Tools & Resources Avoidance of Over-indebtedness: Guidelines for Financial and Non-financial Evaluation

Avoidance of Over-indebtedness: Guidelines for Financial and Non-financial Evaluation

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This tool is for financial service providers that want to incorporate good client protection practices into their evaluation processes for individual loan clients. Specifically, the tool provides guidelines for determining a loan applicant’s capacity and willingness to repay a loan.

Note:  Please be aware that all of this tool’s references to the Client Protection Principles were made prior to the principles’ revision in 2011. For more information on the revised principles, how they are evolving, and how they relate to the pre-revision principles, please see this [Detailed Guidance Document].

“Avoidance of Over-indebtedness: Guidelines for Financial and Non-financial Evaluation” is a tool for financial service providers that want to incorporate good client protection practices into their evaluation processes for individual loan clients. Specifically, the tool provides guidelines for determining a loan applicant’s capacity and willingness to repay a loan. A careful evaluation process is critical to avoiding client over-indebtedness, the situation in which a client cannot repay a loan without sacrificing his or her quality of life. Financial service providers have a responsibility to actively prevent client over-indebtedness.

The tool is divided into three parts:

I. Overview of the Individual Credit Process: The Smart Campaign’s “Smart Lending” tool provides details on how to apply the Client Protection Principles at each step in the individual lending process. This section summarizes that tool and demonstrates how it interacts with this tool. 

II. Collecting Financial and Non-financial Data: Collecting sufficient data on loan applicants reduces the risk of client over-indebtedness resulting from loans that clients are unable to pay, or loans to clients who are unwilling to pay. This section describes database research and data collection. For each step in the data collection process, the tool outlines: 1) The institution’s objective, 2) Client protection guidelines for the institution, 3) Additional process guidance for the institution, and 4) Related evaluation forms.

III. Evaluating Financial and Non-financial Data: After collecting client information, institutions must carefully evaluate client creditworthiness and debt capacity. This section provides guidelines for:

  1. Financial and ratio analysis—provides ratios and guidelines for evaluating a client’s business and household
  2. Non-financial analysis—provides non-financial indicators and guidelines for interpretation
  3. Development of the loan proposal—provides guidelines for setting the installment amount, loan amount, loan term, and repayment frequency

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