Challenges of dealing with clients’ over -indebtedness www.partner.ba
Partner MCF • Partner was started by Mercy Corps in April 1997 as a non-profit organization. • Long term goal is to establish a microcredit company and to eventually transform into a bank. www.partner.ba
Business indicators Partner is a non-profit, non-deposit, multhiethnic, inter-entity NGO Partner provides financial services to economically active people who do not otherwise have access to commercial sources of funding. End of 1st quarter 2010 No. of active clients (market share) 16,2% No. of active clients 51,463 Gross portfolio EUR 62 mil No. of employees 283 Case load per Loan Officer 326 Active portfolio / Loan Officer EUR 400,000 Field Offices 59 Average loan EUR 1,200
The demand side factors for overindebtedness • Unwillingly (e.g. lack of awareness, low education, certain attitudes towards financial institutions and products) • Willingly (deception about actual loan purpose, hiding information, financial stress,etc)?
The supply side factors that led to over-indebtness • insufficient credit appraisal • competition among credit providers • loan officer incentive systems • lack of credit information (before CLR) • borrowing at several institutions • high capital inflow to the financial sector • lack of industry code of conduct • fast institutional growth (profit-oriented)
Study findings by EFSE Distribution of clients by borrowing patern Multiple contracts with different FI One contract 37% 41% Multiple contracts with the same FI 22%
Response from Partner Partner employs a multifaceted system to prevent, detect, and correct over-indebtedness among its clients. Management views avoiding client over-indebtedness as an institutional responsibility and has built a robust system that functions throughout the lending process.
Beyond codes SIX PRINCIPLES 1. Avoidance of over-indebtedness 2. Transparent and Responsible pricing 3. Appropriate collections practices 4. Ethical staff behavior 5. Mechanisms for redress of grievances 6. Privacy of client data
Institutional factors: • Market leader in clients’ protection • Rigorous analysis and approval • Good image, clients’ trust • Constant market survey • Sophisticated internal systems • Client oriented management
Preventing overindebtness • Careful CL’s capacity and affordability assessment • Explicit guidance regarding debt thresholds • Multiple loan product offer answering CL ’ s needs • Incentive system includes portfolio quality • Educational brochures • Internal audits, marketing audit, Clients satisfaction surveys ,
Transparent and responsible pricing • Clear and complete promotional info • No hidden cost • All staff trained in financial education • Prices, terms and conditions are disclosed (prior and at point of sale) • Customer Protection Code
Fair pricing • NO provision fees • Penalty for pre-payment reasonable compared to other institutions • Penalties for delayed payments cancelled • Competitive prices within the country context
Appropriate collection practices • Stated in Credit Manual & followed by LOs • Employee Code of Conduct • Collection practices prevent depriving borrower of basic survival capacity • Procedures are monitored by the internal audit • Negotiation possible for willing borrower • Re-scheduling policies prevent automatic debt extensions
Ethical staff behavior • Management creates organizational culture valuing ethnical behaviour and excellent service • Hiring procedure effective • Anti corruption policies in place & effective • Evaluation of LO behavior (managers+internal audit+marketing audits) • Fraud prevention: control and organizational culture
Mechanisms for redress of grievances • Procedure for handling complains in place • Free info line • Mystery shopping • Info used for decision making and service improvement
Privacy of client data • ISO 27001 • CLs’ personal and financial info secured • Rigorous systems and checks in place • IT system secured and protected with various levels of authorized data access • CL consent required for use of information • Statement of Disclosure (signed by all employees)
Recommendations • Limit credit exposure per client • Reduce internaly cross-borrowing from multiple institutions • Strengthen loan appraisal and monitoring • Separate inter-relationship between borrowers and guarantors
Recommendations • Develop industry-wide standards of conduct with clearly defined indicators • Cooperate with the Banking Association to implement the same procedures for monitoring the compliance of bank • Investors should include the assessment of the compliance with the standards of the code of conduct into due diligence
Recomendations (Related to CLR) • Harmonize risk classification methodology • Harmonize the reporting method for the number of days in arrears • Clearly mark restructured loans • Conduct trend analysis of comprehensive CLR data
More info at www.smartcampaign.org
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