NOWADAYS people can be divided into three classes—the haves, the have-nots and the have-not-paid-for-what-they-haves.–Earl Wilson
The Bangko Sentral ng Pilipinas (BSP) released in July 2015 the National Strategy for Financial Inclusion. It was reported that four out of every 10 municipalities remain unbanked by the end of 2014. Thus, it is not surprising that seven out of 10 loans made by Filipino adults come from informal sources such as family, relatives and friends (62 percent) and informal lenders (10 percent), including your friendly neighborhood 5-6. As a natural consequence, most of us have lent to or borrowed money from friends and family. Those of us who are prudent and lucky, get a sense of community that enriches our relationships. But, there are times when lending to friends and family can lead to one’s personal financial disaster.
Just in case you will be a lender for a personal loan, it may be worthwhile to consider the banks’ lending practices. Five key items come to mind:
- Know your client and remember how he or she handled responsibilities before. One has to exercise due diligence and establish the creditworthiness of the client.
- Start lending small and establish trust. Create a credit history of the borrower.
- Monitor the loan performance and act expeditiously if there are “red flags” showing.
- Blacklist irresponsible borrowers. Banks help businesses that honor their obligations. When burned by nonperforming loans (NPLs)—take note, adjust lending policies fast to avoid repeating the mistake and move on.
In spite of the banks’ best practices and oversight by the government regulators, NPLs are part of the banks’ business. As a matter of fact, there are rules of thumb on what may be considered tolerable levels of “bad loans.” It is part of the business.
Now, how does one bring the banks’ best practices to personal loans to friends and family? Let us translate the noted bank practices to personal lending:
- Do not lend or borrow for or guarantee someone you do not trust. Not all family and friends are credit-worthy.
- Never let trust be a reason for not doing due diligence.
- Lend only what you can lose, especially if lending to someone who may be considered high risk, but should be helped.
- You are not the family’s or friend’s automated teller machine or private bank so don’t act like one.
- One needs to handle relationships and money with honor, honesty and reciprocity.
However, not all people are honorable and honest. As a proverb says, “Before borrowing money from a friend, decide which you need most.”
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Dr. Conchita L. Manabat is the president of the Development Center for Finance and a trustee of the Finex Research & Development Foundation. A past chairman of the International Association of Financial Executives Institutes, she now serves as the chairman of the Advisory Council of the said organization. She is also a member of the Consultative Advisory Groups of the International Auditing & Assurance Standards Board and the International Ethics Standards Board for Accountants. She can be reached at clmanabat@gmail.com.