India: Micro, Small, and Medium Enterprise Development Project

Transcription

1 Completion Report Project Number: Loan Number: 2617 September 2018 India: Micro, Small, and Medium Enterprise Development Project This document is being disclosed to the public in accordance with ADB's Public Communications Policy 2011.

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3 CURRENCY EQUIVALENTS Currency Unit Indian rupees ( ) At Appraisal At Project Completion (21 October 2009) (30 June 2015) 1.00 = $ $ $1.00 = UNIT EQUIVALENTS 1 crore = 10 million 1 lakh = 100 thousand ABBREVIATIONS ADB EMS ESMS ESSF GOJ GTZ IDBI IFC JFPR JICA LELAs LIBOR MFI MSMEs MSMEDP MUDRA NBFC NPL NSO OCR PCG PFI RBI SFC SFMC SIDBI SMEs TA - Asian Development Bank - environmental management system - environmental and social management systems - environmental and social safeguard framework - Government of Japan - German Agency for Technical Cooperation - Industrial Development Bank of India - International Finance Corporation - Japan Fund for Poverty Reduction - Japan International Cooperation Agency - livelihood enterprise learning advisors - London interbank offered rate - microfinance institution - micro, small, and medium enterprises - Micro, Small, and Medium Enterprise Development Project - Micro Units Development and Refinance Agency - nonbank financial company - nonperforming loan - nonsovereign operation - ordinary capital resources - Partial Credit Guarantee - participating financial institution - Reserve Bank of India - state financial corporation - SIDBI Foundation for Microcredit - Small Industries Development Bank of India - small and medium-sized enterprises - technical assistance

4 NOTES (i) (ii) The fiscal year (FY) of the Government of India and its agencies begins on 1 April and ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2018 begins on 1 April 2017 and ends on 31 March In this report, $ refers to United States dollars. Vice-President Wencai Zhang, Operations 1 Director General Hun Kim, South Asia Department (SARD) Director Kenichi Yokoyama, India Resident Mission, SARD Team leader Team members Gurjyot Singh, Senior Portfolio Management Officer, SARD Prabhjot Khan, Social Development Officer (Gender), SARD Neha Saini, Senior Operations Assistant, SARD Yoshinobu Tatewaki, Principal Portfolio Management Specialist, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

5 CONTENTS Page BASIC DATA I. PROJECT DESCRIPTION 1 II. PROJECT DESIGN 1 A. History 1 B. Scope of Operations 1 C. Relationship with ADB and Other Development Partners 2 D. Project Design and Formulation 2 III. PROJECT IMPLEMENTATION 4 A. Lending Policies 4 B. Characteristics of Subloans 4 C. Implementation and Internal Operations of Subprojects 5 D. Organization and Operations of SIDBI 6 E. Portfolio of SIDBI 7 F. Financial Statements and Ratios 7 G. Covenants 7 H. Partial Credit Guarantee 7 IV. SUBLOAN IMPLEMENTATION 8 A. Loan Appraisal 8 B. Implementation 9 V. EVALUATION OF PROJECT PERFORMANCE 10 A. Relevance 10 B. Effectiveness 10 C. Efficiency 11 D. Sustainability 12 E. Development Impact 12 F. Performance of SIDBI 13 G. Performance of ADB 13 H. Overall Assessment 13 IV. ISSUES, LESSONS AND RECOMMENDATIONS 14 A. Issues and Lessons 14 B. Recommendations 15 i APPENDIXES 1. Design and Monitoring Framework MSME Portfolio PFIs and SIDBI SIDBI s Loan Appraisal Process Comparison of Expected Subloan Distribution Based on Criteria Established during Appraisal and Actual Subloan Distribution Key Performance Indicators and Ratios for SIDBI and PFIs Eligibility Criteria and Standard Terms and Conditions for Subloans Status of Compliance with Loan Covenants Gender Action Plan Implementation and Achievements 47

6 BASIC DATA A. Loan Identification 1. Country 2. Loan Number and Financing Source 3. Loan Title 4. Borrower 5. Name of Development Finance Institution 6. Amount of Loan 7. Project Completion Report Number B. Loan Data 1. Appraisal Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Actual 6. Terminal Date for Commitments In Loan Agreement Actual Number of Extensions 7. Loan Closing Date In Loan Agreement Actual Number of Extensions 8. Financial Closing Date Actual 9. Terms to the Borrower Interest Rate Maturity (number of years) Grace Period (number of years) Free Limit Repayment Terms 10. Terms of Relending (if any) India 2617, Ordinary Capital Resources Micro, Small and Medium Enterprise Development Project Government of India Small Industries Development Bank of India $50 million October October December December February March June May June June 2015 None 30 June June 2015 None 30 June 2015 LIBOR % 0.40% (3.03 of Loan Regulations) 15 years 3 years Not Applicable Amortized in semiannual installments over 12 years Not Applicable

7 ii 11. Interest Rate for Subloans Original 1 Revised Not Applicable 12. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval 25 October June months Effective Date Original Closing Date Time Interval 17 May June months b. Amount ($ million) Category No. (1) Category or Subloan (2) Original Allocation (3) a Partial Cancellations (4 = 3 5) b Last Revised Allocation (5) c Amount Disbursed (6) d Undisbursed Balance (7 = 5 6) e Indirect Lending Direct Lending * Total (local currency) Total ($ equivalent) Notes: a US dollar equivalent per report and recommendation of the President. b US dollar equivalent as of date of approval of cancellation. c Total of (d + e). d Actual US dollar equivalent. e US dollar equivalent as of report preparation. * Partial cancellation was effective on 30 June 2015 C. Implementation Data 1. Number of Subloans 9, Sector Distribution of Subloans Appendix 4 3. Size of Subloans Appendix 4 4. Other Breakdown of Subloans Appendix 4 5. Subloans Above Free Limit None 1 The cost structure of SIDBI is based on the average cost of funds, which includes cost of capital, cost of reserves, and surplus and average cost of borrowing. The intermediation cost includes operating expenses and regulatory requirements of provisioning/capital charge. The intermediation spread includes the profit margin, credit risk premium, and tenor premium. Accordingly, the lending rate is calculated.

8 iii 6. Project Performance Report Ratings Implementation Period Single Project Rating From Q to Q Q Q Q Q Q Q Q From Q to Q Q Q From Q to Q Q From Q to Q Satisfactory On Track Potential Problem Actual Problem Actual Problem Potential Problem Actual Problem Actual Problem Actual Problem Actual Problem Potential Problem On Track Actual Problem On Track D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members Loan Inception June a Loan Review Special Loan Administration Special Loan Administration Loan Review Mid Term Project Review August March August July 8 August February 8 March b a, b, c a, b, c b, c, d b, c Notes: a = economist, b = project officer, c = social safeguard/environment specialist, d = financial analyst. E. Related Loans (to some financial intermediaries) Loan Loan No. Date of Agreement Amount Industrial Development Bank of India 855-IND 16 December 1987 $100 million Total

9 I. PROJECT DESCRIPTION 1. The micro, small and medium enterprises (MSME) sector in India plays a vital role in the economic growth of the country because of its significant employment and income generating potential. The Micro, Small, and Medium Enterprise Development Project (MSMEDP) was to provide a sovereign loan of $50 million from ordinary capital resources and a partial credit guarantee (PCG) of $250 million as non-sovereign operations. The project aimed to improve access to commercial financing, and provide capacity building services and market opportunities, thereby fostering MSME growth, and their competitiveness and employments. 1 The borrower and executing agency of the loan was the Small Industries Development Bank of India (SIDBI), while the PCG was offered to all public-sector banks in India engaged in the MSME subsector. The project aimed at targeting smaller MSMEs through the sovereign loan to SIDBI as a financial intermediary, while larger MSMEs were expected to benefit from long-term funds raised under the PCG facility. 2 A. History II. PROJECT DESIGN 2. Set up in 1990, SIDBI, a fully government owned bank, serves as the principal financial institution for the promotion, financing, and development of MSMEs, and for coordination of the functions of institutions engaged in similar activities. Until 2004, Industrial Development Bank of India (IDBI) was SIDBI s sole owner. Currently, it is owned by 36 institutions including public sector banks and insurance companies owned or controlled by the Government of India. IDBI, the State Bank of India, and the Life Insurance Corporation of India are the largest shareholders. B. Scope of Operations 3. SIDBI provides indirect financing through refinancing facilities for primary lending institutions such as commercial banks, nonbank finance companies (NBFCs), microfinance institutions (MFIs), and state finance and industrial development corporations. It also provides loans, bills discounting, and pre- and post-shipment credit directly to MSMEs. It is headquartered in Lucknow and has 79 branches all over India. In 1999, it was given an expanded mandate to increase the level of microcredit available to the rural poor, following which a specialized department for microcredit the SIDBI Foundation for Micro Credit (SFMC) was established. In recognition of the growing importance of small and medium-sized enterprises (SMEs) in the economy, SIDBI s mandate was expanded following the passage of the Micro, Small, and Medium Enterprises Development Act in October 2006 to include medium-sized enterprises. 4. SIDBI also provides special services for MSMEs through its various subsidiaries and associates. It has vehicles for providing guarantees for MSMEs that are not backed by collateral security and third-party guarantees. It manages two venture capital funds through a subsidiary: (i) the National Venture Fund for Software and Information Technology, which assists software and information technology companies and (ii) the SME Growth Fund, which was established by SIDBI in association with leading commercial banks to invest in companies, both at the early stage and during second-round financing. India SME Technology Services Limited was set up in November 1 ADB Report and Recommendation of the President to the Board of Directors on Proposed Loan and Partial Credit Guarantee India: Micro, Small, and Medium Enterprise Development Project. Manila. (L2617-IND, $50 million). 2 Under the PCG facility, ADB would assist participating public-sector institutions (PFIs) in raising long-tenor funding by credit enhancing either a loan to or a bond issued by each participating institution in the off-shore financial markets. The long-term proceeds raised through such an instrument credit-enhanced by ADB would be used by the PFIs in channeling long-term funds to their MSME clients on commercial terms.

