Microfinance Credit Reporting Colin Raymond - IFC CB Regional Specialist - Asia Rabat - 22-25 September, 2014 Session 11
Case Study of MicroMicro Read description of the case study provided Discuss the following questions: What are some of the expected obstacles and what recommended solutions can you propose? How do you build the confidence of the rest of the industry to share their customer data? What can the bureaus do on their part, to encourage the submission of data by as many of the industry participants as possible? What resistance (if any) should we expect from staff/personnel within MM? Any other critical issues to consider? Prepare 4-5 key recommendations You have 15 minutes to complete this exercise 2
MFI Credit Bureau Initiative - India HKN Raghavan - COO Equitas Rabat - 22-25 September, 2014 Session 11 bis
Seeds of Credit Bureau Managing Director of Equitas Micro Finance within 2 months of inception strongly felt that there was a need to have better control on the clients leverage. Dec 2008, on the sidelines of the CGAP workshop it was decided to set up an informal data sharing amongst all the MFI s to know the default and over leveraged clients. MFIs had to seek the services of the credit bureaus approved by the Central Bank. Dec 2009, an association of the NBFCs (Non Banking Financial Institutions) MFI s formed an association under the name MFIN (Micro Finance Institutions Network). Highmark, Equifax, Experian were awarded licenses to set up in India. MFIN decided to work with Highmark for credit bureau initiative and also invested in Highmark as a signal to work closely with them. Vijay Mahajan, a father figure for the Micro Finance industry galvanized the entire NBFC MFI s to support this initiative. IFC provided the technical support. Omidyar funded the project, while MFIN did the ground work. IFC did the coordinating all these activities. 2010 Dec, the credit bureau got established. 4
Challenges Many MFIs did not have data captured in the system, different hardware & software, different architecture. All these were a major issue. Many MFIs expressed doubt over misuse of the data for competitive purpose. Some of them were quite skeptical about the output in the absence of common KYC norms. IFC hired a technical consultant who worked with each individual MFI and studied the various software and platform on which the MFIs were working. They developed a software which can sit on any type of architecture and software and extract a common data format (CDF) which can be uploaded by the credit bureau. MFIN on the other hand had a detailed discussion with all the MFI s to alley the fear on any breach of data confidentiality. Regulator came out with guidelines of max 2 MFI exposure for the client made the MFI s to fall in line. April 2011, Equitas and Ujjivan, 2 MFI s started accessing the credit reports. 5
Operational Challenges There were discipline issues of submitting the data consistently with quality every month. By the time the data got uploaded the lag would have been 45 days. In this gap the client could avail loans from other MFIs. Other challenge was if MFIs are using the Credit Bureau report before taking any decision on lending. MFIN set up a credit bureau committee consisting the members who drew road map for weekly data submission, also to know if MFIs were using the CB report for credit decision. This follow up yielded a significant result where the data submission became more uniform and disciplined. 6
Progress on data 7
Clients Portfolio Analysis 8
Next set of challenges 96% accuracy has been achieved thanks to MFI fraternity and the work done by the credit bureaus. We further need to plug the gap. IFC funded the next round of initiative with technology partner which is under way working on further fine tuning the quality of the data. With the recommendations given we should be able to achieve close to 100% accuracy of the data output. MFIN is working with the central bank on getting the similar data on Self Help Groups to the bureau so that we will have complete exposure otherwise this is limited to the MFI borrowing only. We would say this has been fantastic journey where something impossible has been achieved at such a short time. 9
Q & A Discussion 10
2014 Exercise Session 11 - Rabat training Credit bureaus and microfinance: The case of MicroMicro Shall MFIs use Credit bureaus in order to better control their portfolio? Colin Raymond and HKN Raghavan 23 September, 2014
