One of the challenges with crisis management is that these are rare events, and most institutions facing a major crisis have no prior experience in dealing with one. In this session, Donna NAILS, Deborah DRAKE and Daniel ROZAS discussed key issues facing MFIs dealing with crisis.
Rozas started with a reference to the paper ‘Weathering the Storm II’, a joint e-MFP and CFI project to learn from case studies of MFIs that have survived severe crises. He asked Drake to share some of the findings from her work on the paper.
Drake explained that MFIs are currently facing many uncertainties due to the COVID pandemic and are looking for examples of what worked during previous crises. At first, MFIs were concerned that clients would not be able to repay their loans and that the MFI would face liquidity problems. From an equity perspective, the COVID crisis raised many questions on capital requirements and the need to request new capital from investors.
Nails suggested that MFIs take a good look at their portfolio to segment clients by the extent to which they are affected by the crisis. With their Market Information Systems (MIS) and using pivot tables in Excel, MFIs can slice and dice their portfolio to create a COVID dashboard that provides insights into the development of their portfolio at risk. Based on data from their MIS, including postponements of repayments and restructuring of loans, MFIs can then make individual loan assessments, develop risk ratings for their clients and determine their repayment ability. Additionally, MFIs can directly engage with their clients through questionnaires to ask them about their expected repayment ability, their other sources of income and their willingness to repay.
Setting up a good collections department is crucial to secure repayments. Drake agreed that collection is key during times of crisis and added that MFIs have to make sure that their staff is capable of collecting repayments. Nails explained that loan officers can be trained on collection practices and that they need to apply different approaches, hard or soft, depending on the type of client. Good loan officers should be able to find out if a client is willing and able to pay or not. Drake added that FSPs can also change their staff incentive structure to re-orient their staff’s efforts from making new loans to repayment collection.
Rozas suggested that MFIs can use the dashboard and data on individual clients to organise effective collection as well as lending to which Nails responded that lending to new clients is risky during a crisis and that boards of MFIs should set a clear benchmark for lending. Rozas agreed that lending to new clients can be dangerous and that MFIs need a careful strategy.
Drake asked Nails to present her tool for identification of portfolio at risk. Nails showed tables, heat maps, with different colours that indicated how much of the portfolio was at risk. To illustrate, in the first table, one axis of the table showed impact categories that represented how much a sector was impacted by the crisis. The other axis showed repayment categories that represented how many days late on repayment the loans were. These heat maps allow an MFI to monitor the development of their portfolio at risk. For the accuracy of such heat maps it is important that MFIs push their staff to enter data in the MIS after meeting clients.
Rozas pointed out that the number of MFIs that are suffering liquidity problems is actually small and asked the other panellists to explain this. According to Drake and Nails, liquidity problems are not yet visible due to wide use of moratoria on loans. However, investors are already estimating their future losses as delinquency rates are expected to increase in 2021. With all the uncertainties caused by the COVID crisis, trying to forecast budgets is currently a nightmare. Besides the lack of knowledge on developments in repayment rates, MFIs are uncertain about the response of their investors. Nails called for elaborate stress-testing of MFIs under different scenarios to anticipate problems with MFIs. She stressed that she expects that some of the weaker MFIs will not survive the crisis.
Drake voiced her particular concern about the scope of this crisis. As the COVID pandemic is a global crisis, equity investors need to fund a lot of MFIs. Equity investors do not have unlimited money and will need to prioritise. For example, on a global level, investors are making country risk analyses to prioritise countries. Investors will also have to perform some sort of triage to selectively fund MFIs. Rozas explained that MFIs should be transparent to their investors, as this transparency is often rewarded with debt extensions if needed.
Rozas pointed out that MFIs are stretching themselves out through postponements of repayments and that they are also running into solvency problems. As regulators are setting the rules for solvency ratios of MFIs, they also have a role to play in management of this crisis. Rozas expects regulators to show some flexibility in this respect, as they will not close many MFIs at the same time, which would be destructive for the sector. Nails also expects that many MFIs will survive this crisis, but noted that some MFIs will become smaller.
Audience member Edouard Sers asked the panellists: ‘So in your view what will happen to MFIs close or already below regulatory CAR requirement? Will equity investors play their role to accompany a turnaround?’ Drake responded that equity investors are very committed to supporting the sector, but may not be able to help all MFIs.
Ivo JENIK briefly presented CGAP's upcoming publication: ‘COVID-19 Crisis Response Roadmap for Microfinance Institutions’. He explained that CGAP set up three working groups to support crisis management:
Jenik explained that some lessons from past crises can be learned to manage the COVID crisis. At the same time, comparison is sometimes difficult as past crisis were caused by single events and often local, while the COVID crisis is constantly evolving and global.
CGAP’s roadmap for crisis management that was planned to be published in December 2020 consists of the following steps:
This presentation concluded the Fireside Chat session.