When The Collections Call Rings, How Do You Answer?
28 February 2009 at 09:22 boba 7 comments
* image used for illustration purposes only; it is not an actual sign used by our MFI *
The end of the month is always a hectic period at my micro-finance institution. It’s considered to be a critical time to collect the late loan repayments, in order to reduce the amount of risk in the portfolio when the new month rolls around.
There are a number of meetings that take place among the loan officers and the management where the problem clients and groups – those that have not submitted their repayments on time – are discussed in detail. The mood is solemn at these meetings, as the situation is worrisome. Due to the economy affected by the worldwide crisis, more and more clients are becoming delinquent and are having trouble paying back their obligations.
The Collections Process
Typically, when a client is late, the loan officer personally delivers several written warnings to him or her to let them know about the late fees, which are relatively steep, and the consequences that may follow if the payment is not submitted promptly, such as the possibility of a lawsuit. Most of the clients react to these warnings and settle their debt, but not everybody. Thus, at the end of the month, there is an extra emphasis placed on collecting the repayments from these remaining “problem” clients.
Over the last few days, the loan officers have been paying daily visits to the delinquent borrowers. In fact, they even bring in an additional loan officer for reinforcement and effect. Oftentimes clients simply get used to their credit officer “pestering” them about the missed payment and not take it seriously any longer, so the extra support is meant to show how serious the situation really is.
Although today is Saturday, most of the staff has been working and making their rounds. The office stayed open as well, as the clients have been given a deadline to come in and submit their repayments by the end of the business day. As the day rolls to an end, many of the “delinquencies” have been resolved, so the staff starts to breathe easier.
It’s not the easiest part of the job for the loan officers, as that’s when they have to be a “bad guy” to a large degree. Many of their clients – even long-time reliable ones – are struggling to pay back their debts. For some, business has slowed due to the worldwide economic crisis. Others have relied on remittances coming in from Russia which has dried up recently. Although the MFI staff may sympathize, everybody has their job to do and the money needs to be paid back.
Conclusion
When you first learn about micro-finance, you learn about the impact that the loans have on the borrowers. You learn about the social value that the micro-finance organizations provide to their clients. And it’s all true – impact and social value are certainly there.
But because this is still a business and not a charity, things don’t always go so smoothly. As a micro-finance institution, you are caught between a rock and a hard place. Many MFIs, including the one that I’m working for, has a social mission to help the poor population and conducts its operations accordingly.
However, when the clients are struggling to pay back their loans, what should the MFI do? Do they attempt to accommodate the client, since – after all – their mission is to help the struggling population and not take their last money at the time of need? Or do they need to do whatever needs to be done in order to collect – as otherwise they can significantly jeapordaize their operations and the ability to serve more customers in the future?
What do you think?
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* This post has been written by Boris Mordkovich, a Kiva Fellow working for 10 weeks in Tajikistan for MLF Humo and Partners. Check out currently fundraising loans by Humo and join Kiva Lending Team – Supporters of Tajikistan *
Entry filed under: KF7 (Kiva Fellows 7th Class), MLO HUMO, Tajikistan. Tags: delinquencies, kf7, Kiva, late payments, Tajikistan.
1. Judy Humphrey | 28 March 2009 at 12:29
I have rental property, and I find that if I allow laxity in the monthly rental payment, I run a deficit in income that is not recoverable. “Holding feet to the fire,” and treating the payments with the seriousness they deserve makes the transaction between lender and borrower a level field. Both retain respect for one another because they have a contractual agreement that both are honoring.
People often come to the lender because their neighbors have gotten a good deal, but it is a deal, not a handout. Access to capital to expand is a benefit (and a privilege) that not everyone enjoys, and understanding how to use credit is a learned skill. We all know the story of people who get checkbooks and think they can write checks for whatever they want, not understanding the relationship between the money they have in the bank and the check they write.
Rewriting loans and extending payment periods are certainly options that can be used where the situation warrants. But if there’s a wholesale problem of collecting loan payments, then there needs to be an examination of the lending practices,
the borrower’s expectations, etc.
Is there a unique cultural aspect that could be effective in making collections? Is there a local cafe where the loan officer could meet the clients, where over a cup of tea/coffee, more than money changes hands?
