1. Effective Supervision:
MICROFINANCE MANAGEMENT DEVELOPMENT WORKSHOP
Effective Supervision:
Compliance with Policies Review
Welcome to our first lesson of the Middle Management Training Course
Flash Slide 1 and read title of module: Effective Supervision: Compliance with Policies
Explain: There are two tools for effective supervision, these are loan portfolio analysis and staff compliance with policies review. It is important to understand that most of the functions of a Supervisor revolve around the work of Account Officers. In this session, we will focus on one of those functions and that is, reviewing Account Officers’ compliance with policies. Before we proceed however, it is important that we all have the same understanding of the terms used in this session, specifically, let’s understand what the words Compliance, Policy and Review mean.
(Note: Highlight the words as they are defined).
The word Policy refers to rules, guiding principles, guidelines or procedures that one follows to complete a task. Compliance on the other hand means observance of, or conformity to something while the word Review means evaluation, assessment, analysis or examination of something.
For example, when we say review of AO’s compliance with policies, it simply means an evaluation or assessment of AOs’ observance to the rules or procedures that govern the product they handle or observance to the implementing guidelines stipulated in the product manual.
Now let’s proceed…
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2. Session Objectives By the end of the session, the trainees are expected to:
Learn the importance of compliance with policies as an effective way to manage the microfinance operations.
Use the supervision tools in reviewing the work of the microfinance unit particularly the Account Officers.
Read slide title: Session Objectives
Explain: Following are the things we want you to learn by the end of the session:
Read the two bullets:
Learn the importance of compliance with policies as an effective way to manage the microfinance operations.
Use the tool in reviewing the work of the microfinance unit particularly the Account Officers.
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3. Rationale Why Supervise?
Most of the causes of PAR can be prevented with effective supervision of the Microfinance Unit from Supervisors and Branch Managers.
Read slide:
Rationale: Most of the causes of PAR can be prevented with effective supervision of the Microfinance Unit from Supervisors and Branch Managers.
Explain:
The reason we talk about supervision is not only to remind Supervisors and Branch Managers the importance of the day to day administration of the Microfinance Unit but most importantly, to make sure that the Account Officers maintain quality portfolio. PAR is a major concern for every rural bank that offers microfinance and one way of preventing PAR to happen is through effective supervision. Effective supervision of the Microfinance Unit is crucial to productivity and portfolio quality.
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4. Supervision of Account Officers
Causes of Portfolio At Risk (PAR):
Lack of compliance with /deviations from credit policies.
Laxity to comply with policies, after years of experience in microfinance.
AO’s Mentality to take risks in order to reach big targets
Shift from use of pragmatic technical criteria to personal criteria during client selection
Lack of knowledge of Branch Managers and Supervisors about the loan policies
Read slide title: Supervision of Account Officers.
Explain: Let’s now discuss Supervision of Account Officers particularly focusing on the impact of supervision to Portfolio At Risk. The major causes of PAR include:
Read Bullets 1 and 2:
Lack of compliance with or deviations from credit policies.
Laxity to comply with policies, after years of experience in microfinance.
Explain:
Let’s first discuss reason number 1 that is, AO’s lack of compliance with or deviation from credit policies. Most often, lack of compliance is a result of inadequate training or familiarity with product policies and procedures. Supervision plays a vital role in cases where account officers lack training or are not familiar with product policies and procedures. The second reason for PAR in relation to compliance with policies is AO’s laxity to comply with product policies and procedures. After years of experience, Account Officers begin to believe they do not have to comply with loan policies that are too restrictive and laxity on the part of the Accounts Officers to properly evaluate loans causes PAR.
In short, loose supervision is one of the reasons for non-compliance with policies.
Read Bullet 3:
Explain: Aggressive outreach targets and incentive systems that reward productivity push the unit into taking more risks.
Incentive schemes are meant to support efforts towards productivity, portfolio quality, and scale. However, PAR happens when incentives schemes are used for the purpose of productivity and achieving scale without careful consideration for quality. That is why, supervision is very crucial especially if Account Officers are working under pressure to meet targets or working with the ultimate purpose of receiving incentives.
Read Bullet 4:
Explain: MFU begins to use personal criteria in deciding who should get a loan and for how much.
Problem starts when instead of the technical criteria provided by the loan policies, account officers start to use personal criteria in deciding who should get a loan and for how much. Practices like this pass the approving authorities when supervision is loose. In order to prevent this from happening, supervision should be tightened. Supervisors should make sure policies for repeat loans are followed.
Read Bullet 5:
Because of their inadequate knowledge to question loan applications, Branch Managers or the members of the credit committee rely on Account Officers for loan decision-making. There are Branch Managers who approve loan applications even if they’re in the dark as to to the policies of the product. This is clearly a formula for disaster. In order to avoid PAR, Branch Managers and Supervisors must be equipped with tools that will help them improve supervision.
