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

In emerging markets, roughly two-thirds of the population remain unbanked and underserved

34% of

Population Banked

66% of Population

UnbankedRetail, micro andsmall businesses

Large companies and top retail clients

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

2

The Case for Microfinance Credit Reporting (MCR)

DIFFICULTY TO LEND RESPONSIBLY DUE TO

INFORMATION ASYMMETRIES

FINANCIAL EXPOSURE IN SECTOR

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 help MFIs 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.

MINIMIZE RISK BY: SUPPORTING MFI PARTICIPATION IN CREDIT REPORTING

OVER-INDEBTEDNESS / MULTIPLE BORROWING

HIGH SECTOR GROWTH WITH LACK OF CONTROLS /

INSTITUTIONAL DEVELOPMENT

RISING NPLs

3

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

4

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

5

India Microfinance –IFC’s Focus of Work

Component I

Broadening

of

Coverage

Component II

Awareness

Raising

Component III

Research

Study

1 2 3

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)