When The Collections Call Rings, How Do You Answer?

28 02 2009

debt3

The end of the month is always a hectic period at my micro-finance institution. It’s considered to be a critical time to collect the late loan repayments, in order to reduce the amount of risk in the portfolio when the new month rolls around.

There are a number of meetings that take place among the loan officers and the management where the problem clients and groups – those that have not submitted their repayments on time – are discussed in detail. The mood is solemn at these meetings, as the situation is worrisome. Due to the economy affected by the worldwide crisis, more and more clients are becoming delinquent and are having trouble paying back their obligations.

The Collections Process

Typically, when a client is late, the loan officer personally delivers several written warnings to him or her to let them know about the late fees, which are relatively steep, and the consequences that may follow if the payment is not submitted promptly, such as the possibility of a lawsuit. Most of the clients react to these warnings and settle their debt, but not everybody. Thus, at the end of the month, there is an extra emphasis placed on collecting the repayments from these remaining “problem” clients.

Over the last few days, the loan officers have been paying daily visits to the delinquent borrowers. In fact, they even bring in an additional loan officer for reinforcement and effect. Oftentimes clients simply get used to their credit officer “pestering” them about the missed payment and not take it seriously any longer, so the extra support is meant to show how serious the situation really is.

Although today is Saturday, most of the staff has been working and making their rounds. The office stayed open as well, as the clients have been given a deadline to come in and submit their repayments by the end of the business day. As the day rolls to an end, many of the “delinquencies” have been resolved, so the staff starts to breathe easier.

It’s not the easiest part of the job for the loan officers, as that’s when they have to be a “bad guy” to a large degree. Many of their clients – even long-time reliable ones – are struggling to pay back their debts. For some, business has slowed due to the worldwide economic crisis. Others have relied on remittances coming in from Russia which has dried up recently. Although the MFI staff may sympathize, everybody has their job to do and the money needs to be paid back.

Conclusion

When you first learn about micro-finance, you learn about the impact that the loans have on the borrowers. You learn about the social value that the micro-finance organizations provide to their clients. And it’s all true – impact and social value are certainly there.

But because this is still a business and not a charity, things don’t always go so smoothly. As a micro-finance institution, you are caught between a rock and a hard place. Many MFIs, including the one that I’m working for, has a social mission to help the poor population and conducts its operations accordingly.

However, when the clients are struggling to pay back their loans, what should the MFI do? Do they attempt to accommodate the client, since – after all – their mission is to help the struggling population and not take their last money at the time of need? Or do they need to do whatever needs to be done in order to collect – as otherwise they can significantly jeapordaize their operations and the ability to serve more customers in the future?

What do you think?

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7 responses

1 03 2009
Andrey

Well, Boba, the fact that you call these people “delinquent borrowers” points to the fact that you already consider them clients.

Obviously, you collect but then you don’t kid yourself about being a social institution instead of a financial one.

It always gets to the point where you are faced with the question of whether you are willing to sacrifice one person, or two people, or three people, for the benefit of thousands. If you are coming from a social perspective, you say, no and thus you are labeled inefficient and wasteful. Delivering food to poor regions of the world would fall under this category. If you want to keep your business-like efficiency, you should be willing to accept the fact that you are spreading financial capitalism to these people, a system which has no reservations in driving someone deeper into depth and poverty (not only in Tajikistan but also in the US of A). Your “delinquent borrowers” probably had to go around town and borrow from everyone they know to pay back the microloan. So much for improved living standards and social standing among neighbors.

p.s. You really should start responding to the comments on your blog. You never do.

1 03 2009
Frances

Andrey, Andrey, Andrey … give poor Boba a break … he’s got all those cups of tea plus those manly cupcakes to be eating before he can answer blog comments. And so cynical … what up wit dat? LOL

The dilemma can be blamed on our huge brains. Without them, we would act like most other animals and make sure that ourselves and our genetically linked “family” fellow animals would get whatever money was available and not even wish to amass more than we need to survive. That’s why we don’t see too many crocodiles out ministering to other crocodiles who have fallen on tough times, nor do we see them setting up areas where they trade extra food for whatever else it is that crocodiles value. Poor example, but you get my drift.

So, what to do? Do we all return to our caves and fight off anyone who approaches us who is starving to death when we have extra pieces of meat cooling in the back of the cave? Or do we begin to see some of the benefits of helping others? There must be some reason our brains reward us with good endorphins when we help another human being? An article in Life magazine made a huge impression on me a number of years ago. During the Nicaraguan civil war, a journalist was embedded with one group that had captured someone from the other side. The usual process was to force captives to dig their own grave, kneel in the grave, shoot them in the head, and cover over the evidence. Nice and neat. But even in this horrendous practice captured by the photographer in a serious of still photos, the captors stopped to give the starving captive some powdered milk to eat as he finished digging his grave. Of course, they then shot him, but the point remains — they gave him some of their own scarce food. Why? Guilt alone at what they were about to do? Perhaps. But no other animal would do this kind of thing, no matter what the underlying reason.