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5. Supervision of Account Officers
In the absence of proper supervision from BMs and Supervisors, AOs comply poorly with policies on:
A) Amounts : Excessive amounts for repeat loans
B) CIBI : Poor CIBI-character and reference checks
C) Monitoring: Poor monitoring and collection
Read slide: In the absence of proper supervision from BMs and Supervisors, Account Officers comply poorly with policies on:
Amounts
CIBI
Monitoring
Explain: Studies tell us that these are the top three mostly violated among product policies and these are the three policies that Supervisors and Branch Managers should be vigilant about when reviewing loans for approval. In the succeeding slides, we will be learning of a tool that will help Supervisors and Branch Managers take stock of the degree of AO’s compliance with policies or the lack of it.
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6. Tools for Effective Supervision
There are two main tools for effective supervision:
Loan Portfolio Analysis
Compliance with Policies Review
Read slide: There are two main tools for effective supervision
Loan Portfolio Analysis
Compliance with policies review
Explain:
Loan portfolio analysis is the first tool in effective supervision. You can do so much by analyzing numbers, just by sitting down. Portfolio analysis is a tool to control PAR.
In this session, let us focus on AO’s compliance with policies review as a tool for effective supervision. An effective supervisor makes sure that his/her account officers comply with policies.
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7. Compliance with policies (using Supervisor Checklist)
One easy way to check compliance with policies is through the use of a checklist.
The checklist contains the product policies and procedures and loan collection policies and procedures.
On regular basis, the Supervisor should take sample files at random to check on compliance with policies and procedures.
Read Bullet 1: One easy way to check compliance with policies is through the use of a checklist.
Ask: So, what is inside the checklist?
Read Bullet 2: The checklist contains the product policies and procedures and loan collection policies and procedures.
Ask: How often should the Supervision conduct a compliance review?
Read Bullet 3: On regular basis, the Supervisor should take sample files at random to check compliance with policies and procedures.
Explain: The next slide will show you a sample of a Supervisor’s Checklist.
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8. Compliance with Policies Checklist
Instruction: Click to view the hyperlink to see a one page sample of the Supervisor’s checklist. Close the Checklist to go back to this slide.
NOTE: Distribute the Supervisor’s Checklist for easy reference when discussing the steps on how to do the AO compliance with policies review using the checklist.
Explain: The Supervisor’s Checklist is a single page table of policies and procedures. Take note that not all product policies and procedures are in the checklist. What’s in the checklist are only policies and procedures that are oftentimes violated. Let us therefore focus our review on these policies and procedures. The checklist has two parts. The first part is the review of compliance through client folders and the second part is the review of compliance through field visit and interview with the AO.
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9. STEPS IN DOING POLICY COMPLIANCE REVIEW
Read slide: Steps in doing policy compliance review
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10. STEPS for Doing a Compliance Review
STEP 1: Select 5 client files for AO with PAR7 >3%.
STEP 2: Review each file for compliance following the order in the checklist. Mark () only those policies AO is not complying with
STEP 3: Write comments if necessary
STEP 4: In the Compliance Summary Table, plot the lack of compliance and look for consistencies.
Read slide title: Steps for doing a compliance review
Explain: The purpose of doing the compliance review is to find out if AOs are complying with policies and we know that non-compliance with policies results to PAR. In doing the review, focus on reviewing the work of Account Officers with high PAR, that is PAR7 more than 3%. Now, let’s go through the steps in reviewing AOs’ compliance with policies.
Read Step 1: Select five client files for AO with PAR more than 7 days of more than 3%.
Read Step 2: Review each file for compliance following the order in the checklist (NOTE: refer to the Supervisor’s Monitoring Checklist). Mark only those policies that are not complied with.
Explain: When reviewing the client folder, follow the order of policies in the checklist.
Read Step 3: Write comments if necessary
Explain: The last column of the checklist is for comments.
Read Step 4: In a Compliance Summary Table, map the results of your review by putting a check or a round mark for every violated policy. Once mapping is completed, look for consistencies in policy or policies often not complied with.
Explain: A Sample Compliance Summary Table is provided for you (Note: click hyperlink to take you to the table. To go back to this slide, close the table). Plot the result of your review to look for trends. Once you see the trend, you’ll be able to spot the weaknesses of your AOs. Knowing the areas where your AOs are weak would greatly help you address the problem. The next slide will show you a sample of an accomplished Compliance Summary Table.
NOTE: distribute the Compliance Summary Table together with the Supervisor’s Checklist
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11. Summary of Compliance Read slide title: Summary of Compliance
Explain: This is a sample of the Compliance Summary Table. The source of information plotted in this table come from the Supervisor’s Monitoring Checklist. You will only be able to do this after you have completed the Supervisor’s Monitoring Checklist. Take note that the names of the AOs are listed under the branches where they are based. In this example, we named the branches, Branch 1, Branch 2, and Branch 3. You may replace these with the names of the branches you are monitoring.
