Causes of Delinquency Flashcards
5 Main Causes of Delinquency
● Institutional-related causes
● Client-related causes
● Credit officer-related causes
● Group-related causes
● Externally-driven causes
Institutional-related causes (8)
Poor product design
Poor service delivery
Poor client selection
Poor loan management
Poor credit discipline
Poor HR practices
Poor managerial practices
Credit officer-related practices
Under poor product design
-Poor understanding of client’s needs
- Issuance of inappropriate loans to clients (terms and payment schedule do not match borrowers cash patterns)
- Inadequate penalty for late payments
- Incentives or pressure on field staff to make loans
Under Poor Service Delivery
o Failure to adequately explain the loan and repayment requirements to the client
o Lack of adequate training of field staff in client relations
o Delay in releasing the loans, especially for repeat borrowers
o Suspension of loan disbursements – leading clients to think that they could not rely on the MFI for their borrowing requirements
o Failure of the MFI to comply with the agreed mood and schedule of collection
o Too much reliance on the group (especially for appraisal)
o Failure to manage the group (breakdown of leadership or group dynamics)
Under poor client selection
o Poor client appraisal method
o Erroneous or lack of cash flow analysis
o Business risks not properly analyzed
o Lack of information or improper CI/BI which lead to incomplete or misleading information
o Automatic step-up increases in loan amounts
o Accommodations – giving special treatments to friends or preferred clients
Under poor loan management
o Lack of inaccurate MiS, accounting and/or documentation to track reports on installments due, outstanding balance, aging of delinquent loans, and portfolio at risk.
o Infrequent client visits to detect early signs of delinquency.
o Faulty collection system
o Faulty internal control systems (leading to fraud)
o Lack of manpower to pursue collection
o Sluggish follow-up to delinquent accounts
o Perception that MFI is lenient toward delinquency
Client-related causes
● Perhaps the most significant client-related cause of delinquency is poor performance of the business.
● Another major cause of delinquency is an inadequate understanding of borrowing and its implications.
● A related cause is when a borrower, due either to an inadequate understanding of the implications of borrowing or to financial pressure, makes to many financial commitments (e.g., multiple loans)
● Clients may perceive microfinance loans as gifts that need not to be paid back especially where the microfinance operates as an NGO with a strong (and strongly communicated) social mission.
● Some clients may test the MFI to see if it is serious about collecting loan payments.
● In cases of group lending, poor group leadership is major contributing cause of delinquency.
Group-related causes:
In group lending, group officials play an important role. Poor training as well as abuse or corruption of their position can lead to delinquency in a number of ways:
● If the group leaders keep poor records.
● Group leaders can manipulate client records.
● Group leaders may demand bribes from group borrowers.
● Conversely, sometimes a clique of powerful borrowers in a group may bribe group leaders.
● A breakdown of group cohesion due to poor leadership or internal squabbles can lead to weak payment enforcement in a group.
Externally driven causes
● Disasters such as earthquakes, fires, floods and drought may affect the client’s ability or willingness to repay. If a client’s business damaged the resulting cash flow may not be sufficient to repay the loan.
● Similarly, emergencies such as illness cause clients to redirect their loan to those purposes and away from generating the income needed to repay the loan.
● The state of the local and global economy may contribute directly or indirectly to a client’s business’ decline or failure, thus leading to delinquency.
