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Philip Brown Global Risk Director Citi Microfinance Group October 6th 2009

Philip Brown Global Risk Director Citi Microfinance Group October 6th 2009. Strictly Private and Confidential. Macroeconomic environment. Institutional performance. Client. Beyond Institutional Performance. Macroeconomic trends and shocks, e.g. - Too little funding

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Philip Brown Global Risk Director Citi Microfinance Group October 6th 2009

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  1. Philip Brown Global Risk Director Citi Microfinance Group October 6th 2009 Strictly Private and Confidential

  2. Macroeconomic environment Institutional performance Client Beyond Institutional Performance Macroeconomic trends and shocks, e.g. - Too little funding - Political / external interference - Regulatory - Competition MFI Individual performance, e.g. - Portfolio risk - Management quality - Refinancing - Corporate Governance Client credit risk e.g. - Capacity - Stability - Behaviour and willingness - Over-indebtedness Strictly Private and Confidential

  3. Individual classification of important Risks Individual Identification of Most important Five Risks Please rate the most Important 5 Risks out of the 25 Risks identified in the Microfinance Banana Skins survey 2009, in relation to Expected Performance over the next 12 months. Please for each risk, state the name of the risk and its current ranking (number) in the Banana Skins report 2009 Strictly Private and Confidential

  4. Introduction From managingrisk in a booming Industry … in 2008 …toconfronting crisis and change in 2009

  5. Philip Brown Global Risk Director Citi Microfinance Group October 6th 2009 Strictly Private and Confidential

  6. Looking for 2010 Banana Skins • 1. • 2. • 3. • 4. • 5. Most Important Risks – Round-Table Groups How it compares with the Top Risks identified in the Banana Skins Survey 2009 • 1. Credit Risk • 2. Liquidity • 3. Macro-economic Trends • 4. Management Quality • 5. Refinancing

  7. Looking for 2010 Banana Skins in India World 1 Credit risk 2 Liquidity 3 Macro-economic trends 4 Management quality 5 Refinancing 6 Too little funding 7 Corporate governance 8 Foreign currency 9 Competition 10 Political interference India 1 Competition 2 Liquidity 3 Management quality 4 Corporate governance 5 Managing technology 6 Staffing 7 Political interference 8 Inappropriate regulation 9 Transparency 10 Too little funding

  8. Microfinance Risk Barometer - Increased Risk Profile Composition of Loan Portfolio for the Top 100 biggest MFIs by GLP Mix Market 2008 • Low pressure – increased risk profile • Directionally – Where will we be in 2010? • What current and anticipated risk events will impact performance in 2010? Microfinance Risk Barometer Composition of Borrowers for the Top 100 biggest MFIs by GLP Mix Market 2008 2008 2009

  9. Continued growth • Strong decrease in GLP growth rate in 2008 and during 1st half of 2009 across all regions • Citi's internal Microfinance portfolio growth from 2008 to 2Q09 is in line with data reported by MIX and Symbiotics Source: Mix Market 2007-2008 Representing a sample of the top 100 biggest MFIs per GLP in 2008 Source: Symbiotics SYM50 Index

  10. Portfolio-at-Risk rising across all regions • The highest increases are situated in Africa (1.6% increase in 2008), South America (1.3%) and ECA (0.9%) (excluding the Moroccan Market, 3.3% increase in PAR > 30d). • Citi Microfinance portfolio PAR >30 days also showed an increasing trend from 2008 to 2Q09. However most MFI's have provisioned in excess of 100% of PAR>90 days PAR > 30 days (%) Representing a sample of the top 100 biggest MFIs per GLP in 2008 Source: 2007 and 2008 Mix Market

  11. Institutional performance – Managing Structural Funding • Ability to absorb losses due to unexpected events - The high level of Stuctural Funding has helped manage refinancing risk and absorb operating losses over 2008-09 • Management of Structural Funding expected to be a vital Financial risk management consideration for MFI’s over 2010 Structural Funding (%) ((Long Term Debt + Equity)/Total Liabilities) Representing a sample of MFI’s from Citi’s Microfinance Portfolio

  12. Institutional performance – Maintaining adequate capitalisation • Divergence in capitalisation across regions • Financial flexibility has been tested Capitalisation (%) Equity / GLP Representing a sample of the top 100 biggest MFIs per GLP in 2008 Source: 2007 and 2008 Mix Market

  13. MFIs CLIENTS 60% of respondents say clients are somewhat affected, more in ECA and LAC Repayment is down in all regions Greater % of income spent on food Where is the bottom? - First quarter feedback 1Q09 • CGAP Global Opinion Survey – May 2009 • Based on answers of over 400 MFIs Managers 64% of MFIs interviewed say Loan portfolio is stable or decreasing Credit risk is up according to 69% of managers interviewed. More severe in ECA and LAC Increasing liquidity constraints especially for smaller Tier 3 MFIs