Interpreting the results of the review:
In the table you will see differences in compliance with different policies. Some policies are highly complied with, while others are highly violated. Look for common factors. In this example, note that CIBI and Monitoring are the policies mostly not complied with. What must you do about it? Talk to the AOs and conduct a refresher course/training focusing on these two policies. For individual AOs, you can do one on one coaching to solve their problem areas. Remember, it’s easy for you to correct and help improve the performance of your AOs. It is also easy to approve or disapprove loans when you know the compliance tendencies of your AOs. Once you have identified the weak areas of the AO, you will know what to check for when approving loans and then work with the AO on improving his weaknesses. Knowing an AO’s history of non-compliance with certain policies and procedures is advantageous to you.
Let’s take a look at Branch 2. Whose AO should you pay more attention to? Answer: Edwin. You don’t only correct Edwin, you also need to help him improve. Ruel and Andy are doing well. It does not mean however that you do not pay attention to them, they just need least attention because they are doing well.
Let’s take a look at Branch 3. When Samuel and Bobby submit five loan applications for approval, which applications should you worry about or give more focus on, pay more attention to? Obviously, the applications of Samuel because of his history of non-compliance. You don’t need to spend more time analyzing the loans of Daniel, you still check on him but you don’t need to spend more time checking his loan folders because your regular monitoring shows he is doing well as proven by his low PAR.
Knowing the weaknesses of your AO will help you in many ways:
You’ll be able to help him by controlling what he does
You become proactive by preventing PAR instead of reacting to PAR
You’ll have more time to look at more reports, more things to do
You’ll be able to prevent/control fraud
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12. Compliance with policies
LOOK FOR CONSISTENCIES!
Are AOs complying with the credit policies? If not, what policies are AOs not complying with?
How homogeneously are policies complied with OR NOT COMPLIED WITH among account officers?
Is the non compliance related to
the same policies across AOs within a branch?
the same policies across branches?
Read red texts: Look for consistencies!
Explain: What do we mean by this? It simply means, there is a need for you to look what polices you need to review. Go back to your compliance summary table and look what policies are always not complied with. Either you make the AOs comply, you change the policy or revise the policy. When there is PAR, it’s possible that the problem is not the policy but poor supervision. Once you’ve identified what policies are mostly and oftentimes violated, you need to review those policies.
If non-compliance is the same across AOs or the same across branches, it is indicative of loopholes in the policy or lapses in supervision.
If non-compliance is committed by only one or two AOs, it is indicative of the appropriateness of the policies or suggests that something is not right with the AOs.
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13. Compliance with Policies
Is there any co-relation between non compliance by AO and high PAR?
What policies need to be reviewed for quality and effectiveness?
Read slide: Is there a co-relation between non-compliance by AO and high PAR? What policies need to be review for quality and effectiveness?
Explain: Gauging on the result of the compliance summary table, is it safe to conclude that yes, there is a co-relation between non-compliance and high PAR? Is the lack of compliance the result of bad or inappropriate credit policies or is it due to lack of enforcing mechanisms?
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14. Compliance with policies
WHAT IF:
All or most AOs consistently do not comply with the same policy.
Two, out of ten AOs, have different compliance practices.
Read Slide.
Note: Tell the participants to refer back to the compliance summary table.
Explain: These are two situations that point out to either problems with policies or inadequate supervision as reasons for PAR.
IF all or most AOs do not comply consistently with the same policy, the problem may not be with the AOs, but with the inappropriateness of policy or with lack of proper supervision from Supervisor, branch manager and CRECOM.
IF one out of five AOs has different compliance practices, the policies may be good, and the problem may be with the AOs not complying or the Supervisor not checking.
The next slide will tell us what to do in situations like this.
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15. Compliance with Policies
WHAT TO DO:
Modify inappropriate policies.
Enforce compliance with credit policies
Read bullet 1: Modify inappropriate policies
Explain: If in your review, it came out that majority of the AOs or branches do not comply with this policy and you found out that it’s not because supervision is lacking. This simply means, there is something wrong with the policy. If policies are inappropriate they must be modified.
An example of this is the policy on compulsory savings. If your policy says, withdrawal is not allowed while the loan is outstanding and majority of your AOs allow withdrawal due to demands from clients, this already indicates that something is not right with the policy. Some AOs fear of losing good clients, so instead of losing them, they allow them to withdraw their savings.
Another examples:
1. If there is no policy on loan increases, we can’t expect AOs to have uniform loan increases.
2. If there is no policy that AO should visit clients one week after loan release, do not expect your AOs to visit clients. If he does, good. If not, you can not blame him.
Read bullet 2: Enforce compliance with credit policies
Explain: However, if only one or two out of ten AOs are consistently violating a policy, the problem is clearly not on the policy but on compliance with that policy. If policies are appropriate, the Supervisors and Branch managers must make sure they are complied with.

16. Check for trends!
Is the situation for individual AO improving or deteriorating since last review?
Is the situation for the branch improving or deteriorating since last review?
“You will be more effective and efficient if you know the strengths and weaknesses of your account officers.”
Read slide title: Check for trend
Explain: Make your review of compliance a regular thing because this will give you indicators of improvement or deterioration.
Read quotation: “You will be more effective and efficient if you know the strengths and weaknesses of your account officers.”

17. Thank you!
End of Presentation