CREDIT POLICY AND LOAN RECOVERY IN MICRO FINANCE
Micro financing companies are offering collateral free loans to individual and organizations or group to self sustain or develop their business progressively, basically this is the objectives of most micro-financing organization and in time the borrower will need to pay their loan so that they can be granted another loan after their payment cycle. But in the beginning before they were granted to take the loan there will be an assessment, company orientation and credit policy orientation that they need to understand. These are the governing rules and regulation that borrowers may need to deal with so as to continue long term partnership among the borrowers and the financiers.
Here are some general credit policies and lending procedures for a borrower that needs to undertake before taking a consideration in joining the group of micro-financing organization.
1. The borrowers must be qualified, they must have a home based small business or something that needs additional funding to be included in a group or individual loan. They must have a respectable and decent character in their community. They should not have any code of conduct violation or police records; they should also be trusted in the group as honest and trustworthy individual.
2. They should not have any outstanding balance or another micro financing involvement rather than their present organization because they may not be able to pay their loans.
3. They must be a resident for at least 5 years or more in the community, tenants and boarders may not be allowed since they may transfer to another location and they may not be able to complete their cycle of payment.
4. They should be of legal age and must pass the necessary interview assessment or group orientation by the micro-finance representative that will visit them individually or as a group.
5. If qualified they must pass all the necessary documentation including original and photo copy of the following; registration form of micro finance, loan agreement contract, power of attorney, police clearance, pictures, etc.
6. They must attend the group orientation and rules and regulation re training about payments methodology which is usually a group or co-worker relationship that their obligation to pay is not just for individual but as a group, they already know it before application takes place and after that the final distribution of funds.
These are just some of the general guidelines and credit policy standard practice of most micro financing institution has been requiring but depending on your organization they may require more procedures accordingly. Micro-financing company may have to take a lot of risk due to non collateral loan distribution and they have taken the necessary measure in dealing with this dilemma. No matter how lenient they are in providing such loans there are time that some instances of non- payment may occur in the process.
They must meet the most qualified borrowers and therefore loan recovery and revenue that cycles in their financing. According to some micro financing institutions, there really is no standard in loan recovery but t it depends on their employees and borrowers performance to comply to their responsibilities and this is one of the most challenging problems they need to undertake, if for instance that groups or individual run away to their loan obligations, there are some effort that needs to undertake.
Force repayment – Unpaid amount of debt coming from borrowers will definitely put the organization at risk if there are many delinquent borrowers found. The micro-financing organization may need to force their client to repayment of loans. If for instance the borrowers may not have enough cash payment then they will take any available items for replacement. Appliances, animals or vegetable crop can also be another form of payment options but basically this is just a last resolution of payment.
Group cooperation repayment – Usually this is already a compulsory and a known state before the release of funds, members already agreed upon group co-working relationship that they need a group cooperation repayment to help members about non- payment. Usually, group members may need to contribute for the unpaid amount of another member to fill in the balance. This is a basic requirement about loan application and they must fulfill their responsibility of payment.
Legal action – If all measure has been already taken and non- payment of loan still takes place then the last thing the micro-finance organization can do is to settle their issues legally. Usually they talk about arguments and settlement in small town or municipal government and basically come up with a solution of another payment method to suffice their loan balance. If this option is not possible then they may have to settle their dispute in a higher court.