In the early days of the pandemic, many governments put moratoria in place to protect customers. That, combined with the overall economic downturn, caused concerns about the liquidity of FSPs. Now, as moratoria have been lifted and economic activity is returning – albeit at mixed levels – the focus is shifting to how regulators can support FSPs by adopting measures that allow for some degree of flexibility.
CFI’s recent policy report examines the types of regulatory flexibility measures adopted in response to the pandemic and provides early evidence on the impact of these measures. The report tackles pandemic responses by a broad range of regulators and financial service providers (FSPs).
To find out what others in the inclusive finance space are seeing, CFI reached out to FINCA Impact Finance (FIF) for perspectives on moratoria and other regulatory measures, customer-oriented approaches, liquidity, and more.
How has your organization fared through the pandemic? What regulatory measures have you seen governments take that have had the most benefit to your operations?
In addition to the immediate measures we took to ensure the well-being of our customers and staff and the sustainability of the network, we also issued guidelines to encourage and support proactive engagement with regulators by offering direction and suggestions on key regulatory issues that FIF subsidiaries would be facing as they responded to the COVID-19 crisis. The key areas of focus were:
- Temporary waiver and flexibility of requirements, processes, and formalities, such as flexibility for the restructuring and rescheduling of existing client loans, flexibility concerning client analysis requirements, allowing KYC completion remotely when the digital track record of the client is available and sufficient, accepting light KYC to open limited velocity accounts, among others.
- Support of subsidiaries in driving the adoption of digital channels, including waiving or decreasing fees applicable to all digital transactions. This includes fees from third-party agents and terminals. It also includes eliminating restrictions preventing MFIs from developing proprietary agency networks and preventing MFIs from joining directly — not as sub-agent to a bank — national switches accessible to banks.
- Financial or policy support for losses incurred during grace periods given to customers. This includes preferential loans and lines of credit with preferential terms from central banks or other governmental institutions to cover the cash flow shortfall. Support from the regulator to waive any taxes triggered by the refinancing and restructuring of loans has also been key in this regard.
- Support to help conserve our cash position, including relaxing CAR requirements, provisioning requirements, and delaying implementation of IFRS9, and support for intercompany payments.
Across the world, we saw different approaches in response. There was a positive response in countries like DRC and Uganda that increased limits on digital transactions. In Tanzania and Kyrgyzstan, we saw relief of provisioning during the lockdowns. And while we welcome and applaud these moves, we still believe more can be done, especially with regard to allowances for digital signatures and e-contracts.
More can be done, especially with regard to allowances for digital signatures and e-contracts.
As one example, the Central Bank of Congo took numerous actions to support the sector, many of which are still ongoing, including:
- lowering the key rate from 9 percent to 7.5 percent to reduce the cost of credit
- establishing a special refinancing window in local currency with a maturity ranging from 3 to 24 months to increase banks’ resources and allow us to increase financing of the economy
- reducing the coefficient of reserve requirement on sight deposits in national currency, which went from 2 to 0 percent, to free up liquidity
- freezing of loan classification rules to allow financial institutions to suspend the application of late payment penalties on receivables past due during the crisis.
We’ve determined that deposit-taking FSPs “seem to be in a much more comfortable position today.” Has being a deposit-taking institution helped soften any negative liquidity impacts to your balance sheet? Was liquidity less of an issue for you than initially feared?
Like many companies, liquidity has been a primary concern throughout the pandemic, and we quickly implemented measures to monitor liquidity — including changing monthly asset-liability committees (ALCOs) to weekly, and curbing loans to new clients.
One trend we saw among our subsidiaries that defied conventional wisdom was that our deposit portfolio grew during 2020: from $418 million in December 2019 to $433 million in December 2020. In DRC, for example, our agents were still available to their communities throughout the pandemic, and we saw the average agent savings balance move from $12 to $17, a significant amount for microsavers.
We attribute the increase in deposits to the strength of our brand and the fact that people who are going into a period of economic uncertainty are eager for a safe and trusted place to keep their money.
Our research suggests that FSPs that employ high-touch, customer-oriented approaches – even as simple as phone calls to clients’ families – have fared better than those that haven’t. What high-touch, customer-centric approaches stand out as particularly helpful for you?