10 to provide professional services related to technology transfer, joint ventures, business collaboration, finance syndication, and attendant support services to MSMEs. The source of SIDBI s funds is primarily domestic, including issued commercial papers and bonds, and special dispensations from the government and Reserve Bank of India (RBI). A small proportion of its fund is provided through bilateral and multilateral funding agencies. 3 C. Relationship with ADB and Other Development Partners 5. In 1987, prior to SIDBI s establishment, ADB approved a $100 million loan to Industrial Development Bank of India, Ltd. (now known as IDBI Bank, Ltd.) for onlending to small and medium-sized enterprises in the private sector through selected state financial corporations (SFCs). IDBI s refinance operations with regard to SFCs were spun off to SIDBI in The project completion report rated the performance of IDBI under the loan satisfactory, and the performance of the SFCs unsatisfactory Other development partners have been active in the MSME subsector in India. The World Bank-led multi-donor Small and Medium Enterprise Financing and Development Project was approved in 2004 for $120 million. Department for International Development (DFID), and German assistance through Agency for Technical Cooperation (GTZ) and KfW assisted the capacity development and institutional reforms under the project, such as the creation of a credit bureau and an SME rating agency. The World Bank approved an additional $400 million in supplementary assistance in April 2009, which was followed by another $300 million loan to assist the microfinance sector in June 2010, and $500 million loan for the MSME Growth, Innovation, and Inclusive Finance Project. The Japan International Cooperation Agency also extended six credit lines to SIDBI, amounting to nearly $2 billion, for onlending to MSMEs. The present MSME Energy Saving Project provides a line of credit of $300 million to SIDBI to encourage MSMEs to undertake energy-saving investments in production processes and improve long-term profitability. 7. The United Nations Industrial Development Organization (UNIDO) has focused on raising the competitiveness of industrial MSMEs, through policy advice, investment, and technology promotion. The International Finance Corporation (IFC) has been helping MSMEs through its various business lines that focus on (i) lending to and investing in various MSMEs, (ii) creating an enabling environment, (iii) providing corporate advice, (iv) assisting infrastructure, and (v) promoting social sustainability. 5 D. Project Design and Formulation 8. The MSMEDP was designed to promote growth, competitiveness, and employment in MSME through a multipronged approach, by tackling key bottlenecks to MSME financing and development. It focused on (i) supporting, through an ADB loan of $50 million, the so-called missing middle borrower segment of MSMEs in 10 targeted states, or those microenterprises which have grown too large for traditional microfinance support but are unable to access conventional bank financing; 6 and (ii) helping commercial public sector banks gain better access to longer-term financing for onlending to their MSME clients by setting up a PCG facility of up to $250 million without a government counter indemnity. These were supplemented by a capacity 3 SIDBI Annual Report. India. 4 ADB Project Completion Report of the Small and Medium-Scale Industries Project. Manila. 5 Its recent initiative provides a combination of equity-like financing, business mentoring, and capacity building support for the Bharatiya Yuva Shakti Trust (BYST) Growth Fund, a small private equity fund of $5 million, which will assist socially disadvantaged entrepreneurs in the micro and small enterprise (MSE) sector. 6 These are in Andhra Pradesh, Assam, Bihar, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal.

11 3 development grant of $3.0 million financed by Japan Fund for Poverty Reduction (JFPR) to help build awareness and capacity of MSMEs targeting women microenterprises in relatively poor states. 9. The project was consistent with India s development objectives as reflected in the 11th Five Year Plan ( ), which looked at the MSME subsector as an engine of inclusive and sustainable economic growth, and considered it as an important segment of industry, which needs support and access to all schemes of industry with enabling provisions. 7 It was also consistent with ADB s Poverty Reduction Strategy, 8 and the country strategy and program with India, which prioritized the MSME subsector given its critical contribution to and positive impact on women s empowerment. It proposed an innovative combination of sovereign loan and non-sovereign PCG to address the unique subsector challenges. 10. The $50 million sovereign loan through SIDBI aimed to address the persistent constraint in the MSME subsector, that of lack of access to adequate and timely finance, particularly longertenor loans, on competitive terms. 9 It was meant to target the missing middle group, especially low-income women entrepreneurs in the unorganized sector. The project identified this group as having loan requirements of 50,000 to 1,000,000. The ADB loan was provided to SIDBI for direct and indirect lending (through financial intermediaries including commercial banks, NBFCs, and MFIs) to the target MSMEs by establishing specific selection criteria of MSMEs and participating finance institutions (PFIs) while following the prudent financial management norms of SIDBI and the established banking regulations in India. 11. At the time of appraisal in , MSMEs total financing requirement was estimated at $650 billion. 10 In view of this, and the limited access of Indian banks to the international capital market after the 2007 financial crisis, the project included a Partial Credit Guarantee (PCG) facility of up to $250 million, without a government counter guarantee, to enable participating banks raise medium- and long-term funding from the international capital markets, and provide credit to MSMEs in the India local markets. However, the PCG facility was not utilized due to change in market conditions (paras ), thereby the funding to support MSME development under the project was significantly reduced. 12. The project was also assisted by a stand-alone JFPR capacity building grant, designed to facilitate access to project funds more systematically among poorer segments of MSMEs, particularly women entrepreneurs. 11 It supported the selected MSMEs by (i) stocktaking and identifying livelihood opportunities; (ii) providing financial literacy, business development, and other technical training programs; (iii) establishing market linkages for inputs and outputs; and (iv) providing other financial services such as savings and insurance. The JFPR grant under SIDBI s implementation was closed on 31 December 2014 (phase 1) Government of India, Planning Commission Eleventh Five Year Plan, Delhi. 8 ADB Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. Manila. 9 MSMEs have been bypassed by the banking system, having access to only short maturity. The cost of 1-year loans for best MSME is around 8% 10%, while others are charged 10% 15%, compared with short-term government bonds of 3.25% at that time. This constraint has been exacerbated by the global financial crisis. A government committee set up by the Reserve Bank of India estimated that MSMEs would require 20% of their annual projected turnover as working capital compared with 8.1% in FY Intellectual Capital Advisory Services Private Limited Micro, Small and Medium Enterprise Finance in India: A Research Study on Needs, Gaps, and Way Forward. India. 11 JFPR Supporting Microentrepreneurship for Women s Empowerment in Selected States. India. 12 This grant continued providing consulting services for women s entrepreneurship development and was completed on 30 June Its grant implementation completion report will be prepared in 2019.

