Transformation of an MFI

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Sa-Dhan, Goa, March 24, 2010
Transformation of an MFI Expectations of rating
analysts
Micro-Credit Ratings International Ltd 602
Pacific Square, 32nd Milestone NH8, Gurgaon
122001 INDIA www.m-cril.com Tel [phone]
9497, 426 8707 Fax [phone]
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Ratings

• Credit Rating evaluates MFIs creditworthiness
• Areas of evaluation are
• Governance, strategy and external environment
• Management and systems
• Financial performance
• Social Rating
• a judgement on key elements of MFIs social
  performance
• organisational effectiveness in putting mission
  into practice in line with accepted social values

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Transformation - Key Improvements

• Transformation to a well regulated legal form
• Prudential norms of RBI
• Regular reporting to and monitoring by RBI and
  RoC
• Board of Directors increased representation of
  non-executive Directors/ nominee Directors
• Improvements in CAR, fund mobilisation and growth
  rates

Comparison of performance of NBFC MFIs and NGO
MFIs (as on 30 September 2008)
NGOs NBFCs
Portfolio growth rate 16.6 99.8
Debt-Equity Ratio 11.9 6.6
Capital to Risk Weighted Assets Ratio 5.4 15.5
Average number of lenders 6 12
annualised growth rate for the six months period
ending 30-Sep-2008
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Concerns - Accounting

• Fair representation of MFIs profitability
  sustainability is a key objective of credit
  ratings
• Post transformation of an MFI - the new NBFC
  co-exists with the earlier NGO
• Benefits of relatively higher profits in one over
  the other

NGO (Society, Trust or Sec-25 company) NBFC
Tax savings (if it holds exemption under section 12A) Better equity valuations for NBFC Transfer of remaining net worth from NGO
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Contd..

• Allocation of common expenses - Logical
  allocation policies and disclosure help improve
  ratings
• Salaries of the senior management
• Rent of office premises
• Depreciation on fixed assets
• Field staff salaries if the branch network is
  common
• Inter-company transactions (such as loans
  advances)
• should be at arms length with proper
  disclosure
• Creation of Goodwill other intangible assets
• proper disclosure on its need and valuation
• ignore intangible assets for computing certain
  ratios for the sake of comparison

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Mutual Benefit Trusts

• A common conduit to transfer net worth from an
  NGO to NBFC
• Model per-se in accordance with Trust and
  Cooperative principles
• Intends to share the surpluses and capital gains
  among the members
• MBTs should have
• proper and verifiable details of members
• documents evidencing their consent
• clearly interpreted rules for the distribution of
  benefits and decision making
• should not be used as a mean to mobilise deposits

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Social Rating - Concerns

• Members awareness on
• their membership in the MBTs
• benefits and rights accruing to them
• limitation w.r.t liquidity/withdrawal of their
  funds
• Capital gains from the sale of MBTs shares are
  members passed on the benefits?
• Adequate representation of members among the
  trustees - will be a step in right direction
• Increased focus on margins and equity valuations
  need a balance between financial and social
  objectives

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• Thank You!