2. Enhanced by MLSPineda for MABS Preventive and Remedial Measures Enhanced by MLSPineda for MABS

3. “A focused approach to PAR fighting”

4. Enhanced by MLSPineda for MABS Causes of Delinquency Factors within the control of the bank that contribute to loan delinquency:  Poor client selection  Poor loan management  Poor credit discipline  Poor service delivery  Poor product design

5. Enhanced by MLSPineda for MABS Causes of Delinquency FactorsCharacteristics 1. Poor Product Design Lack of incentives for borrowers and staff Automatic step-up increases in loan amount Loan term and payment schedule do not match the borrower’s cash pattern Inadequate penalty for late payments

6. Enhanced by MLSPineda for MABS Causes of Delinquency FactorsCharacteristics 2. Poor Service Delivery Delays in loan releases, especially repeat loans Suspension of loan disbursements – leads client to think that they cannot rely on the bank for their borrowing requirements Failure of the bank to comply with the agreed mode and schedule of payment

7. Enhanced by MLSPineda for MABS Causes of Delinquency FactorsCharacteristics 3. Poor Client Selection Lack of information, or improper CIBI which lead to incomplete or misleading information Accommodations – giving special treatment to friends or preferred clients Erroneous or lack of cash flow analysis Business risk not properly analyzed

8. Enhanced by MLSPineda for MABS Causes of Delinquency FactorsCharacteristics 4. Poor Loan Management Lack of, or inaccurate MIS to track reports on installments due, outstanding balance, aging of delinquent loans, and portfolio-at-risk Lack of manpower to pursue collection Sluggish follow-up of delinquent accounts

9. Enhanced by MLSPineda for MABS Causes of Delinquency FactorsCharacteristics 4. Poor Loan Management Infrequent client visits to detect early signs of delinquency Faulty collection system Faulty internal control system

10. Enhanced by MLSPineda for MABS Causes of Delinquency FactorsCharacteristics 5. Poor Credit Discipline Bank management and staff are tolerant of past due loans due to a false notion that: - Large spreads give allowance for past due - Past due means outstanding loans that are past maturity

11. Enhanced by MLSPineda for MABS Seven Essential Elements to Delinquency Prevention The credit service must be valued by the client Careful client screening Field staff (AOs) and clients must understand that late payment is not acceptable The consequences of late payment must be sufficiently unappealing to clients (penalty) MFIs need timely and accurate management information system MFIs must be alert for changes in their client’s business and household circumstances which may affect their capacity to pay Delinquency needs effective follow-up proceduresDelinquency needs effective follow-up procedures

12. Enhanced by MLSPineda for MABS Delinquency “RED FLAGS” (warning signals) BUSINESSBUSINESS –Reduced inventory –Presence of other loan collectors –Entry of bigger/other competitors –Reduced business days or hours –Lay-off of workers –Replacement of workers –Old, dilapidated & idle equipment –Abandonment of the family business by the spouse HOUSEHOLDHOUSEHOLD –Family problems –Termination of spouse’s employment –Illness / hospitalization of a household member –Large withdrawal from bank deposit

13. Enhanced by MLSPineda for MABS Delinquency “RED FLAGS” (warning signals) Sectoral TrendsSectoral Trends Performance of the major sources of household income ( e.g. crop/poultry & livestock farming, fishing, factories, etc.) Seasonal TrendsSeasonal Trends Performance of specific types of microenterprise in the community ( e.g. fish vendors, carenderia near schools, etc.) Other Warning SignalsOther Warning Signals –Change in Borrower’s Attitude –Change in Borrower’s Lifestyle

14. Enhanced by MLSPineda for MABS Remedial Management Tools Alarm Signals Legal Processes

15. Enhanced by MLSPineda for MABS Delinquency Alarm Signals : Alarm Signal No. 1 - Payment is delayed one (1) day Actions to be Taken Account OfficerMFU SupervisorBranch ManagerCredit Committee Determine cause of non-payment and informs Supervisor and BM Monitor & follow up action taken by AO to effect loan payment. Collect from spouse or co-maker Follows up loan payment and asks borrower to pay penalty fee within 24 hours of default

16. Enhanced by MLSPineda for MABS Delinquency Alarm Signals : Alarm Signal No. 2 - Payment is delayed three (3) days Actions to be Taken Account OfficerMFU SupervisorBranch ManagerCredit Committee Speak with spouse/co- maker and arrange payment Supervisor accompanies AO during visit to client Monitors progress of actions taken by MFU re: clients with delayed payments Withdraws funds from client’s mandatory savings to cover loan payment Reports clients with delayed payments during weekly CreCom meeting

17. Enhanced by MLSPineda for MABS Delinquency Alarm Signals : Alarm Signal No. 3 - Payment is delayed one (1) week Actions to be Taken Account OfficerMFU SupervisorBranch ManagerCredit Committee AO (together with Supervisor & BM) deliver 1 st Warning Letter Supervisor signs 1 st Warning Letter; accompanies AO in delivering letter BM signs 1 st Warning Letter Monitors action taken by MFU and BM on delinquent accounts Demand payment of delinquent installment AO validates reason for default BM considers re- scheduling payment, based on AO verification of reason for default.