12 4 13. The project was categorized as gender equity theme (GEN). A comprehensive gender action plan (GAP) with measurable targets was included in the project design and provided a detailed gender strategy with specific actions to promote gender- and poverty- focused capacity building on leadership, communication and business development services to poor women microentrepreneurs, which were further supported by enterprise development financing. Thus, genderrelated issues under the project were pursued through (i) MSME loans, at least 30% of which was targeted for lending to qualified female micro and small entrepreneurs, and (ii) a JFPR grant to build the capacity of women entrepreneurs in the informal sector. 14. The project design reflected lessons learned from the analytical work on MSMEs, ongoing and completed projects assisted by ADB and other development partners active in the MSME subsector in India, and international best practices. The design of the MSMEDP also incorporated recommendations made by a special evaluation study on financial intermediation support by ADB s Independent Evaluation Department, 13 and a best-practices note on MSME support by ADB s Regional and Sustainable Development Department. 14 Both studies emphasized the need for conducive policy and regulatory framework to ease constraints on MSME finance, 15 competitive and efficient financial sector to provide entrepreneurs with alternative sources of investment capital with competitive rates, and provision of MSME support services such as skills, trades, entrepreneurship, and other business development services. A. Lending Policies III. PROJECT IMPLEMENTATION 15. SIDBI s risk management department under the governance of its credit management committee oversees the formulation, periodic review, and amendment of the loan policy. Its loan policy sets out guidelines for direct and indirect lending, covering such aspects as product and process management, provisioning norms, pricing, credit risk management, credit monitoring, and restructuring of accounts. The basic tenets of SIDBI s loan policy follow the know your customer rule issued by the Reserve Bank of India (RBI), in line with which its strategy, organizational structure, and processes are defined, with the expanded mandate to service MSMEs. The credit appraisal, credit risk management, monitoring and recovery processes have been enhanced through the adoption of internal risk-rating models, a revised exposure limits framework, a range of scrutiny processes to prevent the deterioration of asset quality, and risk-based pricing. 16 These provided a framework to implement the project with prudential financial norms. B. Characteristics of Subloans 16. Under the sovereign project, subloans were to be provided directly or indirectly (through PFIs) from SIDBI, targeting the micro and small enterprises (having up to about 100 employees). Feasible activities for startup, expansion, diversification, and modernization of the enterprises were taken up covering up to 90% of their cost, while complying with the social and environmental policies of SIDBI and ADB. Subloans were provided with the size of 50,000 1 million, with maturity of generally three years, and interest rates determined based on the cost of funds plus a spread that covered transaction costs and risk adjusted returns. PFIs were selected based on the criteria of having domestic rating of at least AA, robust risk management infrastructure and risk 13 Independent Evaluation Department Support for Financial Intermediation in Developing Member Countries. Manila: ADB. 14 ADB Best Practice Notes on Small and Medium Enterprises Support. Manila. 15 This aspect was being supported under the multidonor program referred to in para ADB Proposed Loan and Partial Credit Guarantee Micro, Small, and Medium Enterprise Development Project (India). Report and Recommendation to the President. Appendix 3. pp Manila.

13 5 assessment methodologies specifically tailored to the MSME subsector, with a demonstrated track record in MSME lending and sound performance of MSME portfolio including asset quality, provisioning standards, and cost to income structure. 17. Of the total sovereign loan, $15.0 million was allocated for direct lending and $35.0 million for indirect lending. As of the completion date (30 June 2015), $35.71 million out of the $50.0 million (71%) had been utilized. Of the $35.71 million utilized, $0.71 million was under SIDBI s direct lending operations and $35.0 million under its indirect lending facility through five participating financial institutions (PFIs). (More details are provided in paras ). C. Implementation and Internal Operations of Subprojects 18. The implementation of subprojects followed the criteria and procedures for subloan appraisal along with PFI selection criteria for indirect subloans, which followed the wellestablished systems of SIDBI and were adjusted to cater to the needs of the project while complying with all relevant banking regulations. These provided a robust basis to manage subproject selection, appraisal, implementation, and repayment. However, the project encountered implementation problems in terms of safeguards compliance at startup stage, and in the direct lending modality. 19. Safeguards requirements. For involuntary resettlement and indigenous peoples, the project was categorized as C (highly unlikely to have adverse impact) and remained the same at completion. For environmental safeguards, the project category was FI (financial intermediary), following ADB s Environment Policy (2002). SIDBI and PFIs were to establish environmental and social management systems (ESMS) to address subloans classified as environment category A (likely to have significant adverse environmental impacts) and B (potential adverse environmental site-specific impacts). 20. However, during the startup phase in August 2011, institutional set-up, environment management systems, and assessment, review, supervision, monitoring and reporting procedures at SIDBI and the PFIs were found inadequate. SIDBI took corrective steps by (i) putting in place an appropriate framework to ensure compliance by hiring safeguards experts; (ii) establishing its own Environmental and Social Safeguard Framework (ESSF), 17 which sets out screening and assessment procedures for subprojects directly financed for microenterprises (approved by its board in June 2012); (iii) promoting the establishment of ESMS by its PFIs, and achieving a degree of success with one of its PFIs adopting a modified version of SIDBI s ESSF; and (iv) increasing awareness of environmental and social safeguards among the PFIs. 21. In the meantime, ADB also clarified reporting requirements, by supporting SIDBI to establish a simplified operating procedure that rationalized due diligence requirements with a list of environmentally benign activities that are classified as environmental category C. The actions taken on safeguards implementation enabled full disbursement of the indirect lending component. 22. Direct lending. Post project approval, the microfinance sector and institutions faced major challenges due to a situation at that time referred as the Andhra Pradesh crisis, wherein the state introduced an act in February 2011 that placed stronger restrictions on moneylending practices (to protect the interest of farmers and self-help groups), severely affecting microfinance 17 The World Bank s Environmental and Social Risk Management Framework developed for its SME project by SIDBI was not found fully applicable for the missing middle.

14 6 loan repayments. 18 While the central government introduced a legislation to protect the registered MFIs under RBI from the act, 19 its impact caused higher transaction costs for financial institutions. As a result, SIDBI reviewed and slowed down its direct lending to microenterprises and suggested removing direct lending component of the sovereign loan (30% of loan amount) and reallocating the proceeds to indirect lending. However, this could not be adopted, due to unavailability of gender disaggregated data at SIDBI and PFIs and resulted in partial cancellation of $14.29 million. D. Organization and Operations of SIDBI 1. Organization, Management, and Staffing 23. The Small Industries Development Bank of India Act 1989, provides for a 15-member board of directors. 20 As of 31 March 2015, the board comprised nine directors, including the chairperson and managing director. Under the overall policy guidance of its board, SIDBI s project management division undertook project implementation, monitoring, and supervision, with designation of dedicated staff for the project. 2. Personnel Administration 24. As of 31 March 2016, SIDBI had 1,060 active full-time staff members comprising 908 officers, 95 class III staff, and 57 subordinate staff. SIDBI has a human resource policy approved by its board, regarding compensation, incentives, and promotions. 3. Lending Operations 25. As an offshoot of the microfinance crisis in Andhra Pradesh (para. 22), SIDBI slowed down its microfinance lending operations. About one-third of SIDBI s microfinance institution (MFI) portfolio was restructured, while SIDBI introduced a number of capacity building initiatives. These interventions have helped prevent the effects of the crisis from spreading and laid the foundations for the orderly growth of the sector. SIDBI s lending to MFIs was slowly recovering in FY2014, but was still below the FY2011 level Following the said microfinance crisis, the Reserve Bank of India (RBI) introduced a new regulatory framework for non-banking finance company (NBFC) microfinance institutions (MFI) by setting out prudential norms, disclosure requirements, and a code of conduct. With technical assistance from the IFC, credit bureau s microloans, loan pricing and information transparency, and internal control systems have been improved The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, The same was enacted in February The Micro Finance Institutions (Development and Regulation) Bill, Of these, the central government appoints eight, including the chairperson and managing director (CMD), two fulltime directors, two government officials, and three experts (including one from state financial corporations). Of the remaining seven directors, three are nominated by the three largest shareholding institutions while four are elected by public shareholders. 21 Nair, T. and A. Takha Inclusive Finance India Report. New Delhi: Oxford University Press and Access Development Services. pp. 107, Table Implementation Completion and Results Report for Small and Medium Enterprise Financing and Development Project. December 24, 2013; and Implementation Completion and Results Report for Scaling Up Sustainable and Responsible Finance Project. March 23, The World Bank.

