HEAD OFFICE QUESTIONNAIRE
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- Aubrie Mason
- 5 years ago
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1 HEAD OFFICE QUESTIONNAIRE Microfinance Due Diligence Questionnaire (To Be Used in Conjunction with Loan Application) Name of the Institution. Country... Analyst:. 8/19/2009 C:\Users\wb318031\Desktop\Client Protection\Toolkit\Deutsche Bank\DB HO Due Dili with Loan App version 5.doc
2 TABLE OF CONTENTS I. MFI Background Information... 1 II. Strategy and Business Planning... 1 A. Business and Strategic Planning (CEO / Chairman of Board)... 1 B. Competitive Environment... 4 C. Marketing (Marketing Manager)... 5 III. Social Impact (CEO / Chairman / Board Member)... 6 IV. Governance and Internal Controls... 8 A. Governance Structure, Board & Committees (Chairman / Board Member)... 8 B. Management (CEO) C. Financial Discipline / Accounting (Comptroller or Head Accountant) D. Internal Audit (Internal Audit)) E. General Internal Controls (Internal Audit) F. External Audit (CEO / Chairman / Internal Audit) G. Regulatory Environment (CEO / Chairman) H. External Rating (CEO / Chairman) V. Credit Risk Management A. Underwriting Process (Head Loan Officer) B. Collections Process (Head Loan Officer) C. Loan Loss Reserves, Charge-Offs and Recovery Policies (Head Loan Officer) D. Restructuring Process (Head Loan Officer) VI. Capital Structure A. Capital Plans (CFO or CEO) B. Debt & Savings (CFO or CEO) VII. Market Risk A. Asset-Liability Management (ALM) / Liquidity Risk Management (CFO or CEO) B. Interest Rate Risk Management (CFO or CEO) C. Foreign Exchange Risk Management (CFO or CEO) VIII. Productivity and Efficiency (CFO or CEO) IX. Human Resources (HR Manager) X. Management Information Systems (IT Manager) XI. Appendix A: Rating Table Guidelines for Using Deutsche Bank s Due Diligence Questionnaire Deutsche Bank s Global Social Investment Funds (GSIF) due diligence questionnaire was designed to be used in conjunction with Deutsche Bank s GSIF loan application. It is recommended that before conducting the due diligence visit, you review the loan application and complete as much of the credit write up as possible using Deutsche Bank s GSIF credit format write up. Please take all notes of site visit in this document and then scan the document after you have completed the onsite visit. The scanned document should be saved in the MFI s file.
3 I. MFI Background Information 1. Please update the following information. Date of Update Number of Employees Number of Branch Offices/Service Outlets Plans for New Branches (when) Number of Clients Size of MFI in Assets II. Strategy and Business Planning A. Business and Strategic Planning (CEO / Chairman of Board) 1. How has your business and strategy changed over the past three years? 2. In what direction to you want to take the MFI in the next 1-3 years? 3. When was the last time your strategic medium/long-term plan was updated? 4. Do you have your competitive advantages defined? YES NO What are they? 1
4 5. What are three opportunities that exist for your MFI? 6. What are three threats to your MFI? 7. What are three weaknesses of your MFI? 8. What are three strengths that your MFI have to combat any strengths or weaknesses? 9. What factors are considered in setting rates for loans? a. Type of loan: b. Risk: c. Collateral: d. Spread Management e. Competition f. Regulation g. Savings/Share Guarantee h. Other: 10. Would you have problems raising the loan interest rates if it were necessary? YES NO If Yes why? (Skip if no savings) 11. Are your savings interest rates above, below or about the same as the competition? (Skip if no savings) 12. What factors are considered in setting rates on savings? a. Competition: Inflation: b. Other: Other: (Skip if no savings) 13. Would you have problems raising the interest rates paid on savings to become more aggressive in the market? YES NO 2
5 14. Who authorizes interest rate changes in the following specific areas: c. Loan Portfolio Rate d. Savings Product Rate e. Dividend Return/Rate 15. Which sectors of the community are not currently being served and have the most potential? 16. In your opinion, what is the image of your MFI in the community? 17. Do you compare the annual operating budget regularly with actual expenses? YES NO 18. Have the CEO walk through the performance projected in the business plan for the latest quarter or year with actual results. Discuss variation / deviation and plans to get back on track. Put notes below. 3
