Micro-financing: Agrani SME Financing Company Limited will usually caters to low-income clients, both the underemployed and the entrepreneur with an often informal family business (eg petty traders). Borrowers are typically concentrated in a limited geographic area, social segment or entrepreneurial undertaking. Loans are usually very small, short term, and unsecured, with more frequent repayments.
Credit risk analysis: Loan documentation is generated largely by the loan officer through visits to the borrower’s business and home. Borrowers often lack formal financial statements, so loan officers help prepare documentation using expected cash flows and net worth to determine the amortization schedule and loan amount. The borrower’s character and willingness to repay is also assessed during field visits. Credit bureau data are not always available for low-income clients or for all types of microfinance providers, but when they exist, are used as well. Credit scoring, when used, complements rather than supplants the more labor-intensive approaches to credit analysis.
Use of collateral: Microborrowers often lack collateral traditionally required by banks, and what they have to pledge is of little value for the financial institution but are highly valued by the borrower (eg TV, furniture). Where the lender does take some sort of collateral, it is for leverage to induce payment rather than to recover losses. In the absence of collateral, underwriting depends on a labor-intensive analysis of the household’s repayment capacity and the borrower’s character.
Credit approval and monitoring: Because micro lending tends to be a highly decentralized process, credit approval by loan committees depends heavily on the skill and integrity of loan officers and managers for accurate and timely information.
Controlling arrears: Strict control of arrears is necessary given the short-term nature, lack of collateral, high frequency of payments. Traditionally, monitoring is primarily in the hands of loan officers as the knowledge of the client’s personal circumstances is important for effective collections.