INTERRELATIONSHIP OF PEARLS

WORLD COUNCIL OF CREDIT UNIONS RESEARCH MONOGRAPH SERIES Number 5.a Annex 1 INTERRELATIONSHIP OF PEARLS by: David C. Richardson October 1994 The World Council of Credit Unions Research Monograph Series presents the findings of credit union research and studies carried out through World Council of Credit Unions credit union development activities. For further information on this monograph article please contact: World Council Information Center P.O. Box 2982 Madison, Wisconsin 53701-2982 USA INTERRELATIONSHIP OF PEARLS s Strategies to be followed to attain the goal: 1.) Increase growth spread (R7) by means of adjustments to the savings and loan interest rates. This will allow an increase in the allocations (R9) without affecting net earnings. 2.) Reduce portfolio delinquency a. Better credit analysis b. Effective collection 3.) Write off loans over 12 months delinquent on a quarterly basis. 4.) Monthly adjustments of the allocation for bad loans to keep a balance equal to 35% of total delinquency and 100% of loans over 12 months delinquent. 5.) Transfer of the excess allocations for reconstruction loans to the allocations for current loans. 6.) Let the funds from special recoveries of written-off loans (A4) be used to strengthen the allocations for current loans. 7.) Include within the loan interest rates the historical cost of uncollectible loans. Strategies to be followed to attain the goal: 1.) Set the optimal level of this indicator in terms of cash equivalents (E4) and the yield of this investment (R1) with regard to other investment alternatives (R2-R4). 2.) Readapt lending policies and standards in the following areas: Competitive and worthwhile interest rates on savings Amounts to be granted Term and purpose Leverage New investment projects Security 3.) Speed up loan processing. 4.) Liquidate non-earning assets (A5). 5.) Minimize idle (L3) and less profitable (L1) liquidity. Strategies to be followed to attain the goal: 1.) Set the optimal level of this indicator in terms of cash equivalents (E4) and the return on this investment (R3) with regard to other investment alternatives (R1, R3-R4). 2.) Liquidate non-earning assets (A5) and invest them in earning assets. 3.) Minimize idle (L3) and less profitable liquidity (L1). Strategies to be followed to attain the goal: 1.) Set the optimal level of this indicator in terms of cash equivalents (E4) and the return on this investment (R3) against other investment alternatives (R1, R3-R4). 2.) Liquidate non-earning assets (A5) and invest them in earning assets. 3.) Minimize idle (L3) and less profitable liquidity (L1). Strategies to be followed to attain the goal: 1.) Set the optimal level of this indicator in terms of excess cash equivalents (E4) after subtracting therefrom the cash requirements (L1-L2) and the return on of investment (R2) against other investment alternatives (R1, R3-R4). 2.) Liquidate non-earning assets (A5) and invest them in earning assets. 3.) Minimize idle (L3) and less profitable (L1) liquidity by means of the following suggestions: a.) Manage savings deposit bank accounts with automatic transfer to checking accounts. b.) When interest-earning money market accounts appear on the market, transfer checking accounts to this type of account. c.) Negotiate overdrafts in banks up to the maximum cash balances for the purpose of nullifying the effect of idle cash equivalents. Strategies to be followed to attain the goal: 1.) Pay attractive interest rates on deposits (R5) but taking care that they are always below the loan rates charged. 2.) Set savings rates within the market average and do not attempt to pay more than the market, unless necessary to attract bank savers. 3.) Implement supplementary services related to service, such as: - Savings withdrawals within the federated financial system. - Fund transfers - Access to other services - Timely seasonal promotions 4.) If the by-laws permit it, attract savings from other cooperative institutions in the community. 5.) Create a generalized policy of opening savings accounts with loans granted to members in those cases in which they do not exist. 6.) Make entrance requirements more flexible for saving members. 7.) Be creative and design new figures for savings, i.e., savings for special purposes. 8.) Improve the institutional image so that it will be professional and sound. 9.) Promote savings protection mechanisms: insurance, cash reserves and others that might arise. Strategies to be followed to attain the goal: 1.) Go into debt only for the following reasons: a.) Cash reserve advancements from FENACOAC (emergency credit) b.) Utilization of external lines of credit to finance long-term projects. c.) Loans for financial stabilization. 2. Use any excess cash equivalents (E4) returning (R2) less than the savings rates on loans to pay off these loans in advance. Strategies to be followed to attain the goal: 1. Encourage the attraction of shares, only for medium- and long-term loan investments. 2. Readapt the leverage policy on shares. 