6 B. Competitive Environment 1. How are you improving your competitive position? (Note: You should review loan application to determine what they believe their competitive position is as well as how competitive the market place is.) 2. What types of new activities/products have you seen from key existing competitors or potential new competitors (e.g. full service bank platforms)? 3. Are your loan interest rates above, below or about the same as the competition? 4. Have there been any recent competitive developments (e.g. pricing pressures, anticipated market consolidation)? Who do you view as you primary competitors and why? 5. Are there concerns about clients becoming over-marketed? If so, how are you and industry peers handling this potential for over-indebtedness? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 4
7 C. Marketing (Marketing Manager) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. Do you have your market position defined? (i.e. how does the MFI compare to competitors in price, service, dist., etc. YES NO If Yes, what do you believe is the MFI s market position? 5. How do you evaluate the effectiveness of your marketing efforts? 6. Do you have clients that use bank or other financial institution services? YES NO 7. If Yes, what services? Why don t you offer these services? 8. What is the population of the economically active people in your market? 9. **PERSONAL OBSERVATION BY PERSON ADMINISTERING QUESTIONNAIRE** 10. Professional 11. Needs Improvement Building Reception Furniture and Equipment Security Presentation of Personnel Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 5
8 III. Social Impact (CEO / Chairman / Board Member) 6. Name of the person(s) being interviewed. 7. How long has s/he been involved with the MFI? 8. What relevant experience does s/he have fulfilling his/her role at the financial institution? 9. In your view, what is the primary target market of the institution? Is this accurately reflected by your current client base? If not, how do you expect to get there? 10. What type of organization or business will the MFI be in 3-5 years (i.e. microfinance, bank, etc.) 11. Have you had any problems keeping focused on the primary mission of your institution? Do you have any plans to modify your mission? Review client breakdown and average loan size in light of response. 12. Who are your founding members? Are they on the MFI s Board? 6
9 13. What methods do you utilize to determine the MFI s impact on the client and/or community? If there are written impact studies, ask for a copy. 14. How frequently do you use the above mentioned methods? Skip if No to question above. 15. How do you use the information collected in these impact studies? Skip if No to question above. 16. (Check loan application to see if this applies.) Please elaborate on your non-financial services (business development, education, health). 17. Do you distinguish between and test whether loans are utilized for productive purposes? YES NO Cross check this with the breakdown of the loan portfolio by loan type. 18. How do you ensure that your loans ultimately are used for productive purposes (& not consumer)? (Does the MFI conduct any post-loan evaluations that verifies the actual destination of the money?) 19. Is your institution a signatory to the Client Protection Principles? 20. Does your Board monitor your institution s activities in relation to the Client Protection Principles? 21. In terms of social impact, how does the MFI rank nationally and internationally? What measures do you use to determine this ranking? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 7
10 IV. Governance and Internal Controls A. Governance Structure, Board & Committees (Chairman / Board Member) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. Please walk through the general governance structure and how it works in practice. What changes have been made in the last year relative to your governance structure and members? Please include any changes in committees, format and periodicities of meetings. 5. Is the CEO a member of the Board? YES NO 6. What is the role of the CEO in the Board meetings? 8
11 7. Do any Board members have operational duties in the MFI, either through direct employment or consulting services or contracts? YES NO 8. What types of decisions does the Board make, and what type of information and what frequency do they receive it? Report Frequency Balance Sheet Income Statement Credit Risk Management Reports Recovery / Charge-Off of Delinquent Loans Cash Flow / Liquidity Asset-Liability Management (Maturity) Interest Rate Risk Foreign Currency Exposure Budget Analysis New Product Approvals Other (Specify) 9. How regularly does the Board meet? 10. How does the Board ensure that the decisions of Senior Management and Board are always aligned with the interest of the organization and its mission? 11. What were a few of the key strategic decisions taken by the board and senior management this year? 12. What are the roles of each committee and their members? How involved is the Board in strategy & operations? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 9
