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Loan Rescheduling After a Natural Disaster - English

Loan Rescheduling After a Natural Disaster

This brief discusses the potential interventions and actions that MFIs could undertake in the aftermath of a disaster, based on the experiences of MFIs from Hurricane Mitch and the Bangaldesh flood of 1998. Loan rescheduling in the wake of natural disasters has become a common practice among microfinance institutions (MFIs). MFIs are aware that clients hit by disasters are unable to repay loans according to a pre-disaster schedule. If the MFI insists on on-time repayment, the result for many otherwise outstanding clients may be default. Such actions would punish clients unduly, reduce long-term repayment rates, and force the MFI to remove otherwise good clients from its borrowing list. Moreover, it could mark the MFI as insensitive to its clientele and decrease long-term loyalty to the institution. Clearly, these outcomes are unacceptable to MFIs. This leaves two apparent options: loan forgiveness or loan rescheduling. Loan forgiveness cancels all remaining loan payments and removes the loan from the MFI’s books. But this is not a real option for an MFI: it undercuts long-term client commitment to repay and results in losses to the program. Therefore, in the wake of a disaster, MFIs have only one choice that both serves its clients and is true to institutional goals: loan rescheduling for affected clients.

The brief attempts to answer the following questions:

What is the financial impact of rescheduling on the MFI?
What is rescheduling?
How are missed payments collected?
Does loan rescheduling really protect the MFIs portfolio?
When and where should MFIs reschedule?
What should be the terms and conditions of rescheduling?
Does rescheduling work for all microfinance methodologies?

The conclusion notes that rescheduling is an important post-disaster tool, to be implemented quickly and strategically, based on a desire to avoid disaster-induced defaults while maintaining a flow of repayments into the MFI. Successful rescheduling systems are based on pre-disaster planning and loan officer training.