15 7 E. Portfolio of SIDBI 27. Total outstanding credit balance of SIDBI to MSMEs increased from 380 billion in FY2010 to 553 billion in FY2015 (Appendix 2). 23 Annual disbursement also increased from 319 billion to 531 billion during the same period. The cumulative disbursement since inception to 31 March 2015 was more than 3,900 billion, which has benefitted more than 34.6 million persons in the MSME subsector. 28. Besides enhancing credit flow to the sector, SIDBI took measures to fill the gaps in the nonfinancial needs of the sector, such as (i) providing MSME advisory services, and loan facilitation and syndication services to help MSMEs obtain credit from banks and financial institutions; and (ii) capacity building of smaller banks (regional rural banks, cooperative banks) promoting innovation and incubation. F. Financial Statements and Ratios 29. Key performance indicators and ratios of SIDBI and PFIs are shown in Appendix 5. SIDBI remained profitable and stable, and received the highest credit rating (AAA) by all three primary Indian rating agencies Credit Analysis and Research (CARE) Ltd, ICRA Ltd, and CRISIL Ltd. This is demonstrated by SIDBI s financial statements, which showed fast and steady growth from FY2010 to FY2017 (Appendix 5). According to their Balance sheets, their total asset more than doubled from 419 billion to 880 billion, supported by growth of loans and advances from 379 billion to 742 billion. Income statements also shows doubling in total income ( 32 billion to 68 billion) and total expenditure ( 23 billion to 50 billion), which led to tripling of total profit ( 4 billion to 13 billion). Cash flow statement showed healthy cash flows, with constant positive cash generated from operations and net outflow (i.e., increase) in loans and advances of 143 billion in FY2016 and 58 billion in FY2017. SIDBI also issued share capital of 15 billion in FY2016 and 20 billion in FY2017. Consequently, SIDBI s capital adequacy ratio was maintained near or above 30% during the implementation period, against 12% as required by RBI. Net nonperforming assets (NPAs) was at % of the total loan portfolio in FY , well below the 2.0% prescribed by the RBI and the 6.0% under the loan agreement. 30. The PFIs (three commercial banks and three NBFCs) were also highly solvent over the loan period and exhibited stable operations, maintaining all eligibility criteria as stipulated in the loan agreement throughout the implementation period. NBFCs capital adequacy ratios were substantially higher than the mandated 12% level (Appendix 2, Table A5.2). G. Covenants 31. All the 28 covenants stipulated in the loan agreement were complied with, except for two (Appendix 7). The first was direct lending of at least 30% of the loan, due to the cancellation of $14.29 million, as SIDBI slowed down pursuing the direct financing component (para. 22). The second was ADB safeguards requirements prior to subloan approval (para.16 of Schedule 3 of the Loan Agreement) where corrective steps were taken (paras ). H. Partial Credit Guarantee 32. The PCG could not be implemented due to different expectations in pricing between the selected PFI (IDBI Bank) and ADB, and the change in international capital market conditions. At the time of appraisal, IDBI Bank, one of the largest state-owned banks in India and shareholders 23 The outstanding balance in FY2014 was 613 billion, higher than in FY2015. This was due to the global economic slowdown and the consolidation of various schemes by SIDBI. This recovered and reached 683 billion in FY2017.

16 8 of SIDBI, had shown keen interest in using the PCG for the credit enhancement of an offshore bond issued by IDBI Bank. While the US dollar proceeds raised from the bond were supposed to remain offshore and be used by IDBI Bank in its offshore banking activities, IDBI bank committed to increase its SME loan portfolio in India by the Indian rupee equivalent amount. A term sheet was developed, signed by IDBI and approved by ADB s credit committee. 33. The deal, however, was not realized in the end because of pricing differences between ADB and IDBI Bank. IDBI Bank expected to achieve a 20 to 30 basis points reduction in pricing of its bond raised through ADB s PCG to compensate the bank for the higher administrative cost in monitoring the use of loan proceeds in accordance with ADB s policies. Although a lower market rate could be secured on account of the PCG, this was offset by ADB s guarantee fee which was priced on commercial terms due to its nonsovereign nature. The conditions of international capital market also turned unfavorable to PCG, in relation to its stabilization after the financial crisis of that provided easier access by Indian banks. IV. SUBLOAN IMPLEMENTATION A. Loan Appraisal 1. Distribution of Subloans 34. Distribution of subloans was in line with the loan agreement (Appendix 4), although total amount was substantially lower than the appraisal targets due to the cancellation of direct lending, as well as the non-materialization of PCG. Its PFI wise distribution is shown in Table 1. Table 1: Loan Disbursement for Direct and Indirect Lending Amount Amount Particulars ( million) ($ million) 1 Direct lending Electronica Finance Ltd. (Non Banking Financial Company [NBFC]) ING Vysya Bank Ltd. (commercial bank) Indirect 4 IndusInd Bank (commercial bank) lending 5 Fullerton India Credit Co. Ltd. (NBFC) Janalakshmi Financial Services Pvt Ltd. (NBFC) Total 1, Note: Numbers may not sum precisely because of rounding. Source: SIDBI. NBFC = nonbank finance company 35. The total number of subprojects is 9,007, with 84 under direct financing and 8,923 under indirect financing. The subprojects have covered various sectors such as weaving and finishing (handloom), machinery and equipment, plastic goods, fabrication of iron and steel items, trading, food, and commercial vehicles. A comparison of expected subloan distribution per loan agreement and actual pattern is shown in Appendix 4. With an average loan size of about 220,000, the subloan operation was able to reach the missing middle segment of MSMEs. 36. The project also exceeded the proportionate target for female entrepreneurs. Of the 9,007 enterprises, 5,371 were led by women, which is about 60% of the total (compared with the target

17 9 of 30%). 24 Moreover, there was wide geographical coverage in the targeted states, although the proportion of low-income states (of which per capital income in 2011 was lower than national average) was low at 32%, due to the relatively limited outreach of PFIs in such states. 2. Covenants 37. SIDBI ensured PFIs under the project were engaged through participation agreements following the set conditions stipulated as loan covenant (item 11 of Appendix 7) and obtained declaration letter from PFIs to ensure all subloans were for missing middle and environmentally benign activities as agreed by SIDBI and ADB. The effectiveness of targeting and outreaching the missing middle was enhanced through the establishment and application of the detailed eligibility criteria and terms and conditions, along with its due application by SIDBI and PFIs. 3. Quality of Appraisal 38. The subloan appraisal process followed the set criteria and procedures, for which SIDBI applied due checks and balance to direct and PFI subloans, by ascertaining the compliance both at appraisal and end-use verification of funds. Nevertheless, weaknesses in fully complying with the safeguards requirements were observed during the initial stages of implementation. In March 2013, SIDBI undertook a safeguards due diligence audit on approved subprojects and found that 378 out of the total 940 subloans were considered ineligible and were eventually replaced by SIDBI with eligible ones in September B. Implementation 39. Compared with the original project design, the implementation was affected by the nonrealization of PCG due to the pricing problem and the eventual cancellation of $14.29 million (out of the remaining $50 million) allocated for SIDBI s direct lending window. It also faced challenges in complying with the environmental safeguards requirement during the initial implementation period. Nevertheless, the remaining amount of $35.71 million was implemented by channeling the subloans targeting the missing middle segment of the MSMEs with stronger focus on women entrepreneurs, following the system established with SIDBI and PFIs to stringently manage subloans from appraisal to loan repayments (Appendix 3). Yet limited information was available or pursued as to the impacts of the subloans beyond their financial transaction data. 40. The turn of events after project approval made the size of the loan insignificant, compared with the operational size of SIDBI (annual disbursement of some $8.7 billion) and other development partners (para. 6). Given the robust system available in SIDBI and PFIs, the project could have tapped the opportunities to make more significant contributions to the MSME subsector by pursuing a larger investment while tackling supply side constraints (on top of financing needs) such as MSME capacity building and value chain developments with due focus on prioritized subsectors and geographical areas. 24 The contribution of the project to ADB Results Framework is 9,007 small and medium-sized enterprise loan accounts opened or end borrowers reached (5,371 females) against the original target of 6, Reasons for ineligibility include: (i) lacking required governmental permits or not having fully complied with statutory requirements; (ii) exceeding targeted financing amounts; (iii) being not category C projects involved in construction, automobile servicing, jewelry manufacturing, etc.; (iv) having variable product lines as commission agents, and dealers of agricultural products; and (v) lacking information.

