2 1. Client protection principles 2. Principle #1 in practice 3. Causes and effects of over-indebtedness 4. Participant feedback 5. Practitioner lessons and good practices 6. Conclusion and call to action Agenda

3 1. Avoidance of over-indebtedness 2. Transparent and responsible pricing 3. Appropriate collections practices 4. Ethical staff behavior 5. Mechanisms for redress of grievances 6. Privacy of client data Client Protection Principles

4 1. Client protection principles 2. Principle #1 in practice 3. Causes and effects of over-indebtedness 4. Participant feedback 5. Practitioner lessons and good practices 6. Conclusion and call to action Agenda

5 Avoid Over-indebtedness: Principle in Practice MFI Carefully establishes the borrower’s ability to afford the loan and repay it Takes adequate care that the non-credit financial products (such as insurance) extended to clients are appropriate to their needs and means Are able to handle debt service requirements without sacrificing their basic quality of life Borrowers

6 1. Client protection principles 2. Principle #1 in practice 3. Causes and effects of over-indebtedness 4. Participant feedback 5. Practitioner lessons and good practices 6. Conclusion and call to action Agenda

7 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 −Loan officers are incentivized to oversell credit products

8 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

9 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

10 1. Client protection principles 2. Principle #1 in practice 3. Causes and effects of over-indebtedness 4. Participant feedback 5. Practitioner lessons and good practices 6. Conclusion and call to action Agenda

11 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?

12 1. Client protection principles 2. Principle #1 in practice 3. Causes and effects of over-indebtedness 4. Participant feedback 5. Practitioner lessons and good practices 6. Conclusion and call to action Agenda

13 [Write your points for the presentation here:] Points Lessons from Practitioners

14 Management regularly monitors levels of borrower over-indebtedness and uses that information to improve products, policies, and procedures. Monitor borrower over-indebtedness The financial institution offers multiple loan products or flexible ones that address different businesses and family needs. Suitable products The loan approval process requires evaluation of borrower repayment capacity and loan affordability. Loan approval does not rely solely on guarantees as a substitute for good capacity analysis. Repayment capacity evaluation Indicators of Good Practice (1 of 2)

15 Credit approval policies give explicit guidance regarding borrower debt thresholds & acceptable levels of debt from other sources. Debt thresholds guidelines When available, the institution checks a Credit Registry or Credit Bureau for borrower current debt levels & repayment history. When not available, the institution maintains and checks internal records and consults with competitors for the same. Credit history verification Productivity targets & incentive systems value portfolio quality at least as highly as other factors, such as disbursement or client growth. Growth is rewarded only if portfolio quality is high. Portfolio quality valued Internal audits check household debt exposure, lending practices that violate procedures including unauthorized re-financing, multiple borrowers or co-signers per household and other practices that could increase indebtedness. Internal audit monitoring Indicators of Good Practice (2 of 2)

16 Adjust to Market Needs Employ Solid Credit Methodology Ensure that credit approval policies give explicit guidance regarding borrower debt thresholds and acceptable levels of debt from other sources. Check credit bureaus where they exist. Create a staff incentive policy that balances portfolio growth with portfolio quality. Offer loan consolidation products. Make loans based on business size, income streams, and investment needs. Develop refinancing policies that take into account real repayment capacity. Require higher guarantee coverage ratios. Example of Good Practices from El Salvador (1 of 2) Source: Apoyo Integral, El Salvador

17 Good Customer Care Monitor Portfolio Quality Monitor client use of loans, repayment difficulties, and exits due to inability to repay. Train loan officers to assess repayment capacity. Follow-up Credit Committee analysis with oversight on actual borrower capacity and delinquency. Goal-setting with clients. Offer varied, flexible products tailored to client need. Provide timely, personalized customer service to decrease client incentive to take loans from multiple institutions. Offer additional services (insurance, etc.). Example of Good Practices from El Salvador (2 of 2) Source: Apoyo Integral, El Salvador

18 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? Example of Good Practices from Bosnia-Herzegovina Tip: Interview clients who have fallen behind on their repayments PRACTIC E OUTCOM E MFI uses the information to improve its credit methodology

19 1. Client protection principles 2. Principle #1 in practice 3. Causes and effects of over-indebtedness 4. Participant feedback 5. Practitioner lessons and good practices 6. Conclusion and call to action Agenda

20 Summary: The Smart Campaign has developed six principles of client protection, one is avoidance of over-indebtedness. Client over-indebtedness negatively affects both clients and MFIs in serious ways. Over-indebtedness is a significant problem in many countries. Good practices have been developed to prevent and correct 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?

21 Join the Campaign and Endorse the Principles of Client Protection Have questions? Want more information? Contact the Smart Campaign Thank you!