Breakaway Session-1: Building an Effective Credit Information System Financial Inclusion Conference 4:15pm – 5:30pm, 7th Aug 2012 Convention Hall, Ashok Hotel, Chanakyapuri, New Delhi Colin Raymond Credit Bureau & Risk Management Advisor IFC- CAI Advisory Services

In emerging markets, roughly two-thirds of the population remain unbanked and underserved 34% of Population Banked 66% of Population Unbanked Retail, micro and small businesses Large companies and top retail clients  The bottom of the pyramid remains underserved : Banking sector penetration of 5% to 25% vs. 70% to 90% in developed markets Banks tend to focus on large commercial clients and top retail clients  Targeting the underserved: Microfinance (up-scaling): Total reach: 105 million clients globally Banks (down-scaling): Requires retail skills and systems Non-bank financial institutions (diversifying): Leasing, factoring, housing, insurance 2

The Case for Microfinance Credit Reporting (MCR) DIFFICULTY TO LEND RESPONSIBLY DUE TO INFORMATION ASYMMETRIES FINANCIAL EXPOSURE IN SECTOR KEY RISKS Evidence from functional microfinance credit bureaus operating in Ecuador, Peru, and Guatemala shows that credit reporting can be tremendously beneficial for microfinance institutions (MFIs) and financial sector stability. MFI credit reporting (MCR) can help MFIs become more sustainable by improving risk assessment and risk management processes and thereby portfolio quality and enhancing efficiency. As a result, MCR will help MFIs to (i) Increase access to finance to more clients (ii) Prevent and identify / address client over-indebtedness or bad debt which is becoming increasingly evident in the current financial crisis. MINIMIZE RISK BY: SUPPORTING MFI PARTICIPATION IN CREDIT REPORTING OVER-INDEBTEDNESS / MULTIPLE BORROWING HIGH SECTOR GROWTH WITH LACK OF CONTROLS / INSTITUTIONAL DEVELOPMENT RISING NPLs 3

Risks Facin g Global Microfinance Industry Banana Skins 2012 Survey  Top 3 Risks Globally – Over-Indebtedness, Corporate Governance, Management Quality  Top 3 Risks Asia – Liquidity, Political Interference, Corporate Governance  Report raises question “Are credit bureaux the answer? Pros – most respondents blamed absence of centralised CIBs as CIBs help identify potential risks and help client build credit history Cons - Effectiveness of CIB depend on MFI willingness to use them –Bureau data not complete –MFIs not following rigorous practices to avoid overindebting clients Microfinance Banana Skins 2012 – The CSFI survey of Microfinance Risk 4

India - Recent Stocktake (June-July 2012) Contacted 120 MFIs across 13 states  Varying size portfolios – from than 50,000 members  34 respondents – portfolio mix SHGs, JLGs and individual loans  Most are computerized and have data available for bureau submission Key concerns  Lack of awareness of statutory requirement  Lack of awareness about the actual process involved in terms of how data will be submitted and how data can be accessed.  Belief that benefits of CB are for larger MFI not smaller ones  Cost of membership and integration is “uneconomical” given the thinning spreads, the capped margins and escalating operations cost  Changes in internal credit evaluation processes as well as capability of the ground staff to handle these changes 5

India Microfinance –IFC’s Focus of Work Component I Broadening of Coverage Component II Awareness Raising Component III Research Study Increase MFIs as CIB Members; Increase No. of Enquiries; Explore inclusion of SHGs & cooperatives; Communications Package; Dissemination by practitioners & through workshops; Research report on impact of CIBs. (Timeframe: 2012  2014)