Question

prevention is better than cure, microfinance institution should design their portfolio in such a way that it can reduce the probability of delinquency. Discuss the following strategies adopted for successful delinquency management.(15mks)

i)institutional culture

ii) staff orientation

iii)client orientation

iv)rescheduling or refinancing

Answer 1

answer-

Microfinance is a category of financial services targeted at individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; micro insurance; and payment systems.

Institutional culture, Staff orientation, Client orientation, Rescheduling or refinancing is few of the strategies for successful delinquency management. Institutional culture: Develop a culture that enforces zero tolerance towards nonpayment of loan on due date. Immediate follow up on all late payments with required field staff which would involve giving proper updates and reminder to the client about due date for loan installment and the amount due, following up thoroughly by staff to repay the loan on time through direct meetings with clients and also through panchayats.

Staff orientation: Training of staff to discourage any kind of delinquency will be effective. This can be done by introducing a variable pay component as an incentive for maintain portfolio quality. It should not be based on commercial banks strategy to sell loans, rather quality maintenance than quantity is important in MFIs. Recognition for top performers would go a long way in motivating employees.

Client orientation: Clients should be given proper orientation about the about the loan repayment schedule, procedure and penalties involved. Building an image of zero tolerance to late payments is very important. A combination of incentives like larger loans, follow up loans, interest rebates, information and support to get govt. subsidies and funds, and disincentives like such as penalty fees, no more loans, collection of collateral and legal action.

Rescheduling or refinancing: Rescheduling a loan refers to extending the loan term or changing the payment schedule whereas refinancing is providing an amount of loan in addition to the original loan amount. But MFIs need to take caution in rescheduling or refinancing loans as it should be carried out only in extreme circumstances.