Post on 13-Jan-2016
SOLVING CALAMITY-INDUCED CREDIT ISSUES WITH AN
ENTREPRENEURIAL MINDSET
Joey A. Bermudez, Microfinance Kibitzer
Calamity-induced credit issues
• Sudden surge in delinquencies because of impaired finances of borrowers
• Dampened risk appetite because of looming credit losses
• Urgent need to expand capacity to handle loan recovery functions
• Imminent threat to capital because of mounting credit losses
Manifestations of an entrepreneurial mindset
• Ability to recognize, NOT DENY, the existence of a problem
• Strong desire to fully understand the problem, ascertain its magnitude, and break it down into components to gauge its depth and complexity
• Single-minded focus on solving the problem (no short-cuts) with finality, and moving on
• Keen appreciation of the big picture and the broad impact of decisions
• Objective and clinical view of risk
Solutions that don’t work
• “One size fits all”, across-the-board responses– 30-day moratorium for all borrowers– mass reduction in interest rates
• Walking with the dead– restructuring a hopeless case
• Limping to death– stretching out an apparent loss
• Cop out– freeze lending
Entrepreneurial solutions• Segment the problem– Isolate the problem chunk– Grow the unscathed segment
• Upgrade capacity quickly in order to save what can be salvaged and prevent further deterioration
• Take losses early– Write-off hopeless cases (not gradual provisioning)– Do not stubbornly insist on staying whole
• Raise capital to cover losses and move on
THANK YOU FOR TAKING UNSOLICITED ADVICE
Interest Revenue
Funding Cost
Net Interest Margin (%)
Net Interest Margin (PHP)
0 10% (10%) PHP(10)
18% 10% 8% PHP72
PHP62
PHP100
PHP900
PHP1,000
Bad
Good
Total
PHP300
Good PHP24
PHP14
PHP400Total
Delinquency Ratio 10% 25%
Capacity Planning
• Pre-calamity situation– Optimum load per loan recovery officer: 200 accounts– Number of delinquent accounts 2,000– Number of loan recovery officers: 10
• Immediate post-calamity situation– Number of delinquent accounts: 4,000– Action: Increase loan recovery officers to 20
• Projected situation– Number of delinquent accounts: 6,000– Action: Increase loan recovery officers to 30
The cost of agonizing
• Amount of defaulted loan: PHP100• Funding cost: 10%• Administrative overhead: 3%• Annual cost to carry the loan: PHP13• Loss if loan is written off in Year 1: PHP100• Loss if loan is written off in Year 2: PHP113• Loss if loan is written off in Year 3: PHP126