18 10 V. EVALUATION OF PROJECT PERFORMANCE A. Relevance 41. Overall, the project is assessed as less than relevant. While the project design was relevant at appraisal, its relevance was reduced during implementation. Furthermore, it could not be adjusted based on market condition changes, which affected the intended outcome and outputs. 42. Relevance of the project design. At appraisal, the project was consistent with India s priorities and ADB s strategy. It incorporated lessons learned from past interventions and international best practices based on the analytical studies in the sector. It sought to strengthen two important areas in MSME operations: environmental and social safeguards and gender empowerment. The project aimed at narrowing credit gap in the MSME subsector in India, which was exacerbated by the global financial crisis, by providing PCG to support the Indian banks access to international capital market. The debt gap was estimated at $71.4 billion in , with demand supply gap for approximately 11.3 million enterprises. 26 It was specifically targeted at the missing middle, which is typically not on the radar of other fund providers. About 50% of India s population is below 25 years of age and the MSME subsector is an important employment provider, 27 providing opportunities for leveraging its demographic dividend as driver of economic growth. Modality of financial intermediation loan and PCG, and implementation arrangements were considered appropriate. Market distortion was not found and funds flow to the beneficiaries was straightforward. The project was therefore relevant in the overall project design with strategic focus, and innovative effects that were given attention. 43. Relevance during implementation and at completion. There were marked changes in the international capital market conditions that made the intended PCG unattractive to the Indian banks and substantially reduced the project-supported fund flows into MSMEs (paras. 32 and 33). In addition, the $50 million provided to SIDBI for sovereign lending was also quite small (para. 40). Limited attention was given in its design at appraisal or during implementation to pursue significance, e.g., by pursuing larger loan size at design stage, or focusing the project on specific products or geographical areas to make it commensurate with the loan size. These affected the significance and relevance of the project to the overall MSME subsector. In addition, the sovereign loan implementation was further affected by the impact of the Andhra Pradesh micro finance crisis (para. 22), following which SIDBI restrained direct lending operations and suggested reallocating 30% of the loan amount earmarked for direct lending to indirect lending. However, this could not be finalized, thereby further reducing the amount of sovereign loan to $35.71 million. Overall, the project is assessed as less than relevant. B. Effectiveness 44. The project is assessed less than effective. Its design and monitoring framework (DMF) established sector wide indicators as outcome targets, of which achievements were mixed. The first outcome indicator of 10% increase in the number of MSMEs receiving term financing was achieved (Appendix 1). The annual average growth was 10.3% in , with substantial growth in lending to MSMEs from the PFIs, and growth in the PFIs overall MSME portfolios, although the specific contribution of the project appears marginal due to the small size of the MSME loans channelled by the project. On the other hand, the project could not achieve the other 26 Intellectual Capital Advisory Services Private Limited (IFC in partnership with the Government of Japan) Micro, Small, and Medium Enterprise Finance in India: A Research Study on Needs, Gaps, and Way Forward. pp Office of the Registrar General and the Census Commissioner, India Census Data.

19 11 outcome targets associated with direct lending to SIDBI 20% increase of direct lending by SIDBI and 20% annual increase in the number of MSME female borrowers from the selected 12 states; and with PCG commercial debt finance or bond issuance in international capital markets by an Indian bank. 45. Regarding the other project outputs, the quality of DMF was low and it did not provide specific, monitorable indicators to be delivered by the project. 28 For the direct and indirect loans channeled to MSMEs, SIDBI and ADB revised the targets during the midterm review (MTR) mission in March 2014 to be achieved by 2015, including (i) at least 6,000 subloans supported under direct and indirect lending; (ii) at least 30% of total subborrowers are women; and (iii) PFIs will increase their commercial-term lending to MSMEs by at least the amount channeled from ADB. Of these, the project achieved 9,007 subprojects implemented complying the requisite procedures, against the MTR target of 6,000. Of these subloans, there were 5,371 (or 60%) women beneficiaries under the loan, against the target. PFIs that received indirect lending through SIDBI expanded lending to MSME clients by more than the amount of the indirect loan provided (Appendix 2, Table A2.1). 46. The project s GAP implementation was successful as 12 out of 13 targets were achieved (Appendix 8). In particular, the project s record of channeling 60% of subloans to women enterprises can be deemed significant and demonstrative, given that the estimated percentage of women enterprises in MSME was only 7.4% in FY2007. The project strengthened capacity of SIDBI and PFIs, with development of extensive training modules; policy analysis of 25 PFIs and SIDBI focusing on gender inclusion; training of 164 SIDBI and PFI officials, 1,384 low-income women entrepreneurs (against the targeted 1,200), among others. The project also assisted in fully meeting the safeguards requirements while building awareness, system, and capacity (paras.19-21). There were no reported adverse effects on people or the environment. 47. On the other hand, the project could not effectively monitor its impacts on MSME development beyond subloan management processes (from appraisal to repayment). Its intended indicator of measuring enhanced competitiveness through reduced time and cost of production facilitated by subloans was rather general, and difficult to apply, given the diverse types of enterprises and associated methodologies to undertake such measurement. In the end this was not able to be monitored, nor any alternative developed. Overall, in view of the mixed achievements and performance of its objectives, the project is rated less than effective. C. Efficiency 48. The project was less than efficient, as resources were not fully utilized and start-up delays affected project implementation. Economic and financial internal rates of return (EIRR and FIRR) were not calculated at appraisal and at completion in view of the presence of robust PFI selection, subloan appraisal, and their management systems. The system was duly applied for subloan appraisal and subsequent management while complying with the set performance criteria at project and institutional levels. The said system adopted under the project was also able to channel funds to the missing middle in an effective manner, while successfully focusing on the enterprises run by women. 29 Thus, for the direct and indirect fund channeled to the enterprises, the project is rated efficient. 28 For example, its first output indicator MSME credit as a proportion of total net bank credit increased from 8% in 2008 to 13% in 2012, is a sector outcome and not project output, while the second output indicator the impact in terms of reduced business cost and higher benefit from critical SIDBI MSME investments will be measured, was difficult to clearly define, and could not be monitored. 29 The project is assessed economically viable based on the stakeholder analysis (Appendix 2, Table A2.3).

20 On the other hand, apart from the $250 million PCG that was not realized, the remaining sovereign loan amount had to be reduced from $50 million to $35.71 million. While SIDBI suggested reallocating the balance from direct to indirect lending, this was not finalized due to the unavailability of gender disaggregated data (as a part of revised GAP). A more flexible approach could have led to the higher utilization of the sovereign loan to achieve the other targeted outputs. The project also faced start-up delays for safeguards compliance and replacing ineligible subprojects (paras and 38). Accordingly, overall, the project was less than efficient in delivering its outputs and outcome. D. Sustainability 50. The project is rated likely sustainable, as far as the sovereign loan channeled to the MSMEs ($35.71 million) is concerned. The achieved outcome and output indicators related to the project s business goals of fostering MSME growth, enhancing MSME access to commercial financing with increased lending to MSMEs and female entrepreneurs, are likely to be sustained. The project lending was undertaken following the robust criteria and systems for selecting and implementing subloans through qualified PFIs, which effectively channeled the fund to the missing middle segment of MSMEs maintaining financial prudence. Its GAP was able to prioritize 60% of lending to women-led MSMEs. These demonstrated a replicable model for sustainable MSME development through SIDBI and associated PFIs. 51. At the corporate level, SIDBI is maintaining sound financial performance indicators (paras ). It positions itself at the forefront of MSME development in India and has expanded its scope of operations, such as introduction of schemes to promote downsized technology adoption to the missing middle, including for energy saving. After the closing of the project, SIDBI s outstanding loans increased further to 797 billion at the end of FY2017 from 553 billion at the end of FY2015, an increase by 44%; and gross NPA and net NPA were maintained at 1.20% and 0.44% at the end of FY2017. SIDBI is rated AAA by CARE Rating Ltd. and continues to retain the confidence of multilateral bilateral financing agencies. E. Development Impact 52. The contribution of the project to the development impact was less than satisfactory. While the impact level targets were achieved with the number of MSMEs increased by 234% (against the target of 5%) and the number of employments in the MSME subsector rose 129% (against the target of 5%), the contribution of the project itself is marginal, given the ultimate size of the loan. The intended mobilization of $250 million from international capital market through PCG could not be realized, while the sovereign loan was further reduced in size from $50 million to $35.7 million due to the difficulties to implement direct lending modality from SIDBI. Nevertheless, the subloan modality demonstrated effective in targeting the missing middle segment of MSMEs with financial prudence. The project also established the ESSF in SIDBI that can screen subloans in compliance with the environmental and social safeguards requirements. 53. The project contributed to capacity building among women entrepreneurs to help ease access to credit and unleash better business opportunities, and sensitization of SIDBI and PFI participants regarding gender considerations. It had positive economic and social impacts on women entrepreneurs, as shown in the end-line survey carried out by the National Research Institute (para. 11, Appendix 8). The project also carried out comprehensive stocktaking of the banking policy, strategies and programs, and prescribed steps toward policy change and lateral learning, in addition to dissemination of findings of situation analyses to make the MSME subsector more conducive for women entrepreneurs.

