IBLF Improving financial literacy and responsible lending: the MDM experience

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IBLF Improving financial literacy and
responsible lending the MDM experience
Michelangelo Mazzarelli Head of Strategy
planning department Moscow, October, 17 2006
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Agenda
Agenda

• Introduction
• Market situation
• MDM example
• Conclusion

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Introduction
Introduction

• This presentation is covering only retail loans
  because companies are generally managed
  professionally and they are able to understand
  the credit market and the banking products in
  general and realize all the consequences of their
  actions in such field
• The retail customer instead, especially in a
  vastly under banked country like Russia where
  loans to individuals are a recent development of
  the economy, can often lack of the necessary
  knowledge to support correct decision making
  interacting with a financial institution
• As the deposit insurance scheme secured over 90
  of the Russian deposits and investment in funds
  is not extremely popular, the area where we see
  more risk in the interaction with banks is
  lending
• Recently a share of bad loans in overall
  portfolio have been neglected because retail
  portfolio was growing extremely rapidly
• As bad loans emerge with a certain delay compared
  to the disbursement time the real situation may
  be worse

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Agenda
Agenda

• Introduction
• Market situation steps to avoid
• MDM example
• Conclusion

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The overall strong growth of the Russian banking
market is expected to continue although growth
rates will slow
Market situation steps to avoid
Introduction

• Loans of the banking system has been rapidly
  increasing with the Retail segment (CAGR01-05
  loans 91)
• State-owned banks are dominating the market due
  to cheap resources and increased competitiveness
  (45 of loans)
• The interest margin is decreasing, prospectively
  giving greater meaning to non-interest income of
  banks
• Distribution networks of competitors are widening
  making later penetration of the market more
  expensive

Retail loans volumes and growth
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Fast growth of retail segment is driven by
target consumer loans (autoloans etc.) and
increasing welfare of individuals. Still a
slowdown is expected due to satiation of market
Market situation steps to avoid
Retail loans share on the market
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Overdue loans have increased significantly both
in relative and absolute measurement, in this
case difficulties with loan repayment may cause
negative impact on further growth
Market situation steps to avoid
Overdue loans
Bad loans have reached 686 mln USD at the end of
2005. With an average loan of 2000 USD around
340.000 borrowers (families) have a problem of
bad debt
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In order to avoid situation with growing bad
loans ratio Banks should follow certain rules
Market situation steps to avoid
Steps to avoid

• Banks should establish a limit for how much
  credit they can give as opposed to the financial
  situation of the people (overall expense for
  credit service as opposed to the family total
  income minus reasonable living expenses)

Do not oversell

• Banking offer should be understandable and
  transparent to the client besides interest
  rate, each commission should be clearly stated on
  paper and the client should understand in advance
  how much he will really pay

Properly informthe client
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Consumers are not reading carefully agreements
while some fees and commissions are hidden inside
them
Market situation steps to avoid
Examples of not-proper behavior in Consumer
lending (ex. 1-2)
Effect
Practice

• Monthly payment for debt account management based
  on the of outstanding loan amount

Russian financial institution

• 1,5 monthly for debt account servicing will
  bring to a yearly interest rate of 15,6 with
  annuity payments on top of the interest rate

• 3 lump sum of the total outstanding debt for
  late payment of even one installment

Moscow mortgagebank

• 3 lump sum of the total outstanding debt on a
  mortgage of 200.000 USD is 6.000 USD

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Consumers are not properly calculating the
interest rates and compare rates with the annual
ones
Market situation steps to avoid
Examples of not-proper behavior in Consumer
lending (ex. 3)

• Client takes 8,000 RUR for 4 months
• Pays every month 2,279 RUR
• Preliminary interest rate excluding additional
  commissions is 13,95 per 4 months or 41,85 per
  annum

Medium consumerlending bank
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Agenda
Agenda

• Introduction
• Market situation
• MDM example
• Conclusion

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MDM Bank is working on transparent and
understandable product offering for retail
customers, close to foreign best practices
MDM Example
Examples of not-proper behavior in Consumer
lending

• In most European countries the law obliges the
  banks to state the total effective yearly
  interest rate on the credit including all the
  commissions (TEYIR). Since the introduction of
  this rule, all fees were incorporated in the
  stated interest rate which converged with the
  TEYIR, while before large differences were
  recorded.

Some European regulations

• MDM Bank has a comprehensive scoring system which
  allows to reject all applications not suitable
  for our portfolio
• Important condition is to respect low risk ratios
  between payments for the credit and family income
• We have no hidden fees all conditions are
  clearly stated to the client and written in the
  main body of the contract.
• A detailed plan of repayments is handed out to
  the client and for each payment interest and body
  of the credit are stated

MDM Bankpractice
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Agenda
Agenda

• Introduction
• Market situation
• MDM example
• Conclusion

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MDM Example
Conclusion

• The regulatory environment in Russia does not
  require to show clearly the total effective
  yearly interest rate
• Russian consumers have little experience in
  borrowing and in financial product in general
• Therefore each bank is responsible of properly
  informing the client
• On the characteristics of the product he is
  purchasing
• Of the risk he might take
• Responsible lending should be first a banks
  policy

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