Sep 2011

1. CLIENT PROTECTION PRINCIPLES SKS MICROFINANCE Sep 2011 This presentation is solely for viewing. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from SKS Microfinance.

2. AGENDA Background Microfinance CPP Gold Loans CPP

3. INITIATIVE TO FOCUS ON CLIENT PROTECTION To create a separate vertical for CPP headed by a Senior resource To appoint a social sector veteran as an Ombudsman • SKS will continue to : • Incorporate significant client protection measures into the business model to ensure ethical lending and collections and educate both staff and borrowers • Work closely with regulatory bodies (RBI), leading banks (SIDBI, ICICI) SRO (Sadhan, MFIN) to incorporate their inputs in the CPP AND • Cap ROA on microfinance loans • Avoid hyper growth in microfinance to ensure quality of our processes, people and Sangams

4. FEEDBACK TO BE TAKEN FROM ALL STAKEHOLDERS Industry leaders Regulatory body SKS Leading Banks Independent agencies

5. GUIDING PRINCIPLES OF CPP STRATEGY Group dynamics and concept of shared risk Lend only for income generating and productive purpose Improve standard of living by access to capital CURRENT Right level of debt to avoid service difficulties Incentivize staff on ethical behavior New product and services to assist financial inclusion IMMEDIATE Livelihood training through partnership Financial literacy Detailed background check of staff - KYE SHORT TERM Realign incentive structure across all levels based on CPP guiding principles

6. AGENDA Background Microfinance CPP Gold Loans CPP

7. PRINCIPLES OF CLIENT PROTECTION – CGAP & SMART CAMPAIGN Avoidance of over-indebtedness Transparent & responsible pricing Privacy of client data Appropriate collections practices Mechanisms for redress of grievances Ethical staff behavior

8. TRAINING PROVIDED TO BORROWERS TO AVOID OVER-INDEBTEDNESS Compliance Compliance + Thrust Areas • Eligibility criteria : • Annual House Hold Income (HHI) limit of Rs 60,000 for rural areas and Rs 1,20,000 for urban areas • Total outstanding not to be above Rs 50,000. • Housing Survey and Target Details during group formation • Credit bureau report before conducting CGT on number of MFI loans , total outstanding and default which will be used in decision making • Asset prices and loan sizes to be linked • All loan amounts to be below Rs 15,000 till Jan ‘12. • Loans to be utilized for income generation • Problems in using Loans for consumption • Savings as a useful instrument • Problems of multiple borrowing and over indebtedness • LUC made mandatory for all loans disbursed • LUC incentive introduced for branch staff • Asset viewing mandatory to check frauds • HHI captured in housing survey by SM (surrogate indicators in addition to self declaration, higher of the two will be taken) • HHI assessment to be done yearly for repeat borrowers • Cap on loans from 3 MFIs • Maximum loan amount to be capped Avoidance of Over-indebtedness

9. FINANCIAL LITERACY TRAININGTO BE DONE FOR OUR BORROWERS TO ENSURE THEIR UNDERSTANDING OF THE PRICING Compliance Compliance + Thrust Areas Transparent and Responsible pricing • Member to be trained on • Interest rate (Diminishing balance) • Calculation of EWI • Loan processing fee and actual insurance premium • No penalties for delayed payments or pre-closure • Detailed product features • Passbooks as receipt for the payments made • Collateral free loans • Choice of frequency of repayment • AND • Pricing as per RBI guidelines • All Operation manuals to be revised every year • Refresher CGT for the center on yearly basis • Group Leaders Meeting (GLM) on periodic basis instead of Sangam Leaders Meeting (SLM) • Outbound calls to members to test their awareness of products & policies • AND • Pricing to be lower than RBI guidelines

