CLIENT PROTECTION PRINCIPLES SKS MICROFINANCE Sep 2011 This

CLIENT PROTECTION PRINCIPLES SKS MICROFINANCE Sep 2011 This presentation is solely for viewing. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from SKS Microfinance. 1

AGENDA • Background • Microfinance CPP • Gold Loans CPP 2

INITIATIVE TO FOCUS ON CLIENT PROTECTION • SKS will continue to : ˗ Incorporate significant client protection measures into the business model to ensure ethical lending and collections and educate both staff and borrowers ˗ Work closely with regulatory bodies (RBI), leading banks (SIDBI, ICICI) SRO (Sadhan, MFIN) to incorporate their inputs in the CPP AND ˗ ˗ Cap ROA on microfinance loans Avoid hyper growth in microfinance to ensure quality of our processes, people and Sangams To create a separate vertical for CPP headed by a Senior resource To appoint a social sector veteran as an Ombudsman 3

FEEDBACK TO BE TAKEN FROM ALL STAKEHOLDERS Industry leaders Regulatory body SKS Leading Banks Independent agencies

GUIDING PRINCIPLES OF CPP STRATEGY CURRENT IMMEDIATE SHORT TERM Lend only for income generating and productive purpose Improve standard of living by access to capital Group dynamics and concept of shared risk New product and services to assist financial inclusion Right level of debt to avoid service difficulties Incentivize staff on ethical behavior Detailed background check of staff KYE Financial literacy Livelihood training through partnership Realign incentive structure across all levels based on CPP guiding principles 5

AGENDA • Background • Microfinance CPP • Gold Loans CPP 6

PRINCIPLES OF CLIENT PROTECTION – CGAP & SMART CAMPAIGN Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms for redress Appropriate of grievances collections practices Ethical staff behavior

TRAINING PROVIDED TO BORROWERS TO AVOID OVER-INDEBTEDNESS Thrust Areas Compliance • Avoidance of Overindebtedness • • • Eligibility criteria : • Annual House Hold Income (HHI) limit of Rs 60, 000 for rural areas and Rs 1, 20, 000 for urban areas • Total outstanding not to be above Rs 50, 000. Housing Survey and Target Details during group formation Credit bureau report before conducting CGT on number of MFI loans , total outstanding and default which will be used in decision making Asset prices and loan sizes to be linked All loan amounts to be below Rs 15, 000 till Jan ‘ 12. Loans to be utilized for income generation Problems in using Loans for consumption Savings as a useful instrument Problems of multiple borrowing and over indebtedness LUC made mandatory for all loans disbursed LUC incentive introduced for branch staff Asset viewing mandatory to check frauds Compliance + • • HHI captured in housing survey by SM (surrogate indicators in addition to self declaration, higher of the two will be taken) HHI assessment to be done yearly for repeat borrowers Cap on loans from 3 MFIs Maximum loan amount to be capped

FINANCIAL LITERACY TRAININGTO BE DONE FOR OUR BORROWERS TO ENSURE THEIR UNDERSTANDING OF THE PRICING Thrust Areas Transparent and Responsible pricing Compliance • ˗ ˗ ˗ ˗ Member to be trained on Interest rate (Diminishing balance) Calculation of EWI Loan processing fee and actual insurance premium No penalties for delayed payments or preclosure Detailed product features Passbooks as receipt for the payments made Collateral free loans Choice of frequency of repayment AND ˗ ˗ Pricing as per RBI guidelines All Operation manuals to be revised every year Compliance + • • • Refresher CGT for the center on yearly basis Group Leaders Meeting (GLM) on periodic basis instead of Sangam Leaders Meeting (SLM) Outbound calls to members to test their awareness of products & policies AND • Pricing to be lower than RBI guidelines

BORROWERS AND STAFF ARE TRAINED REGARDING APPROPRIATE COLLECTION PRACTICES & ETHICAL BEHAVIOUR Thrust Areas Appropriate Collection practices Ethical Staff behaviour Compliance • Members are made aware of ˗ Their responsibility in group lending methodology ˗ Peer support as against peer pressure ˗ That all financial transaction are done ˗ in the presence of all members ˗ at a public place and not during odd hours ˗ by employees and not outsourced Inculcate culture of compliance along with culture of customer service • Respect members • No abusive or rude language • No visiting of home / workplace of members • No taking of bribes / commissions • No confiscation of assets • Encourage employees to inform deviations through employee toll free number • Staff to be retrained on ˗ Group lending methodology ˗ Product training ˗ Peer support as against peer pressure ˗ Soft skill training ˗ Emphasis on Core Values ˗ Responsible lending Compliance + • • Guidelines for moratorium for hardship cases Refresher CGT for the center on yearly basis to reinforce JLG Training on assessment of HHI using surrogate indicators Independent assessment of staff behaviour through outbound calls to members