  14. Client Credit Risk – Can it be effectively managed? Quality of Management • Commercial Strategy • Clear Target Segment • Lending model – Group vs. Individual, % of consumer and SME segment • Borrower Screening Process – The Client • Willingness and Ability to repay • Stability of Income • Level of indebtedness • Loan Product Structuring (Purpose, Tailored to Ability of the Client to Repay) • Close Monitoring (Delinquency Policy and Process) • Early Warning Signs • Trends - Rising PAR>30 days • Learning lessons: drivers of delinquency • Collections • Active Oversight by Senior Management • Portfolio Management • Risk Concentration • Adequacy of Reserves – Loan Provisioning • Credit Culture

  15. Macroeconomic risk – Competition as a revelator • Competition -Competitive pressures in microfinance are mounting with the proliferation of MFIs, new entrants and unregulated institutions. Will these push MFIs to take greater risks in areas such as pricing, product innovation and credit quality? Example-Maturity crisis for the Moroccan Microfinance Sector • Morocco was a micro-credit champion in MENA : Loan portfolio multiplied by 11x between 2003 and 2007 • As of Dec. 2008, 12 licensed MFIs, 1.3 million clients, USD 705 million of assets, 45% of client outreach in the Arab world • 2007 : First signs of stress, fierce competition between MFIs in urban areas, over-indebtedness and loan delinquency • 2009 : PAR > 30d passed from 5% in Dec. 2008 to 10% in June + Collapse of MFI “Zakoura” in May • Responses: • Merger of Zakoura with the Fondation des Banques Populaires (Government backed) • Management changes and freezing of new disbursement / loan recovery plans • Coordination among MFIs: MFIs will be integrated in new credit bureaus

  16. Macroeconomic risk – Local politics and performance • Political interference -MFIs may face political pressures, for example in the areas of interest rates, lending terms and subsidised government programmes. How big a risk do these pose to the business? Examples • India • Social /Communal tensions in some areas leading to rapid portfolio deterioration (e.g; Mysore, Kolar , Ramnagaram) • Pakistan • Local Politicians issuing loan pardon slips to MFI borrowers in Kamoki and Ravi Rayon with the objective of gaining political mileage. Worst affected areas have been Lahore, Faisalabad, Sheikhupura and Gujranwala • Venezuela • Direct competition from the government encouraging government backed social cooperatives and community production centres rather than private MFIs • Interest rate caps and no recognition of special status for microfinance institutions • Nicaragua • Government supporting the “Movement of no pay” initiated in July 2008 and which claims a 10-yr moratorium law and cap on interest rates on microfinance portfolio • Loan disbursement were suspended by most MFIs in Northern Nicaragua in Sept. 2009

  17. Institutional performance – Learning Lessons Corposol Case Study – What went wrong? • Failure to track multiple loans to a single client • High delinquency rate and loan losses • Accounting errors • Poor self-governance Source: Micro enterprise Americas 2003 Strictly Private and Confidential

  18. Looking for 2010 Banana Skins Microfinance Risk barometer Directionally – Where will we be in 2010? • Growth • Competition • Liquidity / refinancing • Management Quality • Regulatory • In terms of identifying 2010 Banana Skins : What are the three success / failure factors to look in microfinance risks today? * Unsustainable growth ? * Competition ? * Credit culture / discipline ? 2010

  19. Winners and losers / Cornerstones of success Winners and Losers Emmanuelle Javoy, Managing Director of Planet Rating in France “overall, one third of MFIs have systems, procedures and performance that should really allow them to manage the above stated risks without major problems, while another half have decent systems or procedures or performance, but that might take a little time to adapt to changing situations”. Risk Management, a differentiator Philip Brown, Risk Director at Citi Microfinance “Effective risk management (strategy, process and culture), has become a differentiator of performance… Greater instability and uncertainty exists across the spectrum of macro and micro business risks. These risks have stressed some businesses, resulting in cracks appearing with negative performance, in some case threatening business survival…There is a renewed focus on the monitoring and management of risks associated with business fundamentals”.

  20. For further details, please visit Citi Microfinance website http://www.citi.com/citi/microfinance

  21. THANK YOU

  22. Mapping Risks 1. Credit Risk 23. Ownership 19. Mission Drift 7. Corp Governance 2. Liquidity 8. Foreign Exchange 15. Managing Technology 5. Refinancing 4. Management 16. Transparency 22. Back Office 14. Staffing 12. Profitability 25. Too much funding 24. Product Development 20. Fraud 17. Reputation 21. Depositor confidence 3.Macro-economic trends 1. Credit Risk 6. Too Little Funding Natural Catastrophes 18. Unrealizable expectations 5.Refinancing 8. Foreign Exchange 10. Political Interference 11. Interest Rates 13.Inappropriate regulation 25. Too much funding 9. Competition Strictly Private and Confidential

  23. Deteriorating ROE – Credit provisions and declining efficiency • MFIs’ performance is hit by increasing loan loss provision and costs linked to monitoring, collection and remedial management. Source: Symbiotics SYM50 Index

  24. Portfolio at Risk >30 days% Bank A 20% Bank B Bank C Bank D CEE – MFI Example 15% 10% 5% 0% Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Credit Risk – Macro Economic Linkage

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