10. BORROWERS AND STAFF ARE TRAINED REGARDING APPROPRIATE COLLECTION PRACTICES & ETHICAL BEHAVIOUR Compliance Compliance + Thrust Areas Appropriate Collection practices • Members are made aware of • Their responsibility in group lending methodology • Peer support as against peer pressure • That all financial transaction are done • in the presence of all members • at a public place and not during odd hours • by employees and not outsourced • Guidelines for moratorium for hardship cases • Refresher CGT for the center on yearly basis to reinforce JLG Ethical Staff behaviour • Inculcate culture of compliance along with • culture of customer service • Respect members • No abusive or rude language • No visiting of home / workplace of members • No taking of bribes / commissions • No confiscation of assets • Encourage employees to inform deviations through employee toll free number • Staff to be retrained on • Group lending methodology • Product training • Peer support as against peer pressure • Soft skill training • Emphasis on Core Values • Responsible lending • Training on assessment of HHI using surrogate indicators • Independent assessment of staff behaviour through outbound calls to members

11. GRIEVANCE REDRESSAL MECHANISM & DATA PRIVACY ARE PUT IN PLACE Compliance Compliance + Thrust Areas Mechanisms for redress of Grievances • Members to be made aware of • Toll free number of 1800 300 10000 • Resolution process of their complaints / queries / suggestions • Timelines for resolution • Their right to escalate unresolved complaints to Ombudsman • Implement manning of the toll free telephone lines to 16 hours in 2 shifts • Conduct outbound calls to confirm resolution of the complaints/ queries of members. Privacy of Client data • Borrowers’ data is kept confidential and not shared with anyone except in cases of • RBI approved Credit Bureaus for assessing the number of loans and total outstanding of borrowers • Legal requirement from any court

12. THIRD PARTY VALIDATION OF KEY PERFORMANCE INDICATORS Results to be published on the website and shared with key stakeholders FLCC (Financial Literacy and Credit Counseling) CGT and GRT Physical cross check of household income Transaction details LUC Grievance redressal

13. AGENDA Background Microfinance CPP Gold Loans CPP

14. TRAINING PROVIDED TO BORROWERS TO AVOID OVER-INDEBTEDNESS & APPROPRIATE COLLECTION PRACTICES Compliance + Thrust Areas Avoidance of Over-indebtedness • Number and outstanding of loans to be incorporated in loan application form • IA team to verify 20% of forms and randomly check with2% members • Taking self declaration for ownership of gold • Reiterate product features during the visit • Members to be made aware of • Problems of consumption loans • Advantages of on time payment • Saving as a useful instrument • Loans as a proportion to income • Problems of multiple borrowing and over indebtedness • All transactions would be done at the branches during business hours by employees • Outbound calls to follow up on repayment Appropriate Collection practices

15. BORROWERS AND STAFF ARE TRAINED REGARDING TRANSPARENT PRICING & ETHICAL BEHAVIOUR Compliance Thrust Areas Compliance + Transparent and Responsible pricing • Member to be trained on • Interest rate (Diminishing balance) • Choice of bullet and EMI payments with monthly flexibility and cap of 12 months • Loan processing fee • No penalties for delayed payments • Detailed product features • Receipt for the payments made • Choice of frequency of repayment • Terms and conditions in vernacular being provided in writing to member. • All Operation manuals to be revised every year • Guidelines for moratorium for hardship cases • Outbound calls to capture feedback on understanding of product features Ethical Staff behaviour • Inculcate culture of compliance along with culture of customer service • Respect members by not using abusive or rude language • No bribes/commissions to be taken • Encourage employees to inform deviations through employee toll free number • Staff to be retrained on • Product training • Soft skill training • Emphasis on Core Values • Outbound calls to capture feedback on staff behaviour • Training on implication of mis-selling and responsible lending

16. GRIEVANCE REDRESSAL MECHANISM & DATA PRIVACY ARE PUT IN PLACE Compliance Compliance + Thrust Areas Mechanisms for redress of Grievances • Members to be made aware of • Toll free number of 1800 300 10000 • Resolution process of their complaints / queries / suggestions • Timelines for resolution • Their right to escalate unresolved complaints to Ombudsman • Implement manning of the toll free telephone lines to 16 hours in 2 shifts • Conduct outbound calls to confirm resolution of the complaints/ queries of members. Privacy of Client data • Borrowers’ data is kept confidential and not shared with anyone except in cases of • Regulatory requirement • Legal requirement from any court

