MABS APPROACH TO AGRICULTURAL MICROFINANCE

1. MABS APPROACH TO AGRICULTURAL MICROFINANCE Module 4, Session 2 MAP Loan Forms:The CIBI Form: Format & Analysis

2. Introduction • The Credit Investigation and Background Investigation (CIBI) report is considered as the primary tool of the bank in screening its MF clients. • It shows the results of the activities done by the bank to establish the loan applicant’s characterand repayment capacity • This session will focus on equipping the participants with skills on how to gather data relevant to the preparation of the CI/BI report.

3. Session Objectives At the end of this session, participants will be able to: 1. Prepare a complete and exhaustive CIBI report for new borrowers which focuses on the client’s characterandcapacity to pay 2. Prepare a complete and exhaustive CIBI report for repeat borrowers which focuses on repayment behavior on past loans and results of AO’s monitoring of client’s activities.

4. Who prepares the CIBI Report? • Account Officers prepare the CIBI report by gathering and evaluating information, and establishing applicant’s creditworthiness. • MFU Supervisors review and validate the accuracy of information contained in the CIBI report of the AO

5. How to conduct the CIBI 1.Bring the applicant’s Loan Application and CIBI Forms when you conduct the CIBI. Study the information about the applicant for easier and faster verification in the field. 2.Conduct the interview with the character references. Follow the flow process provided in the overview module. 3. Refer to the Loan Application for information that the AO can use in interviewing character references.

6. Types of CIBI Report • CIBI Report for New Borrowers (CIBI-N) • CIBI Report for Repeat Borrower (CIBI-R)

7. New BorrowersCIBI Report

8. The CIBI–New Form • The CIBI form for new borrowers is a seven-page document composed of four-parts namely: 1) Results of interview with client, 2) Character references, 3) Character and cash flow analysis, and 4) AO & Supervisors Findings and Recommendations.

9. Outline of the CIBI-N Form Part 1 – Results of Interview with the Client I. Personal Information II. Business Information III. Market Risk Analysis IV. Payment Records V. Inventory of Business Assets VI. Merchandise Inventory VII. Inventory of Personal Assets VIII. Balance Sheet

10. Outline of the CIBI-N Form Part 2 – Results of Interview with References IX. Interview with Character References X. Interview with Barangay Official Part 3 – Character & Cash Flow Analysis XI. Character & Risk Analysis checklist XII. Red Flags XIII. Cash Flow Computation XIV. Cash Flow Risk Analysis XV. Suggested Courses of Action

11. Outline of the CIBI-N Form Part 4 – Findings & Recommendations XVI. Account Officer’s Finding & Recommendations XVII. MF Supervisor’s Review Results

12. Group Exercise 1 Instructions: 1. Using the Rosanna Jumilla loan documents, the groups are tasked to do the following: a) review the completeness and accuracy of the loan documents prepared by the AO b) assess the character of the applicant using the 4 indicators c) suggest courses of action on what to do with the Rosanna Jumilla loan application. 2. The group should designate a leader and a secretary. The group leader will facilitate discussion while secretary records group output. 3. Write your output in a manila paper. Be ready for the team presentation. • Time: 45 minutes

13. Repeat BorrowersCIBI Form

14. The CIBI–Repeat Form The CIBI for Repeat Borrowers/Loansshould start at least two (2) weeks before the maturity of the current loan to ensure a quick turn-around time for the re-loan (remember quality service).

15. Outline of the CIBI-R Form The CIBI report for repeat borrowers consist of four (4) pages and contain the following: • Analysis of Repayment Behavior • Results of monitoring • Savings Balances • Business Data • Market Risk Analysis • Inventory of Business Assets • Merchandise Inventory • Inventory of Personal Assets

16. Outline of the CIBI-R Form VIII. Comparative Balance Sheet IX. Cash Flow & Comparative Cash Flow Analysis X. Cash Flow Risk Analysis XI. Suggested Courses of Action XII. Account Officer’s Findings & Recommendation XIII. MF Supervisor’s Review Results

17. Comparison of CIBI Forms

18. Repayment Capacity CASH FLOW ANALYSIS The preparation of the Cash Flow will be presented in detail in the next module (Preparing the Client’s Cash flow).

19. Group Exercise 2 Instructions: 1. In this exercise, a list of possible repayment scenarios is given to you. 2. The group should designate a leader and a secretary. The group leader will facilitate discussion while secretary records group output. 3. As a group, discuss and analyze these scenarios and come up with what you think are the best courses of action. 4. Write your output in a manila paper. Be ready for the team presentation. • Time: 45 minutes

20. To Summarize - • A thorough and properly accomplished CIBI gives the Account Officer a clear basis for recommending the approval or rejection of a loan application. • A thorough and properly accomplished CIBI report provides a vivid description of the life story of a loan applicant to the members of the credit committee who are tasked to deliberate and approve the loan application.