21 13 F. Performance of SIDBI 54. The performance of SIDBI was generally satisfactory. SIDBI provided adequate ownership and assumed responsibility. During project preparation, quality and comprehensive information of the past projects and market background was provided. It actively developed the robust criteria for subloan selection and implementation, as well as the eligibility of PFIs to achieve the project objectives. After project appraisal, SIDBI quickly took actions to make the loan effective within two months after loan signing. It played a primary role in project implementation, by selecting the financial intermediaries for channeling the subloans and supervising subloan selection, appraisal, and follow-on processes while maintaining proper financial books and accounts, based on its experience to manage the requisite processes following the established guidelines and systems prescribed by the SIDBI Act and RBI regulations, as well as under other development partner financed projects. Compliance with loan covenants were ensured at all items, except for two (para. 31). SIDBI also maintained steady financial performance (paras ) and supported capacity building to ensure project sustainability. 55. For safeguards implementation, SIDBI took corrective actions to achieve compliance. While this affected process efficiency, the extensive efforts of SIDBI paved the way for increasing awareness on environment and social safeguards and ensuring sustainable PFI operations. G. Performance of ADB 56. Performance of ADB was less than satisfactory. While the project followed robust appraisal procedures meeting all requisite criteria, the size of the sovereign loan did not appear commensurate with the existing implementation capacity and systems of SIDBI. Given that the risk of non-realization of PCG under evolving international market conditions was already noted at appraisal, consideration might have been made to provide larger proportion of the ADB fund to sovereign loan, or to establish higher focus on specific MSME subsector or geographical areas so that the resources made available were more concentrated on focal areas of the MSME subsector and related issues. Moreover, the project s DMF quality was insufficient (para. 45). 57. As to the project implementation, performance appeared mixed. After loan signing in March 2010, ADB fielded an inception mission in June 2010 but the subsequent mission was fielded only in August 2011, while safeguards compliance was initially insufficient. Although ADB actively engaged with SIDBI and PFIs to undertake corrective measures and helped SIDBI to adopt ESSF that can meet compliance requirements, the process took until June 2012 when it was approved by SIDBI Board. Consequently, a large number of subloan proposals were found ineligible and had to be replaced. Likewise, SIDBI and ADB were not able to agree on the reallocation of direct loan proceeds to indirect loan, losing the opportunity for achieving maximum benefits from the sovereign loan, on which closer discussion with higher flexibility could have contributed to its resolution. On the other hand, ADB s performance in supporting the implementation of GAP is deemed satisfactory, in view of its contribution to the delivery of significant outputs. Its MTR mission, which was fielded in February March 2014 also proposed draft revisions in DMF while agreeing on a number of actions, which led to timely project closure without extension. H. Overall Assessment 58. The project is rated less than successful. The project was less than relevant due to the changes in external environment that significantly reduced the size of operation, although its design was aligned with the strategies and priorities of the government and ADB, with innovative features. It was less than effective because of partial achievements of the intended outcome and

22 14 outputs. The project was less than efficient due to underutilization of resources and efficiency gaps noted during implementation, although subloans were eventually delivered meeting their objectives. The project is rated likely sustainable as far as the delivered subloans and associated systems are concerned, which have demonstrated effectiveness while SIDBI continues to have steady financial performance and robust MSME portfolios. Overall Ratings Criteria Relevance Less than relevant Effectiveness Less than effective Efficiency Less than efficient Sustainability Likely sustainable Overall Assessment Less than successful Impact Less than satisfactory Performance of SIDBI Satisfactory Performance of ADB Less than satisfactory ADB = Asian Development Bank. Source: Asian Development Bank. Rating VI. ISSUES, LESSONS AND RECOMMENDTIONS A. Issues and Lessons 59. Project design, size and focus. The project, originally intended as combined sovereign and non-sovereign loan of $300 million ended up with $37.1 million sovereign loan, which appears marginal compared with the size of SIDBI s operation ($8.7 billion annually disbursed in FY2015) and of other development partners. As such it did not appear commensurate with the capacity of SIDBI having robust systems to manage MSME subloans that are backed by sound national level banking regulations. In pursuing higher and meaningful MSME subsector impacts, any future MSME subsector investments to a national-level agency such as SIDBI may pursue larger project size that is consistent with its implementation capacities, and/or sharper focus such as on the specific geographical areas. 60. Attention to address MSME development issues holistically. The lessons adopted for the project design and those further emerging indicate that the MSME development requires sound policy and regulatory framework to ease constraints for MSME finance and businesses, and measures to address supply side and demand side constraints. The project, recognizing sound enabling environment of MSME finance, focused on the supply side (or financial access) issues to operate effective subloan delivery mechanisms to the missing middle segment of MSME prioritizing women enterprises. While this objective was met, it could not monitor the concerned enterprises impacts on their business developments. 30 To deliver this end, project design would call for higher attention to the demand side issues such as product value chains and enterprise competitiveness, with a focus on specific industry subsectors or their cluster(s). 61. Practical and measurable DMF indicators. The project faced difficulties in tracking the vaguely defined DMF output target indicators. DMF should specify clear and measurable targets, with source data and reports, and be corrected during implementation as necessary. 62. Adequate management information system (MIS) and reporting. MSME project implementation needs to go along with effective and efficient MIS consistent with DMF targets at output and outcome levels. While the project implementation relied on the existing MIS of SIDBI 30 A part of the reason is that the project, despite its small size, did not prioritize specific subsectors. It was difficult to establish monitoring system of business development covering a broad range of subsectors eligible for financing.

23 15 and PFIs that can efficiently track all financial transactions, project specific MIS and reporting was not well established, causing difficulties in properly monitoring progress of project implementation and DMF target indicators, with many data collected ex-post basis. To pursue meaningful sector level impacts, future projects would also need to extend the scope of MIS to include the impacts on the critical supply side issues of the MSME subsectors. 63. Effective project management support. Under the project, monitoring and support provided during the critical startup period does not appear sufficient, causing compliance issue of safeguards that was resolved after 25 months of loan effectiveness. Well-structured projectspecific MIS could have also been developed and agreed upon during the startup phase. As such, the project has demonstrated the critical importance of providing intensive support to the counterpart agencies so that the effective implementation system is established early. Likewise, the project could not utilize $14.29 million allocated for SIDBI s direct lending window, while SIDBI had requested reallocation to the indirect lending window in response to the difficulties encountered in microfinance subsector. Given the needs and opportunities for utilizing the loan, this also called for closer dialogues with flexibility to explore mutually agreeable arrangements in a timely manner. B. Recommendations 64. Strategic Studies for Future Engagements. ADB s Country Partnership Strategy for India ( ) envisages the possibility of its further engagements in MSME subsector. However, to be effective, it is necessary to set out clear strategy and perspectives of its effective engagement, possibly linking up with other related undertakings such as its assistance in strategic planning of economic corridors that is ongoing in several states. To this effect, a diagnostic study may be undertaken to assess the constraints of the MSME subsector covering its enabling environment, supply and demand side issues, and experience and lessons of existing programs in India and elsewhere. A clear operational perspective defined through such diagnostic study would be an essential requirement in further proceeding with sector project identification and engagement for this sector in India. 65. Covenants. The covenants in the loan and project agreements may be made simple and practical. For instance, if all subprojects under FIL are obliged to be category C, the safeguard requirements for subloan appraisal can be simplified in accordance with ADB s Safeguards Policy Statement. On the other hand, the covenant for the similar MSME subsector projects may include the requisite MIS structure and reporting arrangements in a more specific and explicit manner and be agreed upon during the appraisal stage. 66. Further action or follow-up. During the implementation of the project, information beyond financial transactions such as broader social and financial impacts were not collected, whereas the project demonstrated effectiveness in channeling the funds to the missing middle with gender focus. As such, a follow-on study may be undertaken by the concerned sector division or thematic group, possibly as a part of the above diagnostic study, to assess the impacts of the selected individual subloans and draw lessons for any future engagements of ADB in India. 67. Timing of the project performance evaluation report. The project performance evaluation report may be prepared in 2019.

