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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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©2006 MDM Bank – Strategic Planning Department
Agenda
~ Agenda ~
 Introduction
 Market situation
 MDM example
 Conclusion
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©2006 MDM Bank – Strategic Planning Department
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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©2006 MDM Bank – Strategic Planning Department
Agenda
~ Agenda ~
 Introduction
 Market situation & steps to avoid
 MDM example
 Conclusion
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©2006 MDM Bank – Strategic Planning Department
Market situation & steps to avoid
The overall strong growth of the Russian banking market is expected to continue
although growth rates will slow
~ Introduction ~
 Loans of the banking system has been rapidly
increasing with the Retail segment (CAGR01-05
loans – 91%)
~ Retail loans volumes and growth ~
60,00
 State-owned banks are dominating the market
due to cheap resources and increased
competitiveness (~45% of loans)
111,52%
110,81%
56,50
106,51%
95,96%
50,00
100,00%
40,00
80,00%
30,00
42,13
50,19%
22,30
 The interest margin is decreasing, prospectively
giving greater meaning to non-interest income
of banks
60,00%
25,52%
20,00
10,00
10,18
3,14
0,00%
2001
2002
2003
Retail loans
5
40,00%
20,00%
4,47
0,00
 Distribution networks of competitors are
widening making later penetration of the
market more expensive
120,00%
2004
2005
2006H1
growth rate
©2006 MDM Bank – Strategic Planning Department
Market situation & steps to avoid
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
~ Retail loans share on the market ~
13,27%
14,00%
12,00%
12,44%
10,00%
8,67%
8,00%
5,35%
6,00%
4,00%
3,00%
3,43%
6,47%
3,69%
2,00%
0,00%
5,67%
1,06%
1,31%
2001
2002
2,26%
2003
2004
% of GDP
Источник: Анализ рыночных источников
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2005
2006H1
% of BS
©2006 MDM Bank – Strategic Planning Department
Market situation & steps to avoid
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
~ Overdue loans ~
45
42,13
2,94%
40
3,00%
35
2,32%
2,44%
2,50%
30
28,06
25
10
2,00%
22,30
20
15
3,50%
1,84%
1,11%
1,50%
1,63%
1,34%
1,00%
10,18
0,50%
5
0
0,00%
2003
2004
Retail loans, bln. USD
2005H1
Bad loans vs. current portfolio
2005
Bad loans vs. previous portfolio
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
Источник: Анализ рыночных источников
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©2006 MDM Bank – Strategic Planning Department
Market situation & steps to avoid
In order to avoid situation with growing bad loans ratio Bank’s should follow certain
rules
~ Steps to avoid ~
Do not oversell
Properly inform
the client
Источник: Анализ рыночных источников
 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)
 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
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©2006 MDM Bank – Strategic Planning Department
Market situation & steps to avoid
Consumers are not reading carefully agreements while some fees and commissions
are hidden inside them
~ Examples of not-proper behavior in Consumer lending (ex. # 1-2) ~
Practice
Effect
Russian financial
institution
 Monthly payment for debt
account management based
on the % of outstanding loan
amount
 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
Moscow mortgage
bank
 3 % lump sum of the total
outstanding debt for late
payment of even one
installment
 3 % lump sum of the total
outstanding debt on a
mortgage of 200.000 USD is
6.000 USD
Источник: Анализ рыночных источников
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©2006 MDM Bank – Strategic Planning Department
Market situation & steps to avoid
Consumers are not properly calculating the interest rates and compare rates with
the annual ones
~ Examples of not-proper behavior in Consumer lending (ex. # 3) ~
Medium consumer
lending bank
 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
Источник: Анализ рыночных источников
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©2006 MDM Bank – Strategic Planning Department
Agenda
~ Agenda ~
 Introduction
 Market situation
 MDM example
 Conclusion
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©2006 MDM Bank – Strategic Planning Department
MDM Example
MDM Bank is working on transparent and understandable product offering for retail
customers, close to foreign best practices
~ Examples of not-proper behavior in Consumer lending~
Some European
regulations
 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.
MDM Bank
practice
 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
Источник: Анализ рыночных источников
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©2006 MDM Bank – Strategic Planning Department
Agenda
~ Agenda ~
 Introduction
 Market situation
 MDM example
 Conclusion
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©2006 MDM Bank – Strategic Planning Department
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
Источник: Анализ рыночных источников
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©2006 MDM Bank – Strategic Planning Department