A few days ago a post on this blog detailed debt collections practices in the United States. The Smart Campaign, led by Jami Solli of Consumers International, is working to shed light on provider practices in microfinance through exploratory research in Peru, India, and Uganda.

Once a client becomes seriously delinquent and moves into default, the possibilities for serious consequences for the client arise. Yet little is known about how microfinance institutions treat clients at these later stages. What alternatives do providers offer to clients who are in protracted arrears? How are clients treated when they are defaulting on multiple loans? What do clients experience during this difficult and stressful stage? And after the default, are client debt obligations resolved? Is there a concerted effort to rehabilitate or re-include defaulters?

In September, the Smart Campaign kicked off a research project to explore what happens to clients who default. The project focuses on how microfinance practitioners treat defaulting clients. It is scanning for best practices around the world – like debt mediation projects in Europe and middle-income countries – and examining practices in detail through interviews with practitioners and regulators in Peru, India, and Uganda. Interviews were also conducted with credit bureaus, debt collections agencies, consumer advocacy/protection groups, and researchers specialized in those markets. These countries were chosen, in part, because of their variation in credit bureau infrastructure and the hypothesis that this would have significant impact on provider practices.

This post is to report that we are two-thirds of the way through the field interviews, having visited Peru in November and India in December. Interviews in Peru were conducted by Jami Solli, the lead consultant for the project, along with Laura Galindo of the Smart Campaign. Analysis was based in part on the early findings of a global survey (described in the “D is for Default” blog post), which helped the team understand common practices and trends, and determine the right questions to ask. More than 30 key players were interviewed from representatives of small, rural NGOs with average loan sizes of US$300 to large banks giving $25,000 lines of credit via a credit card. Target clients, too, differed – from the potato-growing contract farmer to the small restaurant owner who needs to buy a new oven.

In December, Jami visited India along with members of the Smart Campaign India team and Deputy Director Alexandra Rizzi. The team conducted face-to-face interviews with 31 market actors, hopping from Delhi, to Varanasi, Kolkata, Mumbai, Bangalore, and Chennai. During interviews, the focus was understanding the implications of default and whether all defaults are treated alike by providers. (For example, do defaulters who are ill or suffered a natural disaster receive more sympathetic treatment?) Additional topics included whether and when rescheduling is offered; whether and how collateral is seized; and the time period over which debt is actively collected.

The research team has been thrilled by the positive and open response from actors in Peru and India and are hoping for similar treatment in our last country, Uganda.

Information from individual providers will be kept confidential, and while it is still too early to publish any results without further comparative analysis, a sneak peak to aspects of the conversations from these three deep-dives will be shared through this blog.

Image credit: iStock

Have You Read?

“D” Is for Default

CFI Publishes ‘Over-Indebtedness of Microborrowers in Ghana’ by Jessica Schicks

Consequences of Over-Indebtedness: Lessons from India

We originally published “D” Is for Default a few weeks ago in English. We’re pleased to now share the post in French and Spanish, made possible by the Smart Campaign’s Nadia van de Walle and Laura Galindo, respectively. Read the post in French here, and in Spanish here.

What really happens to microfinance clients who do not repay their obligations?

As a late-comer to microfinance in 2005, I bustled from the Boulder training, to the Blue Book conferences, to the MicroCredit Summits (and back), trying to understand the dynamics of microcredit. At all these events, I heard proclamations of very high repayment rates, which sparked curiosity about what happened to that small percentage of borrowers who couldn’t (or wouldn’t) repay their microloans. This topic wasn’t presented at any conference I attended.

There has been industry research done on why clients default, as well as interesting work highlighting the gap between providers’ and borrowers’ perceptions and experiences related to over-indebtedness.¹ However, there is very little work done that details the actions taken by practitioners when a borrower doesn’t repay, nor on the experience for defaulting clients in the short-term, or over time.

The knowledge gaps on default management include what providers actually do, as well as what influence (if any) legal and regulatory frameworks have on industry practices. For example, what guidelines or boundaries does a country’s legal framework offer on debt collection? Is there a prescribed manner in which MFIs can collect a past due debt, including how to go about the seizure, valuation, and the sale of collaterals? Is there a limit to the length of time which a borrower is legally responsible for a debt? What are MFI practices regarding collection post write-off? Are there any insolvency or personal bankruptcy provisions available to debtors, either by law, or through voluntary debt counseling centers? More importantly, if the legal framework does exist, is it enforced? Are MFIs aware and in compliance with requirements? And, lastly, there does not appear to have been any industry research on the consequences of default from the client perspective.

