Spot checks are conducted by MYC4 on the providers twice yearly. The spot check involves a comparison of provider records with data on MYC4, as well as actual visits to sampled clients. The main purposes of the spot checks are:
- To ascertain that the data as it appears on the MYC4 platform is the same as that on the providers records.
- To verify that the loans are actually given to bona fide clients.
- To establish whether the providers are adhering to their policies and procedures approved by MYC4 at the time of carrying due diligence on the providers.
- Identify gaps in capacity that may be addressed through a capacity building program; as well as sharing industry best practice with the providers.
The spot checks on all partners were carried out between November 2010 and January 2011. The spot checks did not reveal any major issues, but there were some important concerns raised that we require the partners to address.
The spot checks resulted in a rating for each provider on a scale of 1 -10 (10 being best score) which have now been fed into the star rating/ risk score of the providers. The average rating for the providers was 6, translating to small issues identified, of which the determined course of action is to require that providers address issues raised within agreed timelines. A rating of less than 5 results in the partner not being allowed to upload until the identified issues have been corrected. Effect of the spot check score on the overall provider rating can be accessed here by clicking on the stars.
Among the positive observations included:
- We have seen institutions where loans are consistently properly appraised using qualitative and quantitative techniques, with credit committee approval, and adherence to approval terms.
- Loan officers are held accountable for the quality of their portfolio, with weekly PAR review sessions with management. Bad loans are created at the appraisal stage and when loan officers know they are responsible for their mess, they are careful of quality from initial stages.
- Seen institutions that have introduced ESOP (employee share ownership plan) as a way of motivating staff.
- Good separation of functions and duties in all the institutions.
- Withholding tax deducted from investors duly remitted to the government in most institutions.
The main issues identified during the spot checks included:
- Differences between partner records and MYC4 were observed as follows: 1) Amounts received from clients were not entered on the platform as received. There were delays in entering amounts on the system. Agreed that even prepayments to be entered in the system as received; 2) Collateral listed on MYC4 differed with the actual collateral taken by provider. These cases were few and in some cases the collateral substituted with collateral of equal value; 3) Some loans were uploaded on the platform without the borrowers signing consent form.
- Loan assessment especially of repeat clients in some cases was found not to be adequately thorough. The providers were sensitized that many of the defaulting borrowers in the industry have previously had perfect repayment records on previous loans.
- There were some weaknesses observed in collateral perfection. There was a general need for consistency in application of legal requirements regarding securities. Most of the providers are already implementing the recommendations.
- Delinquency management in some institution needed a more professional approach. Loan follow-up to be tightened and well documented.
- Loan documentation was found not to be well done on some occasions, for example, Loan contract documents missing or signed blank; Storage of documents was also not properly done; Borrowings by limited liability companies not properly documented.
- Maps to the businesses were missing in some instances. However, in all instances there was some general description of the business location.
The next spot checks are scheduled to take place in Q2 and Q3 this year.
Credit Operations Manager