Banking & Credit Operations Definitions

This chapter explains the operational credit terminology, microfinance loan cycle concepts, and institutional recovery tools used across BiiTrust.

1. Credit Origination & Underwriting

Appraisal & Affordability Assessment

The rigorous examination of a prospective borrower’s repayment capacity before sanctioning credit:

  • Debt Service Ratio (DSR): The proportion of net verifiable monthly business/salary income dedicated to servicing total debt obligations: $$\text{DSR} = \frac{\text{Total Monthly Debt Repayments}}{\text{Net Monthly Income}} \times 100%$$ Policy Rule: Total DSR across all existing loans plus the new requested facility must not exceed $50%$.
  • Character, Capacity, Capital, Collateral, Conditions (5 Cs of Credit):
    • Character: Verified history of honoring past loan promises and honesty during field interviews.
    • Capacity: Cash flow sustainability of the borrower’s enterprise.
    • Capital: The borrower’s equity stake or skin in the game.
    • Collateral: Pledged security guaranteeing recovery.
    • Conditions: External market, seasonal, and economic drivers affecting the borrower’s trade.

Credit Limits & Delegated Authority Matrix

The hierarchical lending limits established by the Board of Directors governing approval powers:

  • Loan Officer: Appraisal and recommendation only (Limit: KES 0).
  • Branch Manager: Approves standard facilities up to KES 150,000.
  • Credit Committee (Branch Manager + Credit Analyst): Approves facilities between KES 150,001 and KES 500,000.
  • Executive Director: Approves high-value facilities between KES 500,001 and KES 2,500,000.
  • Board Credit Committee: Approves institutional and director facilities exceeding KES 2,500,000.

2. Loan Servicing & Repayment Cycles

Amortization Schedule

The full chronological ledger detailing every installment due throughout the life of the credit facility. Each schedule row specifies:

  1. Cycle Number ($k$): Sequential ordinal installment ($1\dots n$).
  2. Due Date: Date on which payment must be received. If falling on a weekend or public holiday, rules roll to the preceding or succeeding business day.
  3. Principal Due: Capital repayment portion reducing gross book asset.
  4. Interest Due: Cost of funds and margin recognized as institutional revenue upon receipt.
  5. Fee Portion: Periodic ledger fee or insurance levy (if not collected upfront).
  6. Total Installment: Aggregate minimum amount expected for full cycle clearance.
  7. Outstanding Principal Balance: Remaining capital obligation following installment clearance.

Bullet / Balloon Repayment

A credit structure where periodic installments service only interest (or minimal principal), with the entire lump-sum principal balance falling due on the final maturity date. Often used in agricultural trade, import clearing, or invoice discounting.

3. Delinquency Management & Loan Restructuring

Arrears Aging Buckets

Delinquent loans are classified daily into standardized aging brackets based on DPD:

  • Bucket 0 (Current): 0 DPD. All payments on schedule.
  • Bucket 1 (Grace / Watch): 1–30 DPD. Managed through automated SMS reminders, phone calls, and branch officer visits.
  • Bucket 2 (Substandard): 31–60 DPD. Formal default demand letters dispatched. Guarantors notified.
  • Bucket 3 (Doubtful): 61–89 DPD. Final notice of intention to realize security issued. Collateral repossession initiated.
  • Bucket 4 (Loss / Non-Performing): 90+ DPD. Full impairment provision booked. Handed over to auctioneers/debt collectors; reported to CRB.

Loan Rescheduling

Modifying the contractual repayment terms of an active delinquent or stressed facility without advancing new capital:

  • Tenor Extension: Extending duration (e.g., from 6 months to 12 months) to lower the periodic installment amount to an affordable level.
  • Moratorium / Payment Holiday: Pausing repayment for 30–90 days during medical, seasonal, or commercial recovery.
  • Capitalization of Arrears: Folding unpaid overdue interest and penalties into a new consolidated principal balance with a revised amortization schedule.
  • Strict Rule: Rescheduling requires formal borrower request, evidence of genuine business distress with future cashflow viability, and Branch Manager or Executive Director authorization.

Fee & Penalty Waivers

The discretionary forgiving or cancellation of accrued late penalty fees or overdue charges:

  • Used as a negotiation mechanism to incentivize delinquent borrowers to settle 100% of outstanding principal and contractual interest in a single lump-sum compromise.
  • Requires documented approval and leaves an indelible audit trail on the loan account.

4. Default Resolution & Debt Recovery

Loan Loss Provisioning (Prudential Reserve)

A non-cash expense deducted from institutional earnings to establish a balance sheet contra-asset reserve (Allowance for Loan Impairment) ensuring balance sheet solvency against expected credit defaults:

  • General Provision: $1% - 2%$ on all performing portfolio assets.
  • Specific Provision: Graduated reserves held against delinquent facilities:
    • 1–30 DPD: $5%$
    • 31–60 DPD: $25%$
    • 61–89 DPD: $50%$
    • 90+ DPD: $100%$ (net of realizable collateral security value).

Loan Write-Off (Charge-Off)

An accounting action removing an uncollectible loan asset from the institution’s balance sheet:

  • The gross loan asset is eliminated against the accumulated Allowance for Loan Impairment reserve.
  • Crucial Distinction: Writing off a loan is strictly an internal balance sheet cleaning procedure; it does not forgive or release the borrower’s legal liability.
  • The borrower remains legally indebted to BiiTrust. Field recovery, guarantor pursuit, and legal action continue indefinitely until recovery is realized or statutory limitations expire.

Bad Debt Recovery

Any cash or collateral proceeds recovered on a loan account after that facility has been formally written off:

  • Because the loan balance on the balance sheet is zero, recovered funds cannot be credited against principal.
  • Recovered amounts are credited directly to the Income Statement under 43000 Bad Debt Recoveries Revenue, producing a direct positive boost to operating net profit.

5. Security & Collateral Realization

Chattel Mortgage

A legal instrument establishing a registered security interest over movable personal or commercial property (motor vehicles, machinery, shop inventory, household furniture):

  • Must be registered under the Movable Property Security Rights Act (MPSRA) to establish first-ranking legal priority over competing creditors.

Lien & Pledge

  • Pledge: Physical delivery of possession of the asset (e.g., vehicle logbook, original title deed, share certificate) into BiiTrust’s custody while ownership remains with the borrower.
  • Lien: The legal right of BiiTrust to retain possession of a borrower’s property or cash deposit until their outstanding debt obligations are fully discharged.

Collateral Realization / Auction

The legal process of selling pledged security to recover defaulted debt:

  1. Notice to Remedy Default: 21-day statutory notice requiring borrower to cure arrears.
  2. Notice of Intention to Sell: 40-day notice advising that the asset will be auctioned.
  3. Notification of Sale: 14-day public auction proclamation through licensed court bailiffs and auctioneers.
  4. Auction Proceeds Allocation:
    • Auctioneer and storage costs paid first.
    • BiiTrust debt settled via waterfall (Penalties $\to$ Fees $\to$ Interest $\to$ Principal).
    • Any surplus funds returned to the borrower.