The Smart Campaign is very interested in these topics, as are many practitioners we have been in touch with. Thus, this month, to kick-start a larger investigative project, CFI invited endorsers of the Smart Campaign to take part in a survey that asked MFIs about practices related to default. We believe that collection, analysis, and dialogue around such information can help the industry improve how it handles clients in arrears, and perhaps how to salvage, versus sever, relations with clients who have defaulted.

We posted approximately 20 questions on Survey Monkey and held our collective breath, anticipating a potentially low response rate, because the questions touched upon sensitive issues. We were pleasantly surprised, though, to receive more than 300 replies (198 from Anglophones, 59 from Francophones, and 74 from Spanish speakers). We are grateful to all who took the time to complete the survey, in particular those who went above and beyond the call of duty, like a practitioner in the DRC who wrote an essay on applicable microfinance laws and regulations.

Early Findings

The survey illustrated significant diversity in how MFIs deal with defaults, beginning with when collections procedures are triggered (for many, it coincides with the first missed payment), what form those collection efforts take (group pressure, taking individual or group savings, seizing collateral or guarantors’ assets, offering debt rescheduling/restructuring, or using the courts to collect overdue debts), and whether debt collection is outsourced (yes, in 29 percent of the respondent institutions).

One somewhat surprising result was that 27 percent of respondents treat default as a strict liability offense, meaning those borrowers who have defaulted due to illness or natural disaster are treated the same as those with perhaps less sympathetic motives – for example, losing money at cards or fraud. Spanish-speaking respondents were more likely than their Francophone and Anglophone peers to distinguish based on reason for default. For the majority of MFIs that do treat unintentional defaulters differently than those deemed to have intentionally failed to repay, steps for unintentional defaulters include giving more time, restructuring loans, granting bridge loans, and one MFI mentioned it may consider debt forgiveness.

It appears that the majority of the respondents offer restructuring options to clients who have defaulted.² However, a deeper analysis is required to understand at what point this option is offered (for example, after savings, collateral, or guarantors’ assets are seized, or before?), whether rescheduling is discretionary, and if a standard operating procedure exists, is it incorporated into staff training manuals and is it explained to clients.

The vast majority of MFI respondents continue to collect on debts after they have been written off as defaults, with some 85 percent indicating that they keep debt files open post write-off. About 40 percent keep client files for more than seven years. About a third of respondents maintain files on defaulting clients for one to three years. Thus, we are interested to see what ongoing actions if any MFIs take to collect debts over the years, and whether a country’s legal framework provides any guidance on how long debts are valid. For example, are there contractual time bars or prescriptions on the collection of debts beyond a number of years? Is there an existing credit bureau with related legislation?

Another issue we’d like to better understand is whether there are commonalities among MFIs in how they approach collateralization of loans. Almost 75 percent of respondent MFIs are taking collateral, and, nearly 92 percent of those polled responded that they have specific policies on what is acceptable as collateral. In some states, legislation dictates what is possible. Again, we’d like to know how the type of collateral, be it obligatory savings or physical assets, plays a role in a default. More importantly, is there a fair balance between protecting the MFI’s risk, and the risk to a client to lose these items and relationships in a default?

And, finally what socio-economic impact does the default have on the debtor and her family over time — particularly when collaterals are lost or guarantors must pay? Is it possible to re-integrate a defaultor into the financial services sector? Are MFIs likely to re-lend to someone who has defaulted and if so, under what terms? Or, is microfinance as it is practiced now a one strike and you’re out game?³

As you can imagine, the initial survey raised many more questions. We are excited to have the opportunity to explore this important issue, and fortunate that so many MFIs are interested to explore the unchartered waters of default and its implications for clients. Stay tuned for more on this subject from the Smart Campaign.

Jami Hubbard Solli began working on microfinance regulatory issues in 2005 when she joined the International Development Law Organization (IDLO). Jami established IDLO’s department on microfinance regulation and consumer protection. In 2011, Jami joined Consumers International, UK as a senior policy advisor on financial services consumer protection and access to justice issues. She is a member of the Smart Campaign’s Steering Committee, the International Bar Association, and the founder of the Global Alliance for Legal Aid (GALA) which supports access to justice for the poor in developing countries. 

