1. MABS APPROACH TO AGRICULTURAL MICROFINANCE
Module 2, Session 1
MAP Loan Features:Loan Terms and Conditions
Designed After the MABS Approach to Microfinance

2. Session Objectives By the end of the session, the participants are 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
Read objectives
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3. Micro Agri loan Product LOAN TERMS AND CONDITIONS
Eligibility Criteria
Loan Purpose
Loan Amount
Loan Terms
Loan Repayment
Loan Guarantees
Interest, Penalties and Charges
Other Term & Condition: Savings
Let’s start with loan terms and conditions – policies that guide the bank in the implementation of the micro-agri loan product. The loan terms and conditions also determine who will qualify in availing the said loan. Again, remember that these loan features are built around the three major objectives in product designing and that is: To minimize risk, to reduce cost and to deliver fast and quality service.

4. MAP Loan Terms & Conditions: Eligibility 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
In MF, every policy in the manual is written around three factors: minimizing risks, reducing costs, and quick disbursement or access to service.
What are we trying to accomplish when we want our clients to have at least two years experience in operation. – We want to minimize/reduce risk. Meaning a farmer with two years experience in operation is more stable than the one who is just starting. It also means that the farmer is more stable, able to manage his finances. Example: If a farmer with 20 years experience has survived so many trials, that’s telling you that his farm or business is likely to survive in the next 6 months or so.
Multiple sources of income:
People say farmers are risky because they depend on crops and when something happens to the crops farmers find it hard to pay their loans. That’s why we are requiring that farmers have multiple sources of income.
Example:Lend to farmers for four months
Farmer is able to pay the three installments, and even if something happens to the crops, the risk is lower for the bank because he only lacks one more payment to fully pay his loan.
Resident of the community for at least two years, what are we trying to accomplish? Minimize risk again. Client is known in the community, you get more information and client is more stable than somebody who has only been in the area for three months. Who is riskier, someone who is three months in the area or two years in the area? It’s the latter. In terms of stability, he is more stable, and history can already be established.
18-65 years of age – legal
No past due with other banks – this is mostly about minimizing risk. If you have loans with other banks, even if not past due, the bank is still at risk of not being paid and it becomes worst when the client starts to default.
Clear from cases in the barangay – to make sure we don’t lend to clients with questionable reputation.
The point that I’m trying to stress is that there is a reason behind the design of every loan policy. You do not just put it there. Most of the time however, banks modify things without thinking twice, without thinking about the risk factor or cost factor. I want you to understand the rationale behind every policy.

5. MAP Loan Terms & Conditions: Eligibility 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.
In order to qualify for repeat loan, READ BULLET 1 – Meaning you did not pay today but you paid three days after, that’s a delay of three days.
Read bullet 2. – It should be a very good justification.
In summary, the key concepts in client’s eligibility criteria are the following:
New borrower: Multiple sources of income and willingness to pay in frequent installment
Repeat borrower: Excellent repayment behavior

6. MAP Loan Terms & Conditions: Loan 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.
READ BULLETS
We also give credit to a client with a farm and a microenterprise business. Loans may be given for two purposes. Farm plus another business.
Why working capital only in this first six months? Because the client has no credit history with the bank yet and usually, the terms of financing farm equipment are longer.
In summary, we are financing:
1. Crop
2. Crop + other business
3. Farm tools and equipment (financing within 6-12 months)
4. Livestock (hog raising, cattle raising, poultry)
5. Aquaculture activities
6. Fruit and vegetable production

7. MAP Loan Terms & Conditions: Loan Amounts
Loan amounts start small and scale up as the client develops a credit history with the bank
First Borrower - P5,000 to 50,000
Repeat 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.
Read slide. No need to elaborate more, this will be discussed in the next slide.
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8. MAP Loan Terms & Conditions: Loan 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.
Let’s talk about Why we need to give relatively small amounts. This policy serves several purposes.
Read bullet 1: One of the major objectives in lending is to deliver fast service. And because you are releasing very quickly to a riskier clients, it only means you have to be careful, and to be careful means you need to start small. The smaller the amount, the lesser the risks. Loan amount will gradually increase as the AO learns more about the client.
Read bullet 2: In microfinance, amounts start small to make it easier for the bank to disburse quickly. No need for expensive investigation. The smaller the amount the quicker the disbursement, the smaller the requirements, the lesser the costs.
Example:
If I ask you to lend me P5, would you lend me? Yes, Now, did you ask me to fill up an application and collateral? No. Why not? Because the amount is too small. It does not matter. I don’t need to wait 7 days for the lender to release the loan or ask so many requirements. The application paper and all other documents cost more than P5. With P5, you’re not going to go broke, not go bankrupt. But if I ask for P5.0M, it’s another story. You will start to ask questions. The more paper work, the more analysis, the more questions.

9. 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.
READ SLIDE
The first loan is not about client needs. It is about how much the bank is willing to risk. Once a client proves himself, the amount can increase.
The bank feels more comfortable with a client with good credit history.
Note: Give examples of a borrower asking for small loans and scale up. Emphasize that the higher the loan amount the greater the risks on the part of both the bank and the client.

10. MAP Loan Terms & Conditions: Loan 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
Read Bullet 1: It is important that terms are short especially for first loan, however, loans may be extended up to 12 months for repeat loans and with a justifiable reason. If a client is engaged in crops that grow more than six months (like sugarcane), then a loan term longer than six months may be allowed. Also, if the client intends to buy a farm tool/equipment or farm animal, he may also request for a longer loan term.
Read bullet 2:This is important. No grace period. It’s something that is different from the typical agricultural loan.

