A Microfinance Organization introduced their group lending program and first three years the program worked well. But, forth year due to senior management turnover, the group-lending methodology began to grind down. Then their main donor began to put pressure on them to grow. Since they were not reaching the outreach objectives of the donor agreement, the new Director of Operations began to push growth. Because the methodology had already eroded, this was not good quality loan growth. By the end of the forth year, they had grown from 2,000 clients to 7,000 clients, but many of the new clients were now going into arrears.
Early in fifth year, the message was changed to, “Stop! no more disbursements and pull together.” By the sixth year, 65% of the portfolio was in arrears, and they needed to make a provision for 45% percent of the portfolio. By the end of this year they were left with only 1,100 quality, active clients. At that time they asked a Consultant to help them to turn around the situation. At the first visit of Consultant they had just hired a new senior management team, and this was very important because the new team was open to new approaches. They began there work by making an important assumption, and that was that the repayment problems were due to management and not to clients or the environment.
Consultant also assumed that either the clients do not value the product-they do not value ongoing access to the loans because the client service is bad; or they do value the product, but the organization is not effectively communicating in their policies that repayment is important. Somehow the delinquency management is weak. They are not enforcing repayment. To really understand what happened Consultant took three steps. We interviewed staff at all levels, conducted client research, firmly documented all the policies, procedures and found real scenario.There was poor client service. Only 12-month loans were being offered, and this did not fit well with the needs. Managers had never thoroughly been trained in group methodology. They began to add a lot of open guarantee requirements and making the loans very expensive and it was becoming a burden on the clients. In addition, the disbursement record was very poor; there were long delays between an application for a loan and the actual disbursement. There were periods of time when disbursements were suspended. The clients could not depend on the loan.There was movable methodology. It was group lending only in name. Each individual within the solidarity group was given a separate payment. Partial payments were accepted. If one good borrower was in a group with a defaulted borrower, the good borrower could join another group and get another loan. Also the loan officers were, in fact, putting groups together themselves.
The management information was not helping them. The loan quality indicators were calculated incorrectly. They had not kept up with the new thinking in the field, and they had quite a poor computer system. They were not getting timely reports. New loan officers coming in were not well trained in group lending because no one any longer knew what it destined.
To address these circumstances Consultant takes some stapes and inshore some initiatives:
Formed a “Change Management Team” made up of senior managers and other people that they thought could help them to overcome this situation and how to change these aspects.
They changed the loan product, introducing a flax able loan term; they lowered the up-front guarantee requirements; and they ensured that there were timely disbursements. they ensured that the disbursements were reliable, that there would never be periods of time when the Organization was not disbursing.
They spent a lot of time with staff, trying to make them see that these were clients and not beneficiaries. These are people who are paying their way and deserve to be treated with utmost respect and commitment to client service.
In terms of the group methodology, they introduced group testing to ensure that there was group unity. They required everyone to open a group account and the group had to save in the account prior to getting a loan.
They no longer would accept partial repayments. If someone came in with two repayments out of five, they refused it and applied a delinquency fee to the whole group.
They spent a lot of time on human resource issues. They changed the field worker title. Then they gave that loan officer complete control over the client relationship.
They introduced two weeks of re-training for all the loan officers to thoroughly the changes and why they were important. And they followed that up with quarterly workshops in each region. This was really important because there were people who had been around for a while, and they really did not understand and did not like this new paradigm, this new way of working. Then they thought, these the staff are going through huge change, dramatic change in the branches, so let’s reward them financially for the hard work that they are going through.
They introduced a staff incentive scheme which looked at quality and growth, but of course with emphasis on quality of the loan portfolio.
They regularly publish a very innovative newsletter which really encouraged rivalry. It had “Loan Officer of the Month” and stories and really helped reinforce what was happening.
They corrected the calculation of repayment rates; they introduced a portfolio-at-risk figure. They improved the reporting, made them timelier and Up-graded the computer system.
By this way within a year they began their changes and dramatic improvement in quality. Repayment rate improved from 73 percent up to 92 percent. Portfolio-at-risk dropped from 24 percent down to under 10 percent. They confirm their growth and loan quality. They went from fewer than 3,000 clients to almost 9,000 clients.
There was some external factors which helped them:
Great support from the board;
New senior management that was not hanging on to old policies-they were eager to learn;
Donor pressure, claiming they’ll pull support unless the improvement.