disaster preparedness and management. objectives create greater awareness for rural banks on how to...

Disaster Disaster Preparedness and ManagementPreparedness and Management

ObjectivesObjectives

•Create greater awareness for rural banks on how to better manage the impact of natural disasters on their operations.

•Present options and measures to manage the impact of disaster for both the banks and clients.

Framework for Disaster

Preparedness and Management

Disasters

RISKS

Rural Banks Clients

IMPACT

Framework for DisasterPreparedness and Management

Liquidity

Income Portfolio Quality(PAR)

RISKS

A Framework for A Framework for

Disaster Preparedness & Management Disaster Preparedness & Management

DISASTERS

Banks Banks On LiquidityOn Liquidity1. Temporary decline in inflows from affected clients2. Temporary increase in outflows to affected clientsOn Portfolio QualityOn Portfolio Quality3. Medium-term decline in repayment rates and/or new loan demandOn ProfitabilityOn Profitability1. Less collection means less income2. Less or no disbursement means less generation of profit

Clients Clients 1. Temporary inability to earn income2. Damage to or destruction of income-generating assets3. Increased basic expenditures4. Damage to or destruction of household assets5. Loss of lives

IMPACT

1. Less savings; possibility of withdrawals2. Less or no repayment of amortization3. May need new loans

A Framework for A Framework for

Disaster Preparedness & Management Disaster Preparedness & Management

DISASTERS

IMPACT

Coping MechanismsCoping Mechanisms

Response & Response & RecoveryRecoveryMeasuresMeasures

Banks Banks InstitutionalInstitutional

PreparednessPreparedness

ClientsClientsClient Client

PreparednesPreparednesss

Disaster PreparednessDisaster Preparedness

ASSESSMENT OF RISKSBasic Questions to Answer

1. Are my clients located in a disaster-prone area?2. Is my institution located in a disaster-prone area?

Institutional Preparedness• Adopt a Disaster Preparedness Manual• Have in placed a working MIS• Observe Liquidity planning and management• Strictly implement a portfolio management system• Conduct periodic staff monitoring and training

Client Preparedness• Assess preparedness of clients• Anticipate possible needs in line with continued access to financial services

• Disaster Preparedness Manual

- Access to information

- Infrastructure and equipment

- Staff security

- Communications

- Access to clients

- Market shocks


• Install adequate and functioning management information system (MIS)

- Ensure the safety of data

- Ensure adequate capacity to offer preparation, response and continue banking services for clients - Train human resources


• Liquidity management measures

- Observe strict asset and liability management

- Ensure that bank has ready credit lines which the bank can draw from in times of emergencies

- Negotiate for flexible conditions on existing loans with fund providers


• Ensure strict portfolio management system - Carry out regular loan portfolio analysis (daily, weekly, monthly)

- Classify loans based on PAR Ageing - Establish trigger points (PAR ceilings by AO, Branch)

- Observe delinquency alarm signals

- Observe proper loan loss provisioning


• Provide periodic refresher training on the bank’s disaster preparedness plan to staff


Disaster preparedness is not a one-time process.

It is a process that happens daily in many facets of the bank’s activities.

Before deciding on recovery measures to take:

• Conduct Portfolio Review Current vs. Delinquent loan account New vs. Repeat loans Determine risk exposure against savings balance

• Conduct on-site field verification Verify damage to whole community, and client’s

business and household Establish client’s ability to re-establish business Ascertain other sources of income

WHEN DISASTER STRIKES: Disaster WHEN DISASTER STRIKES: Disaster ManagementManagement

• Modified Policies and Procedures

Imposing a moratorium on lending

Restructuring loan

Refinancing

Write-off

• Product Modifications

Withdrawal of compulsory savings

Provide emergency loans

Shift from group-based liability to individual liability during a disaster

Disaster ManagementResponse Measures/ Options

Disaster Response Measures & Disaster Response Measures & OptionsOptions

Response Measure Considerations Possible Impact

I. Moratorium on Lending

a) General – New &

Repeat Loans?

b) Selective – New

Loans only?

