Application of PPI in new client enrolment process as effective and easy toll to exclude ultra-poor and non-poor members to groups
By : DR. Sunil Liyanage (CEO CB Lanka Microfinance)
CB Lanka Microfinance (CBLM) is a national MFI providing micro credit services to members of rural and disadvantage communities in Sri Lanka through its 14 branch network. CBLM started in 2007 and expanded its services to 10 out of 25 districts of the country during the last 7 years covering over 9000 families. CBLM provide wide range of credit services to meet clients credit needs and also provide credit plus services to enhance development of sustainable livelihood for client families. CBLM is fully e-base MFI and adopt contemporary management practices to have faster and better services to its clients. CBLM services are very much competitive in the ever increasing microfinance market in the country. The wide range of loan product and faster services with additional free livelihood development services attracts more clients. CBLM meet close to 20% of its actual loan demand and facing limitation of expanding services due to limited loan capital. However CBLM able to manage operational sustainability through cost effective operational model including free technical training which focus on clients to build up sustainable family livelihoods. In this scenario, CBLM face the difficulty of selecting deserved poor clients for lending process because even rich and middle class villagers also joining the group formation to get CBLM services.
CBLM adopt responsible lending process where CBLM staff as lender is responsible for delinquency rather than clients. CBLM make special attention to avoid multiple borrowing by clients and much concern about over indebtedness. Even CBLM has very effective delinquency management process, CBLM adopt responsible lending as key strategy to manage high quality portfolio. CBLM adopt group base individual lending and recovery process where Group Leaders recommendation is compulsory for loan processing. Branch staff form new groups with 8-12 members and include new members to have maximum of 20 members per group. The loan amount is decidingbase on client credit score card which develop after details loan feasibility studies by branch staff. With all good practices, CBLM found that rich or upper middle class client also joining the groups and seek credit facilities and difficult to exclude them because they are members of the groups or communities. The real issue of inclusion of rich and middle class members to the group is increase heterogeneous nature of the group which makes difficulties in managing groups. Experiences revealed that most of these rich and middle class members attend the group process till get the loan and after that not attending group recovery process. In such case Loan officer has to go behind these clients which is a difficult as well as costly task. CBLM also found most of these are willful defaulters of other lending agencies such as banks and they are applying loan facilities from CBLM largely because they are blacklisted clients in the CRIB.
CBLM vision / mission are to assist poor rather than any member of the community. Hence CBLM was looking this issue in more practical way to exclude rich and upper middle class members of the community through technical and easier process. CBLM also wanted to exclude ultra-poor from normal lending process due to poor repayment capacity of those but provide low interest Ultra Poor loan (UPL) which is interest rate is 6% less than the normal loan products. UPL is non-profitable loan product for CBLM but CBLM intention is to assisting ultra-poor and improves their credit worthiness.CBLM found that non-ultra-poor also seeking UPL due to low interest rate and some have already obtained UPL through indirect support of branch staff. CBLM wanted to avoid this because CBLM cannot provide UPL product to all new clients due to non-profitability of UPL.
Hence CBLM conducted field level studies to find out appropriate process to exclude rich from joining the lending process and also exclude disbursement of UPL to non-ultra poor. CBLM adopted Participatory Wealth Ranking (PWR) as a tool to select appropriate poor disadvantage for lending process. However PWR is not a cost effective mechanism and also take 1-2 days time to complete a small village. The field studies revealed that it is necessary to have a tool which ensure above 2 objectives, exclude non-poor and ultra-poor from normal lending process but also not provoking members of the community due to exclusion. The method should able to justify the exclusion process with highly transparent process and also branch staff cannot manipulate as they wish.
2. Application of PPI in client selection and loan feasibility
While exploring the different publications, research studies to find out appropriate tool, PPI references showed that it could apply to CBLM client selection process successful manner if properly implemented. Grameen Foundation developed country specific PPI score card obtained from web and initial studies conducted in selected branches. With the success of pilot testing and clients, responses, details study carried out with new group from each branch. The number of members per group varied from 8 -12 and PPI score card prepared for each member by Loan officer and Branch Manager recheck the data. The total sample size is 120 and summary of the data given below.
|No of clientsof the group
|PPI scores range
|Average PPI of the group
After collecting the PPI data of the new groups through branch staff, head office team conducted filed level verification process to assess the wealth of group members in each branch to avoid socio-economic variances and geographical inference to final results. The findings of the field studies are summaries below.