3. Render more flexible the conversion of idle shares to savings deposits. Strategies to be followed to attain the goal: 1.) Do not allow the percentage of institution capital growth (S5) to be greater than the percentage of growth in total assets (S1). 2.) Achieve an efficient financial structure (E1-E7) with optimized yields (R1-R2), minimizing non-earning assets (A5) and idle liquidity (L3). 3.) Monitor and minimize overhead (R8). 4.) Reduce delinquency (A1) and as a result thereof reduce the need to build provisions (R9). 5.) Capitalize the undistributed reserve—all net earnings generated by the credit union. 6.) Review and evaluate allocations for bad loans and transfer excess to undistributed reserve. 7.) Transfer the earnings generated by third-party operations to undistributed reserves. 8.) Transfer the balance from other reserves to undistributed reserve prior to annual close-out. 9.) Review and evaluate the provisions accumulated and transfer the excess to the undistributed reserve. 10.) Capitalize profits and bonuses from other investments directly to the undistributed reserve (shares and interests). 11.) Purge shares and deposit accounts of inactive members according to an established schedule and transfer the balances to undistributed reserves. 1.) Assign collection responsibility to one person. 2.) Initiate administrative collection starting with the first unpaid installment. 3.) Undertake extrajudicial and judicial collections in a timely fashion, including effective follow-up. 4.) Establish surcharge charges for delinquency at no less than 3% a month. 5.) Increase the contract interest rate by 3 percentage points on delinquent loans. 6.) Award prompt payment of loan installments by means of drawings. 7.) Improve credit analysis. 8.) Do not use lending management instruments irrationally (renewals and extensions). 9.) Require lawyers to provide a monthly report on the progress in legal collections. 10.) Restrict credit until the delinquency problems have been solved. Strategies to be followed to attain the goal: 1.) Concentrate all of the credit union's efforts on cleaning up this account.  It is a transitory account that accommodates loans over 12 months delinquent which have not been written-off because of insufficient provision.  It is a fictitious asset that should be written off as soon as possible. 2.) Apply 100% of the recoveries of written-off loans to this account first, before transferring them to the bad loan provision account. 3.) Devote 100% of allocations for bad loans delinquent from 1 to 12 months to this account, allowing the other protection indicator not to be met (P2). Strategies to be followed to attain the goal: 1.) Minimize this indicator through a good delinquency control system. 2.) Make write-offs on a quarterly basis, taking into account loans delinquent over 12 months at the date of the write-off and do not wait until the end of the year. 3.) Establish allocations for loans on a quarterly basis in order to facilitate the write-off process. Strategies to be followed to attain the goal: 1.) Establish a table of incentives for staff for the collection of written-off accounts according to the complexity of collection and the age of the account. 2.) Contract a specialized collection firm to collect written-off loans. Strategies to be followed to attain the goal: 1.) Evaluate leasing alternatives against purchase or construction of fixed assets.  Banking strategy. 2.) Establish depreciation and amortization policies based on the actual useful like of the goods and on the basis of the applicable legislation. 3.) Make a rapid realization of special assets. 4.) Set the maximum amount to purchase in fixed assets on the basis of actual figures versus the index of total assets projected (+) annual projected depreciation. 5.) Undertake an aggressive campaign to collect non-earning accounts receivable, including an analysis of age and amounts, establishing a policy for write-offs. 6.) Define an accounting policy for fixed assets and write-offs. Strategies to be followed to attain the goal: 1.) Follow the strategies mentioned in E8 - Institutional Capital, to increase this item. 2.) Follow the strategies mentioned in A5 - Non-Earning Assets, to reduce this item. Strategies to be followed to attain the goal: 1.) Follow the strategies mentioned in E8 - Institutional capital, to increase this item. 2.) Follow the strategies mentioned in R9 - Bad loan allocations. Strategies to be followed to attain the goal: 1. Set different interest rates on loans, according to the following criteria: a. Purpose b. Amount c. Term d. Risk 2. Write off delinquent loans with heavy surcharges for delinquency. 3. Charge a commission for processing documentation for new loans. 4. Eliminate subsidies for special loan projects and programs and collect real market interest rates to cover the true cost of said programs. 