Management of Hardcore Delinquent Accounts

Seminar Workshop
The Case of BayWalk Bank, Inc. (a Rural Bank)

Background

In early 2001, Baywalk Bank Inc., a rural bank based in Baywalk City, one of the highly
urbanized cities in the province of Cavite, ventured into microfinance operations through a
microfinance loan product called “Mutya”. The product was designed for microenterprise
operators including the well-established fish and marine products dealers in the province.

The bank has six (6) branch offices. Four (4) of their branches are located in different
coastal towns of the province, while one branch is located in Lipa City, Batangas.

All of the branches including the head office are implementing microfinance lending through
a microfinance unit (MFU) in each branch. The Unit directly reports to the bank president,
who monitors its performance. Oversight and day-to-day operations are delegated to the
branch managers. Each Unit in the branch has a MF supervisor and 2 account officers.
Branch managers are directly responsible for the MF performance and direction.

The bank’s microfinance core group was originally composed of 2 senior officers and 4
account officers. They are no longer involved in microfinance, since the 2 senior officers
have been promoted and the account officers have left the bank.

The bank’s hiring policy is to attract the top 20 graduates of local universities in Cavite,
particularly graduates of De LaSalle-Dasmarinas and other top rated schools. The bank
uses the MF Unit as a training ground for potential bank officers and staff. Training for basic
microfinance is conducted over a 2-month period; consisting of 1-week office orientation and
7 weeks of field or on-the-job training. During the on-the-job training, the new microfinance
staff observes the work activities of a more senior account officer.

In the last two (2) years, 6 account officers (new and old) have either resigned or were
terminated. At the end of 2005, the bank had 16 account officers and six (6) supervisors.
The bank’s MF supervisors and managers’ rely on reading materials and job experience to
learn microfinance. The officers and staff are seldom sent for training since the bank
believes that microfinance is little different than commercial lending; just an emphasis on
collections.

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A review of microfinance performance shows the following:

Table 1 - 5-Year Microfinance Performance Data

2001 2002 2003 2004 2005

Active clients 989 1245 1950 1480 1873
Repeat clients 812 1023 962 765 680
New clients 400 665 745 690 575
Loan Disbursed P14.000 20.000 40.000 34.000 22.000
Portfolio balance P7.560 11.800 24.200 21.600 19.845

PAR 30 days 1.3% 5.25% 4.5% 8.15% 28.55%

PAR 90 days 0% 2.5% 4.90% 9.40% 18.89%
Net Income (PM) P1.8 P2.4 P3.8 P2.3 P1.320
Field Staff 8 8 10 13 16

Note: Please refer to the attached Table 2 – PAR Aging Report as of December 2005

Reviewing the results, Ryan Atienza, the president and general manager of the bank was
alarmed with this performance. In the first 3 years, microfinance was the bank’s ‘favorite
product’ greatly contributing to the bank’s revenues.

He was scheduled to report to the bank’s board of directors and to the stockholders who
have shown great interest on the bank’s microfinance lending activities. After reviewing the
performance report, he was puzzled with the continuing decline in the bank’s outreach,
portfolio levels and the declining profits. He was also alarmed with the sudden rise of
delinquencies.

A review of the microfinance lending process revealed the following:

o In the first 3 years of its micro operations, Baywalk Bank was completely
monopolizing the markets in their areas of operations. The lone competitor was a big
rural bank branch that was concentrating on salary loans and other commercial
lending activities. The perennial competitors were the informal lenders, ‘5-6’
operators and lending investors;

o The head office and its five (5) branches had focused only on 2 segments of the
market which they found to be substantially large: The retail operators (sari-sari,
carinderias) and the service sectors. The thriving fish processing business in the
area was ignored by the account officers as these clients tend to request bigger loans
ranging from P100-150 thousand for their working capital needs. Moreover, they
have limited experience in handling or evaluating loan applications higher than P50k;

o In the later part of 2003, a commercial bank and 2 rural banks entered their areas of
operation and started offering microfinance loan products even to the bank’s existing
clients and to the un-served fish processing sector. Likewise the number of informal
lenders also increased.

