Colin Raymond Credit Bureau & Risk Management Advisor IFC- CAI Advisory Services

1. Breakaway Session-1: Building an Effective Credit Information System Financial Inclusion Conference4:15pm – 5:30pm, 7th Aug 2012 Convention Hall, Ashok Hotel, Chanakyapuri, New Delhi Colin RaymondCredit Bureau & Risk Management AdvisorIFC- CAI Advisory Services

2. In emerging markets, roughly two-thirds of the population remain unbanked and underserved • The bottom of the pyramid remains underserved: • Banking sector penetration of 5% to 25% vs. 70% to 90% in developed markets • Banks tend to focus on large commercialclients and top retail clients • Targeting the underserved: • Microfinance (up-scaling): Total reach: 105 million clients globally • Banks (down-scaling): Requires retail skills and systems • Non-bank financial institutions (diversifying):Leasing, factoring, housing, insurance Large companies and top retail clients 34% of Population Banked 66% of Population Unbanked Retail, micro andsmall businesses

3. The Case for Microfinance Credit Reporting (MCR) MINIMIZE RISK BY: SUPPORTING MFI PARTICIPATION IN CREDIT REPORTING 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 helpMFIs 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. RISING NPLs OVER-INDEBTEDNESS / MULTIPLE BORROWING DIFFICULTY TO LEND RESPONSIBLY DUE TO INFORMATION ASYMMETRIES HIGH SECTOR GROWTH WITH LACK OF CONTROLS / INSTITUTIONAL DEVELOPMENT FINANCIAL EXPOSURE IN SECTOR

4. Risks Facing Global Microfinance Industry • Banana Skins 2012 Survey • Top 3 Risks Globally – Over-Indebtedness, Corporate Governance, Management Quality • Top 3 Risks Asia – Liquidity, Political Interference, Corporate Governance • Report raises question “Are credit bureaux the answer? • Pros – most respondents blamed absence of centralised CIBs as CIBs help identify potential risks and help client build credit history • Cons - Effectiveness of CIB depend on MFI willingness to use them • Bureau data not complete • MFIs not following rigorous practices to avoid overindebting clients Microfinance Banana Skins 2012 – The CSFI survey of Microfinance Risk

5. India - Recent Stocktake (June-July 2012) • Contacted 120 MFIs across 13 states • Varying size portfolios – from < than 1,000 to > than 50,000 members • 34 respondents – portfolio mix SHGs, JLGs and individual loans • Most are computerized and have data available for bureau submission • Key concerns • Lack of awareness of statutory requirement • Lack of awareness about the actual process involved in terms of how data will be submitted and how data can be accessed. • Belief that benefits of CB are for larger MFI not smaller ones • Cost of membership and integration is “uneconomical” given the thinning spreads, the capped margins and escalating operations cost • Changes in internal credit evaluation processes as well as capability of the ground staff to handle these changes

6. India Microfinance –IFC’s Focus of Work 3 1 2 Component I Broadening of Coverage Component II Awareness Raising Component III Research Study Increase MFIs as CIB Members; Increase No. of Enquiries; Explore inclusion of SHGs & cooperatives; Communications Package; Dissemination by practitioners & through workshops; Research report on impact of CIBs. (Timeframe: 2012  2014)