Portfolio Management in Inclusive Finance BPI Direct BanKo - PowerPoint PPT Presentation

Portfolio Management in Inclusive Finance BPI Direct BanKo

Inclusive Finance • Encompasses improving the range, quality and availability of financial services to the underserved and the financially excluded Stein, Peer, “Inclusive Finance,” Korea-World bank High Level Conference on Post Crisis Growth and Development, p. 10, June 4, 2010

Microfinance • “Provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products • to the poor and low-income households, • for their microenterprises and small businesses • to enable them to raise their income levels and improve their living standards ” BSP, 2001

Microfinance Market Segments by Regulation • Banks – up to 300,000 microenterprise loans • NGOs – up to 150,000 microenterprise loans • Housing – up to 450,000 housing loans • “Meso”-enterprise – 300,000 to PhP1M BSP Circular Microfinance NGO Act Classification of mass affordable housing

Microfinance in PH Today • Over 2,000 industry players composed of NGOs, cooperatives, financing companies, rural banks and thrift banks – 4.24M borrowers – 4.93M depositors

Microfinance in PH Today • Highest number of active borrowers – ASA Philippines - single institution – CARD – group of companies

Top 10 MFIs in PH Institution ASA Ph CARD NGO 10 players comprise CARD Bank NWTF 88% market share TSKI Pagasa TSPI PR Bank ARDCI KMBI

Actual Market Segments Market Share Market Share Market Segment (Portfolio) (Clients) Micro Tier 1 74% 97.2% <50,000 Micro Tier 2 21% 2.7% 50,000 – <300,000 Meso 5% 0.1% 300,000 – 1 million

Challenges in Microfinance • High interest rate to clients – high transaction costs – high loan losses due to disasters • Tough competition in the market: – Saturation in areas – Staff turnover • Frequent occurrence of natural disasters • Impact of climate change

Market Competition • Philippine MF industry is considered to be near the mature stage characterized by high competition – About 5 – 19 MFIs compete in one barangay – Entry of commercial banks in MF – Clients have multiple borrowings – Fast growth rate of leading MFIs in the Philippines • Penetration rate is estimated at 80%

Opportunities in Microfinance • Continuous economic growth of the country • Diversification of needs of clients: – Microhousing - Water, Sanitation, Hygiene – Education – Microinvestments • High government support for growth and capacity development of MSMEs • Availability of technology – mobile money platforms

Awareness of Access Points • Filipino adults are most • Low awareness: aware of: – microfinance NGOs (30.5%) – banks (98.3%) – e-money agents (25.6%) – pawnshops (95.7%) – NSSLAs (13.6%) – ATMs (93.5%) National Baseline Survey on Financial Inclusion, Bangko Sentral ng Pilipinas

National Loan Usage • 47.1% of Filipinos borrow money – Family and friends – 61.9% – Informal – 10.1% – Financing/Lending companies – 12% – Cooperatives – 10.5% – Microfinance – 9.9% – Banks 4% National Baseline Survey on Financial Inclusion, Bangko Sentral ng Pilipinas

Loan Features Sought • Interest rate (57.5%) • Reputation of the credit institution or lender • Loan amount (41.7%) (24.5%) • Period to pay for the • Amortization (14.9%) loans (35.0%) • Collateral (14.3%) • Ease of loan application • Fees and other charges (33.1%) (11.4%) • Processing time (11.0%) National Baseline Survey on Financial Inclusion, Bangko Sentral ng Pilipinas

PROFILE OF MICROCREDIT CLIENTS

Demographics 2010 2016 Female 96% 90% Age 39 44 Married 85% 82% Elementary graduate 33% 22% High school graduate 51% 53%

Credit Experience 2010 2016 Loan cycle 3 4 Membership (months) 10 23 Loan amount 5,461 7,233 Multiple loans 30.9% 72.3%

Livelihood 2010 2016 64.2% Trading, vending 89.5% 14.8% Service 12.5% 6.5% Manufacturing 11.9% 6.8% Farming 2.7% 3.6% Fishing 2.5% 6.1% Animal raising 1.8%

