How to prepare and analyze the CIBI Report

1. How to prepare and analyze the CIBI Report

2. Introduction • The Credit Investigation and Background Investigation (CIBI) report is the primary tool of the bank in screening its MF clients. • It shows the results of the investigation done by the bank to establish the loan applicant’s characterand repayment capacity • This session will equip the participants with data gathering skills to the preparation of the CI/BI report.

3. Objective At the end of this session, participants will be able to: 1. Prepare an exhaustive CIBI report for new borrowers which focuses on the client’s characterandcapacity to pay 2. Prepare a complete CIBI report for repeat borrowers which focuses on repayment behavior on past loans and status of client’s business.

4. Who prepares the CIBI Report? • Account Officer prepares the CIBI report by gathering and evaluating information, and establishing applicant’s creditworthiness. • MFU Supervisor reviews and validates the accuracy of information in the CIBI report.

5. How to conduct the CIBI 1.You should have the applicant’s Loan Application and CIBI Forms when you conduct the CIBI. Study beforehand the information in the Loan Application for faster verification in the field. 2.Conduct the interview with the character references. Follow the flow process provided in the overview module. 3. In interviewing character references, observe the tips provided in the previous session on Loan Application.

6. Types of CIBI Report • CIBI Report for New Borrowers (CIBI-N) • CIBI Report for Repeat Borrower (CIBI-R)

7. New BorrowersCIBI Report

8. The CIBI–New Form • The CIBI form for new borrowers is a seven-page document composed of four-parts namely: 1) results of interview with client, 2) character references, 3) character and cash flow analysis, and 4) AO & Supervisors Findings and Recommendations.

9. Outline of the CIBI-N Form (Part 1) Part 1 – Results of Interview with the Client I. Personal Information II. Business Information III. Market Risk Analysis IV. Payment Records V. Inventory of Business Assets VI. Merchandise Inventory VII. Inventory of Personal Assets VIII. Balance Sheet

10. Outline of the CIBI-N Form (Part 2 & 3) Part 2 – Results of Interview with References IX. Interview with Character References X. Interview with Barangay Official Part 3 – Character & Cash Flow Analysis XI. Character & Risk Analysis checklist XII. Red Flags XIII. Cash Flow Computation XIV. Cash Flow Risk Analysis XV. Suggested Courses of Action

11. Outline of the CIBI-N Form (Part 4) Part 4 – Findings & Recommendations XVI. Account Officer’s Finding & Recommendations XVII. MF Supervisor’s Review Results

12. Repeat BorrowersCIBI Form

13. The CIBI–Repeat Form The CIBI for Repeat Borrowers/Loansshould start at least two (2) weeks before the maturity of the current loan to ensure a quick turn-around time for the re-loan (remember quality service).

14. Outline of the CIBI-R Form The CIBI report for repeat borrowers consist of four (4) pages and contain the following: • Analysis of Repayment Behavior • Results of monitoring • Savings Balances • Business Data • Market Risk Analysis • Inventory of Business Assets • Merchandise Inventory • Inventory of Personal Assets

15. Outline of the CIBI-R Form VIII. Comparative Balance Sheet IX. Cash Flow & Comparative Cash Flow Analysis X. Cash Flow Risk Analysis XI. Suggested Courses of Action XII. Account Officer’s Findings & Recommendation XIII. MF Supervisor’s Review Results

16. Comparison of CIBI Forms

17. Repayment Capacity CASH FLOW ANALYSIS The preparation of the Cash Flow will be presented in detail in: Session 4 - Cash Flow Lending Session 5 - Preparing the Cash Flow Session 6 - Cash Flow Review Techniques

18. To Summarize - • A properly accomplished CIBI gives the Account Officer a clear basis for recommending the approval or rejection of a loan application. • When done properly, the CIBI report provides a vivid description of the “story” of a loan applicant to the credit committee that decides on the loan application.

19. To Summarize - • The information in the CIBI Report should be analyzed in the light of character indicators. The character indicators provide the bases for assessing the level of risks of granting a loan to an applicant. • Character analysis together with the cash flow analysis positions the bank to make better decision on the loan amount the bank can afford to risk with a borrower.

20. To Summarize - • Therefore, the use of the CIBI tools for analyzing character and cash flow decreases the level of risk when lending to microentrepreneurs who do not have hard collateral and credit history.