• Staff will require training to implement this procedure particularly on how and when to inform clients to ensure that it does not create a crisis of confidence

• Should define the time period for implementing the policy

• May result to a temporary excess of liquidity

• If not done properly, may result to a crisis of confidence

• May negatively affect bank’s ability to generate income

Modification of Policies and Procedures

Disaster Response Measures/OptionsDisaster Response Measures/Options


II. Options for Restructuring Loans

Option 1: Bank continues to collect interest payments while principal repayments are restructured

• MIS must be able to track interest payments without principal payments

• MIS must be capable of altering loan terms

• Liquidity projections of the bank must be altered

• Staff training to assess clients’ situation, whether they meet selection criteria and how to communicate procedure to them

• Interest payments minimizes impact of delayed payments to the banks liquidity


II. Restructure Loans –

Option 2: Bank charges additional interest payments to compensate for extended loan period



• This puts greater strain on liquidity as no payments is expected for a period of time

• This however helps to reduce losses as full interest payments are made

• Allows clients sufficient time before payments are required



II. Restructure Loans –

Option 3: Bank extends the term of the loan by, say, 1 month during which time no additional interest is charged



• This strategy foregoes potential interest income to compensate for possible losses

• Allows severely affected clients time before payments are required

• May affect bank’s profitability



III. Refinancing

Providing an additional loan to an existing good client to assist in the full recovery of his/ her business

• MIS must be capable of capturing additional loan to client


• Bank is liquid enough to service additional loan requirements

• Bank is able to keep its good clients



IV. Write-off • Candidates for write off are loan accounts with PAR more than 90 days

• Bank has adequate loan loss reserve

• A special unit or dedicated account officers are in place to pursue remedial management measures

• Flexibility to negotiate with clients on various ways to settle delinquent account

• If collected, it is realized as other income

• Written-off account is recognized by BIR as an expense; hence lesser income tax for the bank

• Instead of following-up on non-productive accounts, AOs can instead generate new loans



Savings Context What to do

Compulsory Savings

• In normal times, used as a substitute collateral, hence tied to client’s loan•In times of disaster, clients should allowed access to address emergency needs

Make compulsory savings semi-flexible (allow a percentage of the savings balance to be withdrawn by the client)Caution: Don’t ask clients to return all amounts withdrawn before giving client another loan

Voluntary Savings

• Used for asset-building purpose which the client can access anytime•One of the best coping mechanisms for clients during times of disasters

Design an “emergency needs” savings product that clients will regularly save for with affordable amounts, with no restrictions on withdrawals

Savings: One of the best coping mechanisms for clients


Response Measure

Considerations Possible Impact

I. Withdrawal of Compulsory Savings

• MIS must be capable of tracking extraordinary withdrawals

• Consider looking for alternative sources of funds


• Will have an impact on the banks liquidity situation

• However, this will enable the bank to earn loyalty of its clients, and may encourage more savings especially if CS is made semi-flexible

Product Modification

Disaster Response MeasuresDisaster Response Measures

Response Measure


II. Provide Emergency Loans

• MIS must be capable of tracking multiple loans of different products from one client


• Will require additional sources of funds since additional disbursements are to be made before the projected payment of outstanding loans

• This loan will assist clients in good standing but will be a burden to those with history of missed payments

Response Measure


III. For group lending: Shift from group-based liability to individual liability, as an interim policy of the bank

• For members of centers that demonstrate varying levels of repayment capacity

• May require designing of a transition product

• MIS must be capable of handling the change to individual loans

• The bank should be prepared to handle a substantial increase in transaction flow


• Impact on liquidity depends greatly on clients’ response

• It may encourage prompt repayments from clients who are able to, but also removes the guarantee for those who are not

• It may encourage payments and increase loan disbursements


• Non-Financial Emergency Responses

Before a disaster:

Training on Risk/Disaster awareness

Information Dissemination

After a disaster:

Distribution of emergency/relief supplies


Non-Financial Emergency ResponsesResponse Measure


• The banks’ loan portfolio must be under control and liquidity position adequate before venturing to these

• Assess the banks human resource capability to undertake additional tasks

• Additional funds to cover costs of these services

• Accounting system must be able to track costs separately

• Clients who do not receive sufficient explanation as to why, how and for how long these services are offered could start to see the bank as a relief agency and fail to make future payments

• Getting involved ensures the survival of the bank during and after the crisis


Reference material:

Miamidian, Arnold, Burrit and Jacquand, Surviving Disasters and Supporting Recovery: A Guidebook for Microfinance Institutions, The World Bank, February 2005

Disaster Preparedness and Management

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