1 Preparing and Analyzing Client’s Information

2 Important Considerations in Lending Operations RISKCOST SERVICE

3 Profile of the small and micro entrepreneur Low educational levels Low educational levels Small volume of operations Small volume of operations Rudimentary/obsolete equipment Rudimentary/obsolete equipment Few employees (0-9) mostly unpaid family members Few employees (0-9) mostly unpaid family members Family and business are entangled Family and business are entangled Multiple income generation activities Multiple income generation activities

4 Profile of the small and micro entrepreneur Basic or none business records Basic or none business records No marketable collateral to offer No marketable collateral to offer No access to formal sources of credit/ no credit history No access to formal sources of credit/ no credit history Active participation in informal sources of credit Active participation in informal sources of credit Large, extended families Large, extended families Basic financial skills Basic financial skills

5 Environment Most SME are not registered, however, they have been in operations for many years Most SME are not registered, however, they have been in operations for many years While SME may have property and assets, most do not have property titles /ownership documents While SME may have property and assets, most do not have property titles /ownership documents Registry of guarantees is cumbersome, time and resource consuming. The cost is often too high for both client and lender Registry of guarantees is cumbersome, time and resource consuming. The cost is often too high for both client and lender

6 Environment Execution of guarantees through the legal system may take take a while. Execution of guarantees through the legal system may take take a while. Contradictions in the legal system (e.g. creditors cannot seize a person’s means of production) make executing guarantees very difficult. Contradictions in the legal system (e.g. creditors cannot seize a person’s means of production) make executing guarantees very difficult.

7 Character Based Lending In micro and small lending, loan analysis is based on CHARACTER rather than on collateral and business analysis. In micro and small lending, loan analysis is based on CHARACTER rather than on collateral and business analysis.

8 Why not based on collateral? Most SME do not have marketable guarantee to offer (land, property, equipment). They use rudimentary/ obsolete equipment of little or none marketable value. Most SME do not have marketable guarantee to offer (land, property, equipment). They use rudimentary/ obsolete equipment of little or none marketable value. For those who do, the value of the guarantee or the cost of registering it far exceeds the amount of the loan For those who do, the value of the guarantee or the cost of registering it far exceeds the amount of the loan

9 Why not based on business analysis? The micro and small entrepreneur rarely has financial statements and never audited ones. The micro and small entrepreneur rarely has financial statements and never audited ones. For business analysis, the credit officer would need to rely on information based on the client’s memory. The resulting financial data and analysis is at best questionable (little reliability) For business analysis, the credit officer would need to rely on information based on the client’s memory. The resulting financial data and analysis is at best questionable (little reliability)

10 What is Character Based Lending? Character-based lending relies on information on the client’s stability, entrepreneurship reputation, and repayment behavior Character-based lending relies on information on the client’s stability, entrepreneurship reputation, and repayment behavior It also relies on information that neighbors and peers have on the client It also relies on information that neighbors and peers have on the client

11 Character based lending help us to reduce the RISKS and COSTS of lending to a client unable to provide Character based lending help us to reduce the RISKS and COSTS of lending to a client unable to provide Marketable collateral Marketable collateral Credit history Credit history Reliable financial information Reliable financial information What is Character Based Lending?

12 To overcome these barriers we analyze four aspects of the client’s character: To overcome these barriers we analyze four aspects of the client’s character: STABILITY: permanency, responsibility towards family and business, STABILITY: permanency, responsibility towards family and business, ENTREPRENEURSHIP: experience, knowledge of his market, ability to grow. ENTREPRENEURSHIP: experience, knowledge of his market, ability to grow. REPUTATION: standing in the community, ties to community associations and other groups, accomplishments REPUTATION: standing in the community, ties to community associations and other groups, accomplishments REPAYMENT BEHAVIOR: how well the client meets his payment obligations of any kind. REPAYMENT BEHAVIOR: how well the client meets his payment obligations of any kind.

