An Outline of a
Credit Policy for partnership between Banks and NGOs
a. Savings before borrowing.A NGO partner is only considered to qualify if it has begun a significant savings programme with the community. This need not necessarily be the savings programme of the NGO, but is preferable. Completing a savings programme need not necessarily take long; it is the linkage with the community that is important.
b. Credit.Credit is a serious matter - offering credit should at no time be considered as a 'learning process' or a 'try-out'. NGOs have other resources for such attempts. Granting credit has to be based on a scheme of criteria, conditions, cost calculations, and sanctions. The system must be approved and adopted in the policy documents. In principle, security must be given to cover the risk in granting loans. On the community level, there should be partial risk cover by relating the loan sum to the savings deposited by the borrower. Furthermore the volume of the credit has to be related to the borrower's proven capacity to contract.
c. Costs.Borrowing costs money. First of all, there is the interest - in principle, the interest should be in conformity with market rates. The main purpose of interest is the maintenance of a central community fund: to cover operational costs, to set aside money for irrecoverable/bad debts, and to control inflation. The interest rates can be below market rates, but they must cover the costs. There are organizations that are successfully charging different rates, for instance by charging less to women.
It is a misconception to think that the users should not pay any interest, or too little. The great advantage, in comparison with commercial institutions, lies in the access to credit, not the costs. This is of course on the assumption that the credit costs are affordable.
It is advisible to make the cost of money transparent and to train borrowers on this subject. In particular regarding the interest payments there is often something wrong in the NGO programmes. They are usually willing to reimburse the principal, but have second thoughts about interest. For this reason and to keep inflation in check, if legally possible, it is advisible to apply the "interest to be paid at source" principe (payment of the total interest sum with the first payment of credit) or by using a "service change" instead of interest payments.
d. RepaymentIn principle, all loans should be paid back entirely and not forgiven. It is something else that irrecoverable debts have to be written off in the bookkeeping after a certain length of time. This is important for the balance sheet (a shift from assets to liabilities). Many NGOs fail to do so, causing strongly inflated figures.
Another problem is the rescheduling of debts, a mechanism often applied by NGOs to make irrecoverable debts seem recoverable. Putting this into practice on some scale should be discouraged, because it causes the credit fund serious cash problems.
e. Operational AuthorizationsIn principle, savings and credit programmes must be expected to have obtained the licenses required by law, or to comply with statutory obligations.
f. ManagementIf, for any reason whatsoever, the above is not possible, the management of the programmes should at any rate be implemented in the spirit of such statutory obligations. Any savings and credit programme, however small, should at least satisfy the criteria of practical and responsible management. The core of this is that the administration of the programme adheres to the policy determined and to the procedures and rules that have been sanctioned.
g. Business ForumBy preference a savings and credit programme should be set up in the most suitable legal structure, i.e. that of a banking institution. Programmes started by NGOs are best formed on a cooperative basis.
If this is not feasible and the programme has to be realised under the judicial cover of a facilitating NGO, there should be at least adequate safegaurds to manage the programme properly, especially those that expressly eliminate intervention by other projects implemented by the same NGO.
If the local supervisory body (the central bank) cannot, or is prevented from carrying out its responsibilities, the rule to go by could be that the donor organization insists on supervision, and, if necessary, shoulders this responsibility or has it fulfilled.
Adopted from a donar agency's credit policies
Hari Srinivas - hsrinivas@gdrc.org
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