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.
- Resource type Paper
- Author Development Alternatives Inc
- OrganisationDevelopment Alternatives Inc
- Year of Publication1998
- Number of pages5 pp.
- EditionMicroenterprise Best Practice Rapid-Onset Natural Disaster Brief
- Keywords Microfinance Policy, Natural Disaster, Planning, Rescheduling