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Loan Loss Provisioning and Write-off Policy
Grameen Bank has been subjected to sharp criticism for its provisioning and write-off policies under GCS. We always defended ourse
lves that our policies are more generous than the standard set by the central bank of the country. Also we find both policies very satisfactory for the financial prudence required in our business.
GGS has made these policies still more generous. "Overdue" is defined in a very sharp manner. If a borrower fails to repay her installment for ten consecutive weeks, or if she fails to repay the total amount she is required to pay within a six month period, and she does not move into flexible loan, she becomes a defaulter. If she becomes a defaulter, 100 per cent provisioning must be made for the unrepaid principal and interest. Exactly one year later, the amount must be written off. Writing off will be done on a monthly basis, rather than at the time of annual account closing. If a borrower is on flexible loan, generally the same policy will hold. Fifty per cent provision must be made for the total balance amount of flexible loan and accrued interest on the annual closing date, even if the repayment rate of flexible loan is 100 per cent for the whole bank.
Borrowers always worry what will happen to their debt if they die. Will the family members pay off their debt ? They believe that if their debt remains unrepaid after their death, their soul cannot rest in peace. Inclusion of loan insurance program in GGS has made them very happy. This has become another popular feature of GGS.
The insurance program is very simple. Once a year, on the last day of the year, the borrower is required to put in a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She deposits 2.5 per cent of the outstanding amount. If a borrower dies any time during the next year, her entire outstanding amount is paid up by the insurance fund which is created by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account. Borrowers find it unbelievably generous. Everybody loves it.
If the outstanding amount remains the same on two successive year-ends, the borrower does not have to put in any extra money in the loan insurance savings account in the second year. Only if the balance is more she has to put in money for the extra amount. Even if the outstanding amount happens to be several times more at the time of her death than what it was on the preceding year-end, under the rules of this program, the entire amount will still be paid off from the insurance fund.
The borrowers have good reasons to be happy.
Loan Ceiling Grows with the Borrower
GCS operated with a loan ceiling for the whole branch. No borrower can take a loan above the ceiling fixed for the branch. On top of it there was a ceiling for the whole zone. Branch ceilings were below or equal to the zone ceiling. GGS has replaced it with a up- gradable able loan ceiling for each borrower. Under GGS there is no ceiling for the zone, and no ceiling for the branch. For basic loan, the ceiling is fixed each time a borrower requests a new loan. It is calculated in two different ways. Higher amount between the two is accepted as the ceiling. Under the first method the ceiling is worked out on the basis of performance (regularity in repayment, attendance in weekly meetings etc) of the borrower, her group, and centre. Under the second method the ceiling is fixed on the basis of the total amount of the savings (excluding personal savings). Ceiling is equivalent to 150% of the total savings. If a borrower has a total saving of Tk 10,000, her loan ceiling will be Tk 15,000. There are many borrowers who have accumulated quite a good amount of saving in their various saving accounts. They can now take large loans too. Under the first method ceiling can go up or down depending on the performance. For example, loan ceiling diminishes by Tk 500 for each day of borrower's absence in the weekly centre meeting. If the repayment record of the entire centre is perfect, her loan ceiling goes up by a fixed percentage. A borrower can enhance her loan size by increasing her savings, or by making sure she, her group, and the centre do all the right things.
In flexi-loan, a borrower has no opportunity to enhance her loan size. She can borrow only what she has paid back, except after the first six months, when she can borrow twice the amount she has paid back if she fulfills some stringent conditions.