Thursday, May 20, 2010

Outsourcing Micro-loan Underwriting and Portfolio Management

How can micro-lending institutions cut operational costs and devote more resources directly for the benefit their clients? Micro-loan Management Services (MMS), a unit of ACCION Texas, offers loan underwriting and portfolio management services that may do just that. Gustavo Lasala, CFO of ACCION Texas-Louisiana gave a presentation at the Microfinance USA 2010 Conference that covered the development and features of their outsourcing product that is now used by 20 different MFIs in 14 states.

ACCION Texas saw the opportunity for this product after 10 years of their own lending experience and efforts to develop back office processes that would yield better loan decisions and more efficient management of their loan portfolio. It was a two track process that included a “look-back” analysis of their portfolio to develop a loan scoring and predictive model, and a quantitative decision grid for making yes/no loan decisions.

The effort came together in August 2004 in a combined decision grid/predictive engine that they make available to clients on-line. MMS’s service is not “visible” to the loan applicants (the clients of their clients). It is accessed by the loan applicant via a link on the website of the MFI.

Since MMS began offering this service they have processed over 5,000 loan applications resulting in 500 loans closed at a cost of $200-300/ loan. According to Gustavo, this is 25-30% of the cost their clients would have spent doing the processing in house. MMS currently has 450 loans under management. Their product also enables institutions, such as Citi Bank to purchase micro-loans for their own portfolio.

MMS looks for client MFIs with loan portfolios of $1 million or more and who have the intention to grow their businesses. According to MMS, benefits are not limited to lower monetary costs but also extend to better credit decisions and loan officers’ ability to spend more time with their clients.

Clearly, the outsourcing of the loan application process and portfolio management to an outsider requires a high degree of trust. Nevertheless, the benefits of lower costs, higher quality portfolios and more time and money to spend on serving low income entrepreneurs may outweigh the risks.

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