What Marcellus Wallace Looks Like

Not Pictured: Marcellus Wallace

Or, Blogpost VII regarding eligibility requirements.

Gosh. I’m very unsure how to go about breaking this down. I have in my mind some concept for statistical performance that we’ve had in the past.

As of the last performance team presentation, we weren’t doing terribly. I can’t say that will carry over to the next presentation (because I don’t know yet, not because of new data). 59% of 74 loans had been paid back. thats…well, not to sound like captain obvious, thats more than half. The conclusion that I got out of it was that we were succeeding by sheer luck.

AND THATS OK!

We were keeping with our unofficial policy of doing that $25 bet, giving loans to basically anyone new, and not giving loans to anyone who still owes us some green. or, whatever color Lempires are. I was skeptical of that, but its something i can get behind now especially with some of our changes.

Here are the factors that we had going against us. during that period in which we succeeded by sheer luck.

    No Guarantee
    No Collateral
    No Use-Data
    Unlimited funds, without justification

The list could go on. BUT we fixed the unlimited funds with the Business Loan cap. We’re starting to get data on what the loans are being used for. And, as Shawn and I will propose next week, we have a framework for assessing toxic loans LIVE. (we could tell you the exact day that we need to start worrying about a persons loan, for example, and how worried we should be).

So, compared to this time last year, we have MORE safeguards in place.

Now we have to answer two questions. 1- Will eligibility requirements increase our confidence with the loans, while decreasing barriers to loans in the first place? and 2- How confident do we want/have to be with each of these loans?

The following is the result of a spreadsheet i was trying to do in class, that Shawn perfected and I have replicated for my purposes.

As I said earlier, 59% of our loans have been paid off. so lets assume that this translates to new loans as well. As far as I understand, we give 3 new loans every month or so. So assuming the 60% figure holds, that would mean that for every 3 new loans, we’ll lose one.

So example time. three loans, $25, 12 months to pay back, 30% interest rate.

$75 paid out, $97.5 due, and since only two people pay back, we earn $65 dollars. So at THAT rate, we’re not even recovering the initial investment. This is NOT good, and if we want to improve it we’ll need to pick 3 clients who are virtually guaranteed to pay us back. 100% loan repayment, 0% loan loss rate. Thats highly unlikely, and even with eligibility requirements we’ll STILL have defaults to deal with. Its just a fact of life. Our eligibility requirements would have to be SO STRICT and SO intrusive that it would provide an increased barrier to entering our loan program, which we want to avoid.

Under a NEW assumption that only one client is defaulting in any given loan sequence, we would need to give FIVE loans a month to be able to churn a profit after having one client default and give us NO money. using the 60% loan repayment ratio makes things more complex, but the premise is this: the more people default, the harder it is. And so far, just with rough, unprofessional statistics, we have about one in three loans defaulting, one out of every issuance of loans.

So what does this mean?

In my opinion, it means that we should give 5 loans at a time and see if that works. If it doesn’t, then we should give serious consideration to eligibility requirements, but with the new safeguards in place i am 100% confident that we can reduce defaults and increase the financial impact of our Loans, without introducing any new eligibility requirements and without changing anything that hasn’t already been changed.

What say you to THAT?

AFTERTHOUGHT: This is assuming that clients will make a good faith effort to pay back their loans, and that extenuating circumstances prevent loan repayment. There is no defense for clients that want to take advantage of our system besides recording characteristics and traits to help us identify people, but really i’m not sure how we defend ourselves until after the fact. Its very likely that this will be where most of our expenses come from that we may just have to compensate with donations and other things.

UPDATE: As per Caitlin’s email, i’m updating this to make sure that i satisfy the points she requested.

My suggestion (as an alternative to eligibility requirements), is to give MORE loans each month, to see how the current changes hold up, and how the risk assessments work out (which we’ll be giving more details on this week). As I said, i am very confident that the changes we already have in place are sufficient to protect us from clients that will not pay us back. If they do not, then i think that would be appropriate to consider the further eligibility requirements. It makes sense to change one thing, see if it works, and if it doesn’t change something else. we don’t want to make too many changes because then if something doesn’t work, we wont know what it was.