Majority of group members (96%) PPI scores lies between 20-60 whose socio-economic status could be categories as poor or lower middle class
Fewer number of group members (3%) PPI scores lies between 70-90 and socio economic status of these could be categories as rich or upper middle class.
Very few less than 1%, PPI score lies less than 20 and those are really poor without basic housing facilities or having regular income source.
Out of sample of 120 members, only 3memberscategorized as ultra-poor and 10 categorized as rich or upper middle class. This provided a very clear process to CBLM new client selection process where CBLM could easily identify poor and lower middle class from rich/upper milled and ultra-poor members of the group. With these findings, further details analysis conducted for ultra-poor members and decided to provide Ultra-Poor Loan (UPL) with LKR 10,000 (equal to 76 USD) with smaller monthly loan installments 5-7 USD. The loan feasibilities revealed that ultra-poor could pay such installment without many difficulties.
The details analysis of upper middle and rich revealed that these members could get loan facilities from banks or other formal financial services providers but they try to get CBLM services largely due to less number of pre-qualifications and also due to easiness of in-situ operations. The faster loan feasibility and disbursement are the key plus factors for such non-poor to join groups to get loans. The details analysis also proved that cost of loan (cost to client) is significantly higher in bank or formal finance sector. The higher transaction and opportunity costs make microfinance loans more profitable for members in village or rural areas where formal financial services providers are not available. Another important aspect found out in the study was most of these rich members have taken bank loans but other members not aware. On the other hand members who obtained loans form MFis are known to most of villagers due to group process.
Considering the findings of the studies, it is decided to enroll new clients whose PPI is in the range of 20-60 but group average PPI is 20-50. All clients check with this PPI norm and found we could select almost all poor members as new clients and also exclude rich and upper middle easily. It is also possible to exclude ultra-poor who are very small number. Both rich/upper middle and ultra-poor make the groups more heterogeneous and badly affect the group dynamics.
After the initial studies and findings, advised each branch to select new clients based on group average PPI of 20-50. Then provided start-up loan LKR 20,000 (USD 155) to all these selected group members.Then six months follow up process adopted to monitor the repayment pattern and capacity of selected clients. After 6 month pilot testing, repayment pattern of selected clients check with MIS ledger cards. These records revealed that more than 96% of client paid the loan installments on or before due dates and balance clients (less than 4% ) paid loan installments 1-7 days after due dates.
Cost aspects also considered and assessed using PPI and not using. However cost increase is very marginal because PPI score card prepare by Loan Officer (LO) while doing the loan feasibility and there no additional cost. It was also revealed that LO loan feasibility make easier because LO has to discuss with clients to get information for PPI score card fillings. Hence it looks PPI process is very successful and also cost effectives. The PPI score cards prepared by LO is verifies later by Branch Manager while BM is doing secondary loan feasibility. Such mechanism avoids incorrect entries by LO.
With the initial success of using PPI in new client selection process, application of PPI in group formation and selection of new clients stream lined within the CBLM. CBLM is adopting PPI for in the new clients enrolment for last 3 years with greater success. The success assessed in two folds. CBLM was able to exclude ultra-poor from normal lending process and also avoid poor getting UPL which has lower interest rate. From the higher end, CBLM was able to avoid rich and upper class entering CBLM lending process. With the practice of PPI for several groups, Loan Officers also developed the skills to assess the clients wealth more correctly and get accurate PPI scores. Since the same PPI form use for all members and scoring process is also same, excluded group members also accepted the decisions without any issues. The application of PPI also reduced the credit risk and opportunity for delinquency. Hence CBLM portfolio quality, particularly PAR improved much and CBLM maintained less than 3% arrears ratio and PAR-30 sustainable manner for last 3 years. As a concluding remark, we can adopt PPI as cost effective easy tool to enroll new clients to CBLM lending process.