21. LINKS

22. Fill in the official FULL first and last name of the applicant. If the applicant goes by a different name, write in parenthesis afterwards. Example: Manuel J. Cruz (Maning) This information can be lifted from the loan application form. This is repeated here to serve as a guide to the account officer on what questions to ask to the applicant and to the character references. Get this data if your loan product eligibility criteria requires it. The business registration permit attests that the microenterprise activity can legally operate in the specified trade area.

23. High or low months in terms of sales guide decisions on whether to increase, maintain or reduce loan amounts. The more operating days the business has, the greater the sales potential Indicates the amount of sales from the business cycle as when sales are daily, how much comes in a slow day, in a busy day, etc. Sales frequency indicates how often money from the business comes in (used as an input for the Cash Flow)

24. A Market Risk Analysis is important to establish if the applicant has a clear understanding of his/her market and the capacity of the business to cope with demand • Indicate seasonality of applicant’s business • Will the proposed loan term fall during a lean or a peak season? • What could negatively affect business production or sales? • Can the business increase production or sales easily or not? • Does the applicant have a regular supplier? A regular supplier would indicate increased business transactions. • Are stocks readily available when needed? • Is the supplier reliable? • Are supplies bought in “Cash” or “On Credit?” If on Credit, what are the terms? • Who are the applicant’s clients? • Do they buy on wholesale or retail? • Do they buy cash or credit (e.g. 15-30) and what is level of sales on credit? • Is the business market limited only to local area and is there much competition?

25. Provides the Account Officer with information on the applicant’s repayment behavior This section of the CIBI report must be completely filled-up. The account officer must ask to see copies of official receipts (OR’s) or proofs of payments. To get a better handle of the applicant’s repayment behavior, AO must request receipts for the last 3 months prior to loan application.

26. Include all assets used in the business; these could be used as loan guaranty (security agreement) • HOW TO COMPUTE APPROXIMATE VALUE: • Purchase Price minus Accumulated Depreciation = Approximate Value • Definition of Terms: • Depreciation–the decrease in the value of an asset due to “wear and tear” , obsolescence or impairment. Usually computed annually by dividing the purchase price of the asset by the useful life of the asset (ex. P5,000 / 5 yrs. = P1,000 depreciation expense yearly) • Accumulated Depreciation – the total of Depreciation already expensed by the business. This amount is deducted from the Purchase Price of the asset to get its Net Value (or Approximate Value) • Purchase Price – Amount paid to buy the asset

27. Most retail outlets (sari-sari stores) have different items in their merchandise inventory. Limit the list to the five (5) fastest selling items since this could provide a rough estimate of the sales and purchase levels. Unit buying price of merchandise Unit selling price for each item of merchandise Description of merchandise (e.g. sardines, laundry soap, softdrinks, etc.) Total Purchase Cost (Quantity x Unit Cost) Indicate quantity; include unit of measure (kgs., bottles, cans, etc.)

28. Personal assets could serve as guarantees, should the bank require them (especially for larger ticket loans) If asset has a potential for use as a guarantee, check for ownership documents • Relate the approximate value of the asset to its age • During the visit to the applicant’s residence, check condition of the assets

29. Shows the joint financial condition of the business and the household • Shows if the size of the business/business assets can support the requested loan amount Should reflect the combined value of inventory of (1) Personal Assets (household or serialized assets), (2) Business Assets (microenterprise activities), and (3) Merchandise Inventory Include all collectibles the applicant has, whether from the business or personal loans to other persons Should include whatever cash the applicant actually has on hand and in deposits with any institution (data on deposit may be retrieved from the Loan Application Form (Savings Information)

30. Provides the Account Officer with independent information on the applicant’s reputation Indicate the reference category of the interviewee by putting a √ in the appropriate box. Fill in the full first and last name of the person interviewed

34. Character & Risk Analysis ChecklistStability When analyzing stability look for permanency These indicators show how “rooted” an applicant is – or how difficult it is for an applicant to leave town and the loan obligation. The absence of any of these indicators does not mean that an applicant cannot qualify for a loan – it simply means that the risk of lending is higher

35. Character & Risk Analysis ChecklistEntrepreneurship Client does not have all of his/her money invested in one business. Should one business fail, s/he has other sources which can pay for the loan Having multiple businesses Is a clear indicator of entrepreneurship Business growth over the years means that a client has survived several years of trials (economic, political, natural calamities); this means that client has good entrepreneurial skills.