I agree with Andrey that anything one individual does is unlikely to solve problems as difficult as those we face, but I am still idealistic enough to think that doesn’t mean that we shouldn’t try. Call it the Golden Rule, Pay It Forward, or whatever you wish, it is such things that make us human.

1 03 2009
Alex M


Obviously, you collect but then you don’t kid yourself about being a social institution instead of a financial one

Couldn’t agree more. The fundamental cause of the dilemma with which Bor’ka and others in his organization are grappling is that MFI’s has what seems like two mutually conflicting goals: to generate a profit by collecting interest and to “help the poor population”. To make matters even fuzzier, the latter goal is somewhat, well, fuzzy.
Now, certainly an investor “helps” an organization — be it government or private — by purchasing its bonds, for example. This is a mutually beneficial relationship simply on the premise that the borrower does his best to repay the loan and the lender does his best to collect his return. Lending stimulates the economy (see: credit crisis) and the practice “helps” both parties involved: the lender is compensated for his/her risk-taking and the borrower grows his/her business.
Then there’s the other kind of “helping”. This the ill-defined, “charitable” type of help, and it only serves to confuse people in these situations. Note that charity can be straightforward, like when you donate to a fund, or volunteer to rebuild homes, or volunteer at an MFI =). But do not confuse the individual volunteer’s form of help (bona fide charity), with the MFI’s goal as an organization. That’s not to say that an MFI can’t be a charitable organization; it certainly can, as long as its mission is stated as such. Such an organization would presumably be much more lax about collecting repayment from borrowers, and soon enough the borrowers would realize this and take advantage of the situation, treating the loan as a handout. Which is fine, since the organization is not-for-profit. Anything in between a for-profit business and a true charity is not a stable state — it will always tend toward one end or the other, like a ball that is placed on the crest of a narrow hill.

1 03 2009
Alex M

I just noticed the “Final Notice” image at the top of the blog. Can legal action be actually taken against delinquent borrowers? Also, do MFIs require collateral on loans?

2 03 2009
Borya

I will definitely start responding to the comments. I read every one of them and respond in my head, but that probably doesn’t count. Honestly, I really appreciate it when people comment, so I will as well.

Andruha/Alex, as a whole, I agree – I also think that the MFI needs to collect and strive for efficiency. But I wouldn’t say that they are kidding themselves about being a social organization. Many of the things they do have a social value rather than a financial one.

For example, 70% of their portfolio must be rural customers – those that are more difficult to reach and the ones that cost more to service. Moreover, they made a commitment that the average size of their loan doesn’t exceed $2,000 – to be able to serve more customers. It would be a lot more profitable and less costly to do larger loans, but they chose to do smaller ones for a social reason. There are many other factors, as well.

The problem is that if you become lenient on some borrowers, the word quickly spreads and very soon, you wind up in a situation that many more borrowers wind up skipping on payments – just because they think they can. Hell, we’re going through that in the states ourselves! But you are correct about: “”Your “delinquent borrowers” probably had to go around town and borrow from everyone they know to pay back the microloan” – that’s exactly right in many cases. So, in this example, the “social reason” of helping that individual takes a back seat.

Also keep in mind, the MFI itself often borrows funds from elsewhere and relends it at a higher rate. And you can rest assured that those creditors are not going to be lenient. Well, with the exception of Kiva.

What’s quite interesting, by the way, is a discussion that’s taking place on the Kiva blog. It’s kind of interesting since it’s taking a completely different approach:

http://fellowsblog.kiva.org/2009/02/28/when-the-collections-call-rings-how-do-you-answer/#comments

Alex – yes, legal action can be taken against the borrowers. I was pretty surprised myself since I thought that it would not really be efficient, but it is an option. And it’s often used as a tool to “pressure” the clients into paying.

As for collateral, the MFI requires collateral for individual loans (e.g. gold, furniture, etc.), but no collateral on group loans. On those, each member of the group is responsible for making sure that everybody pays back. For the individual loans, as far as I know, my MFI never had to confiscate the collateral from borrowers in the last 4 years of operations – but again, it serves as a tool to persuade the clients into paying.

Frances – umm… I’m still thinking how to respond to that one🙂

4 03 2009
Anuta

Hey, I have a completely unrelated question. How do new borrowers find out about the opportunities available to them through the MFIs? Do you guys advertize, and if so where and how? Or is just through word of mouth?

4 03 2009
boba

It’s a very related question🙂 It’s something that I was wondering about as well.

The primary way they attract new customers is by having the loan officers do something they call Marketing (really :)). Basically, twice a month, the loan officers go to the bazaar, give out flyers and pitch their services to the vendors.

Traditional advertising doesn’t always work since many households don’t have a TV. Plus, keep in mind that in some villages, they haven’t had electricity for month, so even having a TV wouldn’t work🙂

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