OFFICIAL USE

TERMS OF REFERENCE

UKRAINE: Oschadbank- Strengthening Capacities for MSME Lending

1. Background

PJSC Savings bank of Ukraine (“Oschadbank” or “Oschad”)is a Ukrainian successor to Soviet Savings Bank, and is ranked second largest by assets and retail deposits as of 1Q2016. Through the largest branch network in the country of more than 4,000 outlets and 30,000 employees, it provides services to almost 3,000 corporate, 126 thousand MSME and 5.6 million active retail customers.

On 11 February 2016 the Cabinet of Ministers’ approved the Guidelines of the strategic reform of the state-owned banks (the “SOB Strategy”). The paper introduces the OECD corporate governance standards and establishes the level-playing field standards and a commercial focus of the Oschadbanks’ operations. It also declares the Government’s plans to consider partial privatisation of the two core banks (Oschadbank and Ukreximbank) in 2018 and their full privatisation by 2020. Both banks are also expected to undergo significant operational transformation. The SOB Strategy defines the key target customer segments, performance indicators, and sets implementation deadlines.

Oschad is expected to capitalise on its large branch network and substantially expand retail and MSME business in order to diversify its loan book away from large corporate exposures.

EBRD plans to establish business relationship with Oschadbank and support implementation of the SOB Strategy in a number of ways through direct engagement with Oschadbank under various financing programmes as well technical assistance. One of the critical areas for such cooperation is the building of Oschadbank’s institutional capacity in MSME segment.

2. Objectives

The objectiveof the Assignment is to increase Oschadbank’s efficiency and competitiveness in providing MSME loans in Ukraineon a sustainable basis including through identification of gaps, impediments and risks in the current MSME lending system and implementation of institutional capacity building measures.

The MSME credit advisory services will allow not only to identify gaps in the key aspects of working with MSME but will introduce a systemic approach to MSME lending,help develop and implementthe lending methodology, policies, processes, procedures and systems at Oschadbank in MSME lending. The objectives of the Assignment are therefore focused on the following aspects of MSME lending:

a)Effective functioning of the MSME department;

b)Strengthening of underwriting, risk management,portfolio monitoring,collection/work-out functions;

c)Improvement of efficiency, standardisation and automatization of business processes.

3.Scope of Work

To achieve the Assignment’s objectives, the Consultant will undertake the following:

MSME Department

a)Implement effective organizational structureand staffing of the MSME department, alignment and streamlining of credit and business processes in headquarters and branches; introduction of centralized marketing and methodology function, effective system for interaction with adjacent departments/divisions of Oschadbank in the HQ and branches, efficient division of powers and responsibilities;

b)Streamline/establish transparent and objective decision-making mechanisms in MSME lending within Oschadbank(decision-making system, committees, member and authority, accountability and control);

c)Assists in development and integration of the relevant internal procedures and processes including through design of the comprehensive training materials for the network employees in coordination with Oschadbank’s Learning Centre (the Consultant is expected to do a limited number of train-the-trainers courses only);

d)Design and implement lending schemes to meet the MSME demand requirements. The Consultant will assist in selection of target segments, design of MSME business development and operational strategy as well as contribute to the motivational scheme development.

MSME Lending Institutional Capacity

a)Analyze existing credit technologies, lending methodologies and systems and propose necessary changes in order to enhance efficiency of lending to various clients (individual entrepreneurs, micro, small and medium business), and assist in implementing necessary changes in procedures and policies;

b)Analyze the existing product range and services for MSME and propose measures to standardize/streamline such products and services or develop new ones according to the needs of each type of MSME clients;

c)Recommend and assist in improvement of business processes in the field of underwriting, risk management and monitoring in order to raise efficiency, earning capacity and quality of MSME portfolio. Introduce and implement cash flow based MSME lending schemeincluding credit extension and credit monitoring. The methodology shall contain appropriate means to screen and analyze credit applications, and to monitor credits. In coordination with Oschadbank select and implement the business process in at least 2 regional branches;

d)Develop/improve workout procedures. The methodology shall contain appropriate meansto motivate and enforce repayments;

e)Draft procedures for combating and persecuting fraudulent activities;

f)Ensure that Oschadbankestablishes mechanisms and systems to follow the EBRD’s environmental and social due diligence procedures, including compliance with Environmental and Social Procedures for Small and Micro Loans and E&S Procedures for Trade Finance, as set out in the eManual (“eManual” with the EBRD Environmental and Social Exclusion list, E&S Risk Categorisation List. Overall, the Consultant shall observe and ensure EBRD Environmental and Social Policy principles and Performance Requirements 2, 4 and 9 are adhered to by Oschadbank. The consultants shall include E&S requirements into the overall training programme delivered to Oschadbank.

Automation

Assist in selection and introduction of credit scoring and analytical systems covering front office functions related to MSME operations. Specifically, the Consultant will recommend and assist in:

a)Development of the financial projections, including sensitivity and stress-test analysis for MSME project appraisal;

b)Analysis of financial modelling practices and methodologies for individual entrepreneurs and small business;

c)Identification of features and characteristics necessary for creation of model(s), including financial and non-financial characteristics;

d)Identification of an appropriate period for evaluation of historical data necessary for development of a model (models); and

e)Necessary changes in credit analysis methodology and credit process considering expected division of the decision-making process according to complexity/type of MSME clients/credits; building algorithm according to scoring and terms of credit products.

4.Implementation Arrangements

The assignment will last for twelve (12)months. The Consultant is expected to complete most of the activities within the first six (6) months and support the implementation at the pilot regional branches as well as ad-hoc services during the second half of the Assignment.