12 B. Management (CEO) 1. Name of the person(s) being interviewed. 2. How long have you been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. What type of information do you use to manage the MFI and what frequency do you receive it? Report Frequency Balance Sheet Income Statement Credit Risk Management Reports Recovery / Charge-Off of Delinquent Loans Cash Flow / Liquidity Asset-Liability Management (Maturity) Interest Rate Risk Foreign Currency Exposure Budget Analysis Other (Specify) 5. Which of the above reports is most useful in helping you manage the MFI? Why? 10
13 6. What are the elements of your business that keep you up at night? 7. Where has the Board been most useful in supporting your management of key issues? Where are their gaps in the Boards support? 8. What are the strategic initiatives that you are working on or plan to work on that are key to your MFI s performance or future? 9. What are the key issues with your investors / donor organizations? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 11
14 C. Financial Discipline / Accounting (Comptroller or Head Accountant) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. Where do the majority of accounting discrepancies come from? What are you doing about this? 5. What is the date of the latest unaudited financials? (Note: We should have the latest audited financials. Audited financial statements should be completed in a few months after the fiscal year end. Delays in audited financials can indicate a problem.) 6. Do you accrue interest from loans? If so, what are the criteria for reversing accrued income on loans made to clients? If not, what are the policies followed by the banking sector? 7. Do you have a policy to control & minimize the amount of non-earning assets? YES NO (Ask for a copy) In general, how is this policy applied? 8. Does the accounting system have any suspense accounts where accounting differences are noted? YES NO 12
15 9. If so, how big is this account? Is there variability around it? If not, how do they handle accounting discrepancies? 10. Does the accounting system have separate results for financial and non-financial services? YES NO 11. Does accounting register all guarantees in off-balance sheet accounts? YES NO 12. Please outline any areas that could be improved in the current accounting system. 13. What are the current strengths of the accounting system? 14. Review the General Ledger account and separate out the amount of Other Assets (sometimes called OREO or Other Real Estate Owned) that are directly related to loan recoveries. This should be measured as a percentage of the total loan portfolio. If larger than 2%, when reviewing loan files make sure to look at credit analysis closely to see if undue weight is placed on the Collateral as opposed to the Capacity of the borrower to repay. Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 13
16 D. Internal Audit (Internal Audit)) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. Review the description of IA from loan application. Be sure that five bullet points for first question are answered completely. Where they have left out issues, complete below. Make sure IA reporting is outlined. 5. How many staff members are in the department? Date 6. Does your institution distinguish between the internal control and internal audit functions? Who performs which? 7. Who does Internal Audit department report to and who evaluates your work? 14
17 8. Where were the MFI s key weaknesses this past year? What is being done to address them? Are you satisfied with the steps and the progress? 9. Have there been any significant changes to Internal Audit s review process in the last 12 months? 10. What issues keep you up at night relative to your MFI s future? 11. In your audits do you look for corruption and code violations? (Client Protection Principles question, Staff Ethical Codes of Conduct ) 12. In your audits do you check that complaints are resolved satisfactorily? (Client Protection Principles question, Client Complaint Resolution ) Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: E. General Internal Controls (Internal Audit) 15