CREDIT REPORTING EXERCISE SESSION 11 - RABAT TRAINING Shall MFIs use Credit bureaus in order to better control their portfolio 23 September, 2014 DRAFT WORKSHOP CASE STUDY MicroMicro (MM) is a specialized microfinance institution offering flexible micro- credit, micro- savings and micro- insurance products countrywide. MM is currently active in 12 districts, encompassing both rural and urban areas of the country, and has successfully implemented development projects involving wide- ranging development aims: from disaster risk reduction to the provision of non- formal education to working children. In particular, MM is at the forefront of efforts to improve the lives of poor and extreme poor people. MM has been engaged in (i) empowering target groups through institution building, (ii) women s development, (iii) environmental development through awareness raising, plantation and sanitation programs, (iv) emergency disaster response and service delivery, (v) the provision of health services to women, children, adolescent and older people (vi) formal and non- formal education to underprivileged children, (vii) income generation through micro- credit operations, (viii) employment development training for the poor, (ix) natural disaster preparedness and risk reduction programs, (x) empowerment of older people, (xi) agriculture development and food security and (xii) urban governance. Target clients: Very poor, poor, micro- entrepreneurs, small and marginal farmers Mission: To be an independent, sustainable, cost- effective microfinance institution that provides diverse, appropriate and market responsive quality financial and business development services at competitive prices along with other social development programs to very poor, poor and non- poor customers. Products: The microcredit products on offer consist of both, group- based microcredit (urban and rural), as well as individual microenterprise loans. Moreover, existing clients are eligible for short- term additional loans such as seasonal input loans, educational loans and disaster relief loans. Installments have to be made on a weekly, bi- weekly or monthly basis, depending on the loan category. For regular loans, the term is fixed at 12 months, interest rate ranging from 25 to 35%, repayments are scheduled over 45 weeks only. Different types of loans are given to meet specific needs of customers. The loans include rural/urban, micro- enterprise, disaster, seasonal, educational, ultra- poor, emergency, festival, family and housing loans. Despite significant competition (at least half a dozen other MFIs operate in the same geographical districts) and the recent financial crisis, MM has managed to remain profitable in its microcredit operations. Loan repayments are maintained on healthy levels, while the customer base will need to be broadened steeply over the next 2-3 years. Operational strategy: Formation of village organization (kendra) with poor women. Weekly meeting for participatory decision making, Provide social awareness training and then provide small credit based on their need and proposal. International Finance Corporation Advisory Services The World Bank Group IFC Advisory Services Page 2
CREDIT REPORTING EXERCISE SESSION 11 - RABAT TRAINING Shall MFIs use Credit bureaus in order to better control their portfolio 23 September, 2014 Credit Bureaus: Around 12 months ago, the regulating authority issued operating licenses to 4 private credit bureaus, two of whom have started operations and are actively recruiting new members. They are both making the claim as to having the largest database and the best coverage of MFI loans in the country. Both bureaus are keen for MM s patronage and appear to be willing to be very price competitive. As previously mentioned, there are a number of other MFIs operating in the same geography. Some of whom are regulated, while there are a large number non- regulated, they have no obligation to share their credit information, nor to consult with credit bureaus the credit history of their prospective customers. There is a mistrust of credit bureaus, they believe that if they share their credit information, customers will be easily stolen by other financial institutions. There are other issues like internet service not being available everywhere and poor IT capabilities in most institutions. MM is determined to change this situation in order to develop a robust market, with lower rates of non- performing loans and lesser risk of over- indebtedness. Your Assignment (should you decide to accept it!) You are a consultant engaged by MM who has been charged to assess the situation and recommend whether they should use credit bureau services in order to have a better control of their loan portfolio, as well to screen customers more carefully. Focus on the WHAT & HOW of what MM will need to do as actionable activities to incorporate the use of credit bureau services into their risk assessment practices. What are some of the expected obstacles and what recommended solutions can you propose? How do you build the confidence of the rest of the industry to share their customer data? What can the bureaus do on their part, to encourage the submission of data by as many of the industry participants as possible? What resistance (if any) should we expect from staff/personnel within MM? Any other critical issues to consider? Discuss this question with your group and prepare a brief presentation (4-5 bullets with your recommendations). You have 1 International Finance Corporation Advisory Services The World Bank Group IFC Advisory Services Page 3
CREDIT REPORTING EXERCISE SESSION 11 - RABAT TRAINING Shall MFIs use Credit bureaus in order to better control their portfolio 23 September, 2014 International Finance Corporation Advisory Services The World Bank Group IFC Advisory Services Page 4