1 ©2006 MDM Bank – Strategic Planning Department IBLF Improving financial literacy and responsible lending: the MDM experience Michelangelo Mazzarelli

1©2006 MDM Bank – Strategic Planning Department

IBLF

Improving financial literacy and responsible lending: the MDM experience

Michelangelo Mazzarelli – Head of Strategy planning department

Moscow, October, 17 2006


~ Agenda ~

Agenda

Introduction

Market situation

MDM example

Conclusion


~ 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


~ Agenda ~

Agenda

Introduction

Market situation & steps to avoid

MDM example

Conclusion


~ Introduction ~

The overall strong growth of the Russian banking market is expected to continue although growth rates will slow


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

3,14 4,47

10,18

22,30

56,50

42,13

111,52%

50,19%

110,81%106,51%

95,96%

25,52%

0,00

10,00

20,00

30,00

40,00

50,00

60,00

2001 2002 2003 2004 2005 2006H1

0,00%

20,00%

40,00%

60,00%

80,00%

100,00%

120,00%

Retail loans growth rate

~ Retail loans volumes and growth ~


~ Retail loans share on the market ~

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

Источник: Анализ рыночных источников

2,26%

3,69%

5,67%6,47%

3,00%3,43%

5,35%

8,67%

13,27%

1,06% 1,31%

12,44%

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

2001 2002 2003 2004 2005 2006H1

% of GDP % of BS



~ Overdue loans ~

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


42,13

10,18

22,30

28,06

1,63%1,11%

1,34%

1,84%

2,44%2,32%

2,94%

0

5

10

15

20

25

30

35

40

45

2003 2004 2005H1 2005

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

Retail loans, bln. USD Bad loans vs. current portfolio 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


~ Steps to avoid ~

In order to avoid situation with growing bad loans ratio Bank’s should follow certain rules


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



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

~ Examples of not-proper behavior in Consumer lending (ex. # 1-2) ~

Consumers are not reading carefully agreements while some fees and commissions are hidden inside them


Russian financial institution


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

Moscow mortgagebank

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 on a mortgage of 200.000 USD is 6.000 USD

EffectPractice


~ Examples of not-proper behavior in Consumer lending (ex. # 3) ~

Consumers are not properly calculating the interest rates and compare rates with the annual ones


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



~ Agenda ~

Agenda

Introduction

Market situation

MDM example

Conclusion


~ Examples of not-proper behavior in Consumer lending~

MDM Bank is working on transparent and understandable product offering for retail customers, close to foreign best practices


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 Example

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


~ Agenda ~

Agenda

Introduction

Market situation

MDM example

Conclusion


~ 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

MDM Example

Documents

1 ©2006 MDM Bank – Strategic Planning Department IBLF Improving financial literacy and responsible lending: the MDM experience Michelangelo Mazzarelli