24 16 Appendix 1 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Help MSMEs in India realize their full potential, especially those led by female micro-entrepreneurs. Performance Targets and/or Indicators A 5% increase in the number of MSMEs established over the next 3 years (figures to be disaggregated by gender) (2008 baseline: 12.8 million MSMEs) A 5% increase in MSME subsector employment over the next 3 years (figures to be disaggregated by gender) (2008 baseline: 42 million people employed in the MSME subsector) Target was exceeded. Year Achievements No. of MSMEs ( 000) Employment ( 000) ,800 42, ,370 88, ,080 92, ,880 (a) 96,520 (b) , , , , ,850 (c) 111,430 (d) Outcome Improved MSME access to commercial financing and market opportunities, thereby fostering growth, competitiveness, and employment creation. 10% growth in the number of MSMEs receiving term financing through this project, starting in 2010 (2008 baseline for Indian banking sector: 17%) 20% increase in direct lending to MSMEs by SIDBI and the PFIs, and overall increase in their MSME portfolio (FY2008 baseline for SIDBI: 37%) At least one successful commercial debt finance or bond issue in international capital markets by an Indian commercial public-sector bank (2008 baseline: none) Annual increase of 20% in the number of successful applications by low-income female entrepreneurs at SIDBI branches in selected (a)234% Increase from 2008 baseline, against target of 5%. (b) 129% increase from 2008 baseline, against target of 5%. (c)14% increase from 2011 over 3 years (d) 15% increase from 2011 over 3 years Target was exceeded. Year No. of MSMEs Growth financed by State% Cooperative Banks ( 000) FY2010 8,500 FY2011 9, % FY2012 9, % FY , % FY , % FY2015 **13, % **Average growth per annum of MSMEs receiving financing was 10.3% during FY2010 FY2015. Not achieved. The indicator was no longer relevant as this was only applicable to direct financing. Not achieved. The indicator was no longer relevant as this was only applicable to PCG. Not achieved. The indicator related to direct lending was no longer relevant as this was only applicable to direct financing. With respect to indirect lending, 60% of overall successful applications were women. However, despite

25 Appendix 1 17 Design Summary Outputs 1. Enhance credit delivery through SIDBI and PFIs in the MSME subsector. Performance Targets and/or Indicators states (2008 baseline: 5 million) MSME credit as a proportion of total net bank credit increased from 8% in 2008 to 13% in 2012 At least 30% of the proceeds under the ADB loan to be used by SIDBI through its direct lending operations will be earmarked for lending to qualified female micro and small entrepreneurs Achievements the cancellation, strong results were achieved through indirect lending that surpassed the original target. This was achieved through strategic reach out to women borrowers through livelihood enterprise learning advisors (LELAs) and ultimately 42% of the total volume of loans were provided to women. Substantially achieved and exceeded. Sector Dec Outstanding Amount (. billion) % vs. Gross Bank Credit Industry Medium 2, % Priority Sector Micro & 5, % Small Enterprises Priority Sector Microcredit % Total 7, % Gross Bank Credit 47, % Source: Reserve Bank of India, Deployment of Gross Bank Credit by Major Sectors as of 28 Dec All PFI showed general increase in MSME lending portfolio (Appendix 2). On SIDBI, MSME credit delivery, no data for corresponding year and proportion provided. By 2015, at least 6,000 subprojects supported under the direct and indirect lending components of ADB loan. a By end of the project i.e. as of 30 June 2015, total number of subprojects supported under ADB loan was 9,007. Breakup of subprojects supported as of 30 June 2015 is shown below: Particulars No of beneficiaries 1 Direct lending 84 2 Indirect lending 8,923 Total 9,007 Substantially achieved and exceeded. As of 30 June 2015, 5,371 women benefitted from the subloans under the ADB loan, which is approximately 60% of total (direct and indirect) beneficiaries. Particulars Amount No. of No. of ($ million) beneficiaries women 1. Direct route of lending (27%) 2a. Indirect route Electronica Finance Ltd (23%) 2b. of lending ING Vysya Bank Ltd (22%) 2c. Indus Ind Bank (11%) 2d. Fullerton India Credit Co. Ltd. (85%) 2e. Janalakshmi Financial (89%) Services Pvt. Ltd. 2f. Total (60%) Total (60%)

26 18 Appendix 1 Design Summary Outputs 2. Increase of SME productive and managerial capacity and related new jobs created for new markets. 3. Participating banks will increase their MSME portfolios through the use of ADB s PCG. Performance Targets and/or Indicators The impact in terms of reduced business costs and higher benefits from critical SIDBI MSME investments that remove key competitiveness constraints will be measured in terms of cost and time Lending on commercial terms by the participating banks to their MSME clients will expand by at least the amount of financing mobilized under ADB s PCG (2008 baseline: none) Achievements In substance, a total of $21 million (=$35.71M / 9007 x 5371) was estimated to be provided to women borrowers, well exceeding the target of $15 million, i.e., $21 million out of $50 million dollars represents 42% of the total volume, which surpasses the original target of 30% (only number of women clients by ex-post data collection was available, but not amount). This is considered as substantial achievement. While women beneficiaries were 27% of direct lending and 60% of indirect lending, combined result under the project showed that 60% of all beneficiaries and the total proceeds of loans (i.e., $21 million [est.] out of $35 million) were provided to women beneficiaries. a Not achieved. No data provided by SIDBI in this regard. Not achieved. PCG did not take off. ADB = Asian Development Bank; MSME = micro, small, and medium enterprises; PFI = participating financial institutions; PCG = partial credit guarantee; SIDBI = Small Industries Development Bank of India; SME = small and medium-sized enterprises; FY = financial year. a This additional indicator was agreed between ADB and SIDBI at the mid-term review mission in March The DMF was not formally revised, but the indicator was monitored until project completion.

27 Appendix 2 19 MSME PORTFOLIO PFIs AND SIDBI Table A2.1: Increase in Lending to MSMEs by PFIs, and Overall Increase in their MSME Portfolio ( million) Name of PFI Year MSME portfolio of PFI Electronica Finance Ltd IndusInd Bank Fullerton India Credit Co. Ltd. Janalakshmi Financial Services Pvt Ltd Baseline Mar 2010 % growth Loans disbursed to MSMEs by PFIs 1, , % growth , % 1, % , % 2, % , % 2, % , % 3, , % 3, % Baseline Mar , Not available Not available , % Not available Not available , % Not available Not available , % 60, Not available , % 86, % , % 103, % Baseline 16, , Feb , % 23, % , % 33, % Baseline 1, , Jan , % 3, % Note: not available from PFI MSME = micro, small, and medium enterprises; PFI = participating financial institutions; SIDBI = Small Industries Development Bank of India. Table A2.2: Total Outstanding MSME Loans by SIDBI ( million) As of 31 March Particulars FY FY FY FY FY FY FY FY Indirect Credit a. Refinance 485, , , , , , ,850 Not Available b. Micro Finance ,130 16,030 11,700 11,320 15,760 27,740 Not Available c. Others ,780 40,540 77,050 54,690 18,380 4,260 Not Available Total Indirect Credit , , , , , ,850 Not Available Direct Credit Term loans under Direct Credit MSME Receivable Finance 95,410 98,840 95,050 91,440 80,210 86,840 81,860 Not Available 10,710 15,130 20,830 28,690 42,440 26,320 26,830 Not Available Total Direct Credit 106, , , , , , ,690 Not Available Grand Total 682, , , , , , , ,690 Source: SIDBI Annual Reports. MSME = micro, small, and medium enterprises; FY= financial year.

28 20 Appendix 2 Table A2.3: Stakeholder Analysis Stakeholders Costs Benefits Benefits minus SIDBI Indirect lending Borrowing from ADB (interest charge); Safeguards system creation, monitoring Lower borrowing costs from ADB; expansion of MSME lending; growth in priority sector Costs Positive in indirect lending to PFIs PFIs Direct lending Lower interest income from direct lending, worsened recovery after AP crisis, higher transaction costs Interest charge on borrowing from SIDBI; risk of non-recovery after AP crisis (increase in NPA) Interest income, high demand from the missing middle Expansion of MSME lending; growth in priority sector; PFIs significantly increased in lending to MSME at least 11% every year from 2010 to 2015; the number of subproject beneficiary achieved 9,007 Became negative in direct lending, during implementation Positive Women entrepreneurs Interest charge on borrowing from PFI; risk of business failure Expansion of own business; livelihood improvements; 5,371 women (60% of total beneficiaries, against target of 30%) benefited from the subproject supported by the ADB loan Positive MSMEs Interest charge on borrowing from PFI; risk of business failure Expansion of own business; livelihood improvements; over 10% average growth per annum in the number of MSMEs receiving financing increase Positive PCG participating bank Guarantee fee to ADB; obtaining credit rating on bonds Lower financing costs in bond issuance; Increase in MSME portfolio Became negative, during implementation Source: ADB ADB = Asian Development Bank; MSME = micro, small, and medium enterprises; PFI = participating financial institutions; PCG = partial credit guarantee; SIDBI = Small Industries Development Bank of India.

