Microlenders consider lending less to small borrowers
Some microlenders are thinking about lending less money to smaller borrowers, as the loans are considered high risk and default is sometimes substantially above the five per cent of portfolio considered to be healthy by the monetary authority.
Denisher Forbes, managing director E-Loan Micro Financing Limited, told Wednesday Business, “Our institution is gradually moving away from lending certain loan amounts such as those under $100,000 as they attract high interest and are more problematic. These loans are usually high risk.”
The Microcredit Act was passed in January 2021, with the aim of licensing and regulating microcredit institutions (MCIs) that provide financing to individuals as well as micro, small and medium sized enterprises (MSMEs). The regime came into effect in mid-2022. Twenty-six companies are approved to date. There are an estimated 200 microlenders in the sector.
Forbes stated: “[After licensing] you will be required to abide by Bank of Jamaica (BOJ) rules and also stay within the parameters of the other lenders. Otherwise, customers will move away from doing business with your establishment if your rates are exorbitantly higher.”
She stated: “We are walking away swiftly from granting smaller loans. We are aggressively pursuing larger loans and more mature customers. They are better to reason with and they are very responsible.”
Other microlenders also note that many civil servants who have migrated have left their loans behind, failing to service them after departing.
Meanwhile, Jamaica Association of Micro-Financing Institutions (Jamfin) president Blossom O’Meally Nelson echoed similar sentiments.
“What is becoming a problem is that so many people are migrating, and they migrate and leave the loan. It makes it difficult to collect. If that continues it will impact the sector. Civil servants who do salary deduction payday loans they are the ones migrating.”
In relation to companies locally, she said they borrow personal loans for their business, noting that microlenders are chosen as the business might not have the paid-up taxes and documentation needed to approach traditional lenders or commercial banks.
Overborrowing
“Unfortunately, a lot of it is to consolidate loans,” O’Meally Nelson noted. “Individuals are having less and less disposable income because cost of living has skyrocketed. The only thing they can do is overborrow it. There is a fair amount of overborrowing from what I can see.”
The Development Bank of Jamaica notes, meanwhile, that among those microlenders who borrow from them, demand fell in 2022.
Paul Chin, manager of investor relationships, said that the DBJ’s Microfinance Lending Window opened in 2009, and the development bank has been on-lending funds through the microfinance sector.
He indicates that only 10 microlenders borrow from the DBJ and most were still recovering from the contraction in borrowing occasioned by the COVID-19 pandemic.
O’Meally Nelson says the numbers are small because they are capped.
“DBJ puts a cap on your spread. You can only lend three per cent above what they lend. That would not cover our costs,” she admitted.
She also notes that DBJ’s funds are targeted at small and medium-sized companies.
The majority of loans made by microlenders are for personal loans, not to companies.
“Microfins lend majority personal loans. All DBJ money loaned through approved financial institutions is for on-lending to businesses run by MSMEs. Microfins need money for their personal loan portfolio which is the majority of their business,” O’Meally Nelson explained.
The DBJ, however, says the cap on funds on-lent is higher.
“In 2021/22, MFIs were given access to special loan facilities such as DBJ SERVE to make loans of up to $10 million for seven years at five per cent,” the agency stated on November 23. “Each MFI can lend at what they perceive to be a market rate.”
Otherwise, DBJ offers two lines of credit for microfins. One is up to $750,000 and the other is $2.5 million.
“For micro loans they cannot lend at more than 24 per cent per annum. This is the limitation they are talking about. Some were lending at 1.5 per cent per week, which the DBJ did not agree with,” said Chin.
Regarding the fall off in loans in 2022, he said that the DBJ only lends to 10 microfins. Many of these, he said ,were still in recovery mode after COVID, in 2022.
Remains robust
In spite of the circumstances, O’Meally Nelson notes that overall demand for loans from microlenders remains robust.
“Demand [for sector loans] is not a problem. What is a problem is getting money to on-lend.”
‘The demand [for loans]is there. The ones [companies] that have a lot of money to lend, the ones who have the capital are growing.”
Some microfinanciers are considering raising a bond as one possible means of solving their working capital problems, saying that they are challenged for funds in an ecosystem which “favours traditional lenders or bigger companies”.
Meanwhile, the sector is expecting an uptick in borrowing for the holiday season.
Forbes said that the final quarter of the year appears promising.
Optimistic
“I would say we are now down 30 per cent below 2022. The government has been mopping up liquidity and so spending power has been reduced. Also, in 2022 people were seeking post-COVID recovery loans. Now the economy is back to normal, and this pipeline is reduced.”
She is optimistic for yearend.
“November seems very promising because there is one entity with 1,800 employees coming on board.”
She added: “I have started funding my smaller competitors at excellent rates so they can on-lend to the smaller clients. … I found out that customers who borrow larger loans are more stable in their jobs, home, and personal disciplines. Whenever they are late or can no longer meet their initial commitment, they seek remedies from us, including asking for smaller payments.
“We do not have to call them when they come in. They never run and hide or change their address five times like the customer who borrows $50,000 and $100,000 loans.”
The company lends funds in the range of 2.4 to three per cent, with larger loans attracting the cheaper rate.
“All larger loans are in perfect standing with zero delinquency, from 500,000 up to $8 million. Smaller loans from $200,000 and especially all the loans under $100,000, the delinquency is atrocious, up to 30 per cent. Collections on these are over 95 per cent though, due to new strategies implemented to salvage all our debts. I am prudently considering opening a collection’s arm of the business given the success rate on these debts,” Forbes said.