The Role of the Account Officers in the Microfinance

Loan Process
The banks first contact with the prospective
client/borrower/applicant is through the Account Officer during the
Loan Application interview.
The bank relies on the recommendation of the Account Officer for
decisions on approval or rejection of a loan application
An Account Officer can only be effective in his/her job if s/he clearly
understands his/her role in the Microfinance Loan Process, specially
in relation to Client Selection and Loan Portfolio Management
(monitoring and collection)
By the end of this lesson, the Account Officer will be able to:
1. Understand the specific skills required in each of the steps in
the Microfinance Loan process
2. Determine if s/he has the qualities that will make her/him an
effective Account Officer;
3. Focus on their crucial role in the conduct of client selection with
the effective use of CIBI tools to be able to generate quality
loans for the bank
Several steps are undertaken before a microfinance loan is approved.
In this entire process, it is the proper conduct of Client Selection that
spells success or disaster for the bank.

The Microfinance Loan Process

Of the six steps in the process, the most crucial are Steps 1 (Client Orientation &
Application), 2 (Client Selection) and 6 (Loan Monitoring/Collection - also known as
Loan Portfolio Management).

The Account Officer is the person responsible for the effective implementation of
Steps 2 and 6

Qualities of an effective Account Officer

Work-related qualities:

A specific type of personality makes for an effective Account Officer.

Account Officers can acquire the needed technical skills by
undergoing the Account Officers Course
What is Loan Delinquency?
Any loan with a missed amortization of even one day is a delinquent
account.
What is Zero Tolerance?
Zero tolerance means NO LEVEL OF DELINQUENCY IS ACCEPTABLE

It is the attitude of the bank management & staff towards loan

delinquency no level of late payment is acceptable. It is an
institutional culture in which late payments are totally unacceptable
The bank will aggressively pursue past due clients, whatever the
cost, to establish and maintain zero tolerance against loan
delinquency.

Effects of Delinquency

Loan delinquency can weaken and ruin a lending institution

Unless aggressively controlled, delinquency can spread and worsen
leading to high levels of default.
Pursuing the collection of delinquent loans swiftly and aggressively
facilitates the development of a strong credit discipline among the
clients
Characteristics of Delinquency
Delinquencies should be seen as direct costs to the bank
Delinquency and loan losses imply postponed income, lost income
and lost portfolio to the bank.
Measures aimed at reducing delinquency are costly.

What makes loan delinquency distinct from other problems?

Cost of delinquency is hidden
Lenders tend to attribute delinquency to external factors
Delinquency is contagious
What are the costs of delinquency to the bank?
1. Quantifiable Costs:
A. Impact on Bank
Cost Structure

Collection cost

Loan Loss Provision

Legal Fees
Income

Delayed Income

Slower portfolio rotation

Slower portfolio expansion

Financial Condition
Decrease in banks resources

Impacts on banks liquidity

B. Impact on Borrower
Additional cost

Penalties & surcharge

Legal Fees

Increased interest rates

2. Non-quantifiable Costs:

Why is delinquency not acceptable?

 It reduces profitability
It reduces the banks competitiveness
It negatively affects the banks image in the community
It can lead to bank failure
What causes delinquency?
2 Views on Delinquency:
1. Traditional View (Delinquency is caused by uncontrollable factors)
2. Modern View (Delinquency is caused by controllable factors)
Traditional View

Modern View
Factors within the control of the bank that contribute to loan
delinquency:

Poor
Poor
Poor
Poor
Poor

product design
service delivery
client selection
loan management
credit discipline

Causes of Delinquency

High levels of delinquency should not be blamed entirely on the

borrower group, but on the credit institution itself.

To mitigate the effects of uncontrollable factors, the bank should be

able to adjust its methodology, and quickly identify and resolve the
factors on a case-to-case basis.

Perception of the costs and benefits of timely repayment affect

borrower repayment behavior.
Controllable factors should be firmly established within the banks
organizational structure.

The refinancing and re-scheduling of delinquent loans should be used

sparingly in specific, justifiable cases.

Creating a culture of zero tolerance for delinquent loans within your

bank starts with YOU.

