VSE vs. MICRO-lendingVSE/SME WORKSHOPPragueNovember 5, 2015

MFIs UPSCALING

INTRODUCTION

There are two extreme tendencies when moving into VSE lending

WHAT IS THE VSE SEGMENT?

Source: IFC Innovative Financing for Unbanked Small Businesses, July 2013

Banks

Financial Institutions

MFIs

Challenges to downscale

Challenges to upscale

10

# of employees

300

50

5Small

VSEs

Enterprises

DEFINITION: Very Small Enterprises (or “VSEs”) is the financing gap between asset-based lending (by traditional financial institutions) and behavior-based lending (by MFIs).

Large

Medium

Small

Micro

Informall

Informal enterprises are also the scope of the VSEs

3

KEY CHARACTERISTICS & NEEDS OF VSEs

Definition of VSE will vary from Country to Country and can differ across FIs

CREDIT •Fast decision making on credits •Solutions for working capital financing and/or investments•Higher loan limit, compared to Micro customers•Demand investment products and some fee based services•Lower requirements in terms of collateral (compared to SME Segment) & cash based analysis

NON CREDIT •Tailored solutions/ products bundles for daily banking•Simple solutions for deposits and cash management•Simple and fast FI access (e.g. accessible channels)•Insurance solutions to absorb shocks •Non-financial services to increase their access to market opportunities, training (e.g. financial management, accounting), and network to improve their business performance

OTHER•Predictability of costs for banking and financial services (transparent banking policies)

NEEDS

4

HOW IS VSE FINANCING DIFFERENT FROM MICRO-?

1. Micro Loan often ‘cycle’ based - business is ‘eligibility requirement’

2. Micro Loan is dependent on client character for repayment – most

households with multiple income sources, are capable of

repaying Micro Loan, even if business is weak

3. Loan often exceeds Assets

– business used to obtain

consumer loan

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DEALING WITH DIVERSITY

Micro VSE

Standardized Approach Semi-standardized Approach (allowing flexibility), but still being efficient

Simple marketing and communication Customized marketing according to needs

Business and Household visit to verify Business and household visit to verify due to still unreliable documentation

LO can usually handle entire credit cycle

LOs need to apply more critical thinking to assess the business

LO feel able to handle most clients LO may feel intimidated by size or type of activity, therefore needs experience and strong back-up capacities (internal and external)and/or separation of some tasks (i.e. sales)

DEALING WITH FINANCIAL NEEDS

DEALING WITH CREDIT RISK 1_LOAN ANALYSIS

• Loan analysis has to focus on business risks and on financial risks

and in addition also take into account the character and household

• Crosschecks (also with documents) and financial analysis become

more crucial as we cannot see everything the client does.

• Supplier and buyer checks and market knowledge become

increasingly important to assess the overall risks.

• Loan should contribute to business growth

DEALING WITH CREDIT RISK 2_CREDIT RISK MANAGEMENT

DEALING WITH FINANCIAL STRUCTURE

Cash Flow is King!

1. Profitability of business and cash to cover all payments are

crucial

2. LOs need to be able to understand the cash flows of different

VSEs. They need to identify their financing needs and repayment

capacities by analyzing the cash flows

DEALING WITH FORMALITY

HOW TO ORGANIZE VSE LENDING IN YOUR MFI?

1. Separated from or integrated into existing business?• No hard rules – can be a separate VSE unit or integrated into existing credit

department as a separate product• Dependent on Structure of MFI’s current business• And the extent and concentration of market opportunity

2. Separate VSE unit can discourage ‘graduation’ of clients as Micro officers

may be reluctant to ‘give-up’ their best clients

3. In any case, VSE loans should only be processed by appropriately skilled &

trained staff

4. Promotion to VSE-level or being ‘Certified’ to do VSE lending – can be a

good motivational tool too!

5. Not essential for VSE loan officers to do only VSE loans.

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DO’S AND DON’TS

Have sound decision mechanisms for deciding on loan amounts according to VSE needs and capacities

Be –over-optimistic using financial projections