Image credit: DSNews

Have you read?

Help the Smart Campaign Understand How MFIs Manage Defaulting Clients

When Access to Finance Means the Difference Between Life and Death

Gabriel Davel Proposes Tests for Credit Bubbles

Spanish Version »       French Version »

What really happens to microfinance clients who do not repay their obligations?

As a late-comer to microfinance in 2005, I bustled from the Boulder training, to the Blue Book conferences, to the MicroCredit Summits (and back), trying to understand the dynamics of microcredit. At all these events, I heard proclamations of very high repayment rates, which sparked curiosity about what happened to that small percentage of borrowers who couldn’t (or wouldn’t) repay their microloans. This topic wasn’t presented at any conference I attended.

There has been industry research done on why clients default, as well as interesting work highlighting the gap between providers’ and borrowers’ perceptions and experiences related to over-indebtedness.¹ However, there is very little work done that details the actions taken by practitioners when a borrower doesn’t repay, nor on the experience for defaulting clients in the short-term, or over time.

The knowledge gaps on default management include what providers actually do, as well as what influence (if any) legal and regulatory frameworks have on industry practices. For example, what guidelines or boundaries does a country’s legal framework offer on debt collection? Is there a prescribed manner in which MFIs can collect a past due debt, including how to go about the seizure, valuation, and the sale of collaterals? Is there a limit to the length of time which a borrower is legally responsible for a debt? What are MFI practices regarding collection post write-off? Are there any insolvency or personal bankruptcy provisions available to debtors, either by law, or through voluntary debt counseling centers? More importantly, if the legal framework does exist, is it enforced? Are MFIs aware and in compliance with requirements? And, lastly, there does not appear to have been any industry research on the consequences of default from the client perspective.

The Smart Campaign is very interested in these topics, as are many practitioners we have been in touch with. Thus, this month, to kick-start a larger investigative project, CFI invited endorsers of the Smart Campaign to take part in a survey that asked MFIs about practices related to default. We believe that collection, analysis, and dialogue around such information can help the industry improve how it handles clients in arrears, and perhaps how to salvage, versus sever, relations with clients who have defaulted.

We posted approximately 20 questions on Survey Monkey and held our collective breath, anticipating a potentially low response rate, because the questions touched upon sensitive issues. We were pleasantly surprised, though, to receive more than 300 replies (198 from Anglophones, 59 from Francophones, and 74 from Spanish speakers). We are grateful to all who took the time to complete the survey, in particular those who went above and beyond the call of duty, like a practitioner in the DRC who wrote an essay on applicable microfinance laws and regulations.

Early Findings

The survey illustrated significant diversity in how MFIs deal with defaults, beginning with when collections procedures are triggered (for many, it coincides with the first missed payment), what form those collection efforts take (group pressure, taking individual or group savings, seizing collateral or guarantors’ assets, offering debt rescheduling/restructuring, or using the courts to collect overdue debts), and whether debt collection is outsourced (yes, in 29 percent of the respondent institutions).

One somewhat surprising result was that 27 percent of respondents treat default as a strict liability offense, meaning those borrowers who have defaulted due to illness or natural disaster are treated the same as those with perhaps less sympathetic motives – for example, losing money at cards or fraud. Spanish-speaking respondents were more likely than their Francophone and Anglophone peers to distinguish based on reason for default. For the majority of MFIs that do treat unintentional defaulters differently than those deemed to have intentionally failed to repay, steps for unintentional defaulters include giving more time, restructuring loans, granting bridge loans, and one MFI mentioned it may consider debt forgiveness.

It appears that the majority of the respondents offer restructuring options to clients who have defaulted.² However, a deeper analysis is required to understand at what point this option is offered (for example, after savings, collateral, or guarantors’ assets are seized, or before?), whether rescheduling is discretionary, and if a standard operating procedure exists, is it incorporated into staff training manuals and is it explained to clients.

The vast majority of MFI respondents continue to collect on debts after they have been written off as defaults, with some 85 percent indicating that they keep debt files open post write-off. About 40 percent keep client files for more than seven years. About a third of respondents maintain files on defaulting clients for one to three years. Thus, we are interested to see what ongoing actions if any MFIs take to collect debts over the years, and whether a country’s legal framework provides any guidance on how long debts are valid. For example, are there contractual time bars or prescriptions on the collection of debts beyond a number of years? Is there an existing credit bureau with related legislation?

