A basic methodological principle in microfinance is staging. That is, the gradual increase in the amount and term of the credit, depending on the payment compliance shown by the client.
More than one will remember the old slogan of a microfinance company, which said: "You approve your credit", alluding to the advantages of being punctual in the payment, to access higher amounts.
The objective of the beginning was to know, gradually, the morale and payment capacity of the client, before venturing to grant larger loans. Healthy practice that was respected and shared by the majority of microfinance institutions and the result was a delinquency close to zero, of which those Credit Analysts who worked in those times can attest.
Yet today that important principle has been shattered. Now it is common for microfinance institutions to grant extensions of their clients' loans, without demanding compliance with the entire agreed term or, at least, half of the “journey” *. Likewise, it is usual for many Entities to venture to grant their clients medium or long-term financing, without ever having previously granted them short-term loans, which allows them to know the moral and payment capacity of their clients.
The explanation for this phenomenon can be found in the saturation of the markets that microfinance institutions are currently serving and the search for an easy way out by some of them. Instead of healthy growth, such as banking and inclusion of those borrowers from areas where the credit supply does not reach, through public-private alliances, correspondent tellers, mobile applications, remote agencies, information offices, etc.; they prefer to ignore the good practices of yesteryear and run the risk of over-indebting clients.
Thus we have, that now it is common to buy debts, in terms and greater amounts and, even, without complementary guarantees: who has not heard or seen how microentrepreneurs receive approval letters for exorbitant amounts of credit, with a single signature?
Within the microfinance institutions themselves, it is observed that it is no longer necessary to complete the journey to access larger amounts. Worse still, in the case of loans for working capital, the destination of the credit is no longer evaluated, but only the ability to pay (read: “Mechanism of over-indebtedness in microfinance”, in the link:.
Likewise, it is not taken into account that each time the credit is extended, financial income is reduced, since the interest rate charged for the new loan decreases (the higher the amount, the lower the rate), when in reality it should be higher (higher amount, higher risk, higher rate), due to the possibility of over-indebtedness implied by the granting of said credits.
Although the outlook becomes uncertain, we still have time to reverse the trend and return to good practices. For this , microfinance institutions must redesign their growth strategies towards unserved markets, using existing technology tools. While this is happening, it will be necessary to establish a permanent monitoring of the over-indebtedness of the client portfolio, through the management of warning signs (increase in the number of borrowing entities, number of inquiries in the credit bureaus, delay in payments, etc..).
* "Tour": financial jargon, which refers to the term of the loan.
