ACCOUNT OFFICER’S
BASIC TRAINING
Overview of the Client Selection
Process
Rationale


The primary basis for evaluating loan
applications in microfinance is character and
repayment capacity rather than collateral
Creditworthiness is established through
thorough character-check and analysis of the
cash-flow of the microfinance clients.
2
Why Character & Cashflow based?
! Most micro-borrowers have limited or no
marketable guarantees (land, property,
equipment)
! Collaterals, If they are available, often have
limited or no marketable value
! Registration of collaterals are often more
expensive than the actual value of the collateral
3
Why Character & cashflow-based?
! Micro-borrowers lack credit history with
formal institutions
! Micro-borrowers rarely have financial records
and never audited ones
4
Why Character and Cashflow- based Lending?
• Helps to reduce the risks and costs of
lending to applicants who cannot provide –
– Marketable collateral
– Credit History
– Reliable financial information
5
What is Character and Cashflow-based Lending?

Relies on information of the client’s
√
√
√
√

Stability
Entrepreneurship
Reputation
Repayment Behavior
Relies on information provided by the
client and character references
6
How do we establish a Client’s Character?
• Through a Character and Background
Investigation (CIBI), we analyze the
applicant’s character from the information
gathered
Note: The CIBI process will be discussed
lengthily in succeeding sessions.
7
Character/Risk Analysis

What do we mean by S.E.R.R?

STABILITY: permanency, responsibility towards
family and business

ENTREPRENEURSHIP: experience, knowledge of his
market, ability to grow.

REPUTATION: standing in the community, ties to
community associations and other groups,
accomplishments

REPAYMENT BEHAVIOR: how well the client meets
payment obligations of any kind.
8
Character/Risk Analysis
STABILITY
ENTREPRENEURSHIP
(permanence, responsibility towards
family and business)
(experience, knowledge of his
market, ability to grow)
REPUTATION
REPAYMENT
BEHAVIOR
(standing in the community, ties to
community associations and other
groups, accomplishments)
(how well the client meets
obligations of any kind)
9
Analyzing the character indicators

The more information you have on the applicant’s
character, the smaller the risk of lending
Married
Married wi/
children
Bus. Operating
For over 2 yrs.
Resident for
2 years
Bus. In
fixed locaion
Client has post-paid
Cellular phone
Home
owner
Multiple sources of
income
Bus. In same location
For more than 2 yrs.
Keeps financial
records
Children attending
school
Good reputation confirmed
by peers
Clear from legal cases
at the Barangay
Clear from legal cases
at the court
Good reputation confirmed
by neighbors
Holds position in
community assoc.
Good reputation confirmed
by suppliers/landlords
Bus. In
Commercial area
Clear explanation of
Bus. expansion
STABILITY
REPUTATION
Bus. In operation
For over 5 yrs.
RISK
Clearly explains
Use of loan
ENTRE-PRENEURSHIP
REPAYMENT
BEHAVIOR
No outstanding loans
w/ fin. Inst/ appliance stores/
Informal sources
Payment paid on due date/
late not more than 3 days
Schools fees
paid on time
Has active
SA/CA acct.
Bills paid on time –
confirmed by receipts
Rent paid on time
Deposit balances
increasing
10
Analyzing the character indicators

The lesser information you have on an applicant’s character,
the greater the risk of lending
STABILITY
Bus. In
fixed locaion
ENTREPRENEURSHIP
Home
owner
Multiple sources of
income
Bus. In
Commercial area
Children attending
school
Clearly explains
Use of loan
Good reputation confirmed
by peers
Clear from legal cases
at the Barangay
RISK
Bills paid on time –
confirmed by receipts
Rent paid on time
REPUTATION
REPAYMENT
BEHAVIOR
11
How do we establish a Client’s Repayment
Capacity?
• We establish the repayment capacity by
analyzing and evaluating the client’s cash
flow
Note: The Cash flow process will be discussed
lengthily in succeeding sessions.
12
Why is Cash flow Analysis important in lending
to micro borrowers?
• Cash Flow Lending is a prudent and
conservative approach to lending collateralfree loans to micro entrepreneurs who cannot
provide
– credit history;
– security or marketable collateral;
– reliable financial records/information.
13
Lending to micro-borrowers without
analyzing the cash flow …
… is like playing darts
blind-folded.
Determining how
much loan the bank
should give to a
client is a guessing
game that is left to
CHANCE.
14
Character and Repayment Capacity Analysis?
The Character/Risk Analysis establishes whether or not the
applicant meets the minimum eligibility criteria. Through a set of
indicators, risk of lending to a particular applicant is also
determined.
The Repayment Capacity Analysis establishes the maximum loan
amount a borrower can afford to pay on the basis of his/her cash
flow.
In determining the Loan Amount to be granted to an applicant, the
result of the Repayment Capacity Analysis should be seen side by
side with the result of Character/Risk Analysis.
The loan amount to be granted as determined by the repayment
capacity analysis can be further adjusted (maintained, increased,
decreased) depending on the level of risk as determined in the
Character/Risk Analysis.
15
Thank you