risk management regulatory framework for microfinance...
TRANSCRIPT
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2011/GFPN/WKSP/018 Session 5
Risk Management Regulatory Framework for Microfinance Institutions - The Peruvian Case
Submitted by: Peru
Workshop on Microfinance Best Practices Ha Noi, Viet Nam
7-8 April 2011
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RISK MANAGEMENT REGULATORY FRAMEWORK FOR MICROFINANCE INSTITUTIONS
The Peruvian Case
Myriam CórdovaMyriam Córdova
Chief of Microfinance Supervision, SBS ‐ Peru
APEC Workshop on Microfinance Best PracticesApril 2011
Agenda
Context: Microfinance in PeruContext: Microfinance in Peru
Regulatory framework
Recommendations
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Context:Microfinance in Peru
Myriam Córdova Luna
Microfinance in Peru
Microenterprises represent 98% of the totalnumber of enterprises in the country, contributewith 25% of Peruvian GDP, and employ 55% of thecountry labor force.Micro loans represent 6.2% of the total amountgranted by the Peruvian Financial System;however, microclients represent 22.51% of the totaldebtors.Number of micro clients: 1,6 MM (Dec 2010)
Total Portfolio Financial System: US$ 41 176 millions.Total Debtors Financial System: 7 328 563Peruvian GDP: US$ 139 752 millions
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Baseline
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Context changed…
New products and services
MFIsMFIsMFIs competition
Downscaling Transparency of information
Active interest rates reduction
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1980 1985 1990 1995 2000 2005 2011
MSLOs RSLOs EDPYMEs BANKs
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Risk Management
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Enterprise Risk ManagementIntegrated Framework
Regulatory Framework( )(Res.037‐2008)
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Enterprise Risk ManagementEnterprise Risk Management is aprocess, effected by an entity’sboard of directors, management
Categories of objetives
and other personnel, applied instrategy setting and across theenterprise, designed to identifypotential events that may affectthe entity, and manage risk to bewithin its risk appetite, toprovide reasonable assuranceregarding the achievement ofentity objectives.
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Enterprises should manage their risks proportionately to their size andcomplexity of their operations and services.
Committee of Sponsoring Organizations of the Treadway CommissionCOSO – ERM Framework
•Ethical values, technical and moral qualifications of personnel•Organizational structure• Conditions to define
• Aligned with institutional mission and vision•Consistent with risk tolerance and degree of acceptable risk exposure
•Interdependence among events, as well as influential factors determining them
•Qualitative and quantitative methods or a mixture of both
Risk Management ‐ Components
Conditions to define reporting lines and allocate responsibilities
Internal environment
p p
Objective setting Event identification Risk Assessment
•Accept the risk, reduce the likelihood of occurrence, reduce its impact, transfer it totally or partially, avoid risk
•Efficiency and effectiveness of business operations, reliability of information and compliance with laws
•Appropriate and timely information to the Board, managers, staff, as well as external stakeholders
•Evaluation of the operation of the comprehensive risk management framework
Risk response Control activities Information and communication Monitoring
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There is a direct relationship between objectives (what
tit t i t hi )
Enterprise Risk Management
an entity strives to achieve) and enterprise risk management components (what is needed to achieve the objectives).
It is not strictly a serial processprocess.
Components will not operate the same way in every institution.
