Preventing Over-indebtedness: Client Protection Practices

1. Principle #2 – Prevention of Over-indebtednessThis presentation is made possible by the Smart Campaignwww.smartcampaign.org

2. Agenda Client protection principles Principle #2 in practice Participant feedback Tools for improving practice Conclusion and call to action

3. 1. Appropriate product design and delivery 2. Prevention of over-indebtedness 3. Transparency 4. Responsible pricing 5. Fair and respectful treatment of clients 6. Privacy of client data 7. Mechanisms for complaint resolution Client Protection Principles

4. Agenda Client protection principles Understanding over-indebtedness Principle #2 in practice Participant feedback Tools for improving practice Conclusion and call to action

5. 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 • Incentives for loan staff 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

6. 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

7. How over-indebtedness affects the client Source: DAI

8. Agenda Client protection principles Understanding over-indebtedness Principle #2 in practice Participant feedback Tools for improving practice Conclusion and call to action

9. Prevent Over-indebtedness: The principle in practice MFI Borrowers • Are able to handle debt service requirements without sacrificing their basic quality of life. • Carefully establishes the borrower’s ability to afford the loan and repay it. Consider this: Research and practical experience show that borrowers consistently overestimate their own capacity to repay debt.

10. The Principle in Practice

11. The Principle in Practice (Continued)

12. Example of Good Practices from Bosnia-Herzegovina Good Practice: Interview delinquent clients. Practice Outcome Internal audit department conducts regular interviews of a sample of clients who have fallen behind on their payments. The MFI uses the information to improve its credit procedures and to monitor risk. • 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?

13. Agenda Client protection principles Understanding over-indebtedness Principle #2 in practice Participant feedback Tools for improving practice Conclusion and call to action

14. Feedback from Participants What kinds of practices have you seen at your own (or other) MFIs that have contributed to over-indebtedness? How has over-indebtedness affected clients’ ability to use credit effectively? What consequences have over-indebted clients had on your institution?

15. Agenda Client protection principles Understanding over-indebtedness Principle #2 in practice Participant feedback Tools for improving practice Conclusion and call to action

16. Tools available from the Smart Campaign

17. Agenda Client protection principles Understanding over-indebtedness Principle #2 in practice Participant feedback Tools for improving practice Conclusion and call to action

18. Conclusion

19. Thank you! Endorse the Smart Campaign. Visit www.smartcampaign.org Sign up to receive news and information. What’s next? Download the Getting Started Questionnaire and conduct a client protection self-assessment. Email us! comments@smartcampaign.org