The Covid-19 related economic shock is an existential threat to micro-lenders on several fronts. The immediate threat is from liquidity squeeze, resulting in default.  As the cash flow from the loan portfolio dried up and the payments to lenders come due, it will be important for financial institutions/ lenders to negotiate for restructuring.

Collections strategy based on customer segmentation/ groups becomes critical now. The group-based microlenders will have to reassess the operational model factoring the social distancing for the foreseeable future.

Ebola experience of BRAC Sierra Leone, can provide some clues on how to survive and reopen, post-pandemic.

Summary of recommendations

1. Set up an empowered team that includes Finance, operations & HR. The team should be monitoring, coordinating and taking decisions on the following areas;

• Cash collection projections – based on geographies, industries most/least affected, clients with fewer installments remaining (have a higher probability of repaying).
• Communication with operations staff and clients that FI is keen to reopen as soon as possible. Keep paying salaries to the extent possible. Loan officers would be key in getting the FI back into the business (collections & fresh disbursements).
• Manage lender relationships, negotiate for moratorium/ ‘standstill’ agreement with all lenders.
• Mobilize emergency funding/ credit lines.
• Operations: Cash collections, branch reopening planning as per government guidance, identify client segments/groups that are least affected and most affected – analyze and plan for each type of client group.
• Keep iterating the plans as the situation evolves. FIs would need to also plan for a post-lockdown and a post-Covid stage recovery.

Risk mitigation tactics

Liquidity/cashflow management (immediate risk):

The liquidity crunch and resultant risk of FIs defaulting on their obligations and then going bankrupt are very high.

Restructuring of borrowings by FIs, earlier in the crisis, has disproportionate benefits compared to restructurings at a later stage in the crisis – the higher probability of survival earlier vs insolvency later.

• Cash flow planning – FI should estimate the cash runway & collections from the loan portfolio, both under the base-case and worst-case scenarios (brainstorm scenarios with the team).
• Cut costs on new hiring, delay discretionary investments/ projects that are not mandated by donors.

• Compare the estimated months for cash runway with the expected time for reopening of the businesses and economy in general.

Financial intermediaries are more susceptible to economic /financial shocks as they are leveraged and the ones with non-sticky liabilities (relying on capital markets rather than long term savers for funding) are more so.

• Mitigate refinancing risks and ALM mismatch: monitor upcoming repayments to creditors (a sample AML tool attached). Is the FI in constant communication and planning to renegotiate upcoming payments? Has there been any covenant breach already with any creditor? Are lenders providing waivers to the covenant breach? It’s important to have the waivers in place as soon as possible. Reach out to local banks, DFIs & international lenders (in the order of priority) for renewal of loans and fresh loans.
• Renegotiate – ask for a moratorium (principal & interest) for at least 3-6 months. FIs should seek to renegotiate the terms of current loans (rates, amortization schedule, tenor) from creditors.
• Check if legal recourse of ‘Force majeure’ exists in the legal system and is in the loan contracts between lenders and partner FI.
• Monitor the regulatory responses/relaxations and if they are applicable to partner FIs.
• The above measures are to avoid a payment default to any creditor. Once a payment default occurs, the FI must determine with the help of its legal counsel, a strategy for informal debt workout.
• Credit lines: consider utilizing unutilized credit lines to shore up cash and to ensure that the credit lines are still available from the banks. Talk to bankers to be flexible about enhancing the limit.

International lenders such as MIV funds (microfinance investment vehicles)/ private funds may not be flexible with moratorium or restructuring as they are generally guided by fund policies and have liquidity constraints of the funds (more so in these times). The DFIs (government and multilateral owned funds) may be amenable for restructuring and fresh funds. Steep depreciation & volatility of EM currencies would increase hedging costs for international borrowing thereby rendering the loan terms commercially untenable and freeze the international sources in the near future (post-COVID).

Asset/portfolio quality & growth (immediate/medium term risk)

• Disruption in FI’s collections and business activity has not only increased the PAR (portfolio at risk) in several markets but is soon going to affect the FI’s cash inflow and impinge on FI’s ability to honor their loan obligations. Forecast weekly/monthly cash collection rate and expected PAR level by customer segment (if applicable and if FI already has identified segments) & geography. Feed the collection information/assumptions into Asset Liability match planning.
• Key indicators here would be: PAR by normal/restructured loans, PAR by customer segments, PAR by geography.

Revise provisioning policy for the COVID event. Check if there is any regulatory relaxation applicable on provisioning norms.

Capital adequacy (medium-term risk)

• Reassess capital requirements. The loan impairments, after eating through the provisioning reserves would hit the equity/networth, affecting the solvency of FIs.
• FI’s should reach out to donors or shareholders (as the case maybe) to discuss raising emergency fund and medium-term funding requirements (post Covid).

Management

FI’s leadership acumen and a pro-active management approach would be the most crucial success factor during these uncertain times.

• Is the senior management team organizing and leading crisis management? Has the management formulated any business continuity plan for the next few quarters?

Operations:

Customer insights & outreach

• Identify and strategize for different customer segments. Customers employed in the most affected industries (restaurants/eateries, travel/hospitality) and geographies, customers/households with family members in government service, or managing to get paid by employers, receiving remittances regularly.
• MFIs, if deposit-taking, should be flexible with savings withdrawal for a selected set of customers.
• Disbursements

If the FI decides to restart the disbursements (when the situation allows). It should disburse selectively in a phased manner (& in compliance with local government guidelines), to the customer segments with greater ability to repay.

• Repayments
• FIs can take multiple approaches; (a) complete moratorium on repayments (principal & interest) with interest accruing, especially if asked by regulators and political climate (b) moratorium for clients that request for it.

Planning for the next 12 months – project delinquency along with different categories of products and segments for the next 12 months.

• Staff management:
• Plans for high-risk staff – with greater risk of exposure (field staff). Introduce rules and processes to protect against infection. FIs can provide IPC (Infection Prevention & Control) gears (masks, gloves) and incorporate guidelines into the operations manual on topics such as hand washing/sanitizing before & after client meetings, maintain social distancing during the meetings etc.
• Are the staff and families provided with health insurance? Policy on sick leave for themselves or family in case of family members getting sick due to Covid-19.

Key lessons from the Ebola epidemic

(Case Study: Financial Inclusion and Resilience: How BRAC’s Microfinance program recovered from the West Africa Ebola crisis, 2017)

1. BRAC invested in staff; ongoing training, changes in field operations process to enhance protection from infection.
2. Continued to make salary payments to loan officers.
3. Loan officers focused on clients’ health while being sensitive to clients’ deteriorated financial situation.
4. Continuous communication across the operations team from the leadership to the loan officer level.
5. Some degree of autonomy to loan officers on how to deal with collections. But explicit instruction on treating clients respectfully and sensitively.
6. Post-Ebola, clients were not in a position to start the repayment and needed top-up loans. Clients with fewer installments left had better repayment rates. Clients with fewer residual payments repaid, with the expectation of fresh loans for both consumption and business purposes.
7. Investor/lender support was key in keeping BRAC Sierra Leone a functional and solvent FI.