21. To Summarize - • The information in the CIBI Report only becomes relevant when analyzed in the light of character indicators. The character indicators provide the bank with ideas as to the level of risks it faces when granting to a particular loan applicant. • The results of the character analysis when combined with the results of the cash flow analysis puts the bank in a better position to ultimately determine the loan amount it wants to expose to an applicant-borrower without compromising ability to repay.

22. To Summarize - • Therefore, the use of the CIBI tools – character and cash flow analyses - decrease the bank’s level of risk when extending loans to micro borrowers who do not have hard collateral and credit history.

23. LINKS

24. Fill in the official FULL first and last name of the applicant. If the applicant goes by a different name, write in parenthesis afterwards. Example: Manuel J. Cruz (Maning) This information can be lifted from the loan application form. This is repeated here to serve as a guide to the account officer on what questions to ask to the applicant and to the character references. Get this data if your loan product eligibility criteria requires it. The business registration permit attests that the business activity can legally operate in the specified trade area.

25. Relate business trends with data on Gross Sales (e.g. smaller sales are expected during slow months). Consider business trend at the time of the loan application. The more operating days the business has, the greater the sales potential Sales frequency indicates when money from the business is expected (used as an input for the Cash Flow) Indicates sales generated by the business, considering business trends (slow months vs. peak months)

26. A Market Risk Analysis is important to establish if the applicant has a clear understanding of his/her market and the capacity of the business to cope with demand • Indicate seasonality of applicant’s business • Will the proposed loan term fall during a lean or a peak season? • Does the applicant have competitors for the product/service offered? • With the applicant’s present level of production, can s/he meet customer demand? • Is there a need to increase production levels? • Does the applicant have a regular supplier? A regular supplier would indicate increased business transactions. • Are stocks readily available when needed? • Is the supplier reliable? • Are supplies bought in “Cash” or “On Credit?” If on Credit, what are the terms? • Who are the applicant’s clients? • Do they buy on wholesale or retail? • Are purchases regular or seasonal? • Does the applicant have regular clients?

27. Provides the Account Officer with information on the applicant’s repayment behavior This section of the CIBI report must be properly and completely filled-up. The account officer must ask for copies of official receipts (OR’s) or proofs of payments. To get a better handle of the applicant’s repayment behavior, AO must request receipts for the last 3 months prior to loan application.

28. Include all assets used in the business; these could be used as loan guaranty (security agreement) • HOW TO COMPUTE APPROXIMATE VALUE: • Purchase Price minus Accumulated Depreciation = Approximate Value • Definition of Terms: • Depreciation– an estimate of the decrease in the value of an asset due to “wear and tear” , obsolescence or impairment. Usually computed on an regular basis (monthly or annual) by dividing the purchase cost of the asset by the useful life of the asset (ex. P5,000 / 5 yrs. = P1,000 depreciation expense yearly) • Accumulated Depreciation – the total of Depreciation already expensed by the business. This amount is deducted from the Purchase Price of the asset to get its Net Value (or Approximate Value) • Purchase Price – Amount paid to buy the asset

29. Most retail outlets (sari-sari stores) have a lot of merchandise. Limit the list to the five (5) fastest selling items since this could provide a rough estimate of the sales and purchase levels. Unit buying price of merchandise Unit selling price for each item of merchandise Description of merchandise (e.g. sardines, laundry soap, softdrinks, etc.) Total Purchase Cost (Quantity x Unit Cost) Indicate quantity; include unit of measure (kgs., bottles, cans, etc.)

30. Personal assets could serve as guarantees, should the bank require them (especially for larger ticket loans) If asset has a potential for use as a guarantee, check for ownership documents • Relate the approximate value of the asset to its age • During the visit to the applicant’s residence, check condition of the assets

31. Shows the joint financial condition of the business and the household • Shows if the size of the business/business assets can support the requested loan amount Should reflect the combined value of inventory of (1) Personal Assets, (2) Business Assets, and (3) Merchandise Inventory Include all collectibles the applicant has, whether from the business or personal loans to other persons Should include whatever cash the applicant actually has on hand and in deposits with any institution (data on deposit may be retrieved from the Loan Application Form (Savings Information)

32. Provides the Account Officer with independent information on the applicant’s reputation Indicate the reference category of the interviewee by putting a √ in the appropriate box. Fill in the full first and last name of the person interviewed

33. Provides the Account Officer with independent information on the applicant’s reputation. Put √ in the appropriate box.