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Committee of Sponsoring Organizations of the Treadway CommissionCOSO – ERM Framewok
Types of Risk
Credit Risk
MFIsMFIs
Strategic
Risk
Liquidity Operational
Reputational Risk
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Risk
Market Risk
Risk
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Enterprise Risk Management
Should have a comprehensive understanding of the business risks, but not manage each risk separately, ignoring what is
happening in the rest of the institution
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Best prospects to long‐term business success
Enterprise Risk
Management Regulation
Enterprise Risk Management Regulation
Internal and External AuditRes. No 11699‐2008Res. No 17026‐2010
Conglomerate RiskRes. No 11823‐2010
Res. No 037‐2008
Credit Risk Liquidity Risk Market Risk Operational Risk
Credit Risk Management(Res. 3780-2011)
Over-indebtedness Risk
Operational Risk Management (Res. No 2115-2009)
Treasury Management(Res. No 472-2001)
Stress test scenario
Risk Management Supervision(Res. No 509-98)
Additional Capital Requirement (draft published)
Management(Res. No 6941-2008)
Provision RequirementProcyclical Provisions (Res. No 11356-2008)
Foreign Exchange Credit Risk Regulation(Res. N° 41-2005)
Credit Risk Capital Requirement (Res. No 14354-2009)
Business Continuity(Circ. No G-139-2009)
Information Security(Circ. No G-140-2009)
Operational Risk Capital Requirement (Res. N o 2115-2009)
and Contingency Plan, Liquidity by maturity(Circ. No 2093-2001)
Liquidity Risk Management (draft)
Market Risk Management (draft)
Foreign Exchange Risk Management(Res. No 1455-2003)
Interest Rate Risk Management(Circ. No 2087-2001)
Market Risk Capital Requirement (Res. No 6328-2009)
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Organizational Chart
Annual Meeting of Stockholders
Board
Risk Committee
Compliance Committee
Audit
Risk Management
Unit
Compliance Unit
InternalCEO
Business Area 1 Business Area 2 Business Area 3 …
Audit Committee
Internal
Audit Unit
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Roles and Responsibilities
Board Board Design, approve and oversee the ERMDesign, approve and oversee the ERM
ManagementManagementImplement, consistent with the directionImplement, consistent with the directionDesign, approve and oversee the ERM
framework, and promote an internalenvironment that facilitates itsdevelopment.
Provide reasonable assurance that theenterprise manages effectively its risks,consistent with risk tolerances.
Design, approve and oversee the ERMframework, and promote an internalenvironment that facilitates itsdevelopment.
Provide reasonable assurance that theenterprise manages effectively its risks,consistent with risk tolerances.
Implement, consistent with the directionprovided by the Board, appropriatesystems to manage the risk to which theIMF is exposed.
The CEO is ultimately responsible andshould assume ownership. Othermanagers support IMF´s riskmanagement framework, promotecompliance with its risk appetite, and
i k ithi th i h f
Implement, consistent with the directionprovided by the Board, appropriatesystems to manage the risk to which theIMF is exposed.
The CEO is ultimately responsible andshould assume ownership. Othermanagers support IMF´s riskmanagement framework, promotecompliance with its risk appetite, and
i k ithi th i h fmanage risks within their spheres ofresponsibility consistent with riskstolerances.
manage risks within their spheres ofresponsibility consistent with riskstolerances.
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The risk officer, internal auditor and compliance officer usually have key supportresponsibilities. Other personnel are responsible for executing enterprise risk managementin accordance with established policies, practices, manuals and procedures.
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How to assure compliance?
Board´s Compliance Statement
Annually, Board members should sign a Compliance Statement in whichthey assure the following:they assure the following:
They are aware of ERM regulations and their role and responsibilitieswithin that framework.
The enterprise manages its risks appropriately according to its size andcomplexity of its products and services, except for deficiencies identifiedand disclosed in the Compliance Statement.
They have received information from managers Audit Committee RiskThey have received information from managers, Audit Committee, RiskCommittee and External Auditors and have adopted corrective measuresto avoid deviations from approved risk management policies andpractices.
Deadline: 120 days after the end of the fiscal year
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Recommendations
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Recommendations for effective implementation
IMFs
Board commitment
POLICYMAKERS
Adequate timeframe ( )Managers ownership
Comprehensive approach
Multidisciplinary team
Internal framework and risk matrix design
External expert advise, if
(adaptation period) with partial verification milestones.