There are no bad borrowers, only badly designed loans.

Delinquency Alarm Signals

Delinquency Alarm Signals :

Alarm Signal No. 1 - Payment is delayed one (1) day

Actions to be Taken
Account Officer

MFU Supervisor Branch Manager

Determine cause of
non-payment and
informs Supervisor
and BM

Monitor & follow Monitor & follow up

.
up action taken action taken by AO to
by AO to effect
effect loan payment
loan payment

Collect from spouse

or co-maker
Follows up loan
payment and asks
borrower to pay
penalty fee within

Credit
Committee

24 hours of default

The first step in addressing delinquency when it comes is using the right tools
in measuring and assessing defaults. The basic reports that contains the
delinquency data are the PAR aging reports and the delinquency report per
AO. The AOs and the supervisors should first refer to these reports in
analyzing and determining the reasons and what course of action should be
taken to address the problem. They should be well-oriented with reading and
analyzing these reports.
The AO should inform the Supervisor and Branch Manager immediately (even
the 1st day) of missed payments of the borrower. He should determine the
immediate cause of the missed payment and if possible require client for
payment within 24 hours.
The account officer should focus on the immediate collection and should not
allow the client to dictate on the terms of payment. Allowing the client to do
the same would be the start of the accounts deterioration.
Adhering strictly to the steps and actions to be taken spelled out in the alarm
signals 1-5, would be the best option for the account officers and the
supervisor in maintaining the quality and integrity of their portfolio.

Delinquency Alarm Signals :

Alarm Signal No. 2 - Payment is delayed three (3) days

Actions to be Taken
Account Officer

MFU Supervisor

Speak with
spouse/co-maker
and arrange
payment

Supervisor
accompanies AO
during visit to client

Branch
Credit Committee
Manager
Monitors progress of actions
taken by MFU re: clients with
delayed payments

Withdraws funds
from clients
mandatory savings
to cover loan
payment
Reports clients with
delayed payments
during weekly
CreCom meeting

Delinquency Alarm Signals :

Alarm Signal No. 3 - Payment is delayed one (1) week

Actions to be Taken
Account Officer MFU Supervisor

Branch Manager Credit Committee

AO (together
Supervisor signs 1st BM signs 1st
with Supervisor & Warning Letter;
Warning Letter
st
BM) deliver 1
accompanies AO in
Warning Letter
delivering letter
Demand
payment of

Demand payment
of delinquent

Demand payment
of delinquent

Monitors action taken by

MFU and BM on
delinquent accounts

delinquent
installment

installment

AO validates
reason for
default

installment

BM considers rescheduling
payment, based on
AO verification of
reason for default.

Delinquency Alarm Signals :

Alarm Signal No. 4 - Payment is delayed two (2) weeks

Actions to be Taken
Account Officer

MFU Supervisor

AO delivers 2nd
Warning Letter

Supervisor signs 2nd BM signs 2nd

Warning Letter
Warning Letter

Demand payment Provides CreCom

of delinquent
weekly update on
installment
PAR collection
efforts

Branch Manager

Credit Committee
Monitors action
taken by MFU and
BM on delinquent
accounts

BM goes with AO to
visit client

BM informs client of
drastic measures
that the bank will
take (blacklist
client, file case in
Barangay court,
enforce Security
Agreement/CM)

Delinquency Alarm Signals :

Alarm Signal No. 5 - Payment is delayed three (3) weeks

Actions to be Taken
Account
Officer

MFU Supervisor Branch Manager Credit Committee

AO delivers
3rd/Final
Warning Letter
signed by
Branch
Manager

Implement
Implement
Monitors implementation
drastic
drastic
of drastic measures
measures
measures
indicated in Signal #4
indicated in Signal indicated in Signal
#4.
#4.

Advise client to
talk to bank
management to
avoid legal
action, other
client losses
option to reschedule

payments

Implement
drastic
measures
indicated in
Signal #4.