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 o Mr. Atienza reviewed their marketing strategies and delivery process.

o Mr. Atienza learned that the account officers paid more attention to increasing
their outreach due to incentives and focuses mostly only on new loans with
loan demand ranging from P5k –P15k.

o The bank pays basic salary based on the mandated minimum wage rates.
Salary increases are provided only when it is mandated by the DOLE regional
wage boards
.
o However, the bank suspended giving incentives to the MF unit staff in the last
30 months. There is a feeling among staff that this will be permanently
abolished.

o Clients were always crowding the branch offices for loan releases and other
microfinance loan transactions 3 days a week, with some clients staying from 9.00 am
to 3:00 pm just to avail of their loans. Depositors have been complaining of
inconveniences during these days;

o At times, loan releases are postponed or rescheduled without informing the clients.

o Co-makers and their spouses of both new and repeat clients have to be present
during releases of loans.

An audit and review of the microfinance operations further brought Mr. Atienza tension. The
report revealed the following:

o 5 out of 10 clients have faulty and deficient CIBI, such as incomplete information
(address, location of business and family background of the client). Most of the
clients’ references were not verified and validated.

o Basic documents such as PNs; application forms; disclosure statements are not
properly accomplished, with erasures or blank. Incomplete documents with some
credit folders were found missing from the files.
o Cash flow analysis of repeat borrowers were just copied from the previous loan
record

o There is no limit on the repeat loan sizes. Some accounts received increase loan
from 50% to 100% of the previous loan.

o The branch CreCom seldom rejects or denies loans, both new and repeat. The
Crecom relies solely on the recommendation of the account officers who knows the
client. The Crecom does not use the Client Status Report.

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Delinquency analysis

o 70-80% of the delinquent accounts are repeat loans mostly on their 3-4th cycle with
loan sizes ranging from P15-30k;

o 80% of the accounts past due over 90 days are those coming from the head office
and its San Pablo City branch;

o Collection and follow up are the sole responsibility of the account officers who spends
more or less 50% of his time doing follow up activities on the hardened accounts;

o Follow up of a delinquent account is done a day after it has already missed its
installment.

o At the end of 2005, had a total loan/loss provisioning of P3,580,250.00 against a total
PAR of P6,719,287.37. (Indicated in Table 2).

o Aside from the responsibility of supervising the MF operations, the MF supervisor also
double as the branch loan head for salary, pension and agricultural loan products.
This responsibility takes 50% of his time;

o The only MIS generated reports used by the account officers are the PAR aging; Due
reports and delinquency reports, which track the accounts with due installments and
accounts with missed payment. All account officers conduct their follow up on the
following day, and if it is a Friday, follow up will be the following Monday.

o MF performance reports (MIS generated) seldom reaches the office of the president.
This is compounded by Mr. Atienza’s not providing enough time reading and
evaluating the reports.

o The bank has not experienced writing off hardened accounts from its microfinance
portfolio since it started operations in 2001. The bank believes that writing off would
be a bad precedent for its account officers as this would embolden them to let all their
accounts become past due and be written off.

o The bank believes that account officers are responsible for all past due accounts up
to the final collection. Creating a separate unit just for collection and recovery would
be an expensive exercise. However, collecting past due payments has taken much of
the time of the account officers leaving little time to generate new loans.

o Many of the account officers have complained that the bad portfolio they are
managing are mostly inherited from former account officers who have resigned.

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Questions to Answer

1. Determine the causes of the bank’s high delinquencies and classify the causes into;
i. Internal
ii. External
2. Is the loan/loss provisioning adequate? Compute the correct provisioning as of end
2005, based on the rates provided by BSP.

3. What recommendations will you give Mr. Atienza?