18 1. Have you strengthened / modified internal control structure as the institution has grown to provide stronger oversight for more geographically diverse / more complex products? 2. Are any key internal control statistics tracked such as number of frauds, amounts, etc.? (Note, if the institution is participating in Basle II, then they have to track these statistics. Ask for report.) YES NO 3. If so, what statistics are tracked? Ask for report. 4. Have you experienced any losses from errors or fraud? YES NO When reviewing loan files, simple checks on calculations and analysis can highlight existing control strengths/weaknesses. 5. (If answer above was affirmative) Please describe the fraud including what proportion of total branches have experienced fraud, if staff were let go as a result, etc. 6. What measures are you implementing to address these fraud issues? 7. Do you have a mandatory two-week leave policy? YES NO Is the policy enforced? YES NO (You can investigate this further by discussing how they cover for the person when absent. If they don t have a well thought-out plan, it is likely that it is not rigorously enforced.) 8. Is there some type of check in place to ensure that large expenses are verified as to accuracy and rationale? YES NO Explain: 9. Who reviews the monthly/weekly expenses? 16
19 10. Do you have segregation of the following key duties: - Key / combination of vault YES NO - Credit analysis / disbursement of cash, YES NO - Entry to vault / handling of cash YES NO - Bank reconciliation / Check signing YES NO 11. Does your MFI disburse and collect cash from clients? YES NO Please describe process, i.e. who disburses cash, who receives cash (do loan officers do either?), etc. and any changes that have occurred in the last 12 months. 12. Are there procedures for controlling and maintaining a balanced cashier drawer such as? - Internal audit conduct random audits of teller drawers?. YES NO - Clear oversight of tellers by management (video camera can also be used)yes NO - Daily reconciliation of teller drawers to general ledger YES NO - Dual controls of cash and cash management YES NO Random audits are generally not an effective control point and can sometimes be an inconvenience to clients. 13. What are the procedures for signing checks and handling the MFI s bank accounts? Is there clear separation of duties, dual signatures, no Bearer checks issued, etc. 14. What is the policy for changing the safe combination and location of duplicate keys? 15. How are checks and receipts handled? Should have someone from accounting walk through process with accountant and teller to ensure understand process. 16. Do you have insurance against fraud for all employees that handle funds (fidelity bonding)? YES NO 17. How oftern are the MFI s bank accounts reconciled? 18. Does Internal Audit review the bank reconciliation process? 17
20 19. Which department/person is responsible for reviewing the adequacy of the documentation prior to disbursement of funds for a loan? 20. Do loan officers disburse money, or do tellers/cashiers make loans? YES NO 21. Does accounting/internal audit randomly spot-check appraisals and ensure that documentation is complete? YES NO 22. What is required (documentation, authorization, etc.) to release a lien on an asset? 23. Do you have a contingency plan in the event of a catastrophe or destruction of the head office? YES NO 24. Is there a silent alarm against robbery? YES NO 25. Is there a fire detector and alarm? YES NO 26. Do you have a security guard or other security measure? YES NO 27. Are there instructions on how to proceed in case of an assault? YES NO 28. Do you use pre-numbered and authorized receipts to create an audit trail of the expenses and incomes? YES NO 29. Do you accept post dated checks? YES NO 30. Do you cash all checks daily? YES NO 31. Are all payments (larger than amounts authorized for petty cash) made with check? YES NO 32. What documentation is required to cancel a loan that has been completely repaid? 33. Does Internal Audit do reviews of the off-balance sheet accounts? YES NO 34. Do you have a code of conduct for employees? YES NO 35. Is the code enforced in practice? YES NO 36. Do you have a client/consumer protection policy? YES NO 18
21 37. How often are policies and procedures updated? 38. Which group ensures that policies are updated with regular frequency? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 19
22 F. External Audit (CEO / Chairman / Internal Audit) G. Regulatory Environment (CEO / Chairman) 1. How effective / good do you believe the regulatory environment to be? 20
23 H. External Rating (CEO / Chairman) 21
24 V. Credit Risk Management A. Underwriting Process (Head Loan Officer) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. Please walk me through your loan underwriting process. Key to this exercise is to determine what criteria are used to approve or deny a loan (ability to pay, guarantee, share leverage, credit history, etc.) 22
