Raise your words, not voice. It is rain that grows flowers, not thunder. Rumi
Idea Transcript
June 2010
Workshop on Delinquency Management « Credit without discipline is nothing but charity »
Pr Yunus
Our Business Service
Cost to client
Money and Debt Advice
Free
Access to bank accounts
Free
Microcredit Business Loans
15-19% Interest Rate
Personal Loans
32 - 39% Interest Rate + 5% Admin Fees
Delinquency management definition and coverage Understanding Delinquency and its risks Loan delinquency: A loan is delinquent after one day in arrears
Definition
Measuring the risk: Portfolio at Risk: Proportion of the portfolio that is at risk of not being repaid
Bad debt: Loans never to be repaid after more than 180 days in arrears and a CCJ
• On MFIs: Less income, no sustainability
Risks
• On clients: Less trust, less impact on poverty reduction • On staff: Weakens the motivation, income decreased • On Funders: Less credibility, less income
•Preventative Stage • At the loan appraisal level • Challenge your own practices regularly
How to prevent and manage delinquency
•Curative stage • Loan Monitoring and follow up • Procedure for loan collections • Distinguish Can’t payers and Won’t payers
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Impact of the credit crunch on delinquencies To determine the impact of the Credit Crunch on Delinquency management of UK MFIs, it is essential to understand the UK context, the causes of the credit crunches and their consequences on both clients and MFIS
Credit Crunch
UK context
•No Interest rate cap •Extortionate Interest rates •Financial exclusion versus Over inclusion •Irresponsible lending
Causes of the Credit Crunch in the UK •Bad Product design •Not suitable for client •Inability to understand debts •Credit scoring system •High level of refusal by Banks •Turn to extortionate lenders and fall in Overindebtness
Consequences •On Client’s situation •Redundancy •Unemployment •Living standard •Reduced access to Bank loans, Overdrafts and credit cards •For MFIs •Demand Increase •Client profile
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Observable Consequences
Statistics
Number of applications
Increased by 20%
Refusal rate
Increased by 5%
Consequences on the Portfolio at Risk
NONE
Consequences on the rescheduled Loans
DOUBLED
Client who would never have had to come to us before are now pushing the door
Case study on Fair Finance Fair Finance offers a range of adapted products and as such avoided an increase in the portfolio at risk during the credit crunch. Fair Finance’s clients have been credit crunched for all their life so the institution has built experience in understanding risk and dealing with it.
Fair Finance
Product design (Understanding the market)
Case by Case appraisal Lending responsibly
Delinquency Management
(preventing bad loans)
(Dealing with arrears responsibly)
•Character •Small Loans: less risky •Step by step approach •Based on Existing income •Flexible •Transparent •Site visi •Quick •Face to face Interview •No credit Score •No Collateral
•Disposable income •Income and expenditure •Finance and Debt Management •Business Viability •Credit check
For Can’t payers •Close monitoring of the portfolio •No penalty fees for arrears •Rescheduling/Payment holiday •Focusing on communication For won’t payers •Strong procedure in place: As responsible lenders •Taking them up to court
6
Results
Statistics
2005/06- 2008/9
Total number of clients supported Personal Loans Made (Over 2000) Microcredit Loans Made (160) Bad Debt Rate
5000 £1,500,000 £600,000 9%
Debt Advice Given
1500
Over indebtedness managed
£12m
Bank Accounts opened
120
Outstanding Balance Outstanding balance variation for the last 3 years for Personal Loans and Business Loans •Number of active loans
•Outstanding Balance in Value (£) 800000
1000
700000
800
600000 500000
600
400000
400
300000 200000
200 100000 0
0 2008
2009
2010
2008
2009
2010
8 8
Risk Profile Personal and Business Loans PAR >30 days for the last 3 years (End of month) •Personal Loans •Business Loans 30%
25%
14%
13% 8%
20%
15%
•Bad Debt 9% in 2009
12% 11% 8%
10% 0%
Aug 07
Mar-08
Mar-09
Dec-09
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Fair Finance – Businesses Please tell us where are the risks, would you give the loan?
Application
Business
Case studies
Online retail Jewellery
Mr Paul is married and has been running the business successfully for the past 3 years with his wife. He applied for £10,000 to develop it and secure premises. Cash Flow realistic and genuine client No site visit realised
Mini Cafe
Mrs Jane Draft is divorced and has one dependant child. She lives in Hackney and is tenant of the Council. She is in the process to start her business after having two other loan from 2 other Loan Providers, for a total amount of £10,000. She came to Fair Finance asking for a loan of £5,000 to finish the refurbishment of her premises and buy part of the equipment, in particular the coffee machine with accessories.
10 10
www.fairfinance.org.uk Opening Questions Not to be shown •What would have worsen the situation. (the absence of credit bureau see South America) •What are the next challenges: • Risk of Bad practice in collections • Target driven delinquency management • Challenge the banks on their scoring methods • Avoid a similar crisis in developing countries • What are the differences in management in Europe and the rest of the world; • Are the current PAR in Europe more representative of the reality of the risk?