The microfinance sector has many actors with many different objectives, but if there is one common element that all agree on, it’s that microfinance should not harm the clients. And one of the most important elements of client protection is responsible collections.
To operate as viable enterprises, MFIs must collect on their loans. Inevitably, some clients prove unable to repay. Some cases seem easy – a client has suffered an unexpected tragedy, so an MFI will work to understand her situation and make alternative arrangements to repay the debts, be it a grace period, rescheduling, or even extension of a supplemental loan. But what to do with those cases where a client has simply borrowed too much? What if she did it for a “bad” reason – say, to buy a television? What if a borrower lied by denying that she had other debts? Unfortunately, such situations do happen.
In such cases recovery is still the goal. But one cannot recover money that’s not there. Responsible MFIs don’t press their clients to sell key income-generating assets that they depend on for survival. The key is to find the middle path – maintain pressure to repay, but not so high that the client is pushed into destitution.
So what about Greece? Does the experience of microfinance have any useful lessons for the Greek government and its creditors?
Let’s start with the facts. The current disagreement is over whether Greece’s creditors will release another bailout installment to pay… Greece’s creditors. Any scan of the news breaking down the financials clearly demonstrates that subject at hand is Greece’s inability to make its scheduled loan repayments, thus necessitating the “bailout” funds. From a strictly financial perspective, this is highly problematic. Were a bank or MFI take a similar approach to delinquency management, it would have some explaining to do to its regulator. In industry parlance, this is called ever-greening – give the client funds so that she can pay you back, and that way you can pretend that the loan is on schedule.
It’s obvious that Greece at this point is insolvent – it cannot make its scheduled debt repayments, at least in the near-term. Yet so much of the discussion seems to ignore that financial reality.
Consider the fight over the Greek budget. Greece’s problem isn’t excessive spending – it’s lack of earning. A quarter of its working-age population is unemployed – producing nothing at all. The country is akin to an impoverished family whose main breadwinner has been able to find only part-time work for the past several years.
Consider some of the more contentious proposals in Greece – to rehire office cleaners or distribute a food subsidy to poor families. The effect of these on the economy is unclear. Perhaps the approach may prove counter-productive, but nobody knows the right recipe – certainly not the creditors. For the past five years, they and “the troika” have produced vastly overoptimistic forecasts of the Greek economy. There is little reason to think that the 6th year will prove any different. Moreover, for creditors to insist on specific budget targets for Greece is equivalent to an MFI telling a defaulting client how she should earn and spend her money. Letting the country’s government set the economic agenda, which is what it was elected to do, is both right and proper.
Which brings us back to the client protection principles. If the creditors fail to disburse the next “bailout” payment, Greece will default. On its own, this is just an accounting event. In any real sense, Greece is already in default, and the financial position of the creditors remains the same – they can’t get repaid, except with their own funds. But the resulting consequences of default would go far deeper – a chain of events that may well push the country out of the Eurozone. At its core, refusal to release the funds to Greece is a threat the creditors hold over the debtor. And such threats are exactly what the client protection principles prohibit.
This has nothing at all to do with finance. With Greece out of the Eurozone, the creditors’ ability to recover the loans would be far worse than were it to stay in. So the implicit threat of Grexit is counter-productive to the creditors themselves. Looking solely at the loans and their recovery process, and applying the principle of responsible collection practices, the choice for the creditors is obvious: the loans should be (again) rescheduled, ending the whole charade of bailouts and endless negotiations.
The issues may be international and macro-economic, but the parties could do worse than take a look at the collection practices developed for the world’s smallest loans.