GRIEVANCE REDRESSAL MECHANISM & DATA PRIVACY ARE PUT IN PLACE Thrust Areas Mechanisms for redress of Grievances Compliance • ˗ ˗ • Privacy of Client data Members to be made aware of Toll free number of 1800 300 10000 Resolution process of their complaints / queries / suggestions Timelines for resolution Their right to escalate unresolved complaints to Ombudsman Borrowers’ data is kept confidential and not shared with anyone except in cases of • RBI approved Credit Bureaus for assessing the number of loans and total outstanding of borrowers • Legal requirement from any court Compliance + • • Implement manning of the toll free telephone lines to 16 hours in 2 shifts Conduct outbound calls to confirm resolution of the complaints/ queries of members.

THIRD PARTY VALIDATION OF KEY PERFORMANCE INDICATORS • FLCC (Financial Literacy and Credit Counseling) • CGT and GRT • Physical cross check of household income • Transaction details • LUC • Grievance redressal Results to be published on the website and shared with key stakeholders 12

AGENDA • Background • Microfinance CPP • Gold Loans CPP 13

TRAINING PROVIDED TO BORROWERS TO AVOID OVER-INDEBTEDNESS & APPROPRIATE COLLECTION PRACTICES Thrust Areas Avoidance of Overindebtedness Compliance + • • Number and outstanding of loans to be incorporated in loan application form IA team to verify 20% of forms and randomly check with 2% members Taking self declaration for ownership of gold Reiterate product features during the visit Members to be made aware of • Problems of consumption loans • Advantages of on time payment • Saving as a useful instrument • Loans as a proportion to income • Problems of multiple borrowing and over indebtedness Appropriate Collection practices • • All transactions would be done at the branches during business hours by employees Outbound calls to follow up on repayment

BORROWERS AND STAFF ARE TRAINED REGARDING TRANSPARENT PRICING & ETHICAL BEHAVIOUR Thrust Areas Transparent and Responsible pricing Compliance + • Member to be trained on Interest rate (Diminishing balance) Choice of bullet and EMI payments with monthly flexibility and cap of 12 months Loan processing fee No penalties for delayed payments Detailed product features Receipt for the payments made Choice of frequency of repayment Terms and conditions in vernacular being provided in writing to member. All Operation manuals to be revised every year • Inculcate culture of compliance along with culture of customer service Respect members by not using abusive or rude language No bribes/commissions to be taken Encourage employees to inform deviations through employee toll free number Staff to be retrained on ˗ Product training ˗ Soft skill training ˗ Emphasis on Core Values • ˗ ˗ ˗ ˗ • • • Ethical Staff behaviour • • • Guidelines for moratorium for hardship cases Outbound calls to capture feedback on understanding of product features Outbound calls to capture feedback on staff behaviour Training on implication of mis-selling and responsible lending

GRIEVANCE REDRESSAL MECHANISM & DATA PRIVACY ARE PUT IN PLACE Thrust Areas Mechanisms for redress of Grievances Compliance • ˗ ˗ • Privacy of Client data Members to be made aware of Toll free number of 1800 300 10000 Resolution process of their complaints / queries / suggestions Timelines for resolution Their right to escalate unresolved complaints to Ombudsman Borrowers’ data is kept confidential and not shared with anyone except in cases of • Regulatory requirement • Legal requirement from any court Compliance + • • Implement manning of the toll free telephone lines to 16 hours in 2 shifts Conduct outbound calls to confirm resolution of the complaints/ queries of members.