Loan Utilization 2010 2016 94.6% Income generating activity 96.7% 53.5% Food 70.7% 37.0% Kept for emergency 46.9% 50.6% School 43.1% 44.5% Clothes/HH items/bills 21.1% 20.7% Pay other debts 6.6% 2.8% Extend credit 16.3% 17.1% HH improvement 13.1% 6.1% Celebration 4.6%

INNOVATIONS AND TRENDS LOANS

Features Microfinance Clients Like Least about MFI 2010 2016 Guarantee / Group Liability 6.9% 0.7% Loan Amount Too Small 4.6% 2.6% Problematic Group Dynamics 3.9% 0.0% High Interest Rate 1.1% 0.2% Pre-deductions 0.4% 11.0%

Missing Middle Needs Potential Needs Clients Funding 49% 29% Expansion 19% 10% Fixed Assets 10% 14% Manpower 9% 15% Product Diversity 5% 11% Suppliers - 13% Promotions - 14% Rapisura, “Market Research on SME Clients and Non- Clients of CARDSME ,” July 2016

Top Likes and Dislikes (Missing Middle) Top Likes Top Dislikes Friendly staff 41% High interest 13% Efficient 40% Inefficient 12% 11% Low interest 19% Many requirements Good policies 10% Few 10% requirements Rapisura, “Market Research on SME Clients and Non- Clients of CARDSME ,” July 2016

GOOD DEBT VERSUS BAD DEBT

Vince Rapisura @vincerapisura vincerapisura

DELINQUENCY MANAGEMENT

Quality of Loan Portfolio • What is Outstanding Loan Portfolio? – Principal amount of loan balances outstanding • Why is portfolio quality important to an MFI? – Features of an outstanding loan portfolio • Largest asset • Generates income (interest) • Main product demanded by clients Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Quality of Loan Portfolio • Only ratios with portfolio outstanding in the formula (numerator or denominator) measure the quality of portfolio. – Past Due Rate – PAR Ratio – Annual Loan Loss Rate • Repayment rate does not measure the risk of potential losses. Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

What is Delinquency? • A delinquent loan (or loan in arrears) is a loan on which payments are past due. – Calmeadow • Delinquent loans are loans on which any payments are past due. – SEEP • Situation that occurs when loan payments are past due • Also referred to as arrears or late payments, measures the percentage of a loan portfolio at risk – USAID Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Causes of Delinquency • Make a list of three causes of loan delinquency • Organize the causes into three categories including external, client, and MFI • Decide which category is most responsible for delinquency

Causes of Delinquency • Ultimately the MFI itself is responsible for delinquency (even when the proximate cause seems external to the MFI). • There are many stakeholders in delinquency, but only the MFI can do something about it. Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Causes of Delinquency • The MFI – Sets its own principles – Promotes its own repayment culture – Instills credit discipline in staff and borrowers – Must plan for events beyond its control Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

What is Default? • Default occurs when a borrower cannot or will not repay his or her loan and the MFI no longer expects to receive repayment1 – The MFI may continue its collection efforts • BSP Circular 409 – A loan is declared in default when the borrower has stopped payment for more than 90 days 1 Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Default Amount • The default amount depends on how much is outstanding when the borrower stops making payments. – Amounts that will have to be written off or counted as loan loss may be different from the defaulted amount depending on the ability of the MFI to collect any collateral or on a guarantee. • SEEP 1 Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

Costs of Delinquency / Default • Delinquency is expensive for an MFI. • It affects a program by… – Postponed or lost income – Slower portfolio rotation, which lowers asset productivity – Lower staff morale – Higher costs of fighting delinquency – Diminished program image – Higher likelihood of default – Increased cost of loan loss reserve Controlling Delinquency, Microenterprise Development Brief, Number 31, September 1995, USAID

Cost of Default Formulas Replacement Cost = Lost Principal (+ Interest) Revenue per loan (Number of Loans/Sales units needed to ‘replace’ lost principal or sales) Based on Yatsco, Diana, Replacing Defaulted Customer: The Hidden Cost of Default, Credit and Financial Management Review, 2003