Establishing a committee of persons to make decisions regarding loans is an essential control in reducing credit (and fraud) risk. If an individual has the power to decide who will receive loans, which loans will be written off or rescheduled, and the conditions of the loans, this power can easily be abused and covered up. While loan officers can serve on the credit committee, at least one other individual with greater authority should also be involved.
For larger loans, a committee of three or more individuals is appropriate. A credit committee typically includes senior and middle managers, but it might also include community leaders, local bankers and even clients. The credit committee has the responsibility not only for approving loans, but also for monitoring their progress and, should borrowers have repayment problems, getting involved in delinquency management. This way the credit committee lives with the implications of its decisions.
Additionally, MFIs should have written policies regarding loan approval authority. These policies should specify the loan amounts that can be approved with two signatures, loan amounts requiring additional signatures, and who has the authority to approve loans. This reduces risk of loans being inappropriately approved.
With group lending methodologies, the group usually fulfills part of the credit committee’s function. Since group members guarantee each other’s loans, it is important that they be involved in the approval process. But MFIs should not abdicate all responsibility for loan approval to the group. Borrowers are unlikely to have the skills to make good credit decisions, and therefore the loan officer needs to be familiar with the businesses and should facilitate the discussion.
Ultimately, the MFI’s money is at risk, so loan officers and their immediate supervisors need to sign off on all credit decisions and feel comfortable that the money will be repaid. Loan officers should feel comfortable: a) rejecting entire groups if the members do not know and trust each other very well or if they do not appreciate the importance of joint responsibility; b) encouraging good group members to expel inappropriate members; and c) promoting smaller loan sizes that members are confident that they can repay. To act in this way, loan officers need the tools and the training to conduct business and character assessments, to facilitate group discussions, and to test the group’s commitment.