In the past week, we have had several loans defaulting on MYC4. The defaults are as a result of individual challenges being faced by our providers. We will discuss in this blog the topic of defaults in general and also the factors contributing to current high defaults with specific providers.
MYC4 loans default on attaining 180 days late. This means that they no longer carry interest, but it does not change the claim which investors have to their funds, which will be repaid in the form of recoveries from the Provider. When loans default, providers are required to pay them in full on MYC4 – and then pursue recoveries from the borrowers: In pursuing recoveries of defaulted loans from the borrowers, the providers are free to enforce their rights to recover against collateral provided.
It is a requirement that providers take full responsibility for the MYC4 portfolio they are handling; and they have all signed 100% Risk Guarantee Agreements against defaults. To ensure that there will be sufficient liquidity to pay for the loans as they default, MYC4 demands that providers hold 20% of outstanding portfolio in liquid assets (Referred to as the Risk Guarantee Fund): industry standard (outer limit) for default rate in the microfinance industry is 2%. In the ordinary course of business, MYC4 loans default at a rate that providers are easily comfortable to pay the defaulted loans without having to dig into the Risk Guarantee Fund.
If the MFI continues activities they are obligated to collect the outstanding funds and pay pack as recoveries to investors via MYC4. If the MFI defaults as an institution MYC4 taps into the 15-20% Guarantee fund and channels these funds back to investors. Providers will normally only stop repaying in case of institutional collapse, whereby investors will only receive the 15-20% back, which the Provider has deposited under the Risk Guarantee agreement.
Many MFI’s go through difficult periods where they manage to restructure and continue operations. MYC4 usually takes a constructive approach and tries to help the MFIs to survive. However, MYC4 does not allow re-scheduling of loans: Thus whereas an MFI may decide to alter/ reschedule repayment agreements with their borrowers, on MYC4 the loans will continue appearing as late on MYC4, even as the repayments are received.
Here is a breakdown of the issues contributing to defaults among the providers and subsequent steps.
KEEF was a very well run and performing MFI till the incident with the fraudulent loan officers. MYC4, as well as KEEF, had not seen signals that fraud was imminent. KEEF did the mistake to stop operations for 2 months. This sent the wrong message to the market. One key motivating factor for MFI borrowers to repay loans is the inherent promise of getting subsequent loans: With KEEF not disbursing fresh loans, many borrowers held onto their repayments. MYC4 has been working with KEEF to start up loan activities for the past several months and it finally looks like we shall have success within a fortnight. KEEF has secured a loan from a local bank that will be a catalyst for return to normalcy at the institution.
Due to the sudden stop by our funds transfer service provider, INTL, of operations in Tanzania, MYC4 had to stop activities in this country. Some of our Providers were counting on continued growth and income from handling MYC4 loans and were thus challenged on their cash position by us stopping disbursements. Mtaji therefore had to look elsewhere for loan capital to expand their operations. MYC4 has made a repayment agreement with them by which they commit to paying back their outstanding portfolio in monthly installments over the next 10-12 months. This impacts the repayment pattern to investors but should ensure that all funds are eventually repaid.