36. Character & Risk Analysis ChecklistReputation Indicators of reputation have the biggest weight among the 4 risk categories. A bad reputation eliminates positive aspects about an applicant Be suspicious when character references refuse, or are hesitant to provide information about the applicant If interview results of reputation are mixed, the AO must interview more references until s/he is completely satisfied with the applicant’s reputation If the applicant has legal cases, look further into the nature of the case. Double check for Collection cases and cases involving moral turpitude.

37. Character & Risk Analysis ChecklistRepayment Behavior It’s the person, not the Business, that pays a loan – therefore, how an applicant pays his other obligations tells you how he will pay his loan A refusal to show receipts could indicate delays in payment that the applicant does not want the AO to find out Funds used for family emergencies (illness) do not necessarily disqualify an applicant – It just tells you to be cautious (the illness could take long to cure or recurrent). Decreasing balances in bank deposits could indicate liquidity/cash problems. Find out where the funds went.

38. Red Flags- Warning Signals! Red flags are warning signals that could indicate a character flaw in the applicant; these should be carefully evaluated when doing the Character/Risk Analysis Red flags on the right column should be strong grounds for rejection of the application

39. Provides Account Officers with some tips in analyzing repayment capacity Compare the Adjusted Repayment Capacity (Cash Flow) with the Installment requested by the applicant (Application Form) Compare maximum loan amount (Cash Flow) with loan amount requested (Loan Application Form) • Compare computed maximum loan amount (in the Cash Flow) with Total Assets (Balance Sheet) • An asset size smaller than the loan amount will not be able to generate enough net income to be able to pay the loan.

40. Guides/tips that may be used by the Account Officer to make a decision on the Character/Risk Analysis of the applicant. These four (4) indicators are the benchmarks by which the Account Officer makes a decision whether or not to recommend a loan for approval.

41. The CreCom will be putting a lot of weight on the information provided in this section as a basis for final evaluation and approval. • Approval/rejection of the loan application, based on evaluation, should be clearly stated. • Recommended loan amount, loan term and repayment mode should be stated. • The statement at the bottom of the box reminds Account Officers not to provide false information, or deliberately withhold vital information that could mislead the CreCom into making the wrong decision on the loan application.

42. The CreCom will be putting a lot of weight on the information provided in this section as a basis for final evaluation and approval. • Approval/rejection of the loan application, based on evaluation, should be clearly stated. • Recommended loan amount, loan term and repayment mode should be stated. • The statement at the bottom of the box reminds the Supervisor to review the CIBI reports to detect any false information that could mislead the CreCom into making the wrong decision on the loan application.

43. Repeat Loan CIBI Form Indicate the FULL Name of the borrower; as indicated in the Loan Application form. Indicate the number of loans the borrower has had with the bank. The more repeat loans, the more information the Account Officer has on the repayment behavior (check the Client Status Report)

44. Indicate whether loan is 1st, 2nd, 3rd, etc – starting with most recent loan Indicate approved amount of each loan Check applicable mode of payment (weekly, semi-monthly, monthly, others-specify) Indicate number of loan installments

45. Sample “Client Status Report”

46. Delays in Payment and Loan Size What do delays in payment signal? • Payments over 7 days past due indicate that the loan amount is too large • Partial payments indicate that the loan amount is too large • A steady decline in the number of installments paid on time could mean the loan amount is becoming too large

47. A borrower’s repayment behavior determines the Client’s Classification. The Client Classification serves as a guide for determining increases in loan amount for the next loan cycle.

48. Sample Client Classification Guide for Loans with Weekly Payments

49. Client Classification and Loan Increase The general rule: the increaseshouldbeno more than 30%of thepreviousloan forclients with 100% on-time fullrepayment but subject to results of account monitoring. When the increasebeing requested by the client is more than 30%of thepreviousloan, account officer must do a new cash flow to establish any improvement in the repayment capacity of the client (Refer to section on comparative cash flow).

50. Conditions to meet for not requiring a cash flow analysis 1. 100% on-time full repayment of the previous loan 2. Loan term for the next loan is less than 6 months 3. Increase over the previous loan is not higher than 10%. 4. Repeat loan amount is within the loan entitlement calculated in the previous cash flow analysis.