17. THIRD PARTY VALIDATION OF KEY PERFORMANCE INDICATORS Results to be published on the website and shared with press and media Understanding of charges and product Transaction details LUC Grievance Redressal

18. CLIENT PROTECTION PRINCIPLES CGAP Avoidance of Over-Indebtedness. • Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that only appropriate non-credit financial products (such as insurance) are extended to clients. Transparent and Responsible Pricing. • The pricing, terms, and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) will be transparent and will be adequately disclosed in a form understandable to clients. Responsible pricing means that pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for financial institutions. Appropriate Collections Practices. • Debt collection practices of providers will not be abusive or coercive. Ethical Staff Behavior. • Staff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients. Mechanisms for Redress of Grievances. • Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients. Privacy of Client Data. • The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions, and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories).

19. PRINCIPLES OF CLIENT PROTECTION – SMART INITIATIVE

20. Principles of client protection Source: http://www.smartcampaign.org/tools-a-resources/3/268

21. Points to REMEMBER Our members are the lifeline of our existence It is our duty to take care of our members We are here because of our members

22. Principles of client protection Avoidance of over-indebtedness Transparent & responsible pricing Privacy of client data Appropriate collections practices Mechanisms to redress grievances Ethical staff behavior

23. Principles of client protection Avoidance of over-indebtedness Transparent & responsible pricing Privacy of client data Appropriate collections practices Mechanisms for redress of grievances Ethical staff behavior

24. Understanding indebtedness Total loan amount outstanding of the member = Rs.54,000 This is called Total indebtedness

25. Over indebtedness As per the new RBI guidelines, If a member’s total indebtedness is more than Rs. 50,000/-, It is considered as over indebtedness

26. Over indebtedness impacts the member • Member may … • Have to work longer hours to generate more income • Reduce consumption – (Eat less, feed less) • Use savings for loan repayment • Take new loans to pay off the existing loans • Sell assets, including productive assets • Invest less in income generating activity • Search for help from family and friends leading to strained relationships Source: DAI

27. How do over-indebted clients affect us? Increase in arrear cases Our image and reputation is at risk Unwanted stress levels for all of us Increase in dissatisfied members Extra time spent for collections in the center meetings Genuine members would suffer because, we would not able to disburse loans if collections suffer Our career is dependent on satisfied members

28. Think & Answer Loan O/s from MFI 1 : Rs.24,000 Loan O/s from MFI 1 : Rs.22,000 Loan O/s from MFI 2 : Rs.15,000 Loan O/s from MFI 2 : Rs.13,000 Loan O/s from SKS : Rs.12,000 Loan O/s from SKS : Rs.8,000 Total indebtedness ___________ Total indebtedness ___________ Loan amount applied for : Rs.14,000 Loan amount applied for : Rs.14,000 Is the member eligible for a loan? Is the member eligible for a loan? If “no”, why? If “no”, why? If “yes”, what is the eligible amount? If “yes”, what is the eligible amount?

29. Understanding Annual household income

30. Guidelines on Annual household income • Only the Members who are within the below mentioned annual household income limits are eligible for loans • Members from Rural area – Annual household income should be below Rs.60,000/- • Members from Urban / Semi urban area – Annual household income should be below Rs.1,20,000/-

31. Case study 1 - Urban/ Semi urban Is the member eligible for loan as per annual household income limit?

32. Case study 2 – Urban/ semi urban Is the member eligible for loan as per annual household income limit?

33. Case study 3 – Rural Is the member eligible for loan as per annual household income limit?

34. Case study 4 – Rural Is the member eligible for loan as per annual household income limit?

35. Avoid Over-indebtedness: Principle in Practice We give loan to a member if the total indebtedness is below Rs.50,000/- We discourage over-borrowing by a member

36. Think & Answer Residential status : Rural Area Residential status : Urban Area Total indebtedness : Rs.38,000 Total indebtedness : Rs.54,000 Annual household income : Rs.98,000 Annual household income : Rs.58,000 Is the member eligible for a loan? Is the member eligible for a loan? Loam amount applied for : Rs.14,000 Loam amount applied for : Rs.14,000 If “no”, why? If “no”, why? If “yes”, what is the eligible amount? If “yes”, what is the eligible amount?