2. Lori Gibson Banducci | 2 March 2009 at 11:34
Boris–
Great post and so timely. The MFI where I am working in Guatemala, stayed open 4 hours past their normal closing time on Saturday and the loan officers were furiously working the phones, offering to go pick up payments etc. I have been impressed with the ability of the loan officers to walk that fine line between being firm (two days late on a payment is a MAJOR problem) and compassionate.
MFI’s cannot become charitable institutions or they will not survive. My guess is that most have found ways to accomodate those borrowers who will, perhaps with more time, be able to repay their loans. (quite the contrast from the current situation with banks in the u.s. and their refusal (or inability?) to restructure home mortgages to reflect the current reality.)
3. Boris Mordkovich | 2 March 2009 at 00:12
Hi everyone,
Thank you for your comments and responses.
As Howard has mentioned, there are no perfect solutions to this problem.
Unfortunately, “forgiving” the loan, making exceptions or re-configuring the loans is a very risky business for the MFI. The problem is that it doesn’t affect a single client – when you start being more lenient with one, the word spreads quickly and the MFI is likely to start seeing more problems from other clients as well.
Moreover, the MFI often borrows funds from other creditors and needs to repay those on time. As you can imagine, those creditors expect their money back no matter what. So, in order to ensure its own survival, the MFI needs to collect the funds as planned.
I think that every organization will deal with these differently. I think that the important thing is to acknowledge that every MFI has a choice on how they act in these situations and we should not judge it as a right or wrong one – it’s a matter of each organization’s business/operational model.
Boris
4. Bill Sweitzer | 1 March 2009 at 04:59
As lenders, we are linked to the success of these businesses. I am certain that each loan is as unique as the individual receiving it. If you intend to see the individual succeed, then you must restructure the loan to fit the current circumstances.
The ability of local people to find creative solutions that are consistent with their cultural environment has always amazed me. As a lender, being patient while these solutions are implemented is paramount. Also, sharing these solutions through this blog is very helpful. While we come from different cultures, we can still benefit from the creative thoughts of others.
5. howard | 1 March 2009 at 04:31
Dear Boris,
Thank you for this most informative posting. There is, in my opinion, no perfect solution to this obvious conflict. Even though my first inclination is too “forgive the debt because of the dire circumstances” to do so would begin to unravel the whole concept of Kiva which is to allow the recipients to become independant. I also do not favor “foreclosing the loan because of non-payment”. My solution is to renegotiate the terms (as often happens with more conventional loans) and “stretch the loan” with some partial payments in the intirim.
Its not perfect but its my choice as the best of several poor solutions.
6. Ronan | 28 February 2009 at 12:09
Boris – Thanks for sharing your observations. It’s interesting to hear how differently each of the Field Partners handles delinquencies (especially through the use of social pressure). For example, I learned that Manuela Ramos in Peru collects payments at a group level and leaves it to the group to resolve individual late payments.
Source:
http://jennyballen.wordpress.com/2008/11/20/bout-it/
In these difficult economic times, Field Partners do walk a fine line between ensuring their own sustainability versus being sensitive to the needs of their clients. I think that microfinance institutions that have a social mission, as opposed to other financial institutions motivated solely by profit, have a greater authority to be stringent in handling delinquencies….their survival depends on it. If these institutions do not exist, then the borrowers they currently serve would have no choice than to turn to predatory moneylenders.
I greatly enjoy your blog posts and updates on the Supporters of Tajikistan lending page.
Cheers,
Ronan
7. Unilove | 28 February 2009 at 11:40
You ask a powerful question about delinquencies: “what should the MFI do?” and then provide a tough choice: “Do they attempt to accommodate the client…since…their mission is to help the struggling population” ~ ~or~ ~ “do they need to do whatever needs to be done in order to collect…otherwise they can significantly jeopardize their operations and the ability to serve more customers in the future?”
As a lender, we hope there are no delinquencies, so we can re-loan our funds and help more entrepreneurs. There have been many discussions on KivaFriends.org about MFI’s and their role in protecting a lenders funds, as several have failed.
But, also, KFrs have shared great compassion and concern when entrepreneurs struggle or suffer setbacks, and that concern almost always supercedes loan repayment concerns every time.
Perhaps, loan terms can be extended due to circumstances, and an update posted for Kiva and lenders? Better late than never, my momma used to say
Thank you for this thought-provoking post. Keep ‘em coming!