36. Character & Risk Analysis ChecklistStability When analyzing stability look for permanency These indicators show how “rooted” an applicant is – or how difficult it is for an applicant to leave town and the loan obligation. The absence of any of these indicators do not mean that an applicant cannot qualify for a loan – it simply means that the risk of lending is higher

37. Character & Risk Analysis ChecklistEntrepreneurship Client does not have all of his/her money invested in one business. Should one business fail, s/he has other sources which can pay for the loan Having multiple businesses Is a clear indicator of entrepreneurship Business growth over the years means that a client has survived several years of trials (economic, Political, natural calamities); the fact that he has survived many years means that he has good entrepreneurial skills.

38. Character & Risk Analysis ChecklistReputation Indicators of reputation have the biggest weight among the 4 indicators. A bad reputation eliminates positive aspects about an applicant Be suspicious when character references refuse, or are hesitant to provide information about the applicant If interview results of reputation are mixed, the AO must interview more references until s/he is completely satisfied with the applicant’s reputation If the applicant has legal cases, look further into the nature of the case. Double check for Collection cases and cases involving moral turpitude.

39. Character & Risk Analysis ChecklistRepayment Behavior It’s the person, not the business that pays a loan – therefore, how an applicant pays his other obligations tells you how he will pay his loan A refusal to show receipts could indicate delays in payment that the applicant does not want the AO to find out Funds used for family emergencies (illness) do not necessarily disqualify an applicant – It just tells you to be cautious (the illness could take long to cure or recurrent). Decreasing balances in bank deposits could indicate liquidity/cash problems. Find out where the funds went.

40. Red Flags- Warning Signals! Red flags are warning signals that could indicate a character flaw in the applicant; these should be carefully evaluated when doing the Character/Risk Analysis Red flags on the right column should be strong grounds for rejection of the application

41. Provides Account Officers with some tips in analyzing repayment capacity • Compare the Adjusted Debt Capacity (Cash Flow) with the Installment requested by the applicant (Application Form) • An Adjusted Debt Capacity lower than requested, indicates a lower repayment capacity than what the applicant expected. • Compare maximum loan amount (Cash Flow) with loan amount requested (Loan Application Form) • If loan amount requested (Loan Application Form) is close to the Maximum Loan Amount (Cash Flow), it shows that the applicant has a clear understanding of the income-generation capacity of his/her business • Compare computed maximum loan amount (in the Cash Flow) with Total Assets (Balance Sheet) • An asset size smaller than the loan amount will not be able to generate enough net income to be able to pay the loan.

42. Guides/tips that may be used by the Account Officer to make a decision on the Character/Risk Analysis of the applicant. These four (4) indicators are the benchmarks by which the Account Officer makes a decision whether or not to recommend a loan for approval.

43. The CreCom will be putting a lot of weight on the information provided in this section as a basis for final evaluation and approval. • Approval/rejection of the loan application, based on evaluation, should be clearly stated. • Recommended loan amount, loan term and repayment mode should be stated. • The statement at the bottom of the box reminds Account Officers not to provide false information, or deliberately withhold vital information that could mislead the bank into making the wrong decision on the loan application.

44. The CreCom will be putting a lot of weight on the information provided in this section as a basis for final evaluation and approval. • Approval/rejection of the loan application, based on evaluation, should be clearly stated. • Recommended loan amount, loan term and repayment mode should be stated. • The statement at the bottom of the box reminds Account Officers not to provide false information, or deliberately withhold vital information that could mislead the bank into making the wrong decision on the loan application.

45. Indicate the FULL Name of the borrower; make sure this jibes with the name in the Loan Application form. Indicate the number of loans the borrower has had with the bank. The more loan cycles a borrower has gone through, the more information the Account Officer has on his/her repayment behavior (check the Client Status Report)

46. Indicate the loan sequence number in reverse order – starting with No. 3 – most recent loan Indicate approved loan amount of each loan Check applicable mode of payment (weekly, semi-monthly, monthly, others-specify) Indicate number of loan installments

48. What do delays in payment suggest? • Payments over 7 days past due indicate that the loan amount is too large • Partial payments indicate that the loan amount is too large • A steady decline in the number of installments paid on time could mean the loan amount is becoming too large

49. A borrower’s repayment behavior determines the Client’s Classification. The Client Classification serves as a guide for determining increases in loan amount for the next loan cycle.

50. Sample Client Classification Guide for Loans with Weekly Payments