LEGAL PROCESSES
Steps in enforcing Legal Action

1. Ensure that the borrower has received all three (3) demand/warning letters.
Loan documents should be complete and in order in assuring a successful
legal action and recovery.
2. File complaint in the Barangay Court
Letter of Complaint
Be ready with loan repayment scheme or program to be signed by the
borrower
3. File complaint with the Local Court
A single demand letter is sufficient to take legal action for loan recovery, let it not
be said that the bank did not give the borrower sufficient time to update/make his
loan current. The bank must bear in mind that in resorting to legal process, the
documentary evidence must be in order and complete. This may include witness
and other procedural steps to be taken which the bank should be ready to assume.
Ask the participants about their experiences in bringing a client to a Barangay court,
and how it progressed. Then point out that legally, the Barangay are the duly
constituted agency to handle cases of this nature, i.e., collection cases. But most of
time the head of the office is either reluctant or just not interested in handling cases
like the ones involving the bank. Moreover there is a legal question as to the legality
of a Barangay court handling cases involving an individual vs. a corporation.
If the banks complaint is entertained by Barangay Court, the bank should be ready
to have repayment scheme at hand during the confrontaion with the borrower at the
Barangay court. This document should always be ready for the borrowers
signature.
Normally, when a dispute is not resolved in the Barangay court, it is automatically
elevated to the local municipal court. The bank should be ready to file its complaint
plus the required documents in order for the collection case to be successful.
NOTE : What is a Voluntary Offer to Surrender?
A document signifying the intent of the borrower to surrender any of his/her
valuable item(s) on a specified period in case he/she fails to forward the full
payment of the loan on an agreed date. The bank can sell the item(s) in case
the borrower fails to pay the loan 5-10 days after surrendering the item(s).

Not a legal document, but binding. The ACT only becomes legal once the
borrower signs an Authority to Sell;

Surrendering the item(s) does not extinguish the loan; loan is considered paid
once the bank receives cash in payment for the loan

Action on Court-mandated Agreement:

Borrower Action

Bank Option

Borrower pays loan in full

Bank closes account.

NOTE: NO RELOANS to borrowers
brought to court.

Borrower surrenders item/s

specified in VOS

Keep visiting client/remind about loan

payment
Have borrower sign Authority to Sell,
then sell item/s

Borrower Action

Bank Option

Borrower does not abide by

agreement

Request Barangay Court to issue 2nd (up to

the 3rd) summon.

Borrower faces Court a 2nd time

Determine the cause(s) of failure to pay

and means of paying, OR determine the
cause(s) of refusal to surrender the item(s)
specified in the Voluntary Offer to
Surrender
DO NOT GIVE BORROWER ANY OPTION
OTHER THAN PAYING THE FULL AMOUNT IN
LESS THAN 3 DAYS!

Borrower Action

Bank Option

Borrower refuses to face court after

2nd and/or 3rd summon

Request barangay court to forward the

complaint to the Lupon (barangay council)
for deliberation
Request barangay court to file a
Contempt of Court decision against the
client
Request Lupon to issue a Certification
signifying the failure of the barangay court
to settle the matter due to the refusal of
the borrower to cooperate

Borrower Action

Bank Option

Borrower refuses to face court after

2nd and/or 3rd summon

Pursue a complaint with the Municipal/City

Court for : (i) Collection of Sum of Money.

The only legal action the bank can file against a delinquent borrower is for Sum of
Money, which is a civil case. Criminal cases covers those borrowers who issued
postdated checks as payment of their obligations.
Normally, when collection goes on trial, the bank has to present its witnesses (AOs,
MFU head or BMs) as the banks principal witnesses. Filing collection cases is a long
and expensive process, that is why, the bank should be selective in filing collection
cases only to those borrowers who have still the capacity to pay or assets to back
up their obligations.

Delinquent Borrowers can be Classified into 3 Categories:

1. Borrower forgot to pay
2. Borrower not able to pay
3. Borrower not willing to pay

How to handle Delinquency:

Delinquent Borrowers: Bank Action
Borrower forgot to pay

Frequent visit

Frequent reminder
Borrower not able to pay

Supportive measures:
1. Extension of payment
2. Payment arrangement schemes
3. Shared payment with co-makers

Borrower not willing to pay

REMEMBER:

TAKE LEGAL ACTION

Constant and correct follow-up is one of the keys to preventing

and remedying delinquency.