THIRD PARTY VALIDATION OF KEY PERFORMANCE INDICATORS • Understanding of charges and product • Transaction details • LUC • Grievance Redressal Results to be published on the website and shared with press and media 17

CLIENT PROTECTION PRINCIPLES CGAP Avoidance of Over-Indebtedness. ▪ Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that only appropriate non-credit financial products (such as insurance) are extended to clients. Transparent and Responsible Pricing. ▪ The pricing, terms, and conditions of financial products (including interest charges, insurance premiums, all fees, etc. ) will be transparent and will be adequately disclosed in a form understandable to clients. Responsible pricing means that pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for financial institutions. Appropriate Collections Practices. ▪ Debt collection practices of providers will not be abusive or coercive. Ethical Staff Behavior. ▪ Staff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients. Mechanisms for Redress of Grievances. ▪ Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients. Privacy of Client Data. ▪ The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions, and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories). 18

PRINCIPLES OF CLIENT PROTECTION – SMART INITIATIVE 19

Principles of client protection Source: http: //www. smartcampaign. org/tools-a-resources/3/268

Points to REMEMBER Our members are the lifeline of our existence It is our duty to take care of our members We are here because of our members

Principles of client protection Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms to redress Appropriate grievances collections practices Ethical staff behavior

Principles of client protection Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms for redress Appropriate of grievances collections practices Ethical staff behavior

Understanding indebtedness Member name Lakshmibai MFI name Loan amount taken(Rs) repaid (Rs) o/s (Rs) MFI 1 40, 000 8, 000 32, 000 MFI 2 16, 000 3, 500 12, 500 SKS 15, 000 5, 500 9, 500 Total loan amount outstanding of the member = Rs. 54, 000 This is called Total indebtedness

Over indebtedness As per the new RBI guidelines, If a member’s total indebtedness is more than Rs. 50, 000/-, It is considered as over indebtedness

Over indebtedness impacts the member Member may … • • • Have to work longer hours to generate more income • Search for help from family and friends leading to Reduce consumption – (Eat less, feed less) Use savings for loan repayment Take new loans to pay off the existing loans Sell assets, including productive assets Invest less in income generating activity strained relationships Source: DAI

How do over-indebted clients affect us? Increase in arrear cases Our image and reputation is at risk Unwanted stress levels for all of us Increase in dissatisfied members Extra time spent for collections in the center meetings Genuine members would suffer because, we would not able to disburse loans if collections suffer Our career is dependent on satisfied members

Think & Answer Loan O/s from MFI 1 : Rs. 24, 000 Loan O/s from MFI 1 : Rs. 22, 000 Loan O/s from MFI 2 : Rs. 15, 000 Loan O/s from MFI 2 : Rs. 13, 000 Loan O/s from SKS : Rs. 12, 000 Loan O/s from SKS : Rs. 8, 000 Total indebtedness ___________ Loan amount applied for : Rs. 14, 000 Is the member eligible for a loan? If “no”, why? If “yes”, what is the eligible amount?

Understanding Annual household income Family member Activity Income Per Annum (Rs) Member Small business 10, 000 Member’s husband Agriculture 35, 000 Member’s son Mechanic shop 20, 000 Member’s daughter Helps her mother Annual household income 0 65, 000

Guidelines on Annual household income • Only the Members who are within the below mentioned annual household income limits are eligible for loans • Members from Rural area – Annual household income should be below Rs. 60, 000/- • Members from Urban / Semi urban area – Annual household income should be below Rs. 1, 20, 000/-

Case study 1 - Urban/ Semi urban Family member Member Activity Sells vegetables Income Per Annum (Rs) 20, 000 Member ‘s husband Auto driver 40, 000 Member’s son Mechanic shop 20, 000 Member’s daughter Helps her mother Annual household income 0 80, 000 Is the member eligible for loan as per annual household income limit?

Case study 2 – Urban/ semi urban Family member Member Activity Kirana shop Income Per Annum (Rs) 35, 000 Member's husband Auto driver 35, 000 Member's son 30, 000 Works in a factory Member’s daughter Sells flowers Annual household income 25, 000 1, 25, 000 Is the member eligible for loan as per annual household income limit?

Case study 3 – Rural Family member Member Activity Income Per Annum (Rs) Agriculture 25, 000 Member’s husband Agriculture 35, 000 Member's son 30, 000 Works in a factory Member’s daughter No activity Annual household income 0 90, 000 Is the member eligible for loan as per annual household income limit?

Case study 4 – Rural Family member Member Activity Sells flowers Member's husband Agriculture Member's son Income Per Annum (Rs) 20, 000 35, 000 No activity 0 Member’s daughter No activity 0 Annual household income 55, 000 Is the member eligible for loan as per annual household income limit?

