Personal Loan Program Reform

I think I can say fairly confidently that the need for change has been well established. Our current practices are not working, and so action needs to be taken.

During my presentation today, I proposed three changes to the personal loan program.

  • Repeat Levels on the Loan Ladder
  • Shorten Loan Ladder increments from 500L to 250L
  • Cap the personal loan program at 2000L

These are but some of the ways we can fix the personal loan program, but Repetitions are the most important proposal as it is difficult (if not impossible) to be sustainable without them.

The biggest problem seems to be questions of implementation: How can this be implemented with as little negative impact on our clients? I discussed a rudimentary proposal for this as well:

  • 3 Phased Approach
  • First Phase, Implement the Cap and frontload any difficulties with determining where our clients fit in the new program.
  • Second Phase, Implement Repetitions. Once clients are within the parameters of the Capped program, repetitions would be easier to comprehend.*
  • Third Phase, implement the shortened loan increments.

*One possible solution is “Next Loan Eligibility” Phase-in. Eligibility upon completion of present loan would not change, but the loan after that would be changed with the repetitions or shortened increments. So if a client were currently paying a 1000L loan, and about to be eligible for 1500L when we implement repetitions, they would receive a 1500L loan, but after that they would have to repeat the 1500L steps.

What to Blog, then

  • What do you like and what do you dislike about the above proposals?
  • How do you think is the best way to implement the above changes? What would make it easiest on the clients?
  • What are the problems that could arise from the above changes, both internally and externally?
  • Do you have any questions from the presentation that I didn’t get a chance to answer?
  • What other ways can you think of to help make La Ceiba sustainable? I’ll explore ideas and respond with any evidence i have about whether your idea would work or not.

But don’t limit yourself to those questions, I’m sure I’ve missed something and If I think of something new i’ll edit this post or say something.

Additional Resources:

As always, feel free to e-mail me personally with any questions or comments:

5 Responses to “Personal Loan Program Reform

  • ashley hess
    13 years ago

    I haven’t any experience on the field so I can’t say much about the best way to implement anything. However, I like the idea of repitition and smaller increments between loan amounts. A problem for many is that they are biting off more than they can chew. This slows down the process so that they can become well practiced in handling a certain amount of money before graduating onto something bigger and perhaps tougher. I also think that repayment should occur in smaller increments as well. I was told that in the past we let the clients chose when and how to repay their loans, but I think that we need to have the same dates for everyone, which would make it much easier for them to remember. It would only be a small amountof payment at a time, so that it is not more than anyone can handle, but would also be more often (once again, to prevent forgetfulness). This is also where a good loan officer comes in to enforce and have constant monitoring. I know that flexibility is important, so if we foresee that we are going to need to adapt things to particular clients, it should be pre-written into the contract as not to compromise structure and clarity (“if this happens, then this is how we will handle it”). We also have to decide about penalties for defaulting clients. With the new increment ladder, I hope and think that the amount of default will be reduced. i think we need to be firm with our penalities. We need to make it so that their cost of defaulting is higher than whatever they are giving up in order to make the payment on time. I’m still doing research on this but perhaps the first time we could cut back the loan or have them retry it again, and then second time simply refuse service. A lot of MFI’s that I have looked into simply stop financing after default. I think that is a good incentive to pay on time. As for the loan cap at 2000L, I think it is good to limit clients from taking more than they can handle, but at the same time I don’t think we should limit anyone. If someone is capable of taking out more money, I don’t think that their only option should be to start a business on the business loan model. Tabi brought up a good point last class that some women arent able to be businesswomen..although it could increase their productivity…

    • russellscott
      13 years ago

      I fully agree regarding standardizing the repayment schedule. That is another step towards standard operating procedures and for an added benefit it makes it Significantly easier for Performance Team to mine for data.

      I see value in having a permeable cap for non-business oriented women that have the capacity to repay larger loans. My proposal was based on the following assumptions though:
      1) Client Income is static, so there is a threshold that will always be reached where amount owed exceeds ability to pay.
      2) a Majority of income thresholds are ABOVE the 2000L (Data seems to support that while many clients have been able to create a sound credit history, and have had good repayment up to a certain point, at which point all history goes out the window and a loan is defaulted on).
      3) Given the above uncertainty regarding credit history, a Cap would allow us to build a solid base from which we can expand–a foundation to build on–rather than accomodating many possible scenarios that arise.

      That being said, if there was a way we could screen I would support it whole heartedly. It would be very valuable to ask our clients for considerably more information than we ask of them now, and that would help us make the determinations necessary to have a permeable cap. But right now the system is based on Luck, and so i’d be hesitant about the permeable cap proposal until we make a commitment to get the data and create criteria that can be applied universally and in a standard way.

  • Nicole Cochran
    13 years ago

    One of my biggest concerns about the proposal to the new loan ladder is the reaction of our clients. As Sarah and Ashley have mentioned, they are probably not going to take the news well when they are told that they will not be eligible for the next size loan. Therefore, I think the Next Loan Eligibility Phase-in seems like a more responsible way to handle the implementation of the new ladder. The phase-in fulfills their expectations of higher loans, while preparing them for a different system and allowing us to put that system into effect. It’s really important to appease our clients since they are our greatest priority, and this policy would allow us to do that while simultaneously addressing our sustainability issues.

    I do take issue with the penalties for default. While I understand that it is important to create a strong incentive to repay the loans, again, we have to remember our clients. They live in an unstable environment in which unforeseen circumstances can have a severe economic impact. As such, I don’t think they should be so harshly penalized for circumstances that occur beyond their control. Furthermore, we want to have a sustainable effect on the economic opportunities for our clients, and kicking them out of the program seems a little counterproductive. A system in which the borrower receives a smaller loan during the next cycle seems like a more reasonable way to penalize those who default.

  • santisueiro
    13 years ago

    The repetition ladder is a great idea. It seems more manageable for clients to pay back smaller amounts in many intervals. It will help establish a credit history, tendencies of clients along with other essential information. I am concerned about the rigidness of the program however. I think having a base to build upon is extremely important but we should find a middle ground where we aim for the parameters established by Russ but approach each client on a case to case basis when making a final decision. I also have reservations concerning the cap and default policies. The cap seems too low for personal use. Perhaps we can consider a new round of applications if the client wishes to go higher than 2000L. This way the rise in loan is not guaranteed but we do not deny higher loans to clients we know can handle the responsibility. Can we consider a softer penalty for default? Instead of starting over we can penalize clients by lowering them by one loan level.

    The changes should be implemented gradually and softly. Any new clients could be put under the new program rules. Old clients would move towards the new program in different ways. Perhaps clients with delinquencies and defaults could be installed in the new program? The loan amount for clients above 2000L could be frozen, in other words they would not be allowed to receive loans of a higher amount than they already have, unless we decide otherwise on the individual case.

    Clients will most likely not be open to the changes proposed. It is clear from reading the CCC survey’s that most clients ask for larger amounts on loans. I would emphasize the point however, that most of the changes proposed are necessary but should be applied gradually over time and on a case by case basis, not all at once.

  • emilysherman
    13 years ago

    I really like the proposed restructuring. Sustainability is incredibly important and the life of LC depends on running a sustainable model…that said I think that we have to keep the changes as simple as possible as to not overwhelm our clients. Everything proposed seems that it would be a reasonable request for new clients and I don’t see any reason for not asking these requirements of them if they are laid out from the beginning. For our clients now, I agree with whoever suggested that we grandfather them in to some less harsh version of the proposed changes. I think that this will make clients less resistant to the changes, keep the lines of communications open, and (hopefully) reach our sustainability goals sooner rather than later.

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