5. Establish an aggressive collection program to lower delinquency. Strategies to be followed to attain the goal: 1.) Monitor on a monthly basis the interest rate that banks are paying on deposits. Review investments in cash equivalents held by the credit union and make adjustments on the placement of these cash equivalents (E4) to optimize their return without sacrificing safety. 2.) Minimize idle liquidity (L3). 3.) Liquidate non-earning assets (A5) and invest them in earning assets. Strategies to be followed to attain the goal: 1.) Monitor on a monthly basis the interest rates that finance companies are paying on deposits. Review financial investments held by the credit union and make monthly adjustments in the placement of these investments (E2) to optimize the return thereon, without sacrificing safety. 2.) Minimize idle liquidity (L3). 3.) Liquidate non-earning assets (A5) and invest them in earning assets. Strategies to be followed to attain the goal: 1. Carefully review the return on non-financial investments, because the credit union should specialize in financial transactions. If the return is lower than the return on financial investments, measures should be taken to divest them and give up those less profitable sidelines. 2. If the return is higher, who the users and beneficiaries are of these investments should be analyzed. If the majority are non-members, a corporation should be chartered in which the credit union is the primary shareholder. Under this framework, the cooperative idea is not watered down by doing business with third parties. If the users are members, then it might be worth while to pursue the business or service. Strategies to be followed to attain the goal: 1.) Evaluate and modify the structure of the ranges of deposits in accordance with needs. 2.) Differentiate savings interest rates on the different ranges to attract deposits in the most economical fashion. 3.) Perform monthly surveys of banks and other competitors to ensure that the credit union's savings interest rates are competitive on the financial market. 4.) Optimize the financial structure (E1-E8) and returns (R1-R7). 5.) Reduce non-earning assets (A5) and reinvest them in productive assets (E1-E4). Strategies to be followed to attain the goal: 1.) Differentiate savings interest rates on different ranges of shares to reward members who have large amounts of money "frozen and idle." 2.) Seek a balance between the need to create institutional capital and pay a fair return on shares, taking into account that shares are a long-term investment and, therefore, should earn higher interest than short-term savings deposits. 3.) Increase the yield on shares through the following improvements in the credit union's operating efficiency: a. Optimize the financial structure (E1-E8) by lowering the percentage of shares to 20%. b. Reduce non-earning assets (A5) and reinvest them in productive assets (E1-E4). c. Control and reduce unnecessary overhead (R8). d. Control delinquency (A1) and reduce allocations for bad loans. e. Recover a high percentage of written-off loans (A4). 4.) Increase loan interest rates (R1) at the same time leverage (loans:shares) is released to maintain the same level of earnings (R10). 5.) If savings deposit rates (R5) are higher than the bank's, lower them to the level of the competition and raise rates on shares by the same percentage. Strategies to be followed to attain the goal: 1.) Optimize the financial structure (E1-E8). 2.) Optimize the return on that structure (R1-R6). 3.) Reduce non-earning assets (A5) and reinvest them in productive assets (E1-E4). 4.) Control delinquency (A1) and write off delinquent loans with heavy surcharges for delinquency. 5.) Minimize idle liquidity (L3). Strategies to be followed to attain the goal: 1.) Prepare the budget conservatively and make quarterly adjustments thereto in terms of the growth in assets observed in the preceding quarter and target ratio pursued by us. This would avoid our spending money before generating it. 2.) Try to convert increases in personnel, leadership and other expenses related to human resources into variables against fulfillment of goals, starting from the core budget. 3.) Review administrative structure to determine the need for each position and to readjust salaries. 4.) Establish personnel incentives on meeting combined goals. 5.) Eliminate superfluous expenses and establish discipline in expenses of leadership and employee bodies. 6.) Use the budget as a tool for the authorization of expenses, making sure that there are resources to do so. The fact that a budget allocation exists does not imply there are resources to spend. 7.) Apply the principle of assigning expenses and insurance, office supplies and tools, etc., to the period in which they are used. 8.) Appraisal and collection expenses should be charged to the member. Strategies to be followed to attain the goal: 1.) Lower delinquency (A1). 2.) Create monthly allocations for bad loans and do not wait until the end of the fiscal year to establish reserves. 