Avoid Over-indebtedness: Principle in Practice We give loan to a member if the total indebtedness is below Rs. 50, 000/- We discourage over-borrowing by a member

Think & Answer Residential status : Rural Area Residential status : Urban Area Total indebtedness : Rs. 54, 000 Total indebtedness : Rs. 38, 000 Annual household income : Rs. 58, 000 Annual household income : Rs. 98, 000 Loam amount applied for : Rs. 14, 000 Is the member eligible for a loan? If “no”, why? If “yes”, what is the eligible amount?

Think & write How are we helping our members ensure they would not borrow beyond their capacity to repay? What efforts would you make to ensure that our members understand this philosophy?

Summary of Learning We give loans only to those members whose Annual household income is ▪ Rural areas : Less than Rs. 60, 000/▪ Urban/ semi urban areas: Less than Rs. 1, 20, 000/The total indebtedness of the member should be below Rs. 50, 000/This includes all loans including the one that she has applied for Our aim is to help our members avoid debt traps and ensure they can repay the loan with comfort. We do this by understanding their household income and total indebtedness before accepting the loan applications.

Principles of client protection Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms for redress Appropriate of grievances collections practices Ethical staff behavior

Understanding Transparency We maintain complete transparency in all our transactions. • During CGT, every member is clearly explained the charges & fees that she is required to pay. • All the charges & fees that a member is required to pay, is announced in the center meeting • All our transactions are carried out in the center meeting in the presence of members • The collections at the center meeting are sorted and counted by the center leader before handing over to the staff. • All transaction details (amount disbursed and collected) are entered in the center meeting minutes book and signed by the staff and read aloud in the center before handing over to the center leader

Understanding Transparency Our passbooks clearly mention the following ü Terms and conditions applicable to our loans ü Table where date of payment, installment number, installment amount is written and signed by the staff. ü Table printed with Installment number, installment break-up (showing principal & interest and outstanding amount ü Amount paid by the member as loan processing fee ü Amount paid towards Term Insurance Premium (TIP) Our Code of conduct printed in the passbook clearly mentions that we do not charge any amount other than the charges mentioned above

Understanding responsible pricing Responsible pricing ü All our products are designed keeping our member in mind. ü Our products meet the regulatory guidelines set by RBI

No transparency – impact on member Member may… ▪ not understand how much she has paid and how much is pending. ▪ feel that she is paying extra ▪ feel that we are taking unnecessary charges ▪ feel cheated ▪ conclude that SKS is not a good organization to deal with ▪ tell many others in her family and friends circle about the same

No transparency – impact on SKS Our reputation and image are at risk Our members will not keep faith on us We will lose respect in the eyes of the member We may lose members

Think & Answer In a center, a replacement member is ready to join the group. The member A. SM agrees and takes her loan application who introduced her says “She knows B. SM conducts one day CGT and after all the procedures and methods of she clears the GRT he allows her to SKS” become a member in the group What should the SM do? C. SM seeks permission from BM to accept her as replacement member.

Think & write What are the different opportunities you would get to demonstrate transparency in a center meeting? Write down 3 initiatives that you would take to ensure that our transparency is understood by the members?

Principles of client protection Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms for redress Appropriate of grievances collections practices Ethical staff behavior

Understanding Inappropriate Collections Practices Offensive language and threats • • • Staff uses offensive or abusive language/ bad words Staff scolds for simple things Staff threatens members/ their family or harass them at work, home, or their place of worship. Unethical seizure of property • Staff enters a member’s home/ place of work and seizes property

Inappropriate collection methods – impact on member Member may… ▪ feel humiliated/ insulted ▪ go to extremes to avoid humiliation ▪ undergo mental stress ▪ develop hatred towards SKS staff ▪ revolt

Inappropriate collection methods – impact on us Members will not believe SKS & tell others not to believe SKS reputation may be lost All other members may observe in silence but talk about SKS staff at their home and other places (work/worship) Her family members may walk into center and pickup a quarrel You may not be welcome in the village any more

Think & Answer In a center meeting a member comes Select the correct option without the installment amount. A. Speak to her in a high tone for not What should the staff do? bringing the installment amount. B. Visit the member’s home after the center meeting to collect the installment amount C. Remind the members of the center about the member pledge and the JLG concept. Encourage the other members in the group to contribute and help her. Remind the center of the rules communicated in the CGT

Think & write Prepare a list of all sentences that you would avoid while talking to members Prepare a list of sentences that you would use while communicating with the members Always ask yourself - “how do I feel if someone were to talk to me like this? ”