13 STABILITYENTREPRENEURSHIP REPUTATIONREPAYMENTBEHAVIOR

14 STABILITYENTREPRENEURSHIP REPUTATIONREPAYMENTBEHAVIOR RISKS

15 STABILITYENTREPRENEURSHIP REPUTATIONREPAYMENTBEHAVIOR RISKS

16 Indicators on Client’s Stability 1. Stability Married Married with children Children attending school Resident for over two years in the same community Home owner Business in operations for over two years Business in the same location for over two years

17 Indicators of Entrepreneurship 2. Entrepreneurship ž The applicant (and/or spouse) has multiple businesses ž The applicant has provided concrete examples of how the business has grown since start up Diversification of products or services Diversification of products or services Expansion in the number of clients Expansion in the number of clients Increasing production Increasing production Increasing number of employees Increasing number of employees

18 Indicators of Entrepreneurship (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 compete and how to compete The applicant keeps financial records The applicant keeps financial records The applicant explains clearly how he is The applicant explains clearly how he is going to use the loan going 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 years years

19 Indicators of Reputation 3. Reputation The applicant belongs to and/or holds a position The applicant belongs to and/or holds a 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 peers confirmed by CIBI with peers

20 4. Repayment Behavior The applicant has had loans from other sources. Payments of any relevant loan/credit have been paid on time as confirmed by payment receipts The applicant has credit from suppliers. Payments to suppliers are made on time as confirmed by last three receipts Utility bills are paid on time as confirmed by last three receipts/payment slips. Indicators of Good Repayment Behavior

21 Indicators of Good Repayment Behavior (cont’d) Rent is paid on due date as confirmed by last Rent is paid on due date as confirmed by last three receipts three receipts School fees are paid on time as confirmed by School fees are paid on time as confirmed by last three receipts last 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 increasing The last three bank statements show increasing balances balances

22 RED FLAGS  The applicant inquires about donor financing  The applicant provides contradictory information  The applicant does not have a clear understanding of his market or business  The applicant does not provide a convincing explanation about his need for a loan  The spouse contradicts the information provided by applicant  The spouse refuse to sign collateral authorization

23 RED FLAGS  History of violent behavior  History of spouse/child abuse  History of alcoholism  Spouse refuse to sign authorization  References reluctant to express opinion on applicant.  Applicant unable to provide receipts supporting information.

24 Reference Checks Verifying references is a key step in character based lending. Main sources are:  Creditors  Suppliers  Landlord  Business & residential neighbors  Public market administrator/market supervisor  Vendors association  Barangay officials

25 Reference checks with Creditors, Suppliers and landlord : > How long has the relationship been between creditor/ supplier/landlord and the applicant? > How often does the applicant place orders? > What amounts? > Has the supplier provided credit to the applicant? > How much ? On what terms? ___ > Does the applicant pay on time? > What is the supplier’s opinion on the applicant?

26 Reference Checks With Business Neighbors > How long have you known the applicant? > How long the applicant has been engaged in his/her present business? > What reputation does s/he have as a businessman? neighbor? > Is s/he known to have any problems with debtors? Family? alcohol? Violence? > Would s/he be willing to guarantee a loan by the applicant if ever?

27 Reference Checks With Residential Neighbors > How long have you known the applicant? > What he/she knows of the applicant and his/her family – how long have they been residing in the community, what the family’s sources of income are, who the members of the applicant’s household are, and the occupation of household members? > How other regards the applicant and his/her family- whether they are liked and well-respected in the community or not? > Is s/he known to have any problems with debtors? Family? alcohol? Violence? > Would s/he be willing to guarantee a loan by the applicant if ever?

28 Reference Checks With Co-Maker > Ask the information required in the co-maker’s statement. > Ask if his/her spouse knows about the loan application and his/her role as a co-maker. > Ask if you can talk with his/her spouse about the loan so you can also explain to the spouse the bank policy on loan delinquency and the responsibilities of a co- maker.

29 Reference Checks With Barangay Official > What he/she knows of the applicant. > How other regard the applicant and his/her family > Whether or not the applicant is known to occasionally borrow money from others and reliable the applicant is repaying borrowed amounts > Whether or not complaints has been filed with the barangay office against the applicant or any member of his/her family and the nature of the complaint.

30 Analysis of Repeat Loans

31 Analysis of Repeat Loans Analysis of repeat loans is based on the REPAYMENT BEHAVIOR of past loans.

32 Analysis of Repeat Loans Important MIS reports needed for repeat loan analysis: Important MIS reports needed for repeat loan analysis: 1. Client Status Report (current loan) 1. Client Status Report (current loan) 2. Client Status Report (previous loans) 2. Client Status Report (previous loans)

33 Analysis of Repeat Loans

34 Analysis of Repeat Loans Factors to consider when analyzing repeat loans: 1. Repayment rate: 100% on-time full repayment is highly desired; repayment rate not less than 60% but no late payment for more than 3 days can still be accepted but with certain conditions.