Internal audit support
Training
Mechanisms to supervise effective implementation
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needed
Internal and external independent assessment
effective implementation (on‐site supervisory guidelines)
Capital planning self assessment and supervisory review
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ThanksThanks
wwwwww..sbssbs..gobgob..pepe
mcordova@[email protected]
Myriam Córdova Luna
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MICROENTERPRISESCOMMERCIAL
Credit Risk Regulation
REAL ESTATECONSUMER
• Individuals and firms• Finance production, commercial
activities and services• Debt US$ 30 000
• Individuals and firms• Finance production, commercial
activities and services• Debt> US$ 30 000
• Individuals• Home buying or improvement• Mortgage as collateral
• Individuals• Finance payment of goods and
services no related to business
Regulation of microcredit activityRegulation of microcredit activityMyriam Córdova Luna
Credit types(*)
Credit types Criteria to defineCorporate credits Sales higher than US$/. 71 MM
Big enterprise credits Sales from US$/. 7 MM to US$/. 71 MM
Medium enterprise credits Debt higher than US$/. 107M
Small enterprise credits Debt from US$/. 7M to US$/. 107M
Micro enterprise credits Debt lower or equal to US$/. 7M
Revolving consumer credits Up to US$/. 107 M
No revolving consumer credits Up to US$/. 107 M
Real estate credits Not applicable
(*) Effective since July 2010
Credit Risk Capital Requirement
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Microcredit Regulation Microcredit Regulation •Criteria: capacity to repay• Recognizes existence of particular credit methodology• Flexibility to provide d i
•Nonperforming loan is classified as nonaccrual if principal and interest have not been paid for at least 30 days. Nonaccrual l “ h b i l ” Th
•Debtor risk rating, by the number of days overdue. This scheme is more demanding than that applied for commercial loans
documentation
Underwriting process
loans are “cash basis loans.” These loans can have interest credited only when the borrower makes payment.
Accountingrecord
Provisionsrequirement
• IncomeIncome• Capital • Indebtedness in the financial system• Credit history• Installment amount•Business expertise
Criteriarequired
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Microenterprise debtor rating according by payment compliance
Number of days overdue
CommercialMicro enterprise and
consumption Mortgage
Normal No overdue Up to 30
CPP Up to 60 31 to 90
Defficient 61 to 120 91 to 120
Type of creditRisk Category
Up to 8
9 to 30
31 to 60
Uncertain 121 to 365 121 to 365
Loss More than 365 More than 365More than 120
61 to 120
Key issue to ensure proper classification of the portfolio:proper reporting of refinanced loans.
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Liquidity Risk Regulation
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Liquidity Risk Regulation
Regulation requires adequate administration systems of liquidity risk
Minimum requirements of liquidity rate:
Current assets as a percentage of current
liabilities
Reporting requirements of assets and liabilities
matching, by maturity, under regular and stress
scenarios and asystems of liquidity risk ab es
National currency: 8%
Foreign currency: 20%
scenarios, and a contingency funding
plan.
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Market Risk Regulation
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Market Risk Regulation
Adequate administration systems
of market riskorganization, committees, risk units, information
systems, valuation models
Limits for foreign exchange risk exposure:
Long net position:
< 60% of capital
Short net position:
< 15% of capital
Exposure limits for interest rate risk:EaR: < 5% of capital
Interest rate Risk (trading book)
Equity Price Risk (trading book)
Foreign Exchange Risk
Commodities Risk
Market Risk Capital Requirement
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Operational Risk Regulation
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Operational Risk Regulation
Adequate administration systems of operational
risk
Specific regulation to manage technology risk
Information Safety Plan
Business Continuity Plan to ensure an acceptable level of operation of
critical processes in case major internal or external
failures occur
Operational Risk Capital Requirement
Establishes an important incentive to improve operational risk management: better operational risk management will lead to lower capital requirements
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Calculation methodologies
Advanced Measurement Approach(AMA)
Higher risk sensitivity
Alternative Standard Approach (ASA)
Basic Indicator Approach(BIA)
Lower capital requirement
( )
ASA and AMA requiere previous approval from the Superintendency. While enterprises are not issued the authorization, they should utilize BIA.
In 2012 capital burden will be doubled for that type of risk. Challenge: Improve operational risk management to migrate to ASA
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Additional Capital Requirement(draft published)
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