The Consultant will report to Oschadbank, copying the EBRD’s Operation Leader (the “OL”).The EBRD will monitor the activities of the Consultant. The Consultant will be available for any meeting related to the Assignment organized by the EBRD and will discuss and evaluate any area of concern with the execution of work under the Assignment.

Oschadbank will provide office space for the Consultant, assign counterparts to work with the Consultant's experts throughout the Assignment and give full access to all relevant information for the implementation of the TC project.

  1. Reporting and Deliverables

Reporting will be on a regular basis to Oschadbank’s management and the EBRD and will consist of the below.

The Consultant shall submit to EBRD and Oschadbank the following deliverables in English and Ukrainian (in Word format and/or Excel, where applicable):

  • Work plan – within one months from the start of the Assignment

This report should summarize the assessment of each objective outlined in the ToR. For the listed above work-streams the Consultant, in coordination with Oschadbank and other stakeholders, will develop a detailed Work Plan further defining the objectives, activities/tasks, responsibilities, monitoring/reporting, as well as develop quantative indicators of key deliverables. The deliverables are expected to include inter alia (i) recommendations on further changes in the existing processes and procedures, (ii) detailed internal documents and procedures, specific practical tools, models, templates relevant for each work stream. This work plan will be discussed in detail at a meeting between Oschadbank, the Consultant and the EBRD OL.

  • Inception report – within two month from the start of the Assignment

This report will include the amendments, if any, to the tasks under Section 3 and Work Plan. Potential proposed revisions should not affect the overall objective of the Assignment and should only be to fine-tune tasks/deliverables to achieve maximum efficiency and effectiveness.

  • Quarterly performance reports – within two weeks from the end of respective quarters

Such reports should describe actions and achievements in each of the areas outlined in the ToR during the reporting period and also provide an executive summary of (cumulative) outputs from the beginning of the Assignment to date. Any problems with the Assignment’s implementation and suggested work out plan revisions should be properly presented. A quarterly report should also include an indicative plan for the next quarter.

  • Final report

The Consultant shall submit the Draft Final Report to EBRD in English and Ukrainian no later than 3 weeks after the finalization of the Assignment. The report shall cover the activities undertaken and an assessment of the Assignment in terms of meeting its objectives and targets as well as conclusions and recommendations for future steps to be taken to cement the changes introduced in the course of the Assignment. The Consultant shall then submit the Final Report to EBRD, in English and Ukrainian, no later than 15 working days after having received the EBRD’s comments on the Draft Final Report, taking into account the EBRD’s comments.

Additional ad-hoc reporting may be required by EBRD.

It is expected that, as a result of the Assignment, Oschadbank will reach the following specific objectives with support and assistance from the Consultant:

Within 4 months from commencement of the Assignment:

a)MSME business strategy developed and approved by Oschad’s management;

b)Improved and approved lending methodology /and procedures for various types of MSME clients and products;

c)Agreed recommendations on standardization, optimization and automation of business processes of MSME lending, including approaches to selection of a scoring system and potential provider;

d)Existing/planned motivation system for the MSME staff is reviewed, recommendations for improvement issued;

Within 6 months from commencement of the Assignment:

a)Fully operational MSME Department;

b)Selected scoring system;

c)Introduced measures on standardization and optimization of business processes;

d)Execution of tasks specified in the new MSME business strategy for this period, including relevant marketing plans;

e)In coordination with Oschadbank’s HR and Learning centre the relevant training module(s) are developed and launched;

f)Two regional branches identified and a work plan is developed to turn them into MSME lending champions;

Within 12 months from commencement of the Assignment:

a)Analysis of implementation of the new MSME business strategy and proposals of any adjustments if needed;

b)Execution of tasks specified in the new MSME business strategy for this period, including relevant marketing plans;

c)MSME lending champion branches are fully operational.

The Consultant will also provide the following reports and presentations to Oschadbank at relevant stages of the Assignment implementation:

a)Report for the Company’s management on carried out analysis of the existing MSME lending process at Oschadbank with conclusions and recommendations. Together with relevant managers of Oschadbank, new MSME business and marketing strategy;

b)Regular reports on progress with the Assignment’s implementation.

Additionally, at the end of the assignment (i.e. after 12months),the following outputs and results shall have been achieved, at a minimum:

Success Indicators / Monitoring benchmarks
Building a diversified MSME loan portfolio;
Number of loans made
Number of branches participating in MSME lending
MSME Portfolio Quality: Arrears ratio
Tenor for MSME loans
Share in MSME lending in Ukraine / Min UAH 8,8bn (US$350M)in MSME gross portfolio
Min 5,450
650
PAR90d+ of max 10%
About 90% of MSME sub-loans will be disbursed with more than 12 month maturity
Top-5 position

The progress will be regularly monitored by EBRD. Should the Consultant be of the opinion that some of the outputs and results outlined above cannot be achieved in individual cases due to the lack of commitment and co-operation, lack of available on-lending funds or an adverse change in the overall economic conditions in Ukraine, the Consultant will inform EBRD immediately.If, in the reasonable opinion of EBRD, the information provided by Consultant is sufficient, the results to be achieved by the Consultant under the assignment may be adjusted accordingly.

7. Donor Visibility

The donor funding the project requires adequate visibility for its contribution. The Consultant shall collect evidence of donor's visibility, such as media coverage, official notices and press releases, reports and publications referring to the project. The final report shall detail the ways in which the donor's visibility requirements were adhered to.

OFFICIAL USE