25 6. Could you please rank the following criteria considered in the credit analysis Criteria Rank Savings Leverage Factor Type/Amount of Guarantee Repayment Capacity Credit History Character of the Individual 7. Do you maintain a list of all guarantors as a control to determine the level of risk for each guarantor? YES NO 8. Do you register your interest on collateral on loans to clients? YES NO If no, why not? 9. How is a loan s repayment period determined? Do the loan terms and repayment methods coincide with the cash flows from the financed activity? For example, agricultural loans are generally term loans, as the farmer borrows money to buy seeds, fertilizer, feed etc., and then after the crop has been harvested pays back the loan with the money generated from the sale of the crop. 10. Review loan classification table. Should confirm if interest is charged against the outstanding balance or amount disbursed (flat)? i. Outstanding Balance ii. Amount Disbursed (Flat) 11. How do you calculate the effective rate of interest that you charge your clients? Compare this rate to the portfolio yield in the projections further discussion may be required in case of substantial differences. 12. Do you make second mortgage, piggy-back loans or top-ups? YES NO If they do, make sure to pull at least one of these loans in your loan file review and evaluate the credit analysis conducted for these types of loans to evaluate analysis. 13. Do you have concentration limits by type of credit product? YES NO 14. Is there a maximum loan size based on equity of the institution? YES NO 15. If YES, how is it determined? As a rule of thumb, loans that are larger than 10% of equity would be considered a concentration of risk. It can also be a sign of insider abuse or lack of internal control. 23
26 16. Does a third-party review loan analysis & documentation to ensure that it adheres to documented policies and procedures? YES NO Dept? As the institution grows in geographical size and complexity, it is important that transactions are reviewed more consistently than a periodic internal audit visit. 17. Does someone review disbursement documentation to ensure compliance with policies and procedures? YES NO Who? If answer is the branch manager, than individual loan file read is important, as branch managers many times do not have time to thoroughly review documentation, or in the event of fraud could be involved. 18. Are interviews by loan officers required for all new loans or are there circumstances where an interview is not required? 19. Are there circumstances where an applicant would not be eligible? Ask the loan officer/manager to provide examples of recent applicants that were rejected. If the loan officer/manager cannot readily provide examples, this should be a red flag and loan process should be looked at more closely. 20. Who verifies that collateral is registered. In small institutions, it is likely that the loan officer will be responsible for this task. In an ideal world, there should be a separation of duties. However, in situations where this is not possible, additional control mechanisms should be put in place such as more frequent internal audit reviews, or at a minimum, external auditors should include this in their review. 21. Do loan officers handle cash in the field? YES NO If so, how do you manage the risks? 22. Does Management regularly obtain information about debt levels among the MFI s clients? (Client Protection Principles question, Avoiding Client Over-Indebtedness ) YES NO If so, ask to see the reports that contain that information. 24
27 Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: B. Collections Process (Head Loan Officer) 1. Please walk me through your loan monitoring and collection process. This should include dates of contacts, written notices, when sent to court, etc. 25
28 2. Do you have covenants or the ability to demand payment of the loan when the conditions for repayment have deteriorated or the precept of the original loan had been falsified? YES NO 3. How many days past due before a loan is considered to be delinquent? Days: 4. Is the entire loan balance included in the delinquency calculation or just the amount of payment that is late? (Walk through a couple of examples to be sure.) Balance Payment 5. What is the total amount and percent of delinquent loans? Amount Percent % As of date: 6. What type of analysis is done on guarantors of loans? 