DELINQUENCY MITIGATING RISK FACING SACCOS IN COURSE OF OPERATIONS AFRICA SACCO LEADERS FORUM 2015 HARARE ZIMBABWE

Transcription

1 DELINQUENCY MITIGATING RISK FACING SACCOS IN COURSE OF OPERATIONS AFRICA SACCO LEADERS FORUM 2015 HARARE ZIMBABWE

2 OUTLINE Defining delinquency Causes of delinquency Results and Costs of Loan delinquency Mitigating the Risk Successful Collections Successful Lenders Measuring the Results of Effective Loan Management 2

3 Board of Directors main responsibility is to Ensure. 3

4 LOAN DELINQUENCY Delinquency refers to loans with one or more instalments which have come due but were not paid. The failure to control loan delinquency is probably the largest single downfall of SACCOs Therefore The risk of delinquency and default must be continually addressed because

5 Time Bomb LOAN DELINQUENCY

6 Causes of Delinquency BEWARE OF THE SEVEN SINS OF DELINQUENCY 1. Lack of proper loan policies and procedures 2. Lack of proper collection policies and procedures. 3. Lack of understanding what is loan collection 4. Those that grant loans don t collect 5. Social philosophy 6. Inappropriate loan approval and collection incentives 7. Reactive Vs Proactive collection 6

7 The Borrower Causes of Delinquency 7

8 Causes of Delinquency 1. Fault of the Borrower - Using the money for another purpose than it was applied for. -dishonesty, deliberate refusal to pay. -failure of a member to live within his/her means. -bad planning -personal irresponsibility heavy drinking, gambling etc. 8

9 The SACCO Causes of Delinquency 9

10 Causes of Delinquency Fault of the SACCO - granting loans without proper assessment - granting loans outside policy - granting unsecured loans - favouritism on the part of the SACCO - not educating the member - poorly drawn payment schedule - failures to require a guarantor to assume the loan - Continuing to grant loans when delinquency is high - Lack of loan monitoring 10

11 Causes of Delinquency Unforeseen Circumstances 11

12 Causes of Delinquency Unforeseen Circumstances - death, - drought, - floods, - lay off from work, - illness etc. 12

13 Results of High Delinquency SACCO operations that are affected by high delinquency: CAPITAL LIQUIDITY SERVICES IMAGE 13

14 Results of High Delinquency Lowers liquidity: resulting to credit rationing, external credit dependence, reduced ability to provide services that members want and need Lowers profitability: resulting to diminishing ability to provide for operational costs including staff wages and slow build-up of institutional capital 14

15 Results of High Delinquency Negative reaction from the members, possible loss of good members, losing credibility affecting the image of the SACCO No liquidity, no capital, another lost SACCO! 15

16 Costs of Delinquency Postpones interest income, yet costs remain, so lowers profitability. Slower portfolio rotation, lowers productivity of assets and reduces fee income Contagious hidden beast 16

17 Costs of Delinquency High costs of fighting delinquency, cheaper to prevent Cost of loan provision Cash flow suffers and affects liquidity management Image of the SACCO is affected Erratic cash flow and difficulties in planning Lowers staff morale 17

18 Mitigating the Risk 1. Loan Portfolio Analysis Measures: product performance Profitability Risk policy effectiveness market preferences

19 Mitigating the Risk 1. Loan Portfolio Analysis Determines risk exposure and measures profitability Low Loan Volume Very High Loan Volume Earning not Maximised Liquidity is Low High Collection Rate = Low Del. Ratio = High Profitability Ratio

20 2. Best Practices Mitigating the Risk Written lending policies, Written collection policies and procedures, Education of members, Selection and training of personnel, Identification of delinquent loans (adequate and timely management information system),

21 2. Best Practices Mitigating the Risk Correct computation of delinquency, Schedule (report) of delinquent loans reported to and discussed by board of directors, Knowledgeable collectors and authority to enforce the SACCO policy and procedures. Constant and consistent collection actions Collection activity should continue after a loan has been charged off

22 Mitigating the Risk 3. Written Loan Policy Types of loans to be granted; Maximum amount to be loaned on each type of loan to an individual or regarding a specific loan category in the aggregate; Maturity limits on each type of loan; Collateral requirements on each type of secured loan; Market based interest rates

23 Mitigating the Risk 3. Written Loan Policy 5 C s imbedded in Loan policy 1. Character 2. Capacity 3. Collateral 4. Capital 5. Conditions

24 Mitigating the Risk 4. Written Collection Policy

25 Mitigating the Risk 4. Written Collection Policy To Include the following: Who is responsible for collecting the loans? Are they the same people who make loans? When is a loan considered delinquent? Frequency of a delinquency report to the board (monthly). What information is contained in the delinquency report? When the delinquent borrower will be contacted after a missed payment and the types of contact used (letters, personal contact, phone calls).

