Module Two: RECOVERIES

What are recoveries?

When a member defaults in the payment of his or her

loan as stipulated in the loan agreement form, the loan is said to be delinquent. The Union is therefore obliged to seek procedures to make the said member pay back his loan either amicably or by force. Simply put the process whereby the Union reclaims this money from the said member is called RECOVERY.

Why is Recovery important in Loan Granting in the Credit Unions?

Loans are the main sources of income generation for

the Credit Unions. It is therefore imperative on the

Union to maintain the loan cycle, i.e. members borrow from the Union and pay back on time. This ensures the continuity of the cycle. Recovery helps the Union reduce or eliminate the writing off of loans which is a

loss on the Union.

It therefore becomes very important for the Union to define a line of conduct that will guide the interventions of all the stakeholders in the loan

process. This line or code of conduct could go a long

way in reducing the number of delinquent loans in the Union.

This code could include

The creation of an environment that considers a loan delinquency situation as unacceptable; 2. Ensuring that the overall staff complies with the defined methodology and avoid any deviation with regard to the said methodology; 3. Adopting an uncompromising zero tolerance vis-vis delinquency; 4. Showing a firm willingness to recover delinquent loans;
1.

5. Aiming at institutional sustainability and financial

autonomy; 6. Keeping an updated, reliable and accurate accounting and management information system; 7. Making members understand that loans are an asset for their own activity and that in order to be able to obtain a new loan, they should keep their commitments; 8. Constant compliance with the loan norms and procedures, more specifically, the assessment of borrower's capacity to repay;

9. Setting up an incentive policy for the Credit Union

loan officers. The compensation or sanction should be based on the volume and the quality of the loan portfolio. 10. The development of an information system on the portfolio that enables management to carry out fast and efficient analyses of the quality of the portfolio, determine and identify trends as well as the possible reasons for the delinquency. 11. Having some recovery activities ongoing with regard to loans written off, as evidence that writing off loans does not cancel the obligation to repay. 12. Ensuring that income from written off loans is accurately reflected by the financial statements.

If all of the above is instituted, we would expect a scenario where a members decision to apply for a loan is made together with the decision to repay and how to repay the said loan. The member would be honest and of good faith and would respect the very rational of loan granting, which is, prompt repayment as per the

loan contract. Thus, we would expect loan repayment

by members to be voluntary and punctual.

The Credit Union manager should make a close follow up of all loans and should ensure that the loans officer

and the members of the recovery committee abide by

the following steps:

1.

Produce, on a monthly (weekly where possible) basis, a list of loans (loan aging report). The said list should carry all the information about delinquent loans (folio, borrowers name, balance, accrued

interest) as well as the activities and negotiations

carried out to that effect. The report should be presented to the Credit Committee and to the board of directors.

2. In order to ensure a minimum efficiency, remind

borrower, 5 days before the actual repayment date, to

come to the Credit Union on the date featuring on

the repayment schedule;
3. 5 days after the repayment date, send a first notice to

the member inviting him to regularize his situation or to give the reasons for his delinquency situation

and propose a date when he intends to regularize the

situation. Fill in the loan follow up form.

4. Where the member fails to react to the first notice, 15

days later, a second notice should be served to him

personally by the loan officer. The sureties should, in

writing, be informed of the delinquency situation. The notice will once more invite the borrower to call round the Credit Union and regularize his delinquency situation, and remind him that failure

to do so will result in the foreclosure of the securities

given to back up the loan.

5. Where the member fails to react to the second

notice, 20 days later, the procedure to foreclose the securities backing up the loan should be started. The loan follow up form should be filled in.
6. Where possible and in case there is still some hope to

recover the debt, the Credit Union may start legal actions at the level of the borrower and his sureties. The loan follow up form should be filled in.

7.

Where the loan is partly or totally backed up by a security fund of an external institution, the manager should contact the institution to recover the debt. The loan follow up form should be filled in.

8. Where, after all the recovery activities have been carried

out, there is still an unpaid balance after 90 days the

Credit Union should start provisioning as provided for by the law. From the 360th day of the life of the delinquent loan, the loan should be written off from the balance sheet and transferred to the blacklist. The loan follow up form should be filled in.

9.

Review, on a regular basis, the list of written off loans and analyze the financial situation of the member to determine the possibility to recover the debt. Fill the loan follow up form.

10. In order to ensure a good recovery rate for the Credit Union,

the loan officer and the recovery team should, every week, have a period exclusively reserved for the recovery of bad debts. This period shall vary depending on the number of files and should be chosen by the Credit Union manager. A budget should be voted to face the charges related to loan recovery (phone cards, legal deeds, legal fees, etc.). The recovery charges shall be borne by the delinquent member.

In the event where this code of conduct is not met, or members do not adhere to them and loans become

delinquent, the Union must implement the following

procedures to recover these loans.

Recovery Procedures: Where there is delinquency

Loans Within Savings

As soon as the measures above fail, the member should be
informed and the entire loan and accrued interest and fines deducted from his savings. Care should be taken

firstly, when granting the loan so that the loan applied for
is less than the members share/savings and secondly, the total amount owed i.e. the principal, the accrued interest and fines do not exceed the members savings.

