Post on 18-Jan-2016
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VSE vs. MICRO-lendingVSE/SME WORKSHOPPragueNovember 5, 2015
MFIs UPSCALING
INTRODUCTION
There are two extreme tendencies when moving into VSE lending
WHAT IS THE VSE SEGMENT?
Source: IFC Innovative Financing for Unbanked Small Businesses, July 2013
Banks
Financial Institutions
MFIs
Challenges to downscale
Challenges to upscale
10
# of employees
300
50
5Small
VSEs
Enterprises
DEFINITION: Very Small Enterprises (or “VSEs”) is the financing gap between asset-based lending (by traditional financial institutions) and behavior-based lending (by MFIs).
Large
Medium
Small
Micro
Informall
Informal enterprises are also the scope of the VSEs
3
KEY CHARACTERISTICS & NEEDS OF VSEs
Definition of VSE will vary from Country to Country and can differ across FIs
CREDIT •Fast decision making on credits •Solutions for working capital financing and/or investments•Higher loan limit, compared to Micro customers•Demand investment products and some fee based services•Lower requirements in terms of collateral (compared to SME Segment) & cash based analysis
NON CREDIT •Tailored solutions/ products bundles for daily banking•Simple solutions for deposits and cash management•Simple and fast FI access (e.g. accessible channels)•Insurance solutions to absorb shocks •Non-financial services to increase their access to market opportunities, training (e.g. financial management, accounting), and network to improve their business performance
OTHER•Predictability of costs for banking and financial services (transparent banking policies)
NEEDS
4
HOW IS VSE FINANCING DIFFERENT FROM MICRO-?
1. Micro Loan often ‘cycle’ based - business is ‘eligibility requirement’
2. Micro Loan is dependent on client character for repayment – most
households with multiple income sources, are capable of
repaying Micro Loan, even if business is weak
3. Loan often exceeds Assets
– business used to obtain
consumer loan
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DEALING WITH DIVERSITY
Micro VSE
Standardized Approach Semi-standardized Approach (allowing flexibility), but still being efficient
Simple marketing and communication Customized marketing according to needs
Business and Household visit to verify Business and household visit to verify due to still unreliable documentation
LO can usually handle entire credit cycle
LOs need to apply more critical thinking to assess the business
LO feel able to handle most clients LO may feel intimidated by size or type of activity, therefore needs experience and strong back-up capacities (internal and external)and/or separation of some tasks (i.e. sales)
DEALING WITH FINANCIAL NEEDS
DEALING WITH CREDIT RISK 1_LOAN ANALYSIS
• Loan analysis has to focus on business risks and on financial risks
and in addition also take into account the character and household
• Crosschecks (also with documents) and financial analysis become
more crucial as we cannot see everything the client does.
• Supplier and buyer checks and market knowledge become
increasingly important to assess the overall risks.
• Loan should contribute to business growth
DEALING WITH CREDIT RISK 2_CREDIT RISK MANAGEMENT
DEALING WITH FINANCIAL STRUCTURE
Cash Flow is King!
1. Profitability of business and cash to cover all payments are
crucial
2. LOs need to be able to understand the cash flows of different
VSEs. They need to identify their financing needs and repayment
capacities by analyzing the cash flows
DEALING WITH FORMALITY
HOW TO ORGANIZE VSE LENDING IN YOUR MFI?
1. Separated from or integrated into existing business?• No hard rules – can be a separate VSE unit or integrated into existing credit
department as a separate product• Dependent on Structure of MFI’s current business• And the extent and concentration of market opportunity
2. Separate VSE unit can discourage ‘graduation’ of clients as Micro officers
may be reluctant to ‘give-up’ their best clients
3. In any case, VSE loans should only be processed by appropriately skilled &
trained staff
4. Promotion to VSE-level or being ‘Certified’ to do VSE lending – can be a
good motivational tool too!
5. Not essential for VSE loan officers to do only VSE loans.
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DO’S AND DON’TS
Have sound decision mechanisms for deciding on loan amounts according to VSE needs and capacities
Be –over-optimistic using financial projections