1 ©2006 MDM Bank – Strategic Planning Department IBLF Improving financial literacy and responsible lending: the MDM experience Michelangelo Mazzarelli – Head of Strategy planning department Moscow, October,

2 ©2006 MDM Bank – Strategic Planning Department ~ Agenda ~ Agenda  Introduction  Market situation  MDM example  Conclusion

3 ©2006 MDM Bank – Strategic Planning Department ~ Introduction ~ Introduction  This presentation is covering only retail loans because companies are generally managed professionally and they are able to understand the credit market and the banking products in general and realize all the consequences of their actions in such field  The retail customer instead, especially in a vastly under banked country like Russia where loans to individuals are a recent development of the economy, can often lack of the necessary knowledge to support correct decision making interacting with a financial institution  As the deposit insurance scheme secured over 90% of the Russian deposits and investment in funds is not extremely popular, the area where we see more risk in the interaction with banks is lending  Recently a share of bad loans in overall portfolio have been neglected because retail portfolio was growing extremely rapidly  As bad loans emerge with a certain delay compared to the disbursement time the real situation may be worse

4 ©2006 MDM Bank – Strategic Planning Department ~ Agenda ~ Agenda  Introduction  Market situation & steps to avoid  MDM example  Conclusion

5 ©2006 MDM Bank – Strategic Planning Department ~ Introduction ~ The overall strong growth of the Russian banking market is expected to continue although growth rates will slow Market situation & steps to avoid  Loans of the banking system has been rapidly increasing with the Retail segment (CAGR01-05 loans – 91%)  State-owned banks are dominating the market due to cheap resources and increased competitiveness (~45% of loans)  The interest margin is decreasing, prospectively giving greater meaning to non-interest income of banks  Distribution networks of competitors are widening making later penetration of the market more expensive ~ Retail loans volumes and growth ~

6 ©2006 MDM Bank – Strategic Planning Department ~ Retail loans share on the market ~ Fast growth of retail segment is driven by ‘target’ consumer loans (autoloans etc.) and increasing welfare of individuals. Still a slowdown is expected due to satiation of market Источник: Анализ рыночных источников Market situation & steps to avoid

7 ©2006 MDM Bank – Strategic Planning Department ~ Overdue loans ~ Overdue loans have increased significantly both in relative and absolute measurement, in this case difficulties with loan repayment may cause negative impact on further growth Источник: Анализ рыночных источников Market situation & steps to avoid Bad loans have reached 686 mln USD at the end of With an average loan of 2000 USD around borrowers (families) have a problem of bad debt

8 ©2006 MDM Bank – Strategic Planning Department ~ Steps to avoid ~ In order to avoid situation with growing bad loans ratio Bank’s should follow certain rules Источник: Анализ рыночных источников  Banks should establish a limit for how much credit they can give as opposed to the financial situation of the people (overall expense for credit service as opposed to the family total income minus reasonable living expenses) Do not oversell  Banking offer should be understandable and transparent to the client – besides interest rate, each commission should be clearly stated on paper and the client should understand in advance how much he will really pay Properly inform the client Market situation & steps to avoid

9 ©2006 MDM Bank – Strategic Planning Department  Monthly payment for debt account management based on the % of outstanding loan amount ~ Examples of not-proper behavior in Consumer lending (ex. # 1-2) ~ Consumers are not reading carefully agreements while some fees and commissions are hidden inside them Источник: Анализ рыночных источников Russian financial institution Market situation & steps to avoid  3 % lump sum of the total outstanding debt for late payment of even one installment Moscow mortgage bank  1,5% monthly for debt account servicing will bring to a yearly interest rate of 15,6% with annuity payments on top of the interest rate  3 % lump sum of the total outstanding debt on a mortgage of USD is USD EffectPractice

10 ©2006 MDM Bank – Strategic Planning Department ~ Examples of not-proper behavior in Consumer lending (ex. # 3) ~ Consumers are not properly calculating the interest rates and compare rates with the annual ones Источник: Анализ рыночных источников  Client takes 8,000 RUR for 4 months  Pays every month 2,279 RUR  Preliminary interest rate excluding additional commissions is 13,95% per 4 months or 41,85 % per annum Medium consumer lending bank Market situation & steps to avoid

11 ©2006 MDM Bank – Strategic Planning Department ~ Agenda ~ Agenda  Introduction  Market situation  MDM example  Conclusion

12 ©2006 MDM Bank – Strategic Planning Department ~ Examples of not-proper behavior in Consumer lending~ MDM Bank is working on transparent and understandable product offering for retail customers, close to foreign best practices Источник: Анализ рыночных источников  In most European countries the law obliges the banks to state the “total effective yearly interest rate” on the credit including all the commissions (TEYIR). Since the introduction of this rule, all fees were incorporated in the stated interest rate which converged with the TEYIR, while before large differences were recorded. Some European regulations MDM Example  MDM Bank has a comprehensive scoring system which allows to reject all applications not suitable for our portfolio  Important condition is to respect low risk ratios between payments for the credit and family income  We have no hidden fees: all conditions are clearly stated to the client and written in the main body of the contract.  A detailed plan of repayments is handed out to the client and for each payment interest and body of the credit are stated MDM Bank practice

13 ©2006 MDM Bank – Strategic Planning Department ~ Agenda ~ Agenda  Introduction  Market situation  MDM example  Conclusion

14 ©2006 MDM Bank – Strategic Planning Department ~ Conclusion ~ Источник: Анализ рыночных источников  The regulatory environment in Russia does not require to show clearly the total effective yearly interest rate  Russian consumers have little experience in borrowing and in financial product in general  Therefore each bank is responsible of properly informing the client: On the characteristics of the product he is purchasing Of the risk he might take  Responsible lending should be first a banks policy MDM Example