7. Is there an established hierarchy for partial repayment of delinquent loans in the loan policies, (i.e. legal costs, delinquency charges and interest should be deducted before reducing the principal)? YES NO If so, what is it? 8. In the last year, how many times have you collected from a client using (estimate unless collect information): a. Savings b. Collected from Co-maker c. Liquidated Collateral d. Attorney Collection e Arbitration f Court Action 9. How many lawyers do you have working on collection efforts? Date 10. Is the transfer to legal collections mechanical (i.e. by date) or is there subjectivity involved? Under what circumstances are exceptions allowed? It is important to review the actual transfer of loans into legal collection to see how it actually happens in practice? 11. Do loan officers stay involved in the collection process after it is passed to lawyers for collection? If so, what is their role in the process? 26
29 12. Do you monitor/track the work that lawyers are doing? What controls do you have in place? 13. Have you liquidated any assets used to guarantee a loan in the last year? YES NO How many? 14. Are any of the loans to Board or employees delinquent? YES NO Who, Why, How: Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 27
30 C. Loan Loss Reserves, Charge-Offs and Recovery Policies (Head Loan Officer) 1. Do you have a policy for charging-off uncollectible loans? Make sure that description includes time period after which loans are written-off. Also note if there is any subjectivity in charge-off policies or clean up comes after a number of days (i.e. collectibility is not a factor). 2. When was the last time you wrote-off an uncollectible loan? 3. How are recoveries of loans that are charged-off moved back onto the balance sheet or income statement? 4. When you seize collateral, what is the process for liquidating it and paying down the delinquent loan? Do they appraise the property value before recording the value in the books? If not, how can they be certain of the value of the asset? What value is recorded in the financial statements when assets are seized? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 28
31 D. Restructuring Process (Head Loan Officer) 1. Can delinquent loans be refinanced or paid later than their contracted date without penalty? YES NO What are the criteria used? 2. Are restructured loans included in the delinquency calculation? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 29
32 VI. Capital Structure A. Capital Plans (CFO or CEO) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. What reports do you use to monitor the financial performance, capital structure and leverage of your MFI? 5. Since you filled out the application, have you started discussions with any organization/investors with respect to strategic investors? Are there any special features (e.g. repurchase agreements, right of first refusal etc.)? 6. Review with CFO or CEO the existing employees that own a share of the MFI. How were sales handled/valuation? Is it part of an ESOP or profit sharing program? 30
33 Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: B. Debt & Savings (CFO or CEO) 1. How do you ensure quality growth of the loan portfolio when placing large amounts of funding? The MFI needs to be able to place this money while maintaining portfolio quality. 2. What percentage of your total loan portfolio would new loan from Deutsche Bank represent? % 3. Is the current creditor list provided up to date? YES NO (If not, request updated table) 4. What additional funding or debt issuance do you have in the pipeline? Get names and dates. How is your relationship with your current creditors? 5. Do you intend to eventually mobilize savings? YES NO If so when? 6. Do you have a policy to protect clients savings value against inflation? 31
34 7. Given that your institution is mobilizing savings, why are you interested in taking out a loan with Deutsche Bank? Why do you need additional funding? Are you looking for subordinated debt to shore up your capital base? How much sub-debt do they have? Be sure to ask questions with liability structure in mind? Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: VII. Market Risk A. Asset-Liability Management (ALM) / Liquidity Risk Management (CFO or CEO) 1. Do you have liquidity reserves (short term investments for liquidity)? Please describe. YES NO (this would be more important for institutions that mobilize savings) 2. Where are your liquidity reserves held? 3. Has the MFI ever had any liquidity problems? YES NO 4. Review funding sources, duration and repayment and compare that with the term lengths for the various loan products that they offer. Ideally, average loan term should be shorter than funding. If not, then discuss with Management its strategy for matching asset-liability repayment periods. 32
