Perspectives from two Continents
Ensuring Loan Repayment:

A key component of the Microcredit Summit's learning agenda was the 70 Meet the Challenge Sessions held on the second day of the Summit. Over 400 leaders in microcredit, government, business, banking, and the non-profit sector participated as panelists.

Perspectives of two leading practitioners on repayment problems are excerpted from the Meet the Challenge Sessions. This material is taken from the session entitled "Ensuring that a Repayment Problem Does Not Become a Repayment Crisis."

Barbara Calvin: Director, Calmedow, from Canada

"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, "disburse, disburse". 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 the 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 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 issue. We changed the field worker's 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 now 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 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..........

There 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."

Mila Mercado: President, Ahon Sa Hirap, from the Philippines

"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 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 or 62 percent of the membership. Out of the outstanding loans of US$64,000, we had as much as 42 percent as overdues......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:

� Failed loan activities of members or investments 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 had lost their 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 the service that is provided. Defaulters are relatively better-off among the 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 did not want to blame the borrowers.... In this repayment crisis and in all the problems we are encountering, there is only 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 needed 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 re-training 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..... Bank 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 with 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'the mean business in this project.' We had to apologize with a 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 maintained 98 percent repayment rate."