Agenda
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
2
Client Protection Principles
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
3
Agenda
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
4
Avoid Over-indebtedness: Principle in Practice
MFI
Borrowers
• 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
• Takes adequate care that the
non-credit financial products
(such as insurance) extended
to clients are appropriate to
their needs and means
5
Agenda
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
6
Identifying the Causes of Over-indebtedness
Multiple loans
•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
Poorly designed
repayment
schedules
•Repayment schedule does not match the
client’s business cycles (e.g., agriculture)
Inadequate
capacity
analysis
•The institution relies on guarantees as a
substitute for adequate capacity analysis
Unpredictable
events
•Accidents, disease, or natural disasters
7
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
8
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
Source: DAI
9
Agenda
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
10
Feedback from Participants
What kinds of practices have you
seen at your own (or other) MFIs that
have contributed to overindebtedness?
How has over-indebtedness affected
clients’ ability to use credit
effectively?
What consequences have overindebted clients had on your
institution?
11
Agenda
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
12
Lessons from Practitioners
[Write your points for the presentation here:]
• Points
• Points
• Points
• Points
13
Indicators of Good Practice (1 of 2)
Monitor borrower over-indebtedness
• Management regularly monitors levels of borrower over-indebtedness
and uses that information to improve products, policies, and procedures.
Suitable products
• The financial institution offers multiple loan products or flexible ones
that address different businesses and family needs.
Repayment capacity evaluation
• 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.
14
Indicators of Good Practice (2 of 2)
Debt thresholds guidelines
• Credit approval policies give explicit guidance regarding borrower debt
thresholds & acceptable levels of debt from other sources.
Credit history verification
• 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.
Portfolio quality valued
• 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.
Internal audit monitoring
• 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.
15
Example of Good Practices from El Salvador (1 of 2)
Employ Solid
Credit
Methodology
Adjust to
Market
Needs
• 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.
16
Source: Apoyo Integral, El Salvador
Example of Good Practices from El Salvador (2 of 2)
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.
Good
Customer
Care
• 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.).
17
Source: Apoyo Integral, El Salvador
Example of Good Practices from Bosnia-Herzegovina
Tip: Interview clients who have fallen behind
on their repayments
PRACTIC
E
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?
18
OUTCOM
E
MFI uses the
information
to improve its
credit
methodology
Agenda
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
19
Conclusion
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.
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?
20
Thank you!
Join the Campaign and
Endorse the Principles of Client Protection
Have questions? Want more information?
Contact the Smart Campaign
Email: info@smartcampaign.org
21