26 Mitigating the Risk 4. Written Collection Policy To Include the following: How to Document the collection efforts of the collector. When the borrower should be contacted again if there is no response and what should be done in this situation. When the co-maker will be contacted (normally after the 1st missed payment). The need for all collection information, contacts, promises to pay, etc., to be placed in writing. When collateral will be repossessed.

27 Mitigating the Risk 4. Written Collection Policy To Include the following: How collateral will be sold after repossession and the documentation of the bids and the sale required. When loans can be extended or refinanced. When loans will be charged-off and recoveries accounted for. Who will analyze delinquent loans and how often Delinquency fees and when to stop accruing interest on delinquent loans (after 2 months delinquent). Do collectors receive a commission for loans collected? If yes, how is commission paid and monitored. Who is going to pay?

28 Mitigating the Risk 4. Written Collection Policy DELINQUENT BORROWER COLLECTION CARD Page 1 Member Name Account # Address Name of Co-signer Telephone Number Account Number of Co-signer Place of Employment Address of Co-signer Employment Address Employment Telephone Telephone Number of Co-signer Original Amount of Loan Name of Co-signer's Employer Loan Purpose Employer's Address Original Loan Maturity (date) Employer's Telephone Number Original Loan Period (in months) Member Total Savings Balance Frequency of Payments Co-signer's Total Share Balance Form of Loan Payment: Collateral Description (Payroll deduction, cash) Collateral Value Location of Collateral Condition of Collateral Observations Description of any modifications to the original loan contract

29 Mitigating the Risk 4. Written Collection Policy DELINQUENT BORROWER COLLECTION CARD Page 2 COLLECTION PROGRESS AND INFORMATION Date of Collection Action Type of Collection Action Taken Results from Actions taken and any Observations Date of Next Action

30 Mitigating the Risk 5. Education Of Members Collections begin prior to a member obtaining the loan Any attempts to advise the member of their responsibilities on the repayment of the loan after they have obtained it, is too late. All of the specifics and responsibilities need to be spelled out in person to the member prior to the loan being advanced. 30

31 Mitigating the Risk 5. Education Of Members When loan is granted, the member is reminded of the following: 1. Their obligation is to repay the loan in accordance with terms of the loan contract 2. The money they are borrowing belongs to the members; 3. The member is to notify the SACCO if their financial situation changes or if the member has problems meeting the repayment schedule. 4. If the loan is repaid by payroll deduction it is still their responsibility to ensure that payments are made on time. 31

32 Successful Collections Do not threaten delinquent borrowers. SACCOs must do what they say they are going to do. Have accurate management information system MIS to measure delinquency accurately. Charge competitive loan rates and terms so the CFI can attract quality borrowers. Charge different interest rates on loans depending on the risk involved (i.e. the longer the maturity the higher the interest rate; older the collateral the higher the interest rates). 32

33 Successful Collections Smaller loans should be granted to new borrowers so they can establish a credit history with the SACCO; Have established written quarterly goals for the delinquency and charge off ratios; Management and employees should be appraised based on the attainment on these goals. Require adequate insurance on all collateral 33

34 Successful Lenders Know their borrowers, Maintain close contact with borrowers, Provide appropriate credit products, Offer competitive rates and terms, Are fanatical about collecting on delinquent loans. 34

35 Measuring Results of Effective Loan Management Low Rate of Delinquency: < 5% Low Loan Loss Provisions Zero balance for loans over 12 months Little or no Loan Write off Timely Loan Repayments Very high Loan Interest Collection Member Satisfaction Loan Balance: % of Assets Member Savings: 70 80% of Assets 35

36 Thank You 36

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