short-term loans.

• Working capital loan is the most pressing need of most small farmers. Working capital loans are short- term in nature

• In a farm household, business and family are entangled, problems in the family affect repayment. Hence, having shorter term reduces risks that may arise from this.

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Loan RepaymentLoan Repayment

• Weekly, semi-monthly, monthly installment of capital and interest

• Combination of “Amortized-Lump Sum” payment (Maximum lump sum amount of 30% of loan)

Why frequent payments?Why frequent payments?

• Regular payments serve to mitigate the risks involved in agricultural lending (weather, prices, diseases, etc).

• Most small farmers are involved in several income generating activities, usually off-farm, that ensure a steady income flow for the household.

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Loan GuaranteesLoan Guarantees

P5,000 – P15,000 All household, farm and business assets,

1 co-maker, spouse signature 

P15,001 – P50,000 Co-maker(s), All household, farm and business assets including inventory and livestock, bank deposits, spouse

signature 

P50,001 – P150,000 Co-maker(s), All household, farm and business assets including inventory and livestock, real properties, bank

deposits, spouse signature

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

Interest RatesInterest Rates• The bank will define the interest rate and other charges. • 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.• Interest charging should be based on declining loan balance.

MAP Loan Terms & Conditions:MAP Loan Terms & Conditions:

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.).

WHAT ARE YOUR QUESTIONS?

Thank you