Credit Bureau for Indian Microfinance: Value and Viability Breakout Session II - November 15 th, 2010

Role of Credit Bureaus in financial markets Broader and Fairer Access to Credit:  Decrease information asymmetries between borrowers and lenders, expand access to credit and lower the costs of credit for good borrowers Better performing loans:  Allow lenders to accurately evaluate risks and improve portfolio quality Prevent over indebtedness:  Allow lenders to assess an applicant’s total indebtedness and thereby calculate a borrowers capacity to service debt (with ‘positive data’) Improve Profitability:  Support introduction of credit scoring and automated underwriting, lower lenders’ operational costs in retail & SME lending, improve their margins, capital adequacy, and provisioning requirements Stability in the financial sector:  Positive economy wide effects 2

Financial education about credit bureaus has direct benefits on payment performance Source: Janvry, Alain de, Craig McIntosh, and Elisabeth Sadoulet, The Supply and Demand Side Impacts of Credit Market Information, June Pre Borrower Training Financial education about the credit bureau promoted better repayment rates among Solidarity Group members 20.00% 9.78% 0% 5% 10% 15% 20% 25% Post Borrower Training Fraction of loans late as of last payment 51% Evidence from Genesis Empresarial, Guatemala

Contributors of data to Private Credit Bureaus Source: Doing Business % 75% 57% 68% 86% 82% 52% 51% 44% 23% 52% 44% 0% 20% 40% 60% 80% 100% Private Comm. Banks Public Comm. Banks Development Banks Credit Unions/ Coops Finance Corp. Credit Card Issuers Firms providing loans/Trade Creditors RetailersUtilities Providers Credit Bureaus Microfinance Institutions Public Agencies courts) % of credit bureaus receiving information from each source Over 50% of emerging market bureaus reportedly receive information from MFIs Just over a quarter of these bureaus receive information on individuals in MFI lending groups Data quality remains an issue with respect to data provided by MFIs 4

Credit Information Index Both firms & individuals are listed Both positive & negative information Retailers and/or utilities submit data 5 or more years of historical data All loans included above 1% GNI per capita Consumer right to inspect is guaranteed by law LAC continues to lead in credit information sharing Average private bureau coverage (% adults) Source: Doing Business OECD Latin America & Caribbean Eastern Europe & Central Asia East Asia & Pacific Middle East & North Africa Sub-Saharan Africa South Asia Credit Information Index Sub- Saharan Africa East Asia & Pacific South Asia Middle East & North Africa Latin America & Caribbean Eastern Europe & Central Asia OECD India PCB Coverage = 10.2% CI Index = 4

The Case for Microfinance Credit Reporting (MCR) DIFFICULTY TO LEND RESPONSIBLY DUE TO INFORMATION ASYMMETRIES FC EXPOSURE IN MF 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 6

Useful links and contacts Research Links  - IFC’s Global Credit Bureau Program  - Western Hemisphere Credit and Loan Reporting Initiative  - Doing Business Getting Credit Indicator HQ Program TeamIndia CB Assessment Team Peer Stein, Manager, Tony Lythgoe, Principal Financial Specialist Shalini Sankaranarayanan, Program Officer Fredesvinda Montes, Legal & Regulatory, Alban Pruthi, Program Analyst Colin Raymond, Credit Bureau and Risk Management Advisor Gouri Sankar Gollapudi, Microfinance Specialist 7