11. 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.
Now, why short term?
Read bullet 1: Most farmers are engaged in activities that are short term in nature. Rice, every three weeks, bananas every two weeks, corn every three-four weeks, coconut every 3-4 months.
Read bullet 2: The expectations are not enough, the idea is to put incentive for repayment. When you give a loan for three months and say I’ll give you another loan with 30% increase, that’s incentive.
Read bullets 3,4&5: Problems in the family affect repayment. Imagine, if you have two clients who have loans of P10,000. One payable in 4 months, one in 12 months. Each one got his child sick in the 3rd month. Now, the one with 4-mo. Loan is lesser risk because the balance is already smaller compared to the one with a term of 12 mos. So terms play an influence to risk, therefore, we keep the term short.

12. MAP Loan Terms & Conditions: Loan Repayment
Weekly, semi-monthly, monthly installment of capital and interest
Combination of “Amortized-Lump Sum” payment (Maximum lump sum amount of 30% of loan)
Read slide.
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13. 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.
Why frequent installment?
First: Traditionally, banks lend to farmers with lump sum payment mode but in MAP, we require that clients pay in frequent installment in order to minimize our risks. Again, it’s about reducing our risks.
Second: Experience has proven that clients find it easier to make small, frequent payments (weekly, semi-monthly, monthly) than large lump sums. A survey conducted by MABS revealed that 18 out of 20 farmers interviewed expressed their preference for frequent installments of principal and interest.
Third: Those farmers with regular, other sources of income could actually pay in frequent installments and they like it that the income from harvest all go to themselves instead of to the bank or the trader.

14. MAP Loan Terms & Conditions: Loan 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
WHY NON-COLLATERALIZED?
READ SLIDE
The principle in MF is to use innovative guarantees. You cannot expect all clients to have land titles. This policy is all about facilitating quick access to credit. Ask clients if they have this or that, and use that as collateral. You don’t need to take everything but everything is good, too. This is a more powerful guarantee than land titles. This is about psyching up the clients. It gives the clients idea that everything he owns is at stake. It might not mean too much for the bank as collateral, but it has a lot of value to the farmer, it has intrinsic value to the farmer and his family.
Most farmers do not have guarantees to offer (land, property, equipment). They use rudimentary/ obsolete equipment, of little or no marketable value. For those who do, the value of the guarantee or the cost of registering it far exceeds the amount of the loan. These loans are supposed to be non-collateralized but what happens is household assets, business assets, co-makers, are collateral. And because these are not hard collateral, we are referring to them as non-collateralized loans. Most farmers do not have guarantee to offer. If you want to reach the farmers, then you have to require soft collaterals.
Let’s assume that a farmer has a property worth 250k but he is only asking for 5k, it does not make sense to get the property instead, we require soft collaterals. In most cases, the amounts that the farmers require are so small.
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15. MAP Loan Terms & Conditions: Interest 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.
Bullet 1: Each bank define its own interest rate.
Bullet 2: The interest rates must reflect competition, the cost of capital, administration and loan loss reserves. Farmers are willing to, and actually do pay high interest rates (to traders and money lenders) if other terms and conditions (easy access; no collateral) are adequate. Another very important findings in microfinance around the world is that the client what counts is the total costs of credit. This is interests plus transaction costs (fee, transactions, time). If the transaction costs are low, the interest rates can be high. Let’s stop here for an example
An evaluator, during her evaluation of one bank wondered why a bank with subsidized interest rate was only able to disburse 38 loans. The interest rate is only 6% per annum. She interviewed the farmers and she found out that the farmers spend at least six months before their loans are disbursed. In 6 months, the farmers come to the bank every week to follow up. That’s why most of the farmers prefer to borrow from intermediaries who charge 12% per month and get loans quickly. In other words, with the intermediaries, the transaction cost is low that’s why they are able to peg the interest rate higher than the market, and much, much higher than the bank with subsidized interest rate.
In this case, the farmers live far from the bank so they had to spend for transportation expenses every week, plus snacks, plus time away from the farm, plus time spent in completing the documentary requirements.
Bullet 3: Let’s take a look at this, Notwithstanding the aforementioned, interests rates must reflect the real cost of the loan and adjusted according to inflation. We are saying that yes, the farmers can pay higher interest rates but we also need to be efficient so we can reduce our interest rate and get more clients. Lower interest rate plus quick service equals happy clients and profitable operation.
NOTE to speaker:
Ask participants how much they charge.
Some people will say, that’s too high, the clients cannot afford to pay that. However, farmers are willing to pay more than what you’re charging. Most farmers in this country are financed by traders with very high interest rate. If he can pay 10%-20% per month to a 5-6ers, he should be fine with 2.5%-3.0% that the bank charges.
To summarize, in microfinance, loans are designed around how money lenders do their loans. Simple application, quick disbursement, high interest rates.

16. MAP Loan Terms & Conditions: Fees 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.).
Some banks charge a fixed amount while others charge a percentage of the loan amount. During product orientation, AOs should make it clear that service charges are collected to cover the expenses of the banks in preparation of documents, CIBI, and AOs regular visit to clients.

17. WHAT ARE YOUR QUESTIONS?

18. Thank you