Bonuses and Penalties Item General introduction
Description In order to steer the decision making of the MFI toward being sensible and realistic, a number of bonuses and penalties have been added to the simulation. The bonuses pertain to the following investments: 1. Investments in human resources 2. Investments in IT 3. Investments in loan officers. The general idea is that these investments will help the MFI to recover easier, once loans fall to distress. The penalties occur when regulatory requirements haven’t been met: 1. Not having enough lending activities 2. Sudden jumps in strategy toward average loans size. 3. Not enough cash with respect to the total amount of assets
Role in Simfi
Where?
The role in Simfi is mainly to encourage sensible management by the MFIs. Moreover, these penalties and bonuses prevent participants from outsmarting the simulation by making decisions that are far from realistic. The following bonuses and penalties can be adjusted by the trainer: Bonus competitive advantage: Institution>Impact parameters on probability of recovery Setup>Other parameters> Impact parameters on probability of recovery Penalty regulatory requirements: Institution>Additional regulation category requirements Setup>Regulation>Regulation categories Setup>Regulation>Additional regulation category requirements Penalty insufficient lending activity: Institution>Other parameters Setup>Other parameters>Other parameters Penalty for jumps in loan size: No adjustment possible
Bonuses & competitive advantage
Penalty for not enough cash with respect to the total amount of assets: No adjustment possible A proper investment and human resources policy leads to higher recovery rates for the MFI, for the loans in the portfolio at risk (PAR) and the rescheduled loans. The competitive advantage is calculated by setting the highest investment among teams as a benchmark. This benchmark results in a weighting factor of 100%. The other teams get a weighting factor derived from this benchmark. For example:
There are similar competitive advantages for investments and for the number of loan officers. Apart from these competitive weighting factors, the trainer can set an impact weighting factor that shifts the weight from one factor to another. The default settings for these impact weights are 0.50%.
The result of the formula above is a percentage, which is added as percentage points to the recovery rate. Penalty regulatory requirements
In case the MFI does not meet the regulatory requirements, there is a penalty of a 2% point increase in the interest rate of the following liabilities: 1. Short term borrowed funds 2. Long term borrowed funds 3. Quasi capital accounts. This penalty is incurred in the following cases: 1. The minimum cash of total deposits percentage is not met 2. The capital adequacy ratio is insufficient 3. The liquidity ratio is insufficient. The minimum capital adequacy and liquidity ratios are set by the trainer and depend on the MFI’s regulation type.
Penalty insufficient lending activity
Penalty for jumps in loan size
Penalty for not enough cash with respect to the total amount of assets
In order to encourage the MFI to allocate its funds toward lending rather than investing elsewhere, there is a penalty if the following balance sheet items combined exceed a limit: 1. Interest bearing deposits and investments < 1 year 2. Investments > 1 year. The limit is set by the trainer as a percentage of the total gross loan portfolio. The penalty is also determined by the trainer as a percentage of the sum of point 1) and 2), above. In order to discourage MFIs from changing the average loan size too abruptly, there is a penalty if any of the loan sizes in one round exceed a change of more than 25%. The penalty is an increase of the probability of default for all lending activities, with one percentage point in the current quarter and next quarters. So, even if a trespassing of the 25% limit only took place for one type of loan, all loans will still be confronted with a higher PD. In order to encourage the MFI to have enough cash, there is a penalty if in the balance sheet the amount of cash is less than 1% of the total amount of assets. The penalty amount is 1% of the total assets which could have a large impact on the net profit in the P&L statement. In the P&L statement this amount is booked in “Other financial expenses” under header “Total financial expenses”. During initialisation this penalty is always zero, see also chapter 26 “Initialisation”.