Principles of client protection Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms for redress Appropriate of grievances collections practices Ethical staff behavior

Understanding Ethical staff behavior Always doing what is right in the right way Not compromising on values Some examples of not following ethics ▪ Accepting gifts from members ▪ Harassing a colleague, seeking ▪ ▪ ▪ personal favors Using company property for personal use Claiming false expenses Not respecting the place of work

Not having ethical behavior – impact on member Member may… ▪ Lose faith in you ▪ Lose faith in SKS ▪ Suspect every transaction – even if truth is told

Not having ethical behavior – impact on us Our reputation is at stake People may associate every employee with bad behavior Unethical behavior leads to frauds and all of us would suffer

“Ethics always” is our core value We must ▪ use our Staff Pledge without fail at every center meeting ▪ live and demonstrate the essence of staff pledge in every act of ours ▪ be honest to ourselves and our organization ▪ not use shortcut methods ▪ inform our superiors immediately whenever unethical behavior is noticed ▪ always do the right thing in the right way

Think & Answer One UM and SM were attending a center meeting. The Center leader offers to pay extra amount as processing fee to get loans out of turn. The SM was confused. What should the UM do? A. UM should tell the SM to take decision B. UM should pretend as though he has not heard anything C. UM must remind the center leader about our staff pledge and refuse the offer. After coming to the branch, the UM should assemble all branch staff and narrate this example and reinforce the importance of ethical behavior

Think & write As a group - prepare a list of situations that you have faced where you stood by your ethics How would you ensure that you and your colleagues follow the ethics always?

Principles of client protection Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms for Appropriate redress of grievances collections practices Ethical staff behavior

Understanding redress of grievances When a member has a grievance / complaint she deserves a fair chance of being heard She must be provided a mechanism where her grievance / complaint can be heard She has a right for her grievance / complaint to be resolved within a reasonable time frame

Not having a grievance redress mechanism – impact on member A small problem not solved in time may become a bigger problem A problem that is not heard and redressed will create unhappy members Increases frustration amongst members May result in unrest and revolt

Not having a grievance redress mechanism – impact on us Our reputation is at stake Increase in dissatisfied members leading to collection problems and arrear cases We lose the opportunity of feedback from our “life line – our members”

We have a grievance mechanism in place In our constant endeavor to listen to our members and provide them a platform to interact directly with Head Office - we have come out with a facility to listen to our member in her language This is just an other step towards living our core value“Right Focus – Customer First”

We have a grievance mechanism in place We have a toll free number dedicated to listen to the member grievances – 1800 300 10000 Our toll free number is mentioned clearly on the first page of the passbook available with the member The toll free number is mentioned in the minutes book placed in the center meeting Alternatively, we also mention our branch contact number on the pass book and the minutes book Our call center team speaks all major Indian languages

Think & Answer In one center meeting a member asked the reason for delay in her TIP payout. A. SM was correct as he can not do any thing more than this SM replied “ Don’t worry. Amma! How B. SM should give status updates to many times do I tell you that your money both the members and suggest that would come? ” they can also call our toll free Another member has asked the reason number without waiting for the next for not giving her the loan. center meeting SM replied “I was asked to give only C. SM should be silent. Complete that Rs. 4, 000/- not Rs. 10, 000/-” week collection and proceed to next Both the members were upset. center meeting What best can an SM scenario? do in this

Think & write 3 methods that you would put to practice to ensure that our members know the Toll free number and its benefits At least 5 benefits of calling toll free number

Principles of client protection Avoidance of over-indebtedness Transparent & Privacy of client data responsible pricing Mechanisms for redress Appropriate of grievances collections practices Ethical staff behavior

Understanding privacy of client data We collect member details and KYC documents We keep this information for our consumption only We never misuse this information

Not providing privacy of client data – impact on member Member may. . ▪ not trust us ▪ think that her credit information is shared without her knowledge

Not providing privacy of client data – impact on us Our reputation is at stake Our own members lose faith on us We may develop dissatisfied members

We have to protect the client data We must keep all our member documents in a safe place We must accept only photocopies of KYC documents and discourage if the member offers originals to us. Member information should not be shared with anyone without the prior approval of the member

Think & write 3 steps that you would take to keep the member information confidential

Let’s not forget Our members are the lifeline of our existence It is our duty to take care of our members We are here because of our members

Thank you! This presentation is made possible by the Smart Campaign www. smartcampaign. org