If i’m off the mark on something, or more info is needed, please let me know and i will oblige!

5 Responses to “What Marcellus Wallace Looks Like

  • salvarez2012
    7 years ago

    The performance team assessment you provided proposes some interesting suggestions. I think, as a first step, your patience and confidence in the proposed risk assessment will be a strong indicator of whether we are encountering a problem quantity or quality in our loan clients. If the problem we are encountering is indeed related to quantity then your idea of giving five loans per month, to offset the occasion of an almost assured default by at least one client, will help us realize a profit. This is good for LC’s sustainability and the sustainability of the loan program as a viable means of providing financial assistance. I also agree that it would be disadvantageous to introduce too many changes to the program at once. Doing so may lead to confusion between what solutions work and what solutions don’t; it’s good that you pointed that out.
    On another note, you bring up the stark reality that regardless of the screening methods we employ we will undoubtedly encounter instances of default. So my question for you and the group is at what point do we call the loan payout and payback a success? Is it when we make a profit (not necessarily indicating that all clients paid back their loans) or is it when all of our clients pay back their loans allowing for greater personal impact and bigger loan portfolios? I think it’s a combination of both.
    What I caution LC not to do is to rely too heavily on the idea of profit when considering possible screening methods. While screening methods will help us determine possible loan clients we should also consider what effects the screening method will have on the client. That is to say, if we loosely screen a weak candidate and give her a loan based on the idea of giving out more loans to meet a profit enhancing quota, then we’ve not only invested in a potentially weak client, but we may have also created a potentially burdensome environment for her. If she is not a strong candidate when she applies there exists the possibility that paying the loan back will incur more of a cost on her then if she didn’t receive the loan in the first place. Perhaps this analysis applies to a marginal group of candidates, but that point I want to make is that our focus on the loan program’s success shouldn’t always be profit driven (not that you are explicitly suggesting this), rather it should be a combination of creating sustainable profit within the context of doing the most good for the women we serve.

    • russellscott
      7 years ago

      I’d like to point out that if we’re not making a profit we’re not doing ANYTHING (not even the loans). We cannot help our clients if the amount of money we have in each month is less than the month before. So yes–we should focus both on sustainable profit and client impact, but you cannot have one without the other, and from an accounting perspective profit is what drives our organization and allows us to do the good work that we do. Without it, there is nothing.

  • I’m not positive here, but I don’t think it’s the case that our clients who default aren’t paying us back anything– they’re paying us back, just really late and sporadically. So I’m not sure that this profit-driven model of success, where the assumption is default = lose all the loan is really accurate, and because that assumption isn’t true, this attempt to model success doesn’t work. Again, I’m not positive, but that’s how I read the data in the loan team’s google doc on loan repayment. This doesn’t mean that we are by any means making a profit or are in any way sustainable, which is a serious issue we do have to confront, but I’m not sure that this is the proper way to look at the issue.

    • russellscott
      7 years ago

      I am going to send you an email with some content from the performance team presentation, because there is no way I can explain my reasoning to you without citing some data. This is also in lieu of our full presentation since you don’t come to the Thursday sessions.

  • econrad
    7 years ago

    All, thank you so much for the discussion. These conversations and suggestions are exactly what Caitlin and I are looking for in terms of discussion.

    Russell, thank you for the suggestion. We had many reasons for capping the number of new clients per months, 1) to reduce our risk and 2) to relieve the burden on our Honduran and US loan officers. I don’t think 5 is an unreasonable number of loans, but it will need to be discussed.

    Laura, most of our clients who are in default have made payments. You were correct in saying some are sporadic and/or late, but it is hard to tell at what point a client will not pay back. We had one client who was four months late before making the payment… but did so eventually.

    Remember that while we only accept 3 NEW clients, we are still able to give loans to current clients who have finished making payments.

    Thanks again– Loans

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