|Guidelines for the Formation of Small Enterprise Loan Policies and Procedures (K-REP, 18 p.)|
You have looked at what you will do (Loan Characteristics) with whom (Client Characteristics), It is also necessary to look at how you will implement what you have decided to do in your client and loan strategies. Decisions need to be made covering each of the areas listed below. The purpose of this part of the process is to come up with effective and quick Ways to assist clients; effective in that the process does meet clients' needs, and quick in that the process is streamlined, and has the necessary steps to be effective.
A. Application - How clients come to the project and ask for assistance. To consider:
· how will potential clients find out about the project and its services;
· how will they apply for loans;
· what information will they be required to provide;
· how will they provide the information (through interviews, filling in an application form or possibly others);
· what other requirements will they need to meet before they can apply for a loan (e.g. training/orientation courses, site visits of field extension officer, be active members of a group, etc.);
· who in project will be responsible for: (1) informing potential client about the project; (2) orienting/assisting them in the application process; (3) receiving applications and reviewing pre-application qualifications; (4) packaging applications for further review;
· how are loan applications/applicants tracked so there is a record of what has been done;
· what preparation/training are borrowers given for credit.
B. Review/Approval - This process involves making the decision to lend or not to lend. To consider:
· what are the criteria upon which the decision will be based;
· once potential borrowers have met policy guidelines, then what other benchmarks will be used to judge their projects and loan applications;
· how will the project/loan applications be done (site visits, interviews, analysis of information, reference checks, investigation of previous debt, and possibly other activity);
· who/which job positions have what authority in reviewing and approving/rejecting loan applications;
· what limits are there as to the amount each individual or each level of staff and loan review committee can approve;
· what checks or controls are there to avoid misuse of lending authority;
· what records are kept of these steps in the process.
C. Disbursement - This covers the steps in actually giving loan proceeds to clients. To consider:
· what are these steps; what kind of agreement is there between the NGO and the clients; formal and legal, etc.;
· what tasks must be completed by the borrower and by project staff;
· is the loan extended in cash or in kind;
· is it extended through a bank, financial institution, the NGO, or some other agency;
· who actually delivers the loan to the borrower, and where is it done;
· what records and receipts are used/kept on disbursements, i.e. loan ledger card indicating amount of loan, repayment period and amount, date loan disbursed, plus relevant vouchers and other records.
D. Repayment - How client actually makes payments of interest or other fees and repayments of principal (the amount loaned). Consideration should be given to the steps and those involved:
· does borrower repay to the project directly, through another NGO, a bank or financial institution, through borrowing group, or through other agent. They may have more than one choice.
· is payment made at offices (of NGO, bank, etc.) or in field (at place of business, at particular place designated for repayments etc.);
· who receives the payment;
· what receipts and records are kept of repayments;
· how is loan repayment monitored by management;
· are payments in cash and/or in-kind. If they are in-kind, how is the Value of in-kind payments determined.
E. Collection - What is done when a borrower is not meeting the terms of the loan agreement (not repaying loan, not using loan for intended purpose, closing the enterprise, selling assets, change in key staff, moving out of project area, etc.). To consider:
· what steps are taken to contact borrower and serve notice of default, try to collect repayment, foreclose on collateral, notify guarantor of loan of the default, and any other necessary steps;
· who is involved in collection (field staff, headquarters staff, outside collection agent/company, community or group leaders, or other agents);
· what records are kept of collection process.
F. Renegotiation - When a borrower is having legitimate difficulty repaying a loan according to agreement, the steps the project takes to bring the loan back in line, in accordance with the rescheduling/renegotiation policy. To consider:
· what is the process for reviewing the condition of the enterprise and client;
· what is the process for deciding on a course of action;
· what is the process for approving changes in original loan agreement;
· who will be involved in each step (field staff headquarters loan committee, outside consultants, group leaders, community leaders etc.).
G. Documentation/Reporting - Documentation process required for booking loans and follow up of repayments. To consider:
· what legal formalities must be followed in. respect of loan agreements and collateral taken to secure the borrowings, i.e. guarantees, charges, liens, and others;
· what information needs to be recorded on individual loan ledgers and loan lists for monitoring purposes;
· what progress reports are to be submitted by NGOs to their management and Board and how often, i.e. progress reports on a monthly basis, quarterly reports on loan disbursement, repayment status, and possibly others;
· what progress reports are to be obtained from enterprises by NGOs for monitoring of business performance (income statements, balance sheets, cash flow, production records and possibly others).
H. Related Services - Those other services (group formation, management training or assistance, technical training or assistance information, legal and others) that are provided to clients who are potential borrowers. To consider:
· what technical assistance and/or management assistance are required by clients in preparation for loan assistance, i.e. planning assistance cost analysis, inventory control, marketing advice, identifying appropriate tools and machinery, etc.;
· when the loans are granted, what services are provided to clients to facilitate efficient utilization of credit;
· what are the steps in providing these related services and who on staff will do what to provide them;
· what are frequency and nature of contacts by staff after loans are extended;
· follow up is a key to success of the loan programme. How will the staff determine that loan funds are being well maintained by the borrower, and how often will the follow-up visits be.
I. Inter-Institutional Relations - Working with other agencies or projects. To consider:
· how are existing financial institutions within the areas of program operations used in loan disbursement, collection and/or administration;
· what agreements between the financial institution and NGOs will be required, and what Will be their terms and conditions;
· what are the terms and mechanics of services provided by training, management and/or technical assistance organizations which are linked to loans; are they formal or informal;
· what are the steps in the process for integrating/co-ordinating the provision of those services as they are needed by borrowers.
J. Use of Interest and Other Loan Income - To what will you apply these funds. To consider:
· how will interest earnings from loans and other loan income (services charges, etc.) be utilized, such as for default coverage, as inflation hedge (to maintain real value of loan fund) to coyer loan administration costs, to cover training, other assistance, and/or overhead costs, make investments, or for other purposes.
K. Write-off Bad Debts - Removing unpaid loan amounts that will not be repaid from the loan fund on the project books. To consider:
· how will you go about removing uncollectable loans from loans outstanding records;
· after how long and after what efforts of collection will loan be considered to be uncollectable and, therefore, for charge-off in project books;
· who will recommend/approve write-offs;
· what records will be maintained of charged-off loans for purposes of follow Up and by whom will they be maintained and reviewed;
· how will borrowers whose loans have been written-off on the project books be dealt with.
L. Training - The activities related to ensuring that the staff are prepared to do what is called for in your plans. To consider:
· what are steps in orienting/preparing staff in understanding and implementing the project according to the above policies and procedures.