18. Enhanced by MLSPineda for MABS Delinquency Alarm Signals : Alarm Signal No. 4 - Payment is delayed two (2) weeks Actions to be Taken Account OfficerMFU SupervisorBranch ManagerCredit Committee AO delivers 2 nd Warning Letter Supervisor signs 2 nd Warning Letter BM signs 2 nd Warning Letter Monitors action taken by MFU and BM on delinquent accounts Demand payment of delinquent installment Provides CreCom weekly update on PAR collection efforts BM goes with AO to visit client BM informs client of drastic measures that the bank will take (blacklist client, file case in Barangay court, enforce Security Agreement/CM)

19. Enhanced by MLSPineda for MABS Delinquency Alarm Signals : Alarm Signal No. 5 - Payment is delayed three (3) weeks Actions to be Taken Account OfficerMFU SupervisorBranch ManagerCredit Committee AO delivers 3 rd /Final Warning Letter signed by Branch Manager Implement “drastic measures” indicated in Signal #4. Monitors implementation of “drastic measures” indicated in Signal #4 Advise client to talk to bank management to avoid legal action, otherwise client losses option to re-schedule payments Implement “drastic measures” indicated in Signal #4.

20. Enhanced by MLSPineda for MABS LEGAL PROCESSES

21. Enhanced by MLSPineda for MABS Steps in enforcing Legal Action 1.Ensure that the borrower has received all three (3) demand/warning letters 2.File complaint in the Barangay Court Filing fee P15 – 150, depending on the barangay Letter of Complaint 3.Face borrower in Court Consider loan repayment options

22. Enhanced by MLSPineda for MABS Loan Repayment Options Borrower Action Bank Option Borrower is unable to pay at the moment Payment arrangement scheme Borrower is able to pay but, unwilling at the moment Voluntary Offer to Surrender (VOS) Borrower to sign a Voluntary Offer to Surrender (VOS) Borrower is able to pay but, unwilling to pay Borrower to provide collateral (e.g. CM, REM, etc) or PDC

23. Enhanced by MLSPineda for MABS NOTE : What is a Voluntary Offer to Surrender? A document signifying the intent of the borrower to surrender any of his/her valuable item(s) on a specified period in case he/she fails to forward the full payment of the loan on an agreed date. The bank can sell the item(s) in case the borrower fails to pay the loan 5-10 days after surrendering the item(s). Not a legal document, but binding. The ACT only becomes legal once the borrower signs an Authority to Sell; Surrendering the item(s) does not extinguish the loan; loan is considered paid once the bank receives cash in payment for the loan

24. Enhanced by MLSPineda for MABS Steps in enforcing Legal Action 4.During the court proceedings –Barangay clerk/secretary takes note of the proceeding & the Agreement –Both parties (bank rep & borrower) sign the Agreement –Barangay captain & secretary affix their signatures as “witnesses” 5.Enforcement of the Court-mandated Agreement

25. Enhanced by MLSPineda for MABS Action on Court-mandated Agreement Borrower Action Bank Option Borrower pays loan in fullBank closes account. NOTE: NO RELOANS to borrowers brought to court. Borrower surrenders item/s specified in VOS Keep visiting client/remind about loan payment Have borrower sign Authority to Sell, then sell item/s

26. Enhanced by MLSPineda for MABS Action on Court-mandated Agreement Borrower Action Bank Option Borrower does not abide by agreement Request Barangay Court to issue 2 nd (up to the 3 rd ) summon. Borrower faces Court a 2 nd time Determine the cause(s) of failure to pay and means of paying, OR determine the cause(s) of refusal to surrender the item(s) specified in the Voluntary Offer to Surrender DO NOT GIVE BORROWER ANY OPTION OTHER THAN PAYING THE FULL AMOUNT IN LESS THAN 3 DAYS!

27. Enhanced by MLSPineda for MABS Action on Court-mandated Agreement Borrower Action Bank Option Borrower refuses to face court after 2 nd and/or 3 rd summon Request barangay court to forward the complaint to the Lupon (barangay council) for deliberation Request barangay court to file a “Contempt of Court” decision against the client Request Lupon to issue a Certification signifying the failure of the barangay court to settle the matter due to the refusal of the borrower to cooperate

28. Enhanced by MLSPineda for MABS Action on Court-mandated Agreement Borrower Action Bank Option Borrower refuses to face court after 2 nd and/or 3 rd summon Pursue a complaint with the Municipal/City Court for : (i) Collection of Sum of Money; and (ii) “Estafa” (abuse of confidence) for purposely misleading the bank.

29. Enhanced by MLSPineda for MABS To Summarize …

30. Enhanced by MLSPineda for MABS Causes of Delinquency Borrower forgot to pay Borrower not able to pay Borrower not willing to pay

31. Enhanced by MLSPineda for MABS How to handle Delinquency Bank Action Borrower forgot to payFrequent visit Frequent reminder Borrower not able to paySupportive measures: 1.Extension of payment 2.Payment arrangement schemes 3.Shared payment with co- makers Borrower not willing to pay TAKE LEGAL ACTION

32. Enhanced by MLSPineda for MABS Write-offs Basic Policies BSP Circular 409 Loan Loss Provisioning BSP Circular 463 New Guidelines for Loan Write-offs delinquent accounts for 91 days or more may be written-off. Adequate provisions properly set-up based on BSP Circular 409 Write-off Procedures

33. Enhanced by MLSPineda for MABS Write-offs Write-off procedures I. Implementation of the delinquency “alarm signals” 1.Complete documentary requirements including demand letters, call slips etc. 2.Collect from co-makers 3.Apply savings balance that guarantees the loan (through the debit authority of client’s withdrawal slip) 4.Go after serialized assets 5.File complaint for collection with the barangay or local court

34. Enhanced by MLSPineda for MABS Write-offs II. Provide a list of accounts recommended for write-off and have it approved by the bank’s BOD; III. Send a letter of intent for write-off to BSP together with the list under RB/COB Form No. 23 (BSP form) twenty-five days prior to the actual write-off.

35. Enhanced by MLSPineda for MABS REMEMBER: Constant follow-up is one of the keys to preventing and remedying delinquency.

36. Enhanced by MLSPineda for MABS