2 1. Client protection principles 2. Principle #2 in practice 3. Participant feedback 4. Tools for improving practice 5. Conclusion and call to action Agenda

3 1. Appropriate product design and delivery 2. Prevention of over-indebtedness 3. Transparency 4. Responsible pricing 5. Fair and respectful treatment of clients 6. Privacy of client data 7. Mechanisms for complaint resolution Client Protection Principles

4 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

5 Identifying the Causes of Over-indebtedness Multiple loans Poorly designed repayment schedules Inadequate capacity analysis Unpredictable events Accidents, disease, or natural disasters The institution relies on guarantees as a substitute for adequate capacity analysis Repayment schedule does not match the client’s business cycles (e.g., agriculture) Multiple loans are issued to client, by one or more institutions, due to: −Lack of information on the client’s liabilities −Incentives for loan staff to oversell credit products

6 How over-indebted clients affect the MFI Increase in client delinquency Portfolio provisioning prevents institution from making other loans Slow and costly legal proceedings for collections Damage to the institution’s image and portfolio

7 Source: DAI How over-indebtedness affects the client Clients may … Work longer hours Reduce consumption Use savings for loan repayment Take new loans to pay off current debt Sell assets, including productive assets Invest less in productive assets and human capital Search for help from family, depleting relatives’ assets

8 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

9 Prevent Over-indebtedness: The principle in practice MFI Carefully establishes the borrower’s ability to afford the loan and repay it. Are able to handle debt service requirements without sacrificing their basic quality of life. Borrowers Consider this: Research and practical experience show that borrowers consistently overestimate their own capacity to repay debt.

10 Client Repayment Capacity Analysis Staff Dissemination Uniformly Used Create a policy on repayment capacity analysis. Do not rely solely on guarantees as a substitute for good capacity analysis. Disseminate the repayment capacity policy among staff, considering the staff growth and turn-over. Ensure the repayment capacity policy is uniformly used in the practice. The Principle in Practice

11 Analysis at Each Cycle Consistency Through Cross Checks Policy on Credit Bureau Perform a repayment capacity analysis at each loan cycle, even if simplified for secondary aspects at loan renewal. For clients with informal revenues and/or non consumption loans, visit the client as part of the analysis. For clients with a salary asking for a consumption loan, a client visit is not required. Create a policy to consult the credit bureau and share client data, if a credit bureau exists. The Principle in Practice (Continued)

12 Report to Credit Bureau Group Access Credit Bureau Data Policy on Consultation Consult Competitors Review client data from the credit bureau to assess repayment capacity at each loan cycle. Report client data to the credit bureau. Give groups access to up-to-date data from the credit bureau regarding borrower credit history. Create a policy on sharing information with competitors, if no credit bureau exists. Regularly consult with and report client data to competitors, if no credit bureau exists. The Principle in Practice (Continued)

13 Supervise Data Use Management Awareness Define “High Risk Markets” Put a supervisory system in place to ensure that the credit bureau or competitor data is effectively used to inform credit analysis and decisions. Ensure Management and Board show awareness and concern about the risk of client over-indebtedness, and monitor it. Ensure Management and Board of Directors define what is “high-risk,” and review relevant market level information. The Principle in Practice (Continued)

14 Internal Audit Monitoring Visit Clients Information on Rescheduled Loans Use the internal audit and/or internal controls department to verify the compliance with the policies and systems to prevent the risk of client over-indebtedness. Use the internal audit and/or other departments to visit a representative sample of clients each year. Ensure the MIS regularly provides information on rescheduled loans. The Principle in Practice (Continued)

15 Avoid Parallel Loans Prudent Renewal Limits Accommodate Clients Create a policy that avoids parallel loans within the MFI (i.e., combining loan products to meet the same need, or restricting the loan use). Set prudent limits to allow for the renewal of a loan in case of early repayment on group loans. Create specific procedures for rescheduling loans/ refinancing/ writing off, on an exceptional basis, clients who have the “willingness” to repay but not capacity to repay, prior to seizing assets. The Principle in Practice (Continued)

16 Quality Portfolio Maintained Portfolio Quality Valued Reasonable Incentives Maintain reasonable portfolio quality over time. If there is poor long term quality of loan portfolio, and linked to over-indebtedness, take corrective measures. Ensure productivity targets and incentive systems value portfolio quality at least as highly as other factors, such as disbursement or client growth. Ensure productivity targets and incentive schemes are reasonable as compared to the industry benchmark. The Principle in Practice (Continued)

17 Example of Good Practices from Bosnia-Herzegovina Practice Outcome Good Practice: Interview delinquent clients. Internal audit department conducts regular interviews of a sample of clients who have fallen behind on their payments. Two main areas of investigation: Did loan officers follow proper procedures to avoid over- indebtedness when issuing credit? What are the causes of the client’s repayment challenges? Two main areas of investigation: Did loan officers follow proper procedures to avoid over- indebtedness when issuing credit? What are the causes of the client’s repayment challenges? The MFI uses the information to improve its credit procedures and to monitor risk.

18 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

19 Feedback from Participants What kinds of practices have you seen at your own (or other) MFIs that have contributed to over- indebtedness? How has over-indebtedness affected clients’ ability to use credit effectively? What consequences have over- indebted clients had on your institution?

20 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

21 Technical Tools Getting Started Questionnaire: Self Assessment for MFIsGetting Started Questionnaire: Self Assessment for MFIs and Guide on Smart AssessmentsGuide on Smart Assessments Avoiding Over-indebtedness: Guidelines for Financial and Non-Financial Evaluation Smart Operations Smart Lending- Individual and GroupIndividual Group Smart SavingsSmart Savings and Smart MicroinsuranceSmart Microinsurance Samples and Case Studies Client Business Evaluation Toolkit from Microfund for Women Loan Calculator from Opportunity Bank Serbia Smart Note: Facing Over-indebtedness at Partner Loan Officer Training Manual from Banco Solidario Tools available from the Smart Campaign

22 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

23 Client over-indebtedness negatively affects both clients and MFIs in serious ways. Even without a functioning credit bureau, MFIs can do much to prevent over-indebtedness through credit policies and procedures. The Smart Campaign has tools to help practitioners improve their practices to prevent over- indebtedness. Conclusion Call to Action: What do you see as the industry’s next steps for facing this problem? What are the next steps for your institution?

24 Thank you! Endorse the Smart Campaign. Visit Sign up to receive news and information. Download the Getting Started Questionnaire and conduct a client protection self-assessment.Getting Started Questionnaire What’s next? us!