For customers needing real-time information, our previous investment in call centers was crucial to our response. In the early days of the pandemic, we focused on our call centers to support the increased level of inbound customer inquiries regarding payment locations and restructuring options. Utilizing the call center also allowed staff to work from home — keeping them safe, while we also took steps to ensure the protection of customer data. In just the first two weeks of April, the call center in FINCA Jordan received 4,600 calls — a 59 percent increase from the total number of calls received in March.
Our investment in digital and social media marketing also became an asset. We were able to rapidly develop and deploy a personalized, and multi-channel communications strategy to reach our customers. We used digital channels to reinforce publicly the steps we were taking regarding the safety and health of our customers and staff, emphasize all communication and transaction channels that are available, provide communication channels for customers to have their questions answered, and more.
Regarding moratoria, nearly all FSPs reported that customers asked to continue to pay even during lockdowns, but customers who were ready and willing to continue paying to avoid costs of moratoria didn’t have a lot of options. What role should moratoria play in a crisis like this? What have we learned that could be applied to future crises?
Early on, it became clear we would need to help customers who were suffering from short-term cash flow challenges.
We anticipated that the crisis would affect some business sectors more than others. Because of this, segmenting customers according to their business type was key (i.e. restaurants may be heavily affected, while agriculture less so). We also knew that depending on government reactions to the crisis and given how the virus spreads, segmenting customers according to their location would become important. And lastly, we monitored portfolio at risk (PAR) closely according to business type and location. If a specific segment sees a significant rise in PAR, we contacted these customers with restructuring options clearly explained.
While blanket moratoria can be very effective because of their simplicity, we needed to ensure that clients who could and wanted to continue to pay weren’t negatively impacted.
One final and important point: while blanket moratoria can be very effective because of their simplicity, we needed to ensure that clients who could and wanted to continue to pay weren’t negatively impacted. Many of our customers were still highly motivated to reestablish their livelihoods and continue supporting their communities with their businesses. We considered the full range of options available to support them, which also meant encouraging timely repayment when possible.
How has your organization dealt with accumulating interest during moratoria? Most regulators have not mandated how FSPs should collect the accumulated values. Has this been the case in your experience? How has your organization dealt with this?
At the onset of the pandemic in many of our countries, customers only paid interest. We looked very specifically at industries and terms and felt the key to responding to the pandemic was offering tailored solutions. For example, at FINCA Kyrgyzstan, we restructured a significant percentage of the portfolio (50 percent); over 27,000 clients were provided restructuring options of their loans (out of 77,000 customers that were contacted). Each client was contacted through the call center and different options for restructuring were explained by our customer relationship officers.
Risk weighting for loans to small and medium enterprises (SMEs) has been lowered in a few markets, such as Brazil. Were you the beneficiaries of such reclassification?
In many markets where FIF operates, the central banks offered less stringent provisioning rules for COVID-19 restructured loans. While these were not necessarily lower weights, they helped to facilitate the restructuring of the current overdue loans.
Have any countries you work in stand out with regards to regulatory flexibility? If so, how?
Across the world, we saw different responses based on the different realities on the ground. The most helpful, in our view, were in places like Azerbaijan where there was relief on CAR requirements. The government there was focused on food security, which allowed us to be able to secure dedicated funding for on-lending to the agriculture sector, helping to avoid disruptions. Overall, the financial system and currency stability, together with the concessionary financing made available for on-lending, helped support the micro clients we work with. We were able to see the positive impact in our monthly COVID client surveys where rural clients — who make up most of our customer base — indicated these measures made this challenging time more bearable.
Another example is the Central Bank of Jordan, which at the beginning of the pandemic relaxed the cash reserves ratio, allowing banks to have more liquidity and thus enabling us to continue lending. The central bank also introduced COVID relief loans for SMEs affected by the pandemic, with tenures of up to 10 years, long grace periods, and subsidized rates disbursed through commercial banks.
For more on policy responses to the COVID-19 pandemic and their impacts on low-income consumers of financial services, visit our report series page.