Ensuring Loan Repayment
Calmeadow, a Canadian non-profit specializing in microfinance, operates two loan funds in Canada and offers international consulting services for microcredit programs. In this section, Barbara Calvin discusses how CALMEADOW helped the Get Ahead Foundation in South Africa pull out of their repayment crisis.
The Get Ahead Foundation introduced their solidarity group lending program in South Africa in 1987. For three years the program worked well. But, by 1990, due to senior management turnover, the group-lending methodology began to erode.... In early 1991 their main donor, USAID, began to put pressure on them to grow. Since they were not reaching the outreach objectives of the donor agreement, the new Director of Operations began to push growth and told the branches, "Disperse, disperse." Because the methodology had already eroded, this was not good quality loan growth. By the end of the year, they had grown from 3,000 clients to 8,000 clients, but many of the new clients were now going into arrears. Early in 1992, the message was changed to, "Stop, no more disbursements. Collect. Collect." So you can imagine what happened.
By 1993, 70 percent of the portfolio was in arrears, and they needed to make a provision for 50 percent of the portfolio.... By the end of the year they were left with only 1,800 quality, active clients. At that time they asked Calmeadow to help them to turn around the situation. When we first visited, they had just hired a new senior management team, and this was very important because the new team was open to new approaches. We began our work by making an important assumption, and that was that the repayment problems were due to management and not to clients or the environment.
We also assumed that either the clients do not value the product-they do not value ongoing access to the loans because the client service is bad; or they do value the product, but the organization is not effectively communicating in their policies that repayment is important. Somehow the delinquency management is weak. They are not enforcing repayment.
To really understand what happened we took three steps. We interviewed staff at all levels, conducted client research, and firmly documented all the policies and procedures. And, indeed, we found what we expected....
- There was poor client service. Only 12-month loans were being offered, and this did not fit well with the needs of the urban townships in South Africa. Also, over the years, the new managers had never thoroughly been trained in group methodology. They began to add a lot of up-front guarantee requirements...making the loans very expensive, and it was becoming a burden on the clients. In addition, the disbursement record was very poor; there were long delays between an application for a loan and the actual disbursement. There were periods of time when disbursements were suspended. The clients could not depend on the loan.
- There was loose methodology. It was group lending only in name. Each individual within the solidarity group was given a separate check. Partial payments were accepted. If one good borrower was in a group with a defaulted borrower, the good borrower could join another group and get another loan. Also the loan officers were, in fact, putting groups together themselves [made up] of strangers.
- The management information was not helping them. The loan quality indicators were calculated incorrectly. They had not kept up with the new thinking in the field, and they had quite a poor computer system.... They were not getting timely reports.
- And finally, new loan officers coming in were not well trained in group lending because no one any longer knew what it meant....
What did we do? We formed a "Change Management Team" made up of senior managers, Calmeadow, and other people that we thought could help us to strategize how to change these aspects.... We changed the loan product, introducing a four- and six-month loan term; we lowered the up-front guarantee requirements; and we ensured that there were timely disbursements. We ensured that the disbursements were reliable, that there would never be periods of time when the company was not disbursing. We spent a lot of time with staff, trying to make them see that these were clients and not beneficiaries. These are people who are paying their way and deserve to be treated with utmost respect and commitment to client service.
In terms of the group methodology, we introduced group testing to ensure that there was group cohesion. We required everyone to open a club account and the group had to save in the club account prior to getting a loan. We eliminated the individual check, so we had one disbursement check to the whole group and we no longer would accept partial repayments. If someone came in with two repayments out of five, we refused it and applied a delinquency fee to the whole group.
We spent a lot of time on human resource issues. We changed the field worker title to "loan officer." Then we gave that loan officer complete control over the client relationship. We introduced two weeks of re-training for all the loan officers to thoroughly [review] the changes and why they were important. And we followed that up with quarterly workshops in each region. This was really important because there were people who had been around for a while, and they really did not understand and did not like this new paradigm, this new way of working....
Then we thought, these poor people [the staff] are going through huge change, dramatic change in the branches, so let's reward them financially for the hard work that they are going through. We introduced a staff incentive scheme which looked at quality and growth, but of course with emphasis on quality of the loan portfolio. Finally we had a very innovative newsletter which really encouraged rivalry. It had "Loan Officer of the Month" and stories and really helped reinforce what was happening.
We corrected the calculation of repayment rates; we introduced a portfolio-at-risk figure. We improved the reporting, made them more timely, [and] upgraded the computer system.
So what were the results? We began our changes in March and April of 1994. The dramatic improvement in quality took place over a six-month period, from June of 1994 to December 1994. Repayment rate improved from 73 percent up to 91 percent. Portfolio-at-risk dropped from 23 percent down to under 10 percent. What we were most excited about is that this was not a quick blip; it actually was a sustained improvement in quality over a whole year.
What happened on the growth side? [From January 1994 to June 1995] they went from fewer than 4,000 clients to almost 10,000 clients.... So they did not sacrifice growth in order to improve loan quality....
These were some external factors which helped us: great support from the board; new senior management that was not hanging on to old policies-they were eager to learn; donor pressure, claiming they'll pull support unless we improve; and that it was a new South Africa, it was a new Get Ahead Foundation for a new South Africa.
Chris Hock, Founder and Managing Director, Rural Finance Facility
The Rural Finance Facility serves 8,000 South Africans with loans for self-employment and housing. Here, Chris Hock speaks frankly about problems with fraud.
Like most, we started and very rapidly had the pressure imposed on us, and imposed on ourselves, to grow fast. We doubled in size every six months for the first three years....
