Provision of credit facilities is the core mandate of Savings and Credit Co-operative Societies (Saccos).
Therefore, prudential credit management practices are key to the facilitation of efficient management and administration of the Sacco loans portfolio.
They ensure equity in the distribution of funds to members, thus encouraging efficiency in cash flows.
Saccos are always guided by spelt out credit management policies and procedures as captured in strategic plans, institutional by-laws, the co-operative Act, the Sacco Regulatory Act, and the common rules and regulations.
The boards of directors have a responsibility to formulate, review and revise their societies’ loan policies in line with recommended international standards.
Supervisory committee’s role, therefore, is to provide an oversight and ensure the Sacco’s loan policies are professionally implemented to achieve the objectives and goals for which they were designed.
It is critical that this role is strictly expedited.
It does this through periodical preparation of status reports on samples of loans given to members and those which do not qualify.
It is equally important for Sacco managements and boards to wake up to the reality of non-performing loans, which pose a serious credit risk to the Saccos’ cash flows.
According to the International Monetary Fund (IMF), a loan can become non-performing when the ‘loan installments of principal and interest are at least 90 days due, and the lender no longer believes the borrowers will honor their debt obligations’.
In this case, the loan is written off as a bad debt from the lender’s books of accounts. However, 90 days’ worth of interest payments are capitalized, refinanced, or delayed due to changes in the loan agreement.
When payments of principal and interest are less than 90 days overdue, there are reasons to doubt that the borrower will not pay the outstanding loan in full.
It must be brought to the attention of Board of Directors and credit managers that a non-performing loan is one which the borrower is in default and has not paid the monthly principal and interest for a specified period.
It is worth noting that a non-performing loan (NPL) is declared when borrower runs out of money to make repayments or gets into situations that make it difficult for them to continue making repayments.
Immediately a loan is classified as an NPL, it means that the likelihood of receiving repayments is significantly low.
However, a borrower may start making repayments to a loan that has already been classified as an NPL. Under such circumstances, the NPL becomes an RPL (re-performing loan).
When a Sacco or bank has too many NPLs, it drags in cash flow problems since it is no longer earning income from its credit business.
When a lender records a large percentage of its outstanding loans as NPL, it can hurt the financial performance of the lender.
Banks mainly make money from the interest they charge on loans, and when they are unable to collect the owed interest payments from NPLs, it means that they will have less money available to create new loans and meet operating costs.
The money represents an income that is potentially lost, and it affects the profitability of the lender. Not only does it affect the lender, but it also leaves potential borrowers with fewer options to get loans from the lender.
Holding a high number of NPLs relative to the total assets of a company poses a huge risk to the company as potential investors are interested in companies with healthy books of accounts.
When the percentage of NPLs increases, the lender’s stock price will also go down.
Also, the lender will be required to set aside a portion of its profits as bad debts provision in case it is required to write off the debts.
NPL to Total Loans Ratio
Saccos or banks alongside other micro-finance institutions are required by law to report their ratios of NPLs to total loans (TLs) as a measure of the lenders’ level of credit risk and quality of outstanding loans.
Reporting a high ratio means that the lender is at a greater risk of loss, whereas a small ratio means the outstanding loans present a low risk to the bank.
Handling of NPLs
Sacco or banks having huge NPLs in their books must take urgent measures to enforce recovery of the loans they are owed.
Such actions include but not limited to taking possession of assets pledged as collateral for the loan.
For instance, if the borrower provided a motor vehicle as collateral for the loan, the lender will take possession of the motor vehicle and sell it off to recover any amounts owed by the borrower.
They can also sell off the loans to collection agencies at an interest of at least 90 days.
However, the lender may opt to sell the NPL to collection agencies and outside investors to get rid of the risky assets from their balance sheet.
They sell at a significant discount, and the collection agencies attempt to collect as much of the money owed as possible.
Alternatively, the lender can engage a collection agency to enforce the recovery of a defaulted loan in exchange for a percentage of the amount recovered.
By Ben Oroko
The writer is a communications practitioner and correspondent based in Kisii.
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