Loans with Co-Makers

In the case where the loan was contracted with a comaker, the co-maker should be informed and the

procedure in 1 followed.

Delinquent loans above savings and with no co-makers

Where delinquent loans are above savings or do not have co-makers, the Union should

a. Enter into conciliation and mediation with the

member. This should take the following form

 Communicate with the member: Either by phone call

which enables a fast and personal contact and helps make some arrangements with the member or a notice of delinquency should be issued to a member who cannot be easily reached by telephone.

 A formal letter to enable a direct and personalized

approach with the borrower should be issued. This also prepares the members file for legal proceedings should it get to that stage.
The member should be called to the Credit Union for

an interview. This interview should help reassess the

financial situation of the borrower and the securities

backing the loan.

 The member should be visited at home for the Union

to be able to assess his living conditions.

These conciliations and mediation should enable the member find a solution to his problem, the Credit Union may offer him the following proposal:

 Modify the repayment schedule to match it with income

frequency ;
Modify the repayment frequency; Deduct from savings the outstanding balance; Consolidate his debts;

Use other sources of funds (parents, insurance policy, salary

advance, etc.) ;
Obtain an authorization to deduct from his salary; Obtain additional securities; Sell some assets.

During the negotiation, it is important not to increase

the Credit Union risk.

Other recovery procedures include using

Recovery Task Force

This organ has a limited duration. It educates
delinquent members and recovers loans amicably or forcefully. There should be no delinquent member in the team.

For this force to be created, the CamCCUL Representative shall meet the Board of Directors of the

Credit Union to:

 Review the delinquency situation and, where the need

arises
Adopt the resolution to reduce loan delinquency,
Create the loan recovery task force committee Define expected results Define the period of intervention Identify the appropriate methodology for the recovery

exercise
Draw up a plan of work with related activities

Group and Social Pressure

A delinquent member could be reported to his/her

social groups. These groups would be asked to put pressure on the delinquent member to make him/her repay his/her loan.

Traditional Justice System

Traditional rulers or their councils could also be used

to coerce delinquent members to repay their loans.

ANEMCAM
In the Near future The National Association for

Microfinance, with French acronym ANEMCAM, intends to group all microfinance institutions and create a central risk system. This will check the debtors who run from one micro finance to another.

These amicable approaches are advantageous to the Credit union in that they are time and cost effective.

They present a win-win situation and togetherness such

that all parties are happy at the end of the negotiations.

Where none of the envisaged solutions is possible, the

Credit Union should revert to Court Action.

Court Action
Procedure depends on the mode of and type of security
for the loan It is important to note that all cost and damages will be paid by debtor

Simplified Recovery Procedures

The OHADA Uniform Act No. 9 entered into force on

the 10th of April 1998replacinglaw no. 96/10 of August 1996 which was in force in Cameroon This Act aims to simplify recovery proceedings as rapid as possible and set relatively short deadlines once an order has been issued. Simply put, this Act organises the procedures allowing a creditor to obtain from his debtor what is owed him in the shortest possible time.

Foreclosure of mortgage and sale of property

Mortgage Immovable Property

If security for the loan is not adequate the execution will proceed to other properties owned by the debtor

To sum up, Recovery is as a result of granting bad loans.

Loans should be granted based on the capacity to repay

and not on collateral security provided. Collateral

security is just a fall back in the case where the loan

becomes delinquent. Credit Unions stand better recovery chances if they set up periodical follow ups of loans.

Rigorous follow ups are the key success factors for recovery. Any laxity will leave the delinquent members with the feeling that their repayment may be postponed and that nothing will happen to them.

Follow up may be summarized as follows:

Ensure that the loan is repaid in compliance with the

repayment schedule;
Fill in, for each delinquent loan, a follow up form and

indicate on the said form all the recovery actions taken;

Never grant a new loan to a member who failed to respect

his commitments or who has always been delinquent.

 At the end of each month, update the list of

delinquent loans;
The manager should assess, on a monthly basis, the

situation of delinquent loans and present it to the credit committee and board members for a joint solution to be taken with regard to the problems

identified.

 During its control activities, the supervisory

Committee shall acquaint itself with the situation of unpaid loans and ensure that measures are being taken to correct the situation, and where the need

arises, propose additional solutions.

 Always ensure the blacklist is updated in a bid to

monitor recalcitrant members

 Of recent, CamCCUL is preparing a Credit Bureau

whereby a date base is being developed for all loans within the network. This would restrict members from taking loans from more than one Credit Union.

 Delinquency control concerns all the stakeholders of

the Credit Union. Team work will bring better results than individual work. It is important to always comply with the loan policy, especially as regards the stopping

of loan granting once the percentage of the Portfolio at

Risk for 60 days (PAR60) is above or equal to 10%.

 Loan delinquency is cost on the Credit Union and this

might lead, if not checked, the Union to operate on a loss which affects equity and consequently attract sanctions from supervisory bodies.