35 Analysis of Repeat Loans CLIENT CLASSIFICATIONAAABCD % INCREASE IN LOAN AMOUNTUp to 30%Up to 20%Up to 10%No IncreaseNo Loan A. LOAN REPAYMENT HISTORYREPAYMENT RATE 100%90%80%Below 70% ButBelow 60% Not Less than 60% Weekly Amortizations 2 months - 8 installments876 3 months - 12 installments months - 16 installments months - 20 installments months - 24 installments Note: But no missed payment exceeding 3 days. Other- wise, no increase. wise, no loan.

36 Analysis of Repeat Loans CLIENT CLASSIFICATIONAAABCD % INCREASE IN LOAN AMOUNTUp to 30%Up to 20%Up to 10%No IncreaseNo Loan A. LOAN REPAYMENT HISTORYREPAYMENT RATE 100%90%80%Below 70% ButBelow 60% Not Less than 60% Semi-monthly 2 months – 4 installments43 3 months – 6 installments65 4 months – 8 installments87 5 months – 10 installments109 6 months – 12 installments1211 Note: But no missed payment exceeding 3 days. But no missed payments exceeding 3 days. Otherwise, no increase.

37 Analysis of Repeat Loans CLIENT CLASSIFICATIONAAABCD % INCREASE IN LOAN AMOUNTUp to 30%Up to 15%Up to 10%No IncreaseNo Loan A. LOAN REPAYMENT HISTORYREPAYMENT RATE 100%Below 50% Monthly 2 months – 2 installments21 3 months – 3 installments32 4 months – 4 installments43 5 months – 5 installments54 6 months – 6 installments65 Note: But no missed payment exceeding 3 days. Otherwise, no increase.

38 Analysis of Repeat Loans LOAN REPAYMENT HISTORY (To be supported by MIS Generated Client Status Reports - Current & Previous) LOANAMOUNT NO. OF PAID ONPAID IN ARREARSCREDIT AMORTIZATIONS DUE DATE 1 -7 days late days late days late Over 31 days late CLASSIFICA TION 3rd Loan 14, C 2nd Loan 12, B 1st Loan 10, AA

39 What does repayment problem tell us? Analysis of Repeat Loans  Payments over 7 days past due indicate that the loan amount is too large  Partial payments indicate that the loan amount is too large  A steady decline in the number of installments paid on time could mean the loan amount is becoming too large  A sharp drop in savings balances could mean liquidity problems

40 Analysis of Repeat Loans Factors to consider when analyzing repeat loans: 2. Business conditions Inventory is growing, same or decreasing Inventory is growing, same or decreasing Number of workers is increasing, same or decreasing Number of workers is increasing, same or decreasing Business days/hours are increasing, same or decreasing Business days/hours are increasing, same or decreasing Trade area is expanding, same or decreasing Trade area is expanding, same or decreasing Business assets are increasing, same or decreasing Business assets are increasing, same or decreasing

41 Analysis of Repeat Loans Factors to consider when analyzing repeat loans: 3. Household conditions No problem with other household income sources No problem with other household income sources No illness/hospitalization of a household member No illness/hospitalization of a household member No family problem No family problem

42 Analysis of Repeat Loans Factors to consider when analyzing repeat loans: 4. 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 craft carinderia, school canteens, retail stores, light craft manufacturing, services) manufacturing, services)

43 Analysis of Repeat Loans Factors to consider when analyzing repeat loans: 5. Sectoral Trends - Performance of the major sources of household income (i.e. crop/poultry & livestock farming, fishing, factories, etc.) - Performance of the major sources of household income (i.e. crop/poultry & livestock farming, fishing, factories, etc.)

44 Analysis of Repeat Loans Factors to consider when analyzing repeat loans: 6. Other Indicators - Change in Borrower’s attitude - Change in Borrower’s attitude - Change in Borrower’s lifestyle - Change in Borrower’s lifestyle

45 Analysis of Repeat Loans Conditions that must be met for cash flow analysis not to be required: % on-time full repayment 2. Loan term is less than 6 months 3. Requested increase is not higher than 10%. 4. Requested loan amount is still within the loan entitlement in the previous cash flow analysis done on the client.

46 Analysis of Repeat Loans So how much should the increase be after all factors have been considered? As a general rule, the increase should be no more than 30% of the previous loan for clients with 100% on time full repayment (based on Client Classification), subject still to cash flow analysis.

47 Analysis of Repeat Loans The Supervisor’s Creed!!! It is my solemn responsibility to validate and evaluate all loan accounts the passes my judgment, neglecting this responsibility is like poking a GUN in my head! It is my solemn responsibility to validate and evaluate all loan accounts the passes my judgment, neglecting this responsibility is like poking a GUN in my head!

48 END