3.) Be conservative in building provisions, i.e., expect higher delinquency and establish higher allocations than what is necessary during the year so that at the end of the year the adjustment of the operating statement will be facilitated to eliminate unnecessary allocations and meet recommended financial disciplines. 4.) Analyze gross spread on a monthly basis to ensure that there is sufficient financial income to create estimates. Strategies to be followed to attain the goal: 1.) Increase net earnings through the following improvements in credit union operating efficiency: a. Optimize the financial structure (E1-E8). b. Optimize return (R1-R7) on the ideal structure in 1.a. c. Control and reduce unnecessary overhead (R8). d. Reduce non-earning assets (A5) and reinvest them in productive assets (E1-E4). e. Control delinquency and reduce allocations for bad loans. f. Recover a high percentage of written-off loans (A4). 2.) Encourage policy of generating stable and safe earnings. 3.) If there are sufficient earnings, analyze the possibility on raising the interest rate on shares and/or paying a bonus to key employees. Strategies to be followed to attain the goal: 1.) Adjust the credit union's liquidity levels on a daily basis. 2.) Before approving new loans, ensure that the credit union can meet minimum liquidity levels. 3.) Prepare a cash flow statement on a weekly basis and compare forecasts with actual figures. Strategies to be followed to attain the goal: 1.) Strictly respect the obligation of maintaining a cash reserve of 10% of deposits in FENACOAC and consider it as the first obligation to be paid. 2.) Make adjustments at the end of each month in the cash reserve levels deposited with FENACOAC. Strategies to be followed to attain the goal: 1.) Establish maximum amounts to keep in cash and monetary deposits. 2.) Adjust the credit union's liquidity levels on a daily basis. 3.) Keep a daily account of deposit entries and withdrawals (by number and size) to become familiar with the community's seasonal trends. The information obtained will help to fine-tune the amount of necessary idle liquidity. Strategies to be followed to attain the goal: 1.) Use as a parameter of minimum growth—the inflation rate reported by the Bank of Guatemala (real growth). 2.) Use the savings deposit as the main source of growth and prepare a good marketing program to attract more savings. 3.) Optimize the credit union's financial structure (E1-E8). 4.) Pay market rates on assets, liabilities and capital. 5.) Place emphasis on the growth of total assets, provided it contributes to the gross spread. 6.) Reduce non-earning assets (A5). Strategies to be followed to attain the goal: 1. Use as a parameter of minimum growth—the inflation rate reported by the Bank in Guatemala (real growth). 2. Follow the strategies mentioned in E1 - Loans, to achieve acceptable growth. Strategies to be followed to attain the goal: 1. Use as a parameter of economic growth—the inflation rate reported by the Bank of Guatemala (real growth). 2. Follow the strategies mentioned in E5 - Deposits, to achieve acceptable growth. Strategies to be followed to attain the goal: 1. Use as a parameter of minimum growth—the inflation rate reported by the Bank of Guatemala (real growth). 2. Follow the strategies mentioned in E7 - Shares, to achieve acceptable growth. Strategies to be followed to attain the goal: 1. Use as a parameter of economic growth—the inflation rate reported by the Bank of Guatemala (real growth). 2. Follow the strategies mentioned in E8 - Institutional Capital, to achieve acceptable growth. Strategies to be followed to attain the goal: 1.) Make requirements for the admission of new members more flexible. 2.) Use market studies, principally demographic segmentation of your market to guide promotion efforts. 3.) Make more flexible and readapt the idea of membership to convert the "saving users" into "real members." 4.) Organize investigation panels with "non-members" to determine the causes for low membership growth. 5.) Incorporate the Business Plan, the goal of real membership growth, indicating the effort necessary to achieve this. 6.) Report to FENACOAC the actual statistics of member behavior on a monthly basis. 7.) Review on a quarterly basis the range of ages of the Youth Program to convert young people who have reached the age of 18 years into full members. 8.) Develop specific promotions to attract members. 9.) Work in a personalized manner on the "opinion leaders" of the communities to attract membership groups. WORLD COUNCIL OF CREDIT UNIONS RESEARCH MONOGRAPH SERIES 1. Credit Unions Retooled:  A Road Map for Financial Stabilization, March 1993. 2. Financial Market Niche:  Member Behavior Profile--Credit Unions in Guatemala, March 1993. 3. The Impact of Credit Unions in Guatemalan Financial Markets, September 1994. 4. PEARLS:  Financial Stabilization Monitoring and Evaluation, October 1994. 5. Interrelationship of PEARLS, (Annex 2), October 1994. 6. The Role and Impact of Credit Unions:  Helping to Meet the Needs of Small Scale Producers, November 1994 7. The Road to Success:  Another Crossroads, November 1994. INTERRELATIONSHIP OF PEARLS P 20 AGE