Another issue we’d like to better understand is whether there are commonalities among MFIs in how they approach collateralization of loans. Almost 75 percent of respondent MFIs are taking collateral, and, nearly 92 percent of those polled responded that they have specific policies on what is acceptable as collateral. In some states, legislation dictates what is possible. Again, we’d like to know how the type of collateral, be it obligatory savings or physical assets, plays a role in a default. More importantly, is there a fair balance between protecting the MFI’s risk, and the risk to a client to lose these items and relationships in a default?

And, finally what socio-economic impact does the default have on the debtor and her family over time — particularly when collaterals are lost or guarantors must pay? Is it possible to re-integrate a defaultor into the financial services sector? Are MFIs likely to re-lend to someone who has defaulted and if so, under what terms? Or, is microfinance as it is practiced now a one strike and you’re out game?³

As you can imagine, the initial survey raised many more questions. We are excited to have the opportunity to explore this important issue, and fortunate that so many MFIs are interested to explore the unchartered waters of default and its implications for clients. Stay tuned for more on this subject from the Smart Campaign.

Jami Hubbard Solli began working on microfinance regulatory issues in 2005 when she joined the International Development Law Organization (IDLO). Jami established IDLO’s department on microfinance regulation and consumer protection. In 2011, Jami joined Consumers International, UK as a senior policy advisor on financial services consumer protection and access to justice issues. She is a member of the Smart Campaign’s Steering Committee, the International Bar Association, and the founder of the Global Alliance for Legal Aid (GALA) which supports access to justice for the poor in developing countries. 

Image credit: DSNews

Have you read?

Help the Smart Campaign Understand How MFIs Manage Defaulting Clients

When Access to Finance Means the Difference Between Life and Death

Gabriel Davel Proposes Tests for Credit Bubbles

Defaulting on a loan can have very serious consequences for both financial providers and low-income families, but to-date the microfinance industry has not gathered systematic information on how financial institutions serving the poor treat defaulting clients.

While many assume that financial institutions treat defaulting clients in similar ways, anecdotally there appear to be big differences across countries and between providers. Many questions exist around what policies and practices kick into motion after a client defaults and what could drive differences in practice across or even within countries (i.e. regulation vs. culture vs. educational levels of loan officers vs. how an MFI prices for risk etc).

To begin to address this knowledge gap the Smart Campaign is launching an exploratory project to map out default management practices among providers in several key markets in order to analyze trends and determinants, and to extract good practices. But before jumping into the key markets, as an initial step the Campaign has created a basic survey for its endorsers, partners, and other interested parties to take so that we might first learn more about default management.

Since its founding the Smart Campaign has always been a collaborative initiative working to advance thinking (and action!) around client protection through the involvement of stakeholders from across the microfinance industry. For example, the 30 certification standards were finalized after over two years of careful consultation and piloting with an industry taskforce that included raters, financial institutions, networks, and donors. In addition, many of the tools showcased on the Smart Campaign’s website are directly derived or based off of actual microfinance institutions’ tools and best practices. When it comes to Codes of Ethics, for instance, the Campaign website has over 30 example Codes from Campaign endorsers, spanning parties as diverse as Kashf Foundation in Pakistan, ACME in Haiti, and the Tanzanian Association of Microfinance Institutions.

The Campaign firmly believes that industry momentum and improvement around the sometimes challenging issues inherent in client protection will only come through consistent and thorough stakeholder engagement. This survey is in the same vein. Only through rigorous feedback and input from providers can the Campaign work towards understanding the state of practice around default management and make recommendations, however preliminary, on the best way forward. If you are a financial service provider lending to low-income clients, please fill this survey out and help the Campaign in its endeavor to broaden industry knowledge around this very important topic. Also if you have opinions or ideas for the market-level “deep-dives” that will happen later in the project, please share your thoughts by emailing us here.

And to sweeten the deal, 10 respondents to this survey will be drawn at random and will receive a free “Smart Campaign Kit” with client protection materials including post-cards, Smart-Campaign-emblazoned thumb drives, and more. To access the survey, click here.

Image credit: YIPC

Have you read?

When Access to Finance Means the Difference Between Life and Death

A Challenge to Flat-Earth Thinking in Microfinance

Can Providers Take More Responsibility for Client Protection? The Smart Campaign Says Yes.