35 Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: B. Interest Rate Risk Management (CFO or CEO) Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 33
36 C. Foreign Exchange Risk Management (CFO or CEO) 1. Walk through what the MFI described in the loan application with respect to how the MFI handles FX exposure. 2. What is your open FX exposure? {(Borrowing in FC Assets in FC)/Equity} Walk the MFI through the open FX exposure and compare to DB covenant of 25%. Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 34
37 VIII. Productivity and Efficiency (CFO or CEO) Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: IX. Human Resources (HR Manager) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 35
38 4. If they answered affirmative on job descriptions or criteria defined for the recruitment of new personnel, review materials used for recruitment. Are the materials comprehensive? 5. Are the salaries for personnel competitive with other banks and financial institutions? YES NO How do you know? 6. Does your compensation program adjust salaries and incentives by position? YES NO 7. Do you have a system for evaluation of personnel? YES NO 8. How stable are personnel? What is the average tenure of senior management? Of loan officers? 9. Do you conduct exit interviews with outgoing employees? YES NO 10. What is the most common reason(s) employees leave your MFI? 11. Is management making the necessary changes to attract and retain staff? 12. Is there a Board-approved code of ethics that defines organizational values and ethical standards expected for staff? YES NO If the answer is yes, ask to see the code. (Client Protection Principles question, Staff Ethical Codes of Conduct ) 13. Are there staff rules that describe acceptable/unacceptable behavior, reprimands and violations that can result in employment termination? YES NO If the answer is yes, ask to see a copy of the rules. (Client Protection Principles question, Staff Ethical Codes of Conduct ) 14. Do all staff sign annual pledges to follow ethical codes? YES NO If the answer is yes, ask to see a copy of the pledge. (Client Protection Principles question, Staff Ethical Codes of Conduct ) 36
39 15. Do hiring procedures assess employees for compatibility with organizational values and ethics? YES NO (Client Protection Principles question, Staff Ethical Codes of Conduct ) 16. Are there anti-corruption policies in place, provided to each staff member and enforced by decision-makers? YES NO If the answer is yes, ask to see a copy of the policies. (Client Protection Principles question, Staff Ethical Codes of Conduct ) Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 37
40 X. Management Information Systems (IT Manager) 1. Name of the person(s) being interviewed. 2. How long has s/he been involved with the MFI? 3. What relevant experience does s/he have fulfilling his/her role at the financial institution? 4. Do you have an adequate computer system (with technical support, internal controls, system audits, contingency plans, etc.?) YES NO Explain. 5. Is there a backup/contingency plan? Please describe it. 6. Are transactions in the loan/savings ledgers of clients tied directly to the general ledger? Note: This question was in the loan application, but is repeated here to confirm with IT. If the MFI has separate systems or is manual, there is a significant risk of discrepancies between what has been registered on the clients account and what has been entered into the accounting system. YES NO Section Rating & Rationale (Include Loan Application Observations) 1=Excellent; 2=Significantly Above Average; 3=Above Average 4=Average; 5=Below Average; 6=Significantly Below Average; 7=Seriously Deficient Rating: 38
41 XI. Appendix A: Rating Table Sect. Component Rating I. MFI Background Information N/A II. Strategy and Business Planning II. A. Business & Strategic Planning II. B. Competitive Environment II. C. Marketing III. Social Impact IV Governance & Internal Controls IV. A. Governance Structure, Board & Committees IV. B. Management IV. C. Financial Discipline IV. D. Internal Audit IV. E. General Internal Controls IV. F. External audit IV. G. Regulatory Environment IV. H. External Rating V. Credit Risk Management V. A. Underwriting Process V. B. Collections Process V. C. Loan Loss Reserves, Charge-Offs, & Recovery Policies V. D. Restructuring Process VI. Capital Structure VI. A. Capital Plans VI. B. Debt & Savings VII. Market Risk VII. A. Asset-Liability Management (ALM) Liquidity Risk Management VII. B. Interest Rate Risk Manaement VII. C. Foreign Exchange Risk Mngmnt. VIII. Productivity and Efficiency IX. Human Resources X. MIS 39
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