Client protection principles Principle #2 in practice Participant feedback

Principle #2 – Prevention of

Over-indebtedness

This presentation is made possible by the

Smart Campaign

www.smartcampaign.org

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1. Client protection principles

2. Principle #2 in practice

3. Participant feedback

4. Tools for improving practice

5. Conclusion and call to action

Agenda

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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

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2. Understanding over-indebtedness





Agenda

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Identifying the Causes of Over-indebtednessMultiple 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

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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

7Source: 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

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Agenda

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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.

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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

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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)

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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.


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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.


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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.


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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.


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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.


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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?

The MFI uses the information to improve its credit procedures and to monitor risk.

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Agenda

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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?

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Agenda

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Technical Tools

Getting Started Questionnaire: Self Assessment for MFIs and Guide on Smart AssessmentsAvoiding Over-indebtedness: Guidelines for Financial and Non-Financial EvaluationSmart OperationsSmart Lending- Individual and GroupSmart Savings and Smart Microinsurance

Samples and Case Studies

Client Business Evaluation Toolkit from Microfund for WomenLoan Calculator from Opportunity Bank SerbiaSmart Note: Facing Over-indebtedness at PartnerLoan Officer Training Manual from Banco Solidario

Tools available from the Smart Campaign

http://smartcampaign.org/tools-a-resources/41


















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Agenda

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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?

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Thank you!

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Download the Getting Started Questionnaire and conduct a client protection self-assessment.

What’s next?

Email us! [email protected]

http://smartcampaign.org/tools-a-resources/2/41

Client protection principles Principle #2 in practice Participant feedback

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Transcript of Client protection principles Principle #2 in practice Participant feedback