Chasing Delinquent Loans in Honduras and Nicaragua

This article deals with how one actually collects delinquent payments.  To begin, lets just say, it's a hard and dirty job.  One wishes that delinquent loans didn't exist, but it's just part of doing business.

We watch accounts that have been late payers in the past.  Ten days before a payment is due, our loan officers visit those borrowers just to remind them about the upcoming payments.

If the borrowers do not pay on time, we hand deliver the first warning letters within 10 days following the due date.  Loan officers have to get on their motorcycles and ride out to the borrowers' houses or businesses as there really is no mail service.  They try to collect at the door, but if the delinquent borrowers can't pay immediately, they make them commit to formal appointments at one of our offices to make the payments.

We also notify immediately any co-signers on the loans.  This usually causes some peer pressure on the delinquent borrowers when their co-signers confront them.  The co-signers certainly don't want to have to pay for their delinquent friends.

The second notice goes out between the 11th and 20th days.  Same routine.

The third notice goes out between the 21st and 30th days.  Same routine.

If we haven't rectified the problem by the 31st day, our in-house lawyers get involved.  They talk directly to the delinquent borrowers and co-signers to explain the consequences if we start legal proceedings:

1. Salary embargoes,
2. Ruined credit ratings,
3. Late fees,
4. Court costs,
5. No future credit.

The legal cycle may take 3 to 4 years to complete.  It's time consuming and usually one doesn't recover very much.  In Nicaragua, we just evicted a delinquent payer from his home - he simply did not want to make payments, even though he had the means.  MORAL HAZARD.  He dared us to take action against him because he believed that the courts were so inefficient that they would never get around to his case.  It took 4 years to take his case through the legal system.  We have 3 more court cases pending that will also take 4 years.  It's hard to understand why such borrowers are willing to risk losing their homes when they have the means to pay.  We're hoping that the other 3 delinquent borrowers will take note that we will eventually and legally prevail.

Of course, we're very reasonable people.  If borrowers can't pay because of sickness, loss of jobs, or experience a temporary loss of income, we make arrangements to extend their loans, accept lower payments, or work out individualized grace periods.  They need to come talk to us.

Comments

[Ramon]

Interesting. Indeed, the lack of an enforceable, fair set of rules is a great economic impediment. If it's hard for the MFI to enforce the loan, moral hazard goes up, lending costs increase and as a consequence the interest rate goes up too.

Looking at the macro-economic picture, our whole economic system is based on the enforceability of contracts, both for lending and for "life at large". While the rich part of the population uses the lack of enforceability to their advantage, it's often the poor that disproportionally suffer enormous opportunity costs because of this. Some say that this is one of the reasons why Third World countries are still poor.

--Ramon

[Kendall Mau]

Ramon, this is one of the main points that de Soto has made. Without laws of private and business ownership and the protection they offer, a country does not progress economically. Kendall

[Raul Castellanos Velasco]

I would like to contact Wildring Celenia R

[Kendall Mau]

Raul, I passed your name to Wildrinth 2 times. Try sending an e-mail to her at: admin@prismahonduras.com Kendall

[Loans]

Great post, some very interesting points to think about.

[jonn]

grererret

[Stuart Pike]

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