Owe Money, Pay Money
So when I met Evans, an employee of the Christian Rural Aid Network (a local microfinance institute that partners Kiva in Ghana), and he informed me that he was a Recovery Officer, I got a little nervous.
Me: So, what exactly do you do?
Evans: I recover loans from borrowers who have defaulted.
Me (gulp): Er, how do you recover the loans?
Evans: Why, I just track them down, of course.
Me: And then what? Does it, er, haha, get violent?
Evans (looks at me like I’m a half wit): No, of course not. I just arrange a repayment schedule with the borrower. I return every week to collect the payment.
Me: That’s it? Has anyone given your any trouble?
Evans: Yes, that’s it. The biggest challenge is looking for the borrower, especially if they have moved to another village or town. But once I locate them, they’re very co-operative. I arrange a time that is convenient for them to meet regularly to collect the repayments.
Now Evans is a big guy, but he looks more like a teddy bear than Mr T. I really can’t picture him hurting a fly. But Recovery Officers get a 30 per cent commission on money that they recover and have no base salaries. So what’s to stop them from heavy handed tactics? It was time for a chat with George Tokpo, the Director of Operations at CRAN.
Mr Tokpo was very candid and painted a less rosy picture. He admitted that back in 2008, CRAN was having problems with repayments and their loan portfolio was looking less than healthy for a number of reasons: poor economic conditions, presidential elections and the way the loans were collected. The latter reason was within CRAN’s control, so they decided to revamp the way they did things.
Most of these low income borrowers have no property to offer as collateral, so many microfinance institutes, like CRAN, offer loans to solidarity groups rather than individuals. In essence, members of the solidarity group – usually women from the same village or community – vouch for each other. If one member fails to pay up, the others have to pay for her. In other words, they provide a mutual guarantee. (Read more about how CRAN empowers women here.)
CRAN found the theory to be quite different from its reality. Back in 2008, they disbursed the loans and like traditional banks, waited for the group leader to collect loans back in their villages and deliver the payment to CRAN. However, there were a few hiccups:
- Some solidarity group leaders collected the repayments but chose to keep the money.
- Some members didn’t attend solidarity group meetings and didn’t make payments.
- There were few or no records kept so it became difficult to determine who the delinquent members were.
- CRAN loan officers were not able to anticipate problems with the borrowers or have a good understanding of their business issues because they were so detached from them.
The prevention of defaults is after all, better than the cure. The CRAN team has taken a more proactive approach to disbursing loans and collecting repayments:
- Loan officers now run financial education lessons in villages before the loans are disbursed
- They have weekly meetings at the villages with borrowers to collect their payments. These are meticulously recorded in journals and every borrower gets her own passbook.
- Importantly, borrowers also now have savings accounts, which help them repay their loans.
- CRAN has also started providing comprehensive insurance policies to help borrowers pay for major expenses, such as funerals or accidents. (CRAN has a strict policy of disbursing loans only as working capital, not for expenses.)
- CRAN also ensures that no other MFI works in the same communities so that borrowers are not over-leveraged.
These steps help prevent over-indebtedness and the resulting defaults on loans.
Mr Tokpo says, “Microfinance is not like traditional banking. We need to be on the ground with our clients to understand and anticipate problems. But getting our Loan Officers and Field Officers out in the field so often is expensive and it is a cost that we need to bear in order to make this work.”
Back to recoveries…
Today, CRAN is still trying to recover bad debts from 2008. It has employed Recovery Officers (ROs) and new methods:
- Instead of demanding lump sum payments, ROs now work out a schedule for smaller (and more manageable) repayments. These meetings take place at a time that is convenient to the borrower.
- In many instances, the interest on the bad debts is forgiven
- When dealing with difficult cases, different ROs have different methods (see table) but Mr Tokpo is consulted first before any action is taken. Often, he meets these clients personally.
Given the recent spate of horror stories from India, Andhra Pradesh specifically, about how borrowers were over-leveraged and the thuggish tactics used by lenders to collect payments, it is a relief to know that at least with CRAN, steps are taken to educate borrowers and that collection methods are non-threatening.
Mr Tokpo also assures that me red paint or pigs’ heads are not part of CRAN’s modus operandi. Phew.
Table: Recovery Methods
|When collecting bad debts, ROs employ different methods to get repayments on bad debts when borrowers get difficult. In other words, when they have the ability to pay but avoid doing so. They usually get help from third parties:
To help keep borrowers’ dignity intact, CRAN has stopped using its vehicle, which has its logo emblazoned at the sides, when collecting repayments on bad debts. Or if the use of the vehicles is required, borrowers are contacted in advance to arrange a place and time to meet.
Mei-ing is a Kiva Fellow in Cape Coast, Ghana, working with the wonderful team at the Christian Rural Aid Network, a Kiva Field Partner.
Mei-ing’s previous posts:
Entry filed under: Africa, blogsherpa, Christian Rural Aid Network (CRAN), Ghana, KF14 (Kiva Fellows 14th Class), Kiva Field Partners. Tags: blogsherpa, blogsherpa Ghana, debt recovery, defaults microfinance, group loans, group solidarity, Kiva Fellows, Kiva Lending, loan sharks, Mei-ing Cheok, micro loans ghana, microfinance Ghana, women and.