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