37. Think & write How are we helping our members ensure they would not borrow beyond their capacity to repay? What efforts would you make to ensure that our members understand this philosophy?

38. Summary of Learning We give loans only to those members whose Annual household income is • Rural areas : Less than Rs.60,000/- • Urban/ semi urban areas: Less than Rs.1,20,000/- The total indebtedness of the member should be below Rs.50,000/- This includes all loans including the one that she has applied for Our aim is to help our members avoid debt traps and ensure they can repay the loan with comfort. We do this by understanding their household income and total indebtedness before accepting the loan applications.

39. Principles of client protection Avoidance of over-indebtedness Transparent & responsible pricing Privacy of client data Appropriate collections practices Mechanisms for redress of grievances Ethical staff behavior

40. Understanding Transparency • We maintain complete transparency in all our transactions. • During CGT, every member is clearly explained the charges & fees • that she is required to pay. • All the charges & fees that a member is required to pay, is announced • in the center meeting • All our transactions are carried out in the center meeting in the • presence of members • The collections at the center meeting are sorted and counted by the • center leader before handing over to the staff. • All transaction details (amount disbursed and collected) are entered • in the center meeting minutes book and signed by the staff and read • aloud in the center before handing over to the center leader

41. Understanding Transparency • Our passbooks clearly mention the following • Terms and conditions applicable to our loans • Table where date of payment, installment number, installment • amount is written and signed by the staff. • Table printed with Installment number, installment break-up • (showing principal & interest and outstanding amount • Amount paid by the member as loan processing fee • Amount paid towards Term Insurance Premium (TIP) • Our Code of conduct printed in the passbook clearly mentions that we do not charge any amount other than the charges mentioned above

42. Understanding responsible pricing • Responsible pricing • All our products are designed keeping our member • in mind. • Our products meet the regulatory guidelines set by • RBI

43. No transparency – impact on member Member may… • not understand how much she has paid and how much is pending. • feel that she is paying extra • feel that we are taking unnecessary charges • feel cheated • conclude that SKS is not a good organization to deal with • tell many others in her family and friends circle about the same

44. No transparency – impact on SKS Our reputation and image are at risk Our members will not keep faith on us We will lose respect in the eyes of the member We may lose members

45. Think & Answer In a center, a replacement member is ready to join the group. The member who introduced her says “She knows all the procedures and methods of SKS” What should the SM do? • SM agrees and takes her loan application • SM conducts one day CGT and after she clears the GRT he allows her to become a member in the group • SM seeks permission from BM to accept her as replacement member.

46. Think & write What are the different opportunities you would get to demonstrate transparency in a center meeting? Write down 3 initiatives that you would take to ensure that our transparency is understood by the members?

47. Principles of client protection Avoidance of over-indebtedness Transparent & responsible pricing Privacy of client data Appropriate collections practices Mechanisms for redress of grievances Ethical staff behavior

48. Understanding Inappropriate Collections Practices • Unethical seizure of property • Staff enters a member’s home/ place of work and seizes property Offensive language and threats • Staff uses offensive or abusive language/ bad words • Staff scolds for simple things • Staff threatens members/ their family or harass them at work, home, or their place of worship.

49. Inappropriate collection methods – impact on member Member may… • feel humiliated/ insulted • go to extremes to avoid humiliation • undergo mental stress • develop hatred towards SKS staff • revolt

50. Inappropriate collection methods – impact on us Members will not believe SKS & tell others not to believe SKS reputation may be lost All other members may observe in silence but talk about SKS staff at their home and other places (work/worship) Her family members may walk into center and pickup a quarrel You may not be welcome in the village any more