Fortunately we were relatively well-endowed with useful information systems so we had a strong data system which survived that growth.... But we did have the immediate consequences of rapid growth-the fact that we did neglect proper staff training.... Our systems were stretched to the limit, so there wasn't enough back-up, not enough checking, and not enough time to think about what's happening and to respond to problems as they emerge.
The very first thing that started to happen is that we noticed a falling off of repayment rates. We had on-time repayment rates dropping gradually until they reached...75 percent....
At first there was a bit of a dilemma because the management team of the microenterprise division didn't believe the figures from finance. They said, "No, we know the repayments are better than this." And they could prove on a few occasions that there were little errors in the data-that someone who had repaid on time was listed as 30 or 60 days out....
The very first hurdle that we had to get over was to agree on the nature of the problem, and that took about two or three months until we all agreed that there was a repayment problem....
We then had a second problem to overcome, and that is that we didn't jump to very fast, firm legal action very quickly. There are two reasons for that. One is that we grew up as an NGO with a background of being partly a social development organization which wouldn't immediately take harsh legal action. In South Africa there was an additional component to that-the fact that the criminal justice system has a very harsh history and is associated with all sorts of things that one as an NGO is not wanting to support....
When we decided to take legal action, it was the right thing to do. We realized we probably should have done it earlier. We handed over a number of clients to lawyers for collection. It was the first contact that our clients had with us which was not routed through the loan officer.... For the first time we had some independent access to clients-and it revealed fraud.
We had two loan officers who were misappropriating receipts. It was a painful experience. They managed to abuse a system which is fairly simple. We probably had a hint of a problem but it wasn't checked because we were [growing] at a speed that we weren't checking everything and monitoring as we should have been.
So borrowers were confronted by a letter of demand from a lawyer and came to us and said, "But I've paid my loan," and that, obviously, then revealed the problem.... The two loan officers in question have been fired. We've been painstakingly going through those branches to go over the consequences of that situation.
In one sense I'm actually glad that it happened. The two loan officers-at a pretty early part of our development-showed up our systems, showed up the cost of growing too rapidly and really gave us a good lesson as to how to grow the next step and put systems in place that work better....
The first point is to accept the weakness, and, to recognize it and say, "We made a mistake here" and then to move from there. For a while we denied that it was happening. And that was part of the problem-not accepting that it was happening.
Mila Mercado, President, Ahon Sa Hirap
Ahon Sa Hirap is a Grameen replication program in the Philippines. Mila Mercado describes their repayment crisis, and how they rose above it.
We started as an experiment in 1989 as a social research project of a state university in the Philippines. We started the experiment with just 50 mothers, and now we are reaching 3,500 borrowers....
When we started...our repayment rate was about 100 percent. But from 1992 to 1993, the crisis started.... As a result of lack of funds we had to enclose our project within parishes.... We had to go through affiliations and become a project of the churches.... We had known that we had sacrificed the essentials....
In 1994 the problem became a crisis. We had 1,266 borrowers; we had released US$64,000 in outstanding loans. Of the 1,266 members, we had 785 defaulting-62 percent. Out of the outstanding loans of US$64,000, we had 42 percent overdue.... The total repayment then was 58 percent in January 1994. The credit discipline that is the core of the Grameen Branch had been shattered in every branch. The major crisis was [caused by the following factors]:
- Failed loan activities or investment in non-viable ventures. Most of our clients are venturing into fishing industries, hog raising-[activities] with a gestation period. We didn't know that there had to be other loan activities that had to be [continuously] earning [income for the clients].
- Loss of incomes of borrowers' spouses. Many of the borrowers, when interviewed, said that their husbands died and the [family] has lost that income.
- Utilization of loan for purposes other than what was described in the loan proposal. There was really no [monitoring] of the loans as to their proper use.
- The presence of the non-poor in the clientele. They just take for granted this [service]. Defaulters are relatively better-off poor. They can pay. But because there is deteriorating credit discipline they just decide not to pay.
- Irregular repayment and lump-sum payment being accepted at the end of the loan cycle, apathy between members and staff, and limited monitoring of attendance or default....
We said, in all of these things, we do not want to blame the borrowers.... In this repayment crisis and in all the problems we are encountering, there is one source of the problem: the management. We are not serious in the management of it.
So how do we solve our problem? All our branches are defaulting. We said we need external support. And we need a person to [review] the project. So CASHPOR and Grameen Trust... analyzed the situation for us.... First, it was recommended that we start with the worst branch-and start with the worst center and start with the worst group. We mobilized all our branch managers to come to one branch and had retraining and re-education, because we believed that the commitment and the dedication of the staff was the only asset we had at that time.... Even the board [of directors] had to be re-educated on the essentials of [the] Grameen [model].... [E]ven branch managers and area managers had to form one group-and [that group] had to be recognized so that we know what it means to have the essentials of Grameen....
We, on the board, had to decide whether we would push [forward] on the project.... We had to first reconsider our structure, clarify our relationship with the branches that are under parishes. We had to streamline the organizational structure.... We had to give supplementary loans to those with really worsening projects.... We had to take the initiative to say an apology to the borrowers. "We are sorry that we don't mean business in this project." We had to apologize with the sense of commitment. "We will give out loans, but you have to prove to us your credit discipline." We had to renew peer group, peer pressure...; we had to renew our ten principles; we had to renew values; we had to renew the dignity and empowerment of the people.
As a result, at the end of 1995, we had 98.98 percent repayment rate. At the end of 1996, until now, we have attained 98 percent repayment rate.
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