Juana is the owner of a micro-business, which owes more than $ 10,000 to different Microfinance Institutions - MFIs.
His business inventories are around $.1,000 and his most important items rotate on average every 7 and 15 days, which means average monthly sales of $.3,500, corroborated with the methodology of good, normal and bad days.
The gross margin of the business is around 20%, which implies an average monthly Gross Profit of $.700, which after deducting family expenses ($.500) yields a surplus of the family economic unit of $.200. Balance that is used to cover the amount of the loan installments of $ 10,000, which you owe.
The question is: How can Jane repay a loan of $.10,000 if she generates a monthly surplus of $.200?
In the best scenario, if the interest rate charged for the $.10,000 were 2.00% TEM and the total term of 4 years, the monthly payment would amount to $.326.02.
So: How do you pay, Juana?
To answer the question, we must first ask ourselves: How was it that Juana's loans were made?
The answer can have several explanations, among them; that the Credit Analyst, deliberately or through ignorance, erroneously calculated the volume of business inventories or, due to inexperience, did not consider all of Juana's family expenses. Originating, in both cases, a wrong calculation of the customer's ability to pay and, consequently, the approval of a loan that should have been rejected.
If the error was in the overvaluation of the inventory balance. For example, from $.1,000 to $.2,000, the monthly sales of the business were fictitiously increased from $ 3,500 to $.7,000, yielding a false gross margin of approximately $.1,400, which after deducting family expenses ($.500), they implied a surplus of $.900. Sufficient amount to cover the loan installments and allow the approval of the assumed debts.
On the other hand, if the neglect was generated by not considering all the members of the family unit or by not taking into account all the expenses, the consequence was the reduction of family expenses. For example, from $.500 to $.300, with which, the surplus of the economic unit - family amounted to $.400, which allowed to cover the amount of the fees and approve the credits.
Now the more complicated question. So: How do you pay, Juana?
Simple, due to the ease with which many Microfinance Institutions grant loans. Many times only based on the monthly sales volume of the business and not according to the rotation of inventories. Situation that allows microentrepreneurs to request new loans to pay off previous ones, and so on. And the most tragic, for amounts that reach up to $.35,000 and without real guarantees.
This reality, product of the saturation of traditional markets (urban and marginal urban) and the fear of MFIs to enter new markets (rural and less developed areas), has made the microfinance business increasingly risky, making the work of supervision a determining factor.
The over-indebtedness that was previously seen as distant and unlikely is now starting to generate concern and could become a real threat and go from a Black Swan to a reality.