29 Appendix 3 21 SIDBI S LOAN APPRAISAL PROCESS Discussion / Application / Project Structuring / Initial Screening Stage Broad steps / process involved Branch Office Central Loan Processing Cell Branch Office (BO) to initiate discussion and source application from client. Issue Marketing / discussion with the appropriate application form and 1 promoters / issuance of guide / hand-hold the promoter while loan application filling up the application along with other related documents. 2 Central Loan Processing Cell (CLPC) team to be involved as soon as an application is received or if necessary, at the project structuring / initial discussion stage itself. Loan application sourced BO to ensure proper application, (in at BO / Extended Branch tune with the check list) signed by the Office (XBO) applicant / properly filled up. On receipt of application, it should be incorporated in the system (Application Monitoring Module). Due diligence of promoters BO to ensure the same as per extant 3 etc. as per guidelines. guidelines. Related office notes / papers Third party due should be forwarded to CLPC as part of 4 diligence guidelines. the report by the relationship manager CLPC role defined later in the as per (RM) along with complete application. note. Notes capturing relevant issues should KYC & AML - compliance 5 be forwarded to CLPC as part of RM as per guidelines. report. Broad steps / process Branch Office Central Loan Processing Cell involved The pre-sanction visits is to be carried out and coordinated by BO officials. However, with CLPCs in all regional offices and nearer to BOs, CLPCs 6 Pre-sanction site visit should be generally associated with the pre-sanction visit. RM and the processing officer of CLPC or any other officer visiting the unit should sign the visit report and submit it to the branch head. 7 Relationship manager s report to be finalized at BO. Detailed Appraisal Stage Broad steps / process involved 8 Detailed appraisal at CLPC / rating at CLPC Due diligence of promoters etc. during appraisal. Relationship manager s report along with copy of application (with check list) and related papers to be forwarded to CLPC signed by the branch head for detailed appraisal at CLPC. Central Loan Processing Cell / SFMC Branch Office CLPC should be involved directly with the detailed appraisal. To the extent possible (unless otherwise forced for geographical restrictions), CLPCs can deal directly with the client for project related clarifications keeping the BO informed. The draft term sheet should invariably be finalized in consultation with the BOs. CLPC should ensure that SIDBI s guidelines on due diligence have been meticulously followed by the BO. In case of deficiencies, immediate remedial steps should be taken. BO to provide necessary logistic support to CLPC as and when required by CLPC. In case of any change of promoters during the course of appraisal process, BO shall carry out necessary due diligence as per the guidelines and send a supplementary report to CLPC.

30 22 Appendix 3 Discussion / Application / Project Structuring / Initial Screening Stage Broad steps / process involved Branch Office Central Loan Processing Cell As part of technical appraisal, it shall be the duty of CLPC to evaluate and comment upon the adequacy of the due diligence exercise done and recorded by the BO. Detailed Appraisal Note (DAN) to be forwarded by CLPC to submit the proposal to SFMC CLPC to SFMC for rating 9 for further submission to the sanctioning review after finalization of authority. DAN and Risk Assessment Model (RAM) Rating. Sharing of DAN Risk Management Vertical 10 (RiMV) for comments and preparation of Memorandum at SFMC SFMC to share CLPC DAN with RiMV for their comments. SFMC to prepare memorandum in a specified format and address RiMV comments and other issues before submitting it to the sanctioning committee. Sanction Stage 12 Approval by the sanctioning committee. 13 Minutes to be finalized by the convenor of the respective sanctioning committees. Convenor of the sanctioning committee to forward a copy of the minutes to CLPC and Branch Head / 14 Regional Head (wherever applicable) & BO in-charge. Post-Sanction Stage Broad Steps/ Process Central Loan Processing Cell / SFMC Branch Office involved SFMC to forward copy of final DAN Flow of minutes / sanction 15 memorandum / minutes back to terms BO/CLPC for further necessary action. Documentation and Disbursement Issuance 16 of letter of intent / other letters 17 Disbursement 18 Repayment Monitoring & Follow-up Broad Steps/ Process involved CLPC/ SFMC BO to ensure issuance of letter of intent (LOI) after receipt of processing fees. A No-lien letter to be obtained from the borrower s banker, acceptance of LOI, and certified copies of resolution passed by MFI. Signing of loan agreement and other documents Disbursements to be made only after compliance with all terms and conditions mentioned in the LOI and incorporated in the loan agreement. BO to advise borrowers to make payments / repayments of dues through RTGS / NEFT system on due date which will ensure realization / credit of dues. Branch Office

31 Appendix 3 23 Discussion / Application / Project Structuring / Initial Screening Stage Broad steps / process involved Branch Office Central Loan Processing Cell SFMC to check on the credit decisions taken at various levels in the Bank s Post Sanction Reporting 19 hierarchy and to monitor the quality of (PSR) System new assets being added to the Bank s portfolio Project Advisory 20 Committee (PAC) 21 Progress Report 22 Field Visit 23 Annual Review Appointment of Nominee 24 Director PAC to be on a half-yearly basis and as required to ensure compliance with the terms and conditions of assistance and RBI guidelines. BO to advise MFI regarding the submission of the monthly progress report. ROs/BOs to undertake visit to the office and field areas of the MFI (within 6 months of the last visit) RO/BO to scrutinize financial strength, liquidity position, growth, and management efficiency etc. on an annual basis Appointment of a nominee director is mandatory for loan assistance equal to/greater than 250 million. The nominee director should ensure compliance with the terms and conditions of assistance and the RBI guidelines. Source: SIDBI. AML = Anti-money laundering; BO = Branch Office; CLPC = Central Loan Processing Cell; DAN = Detailed Appraisal Note; KYC: Know your customer; NEFT = National Electronic Funds Transfer; PAC = Project Advisory Committee; PSR = Post Sanction Reporting; RAM = Risk Assessment Model; RBI = Reserve Bank of India; RM = relationship manager; RO = Regional Office; RTGS = real time gross settlement; RiMV = Risk Management Vertical; SFMC = SIDBI foundation for micro credit.

32 24 Appendix 4 S. No COMPARISON OF EXPECTED SUBLOAN DISTRIBUTION BASED ON CRITERIA ESTABLISHED DURING APPRAISAL AND ACTUAL SUBLOAN DISTRIBUTION Conditions as per para , Schedule Actual 3 of the loan agreement The Borrower shall ensure that any During the sanction of the loan to PFIs, a pre- disbursement subloan shall not finance more than 90% of the cost of the qualified subproject (para. 10 of Schedule 3) Subject to the provisions for the above, the Borrower shall not approve any subloan which is below 50,000 or more than 10,00,000 for a single borrower, or has a term exceeding 7 years (para. 11 of Schedule 3) The Borrower shall ensure that it shall apply all relevant appraisal systems in respect of any proposed subloan, which will utilize an internal rating system, credit appraisal, and rating tool for smaller subloans and a rating appraisal model for larger subloans. Such appraisal system shall include a qualitative assessment of the qualified enterprises credentials and background and quality of management. The Borrower shall, and shall procure that the PFIs shall, ensure that it charges interest on subloans at rates that reflect their cost of funds plus a spread that covers transaction costs and risk adjusted returns. (para. 12 of Schedule 3) The Borrower shall ensure and shall procure that the PFIs shall ensure that qualified female entrepreneurs are given preference in accessing financing under the project, a minimum of 30% of its subloans shall be provided to women entrepreneurs. (para. 13 of Schedule 3) condition was stipulated that PFI shall agree to finance not more than 90% of the cost of project. The same has also been ensured at the time of end-use verification of funds. All the subloans covered under the loan comply with the criteria of qualified subprojects. Loans are given for (i) economically and financially viable subprojects; (ii) start-up, expansion, modernization or diversification activities in any of the eligible subsectors as agreed between SIDBI and ADB; (iii) projects that comply with SIDBI s and ADB s environmental and social safeguard policies; and (iv) subprojects not involved in financing of agreed list of 116 environmentally benign activities. The same was stipulated as a loan covenant at the time of sanction of assistance to PFIs. SIDBI has also checked the coverage of subloans between 50,000 to 10,00,000 for a single borrower at the time of submission of statement of expenditure (SoE) to ADB. Maturity of the subloans is generally 3 years. SIDBI has a robust and sound appraisal system in place for the assessment of PFIs. (Appendix 3). The system takes care of the operational, financial, governance, risk mitigation, regulatory as well as responsible lending aspects. All the sanctions made under the LOC have undergone through assessment in accordance with SIDBI s appraisal system. All the PFIs identified under the project are reputed banks/nbfcs with well laid out appraisal systems in place. Interest rates charged by PFIs are well regulated and the same was captured at the time of assistance to PFIs. Details of interest charged by PFIs to end beneficiaries have been shared with ADB from time to time. Female entrepreneurs were given preference under the project. Of the 9,007 beneficiaries, loans were extended to 5,371 women, which is approximately 60% of total beneficiaries (versus the target of 30%). Particulars Total No. of women beneficiaries beneficiaries 1 Direct lending Indirect lending 8,923 5,348 Total 9,007 5,371

33 Appendix 4 25 S. No. Conditions as per para , Schedule 3 of the loan agreement The Borrower shall ensure a wide geographical and sectoral dispersion of subloans within the targeted states and give preference to underdeveloped areas and priority sectors as agreed with ADB. (para. 14 of Schedule 3) Actual The table shows that there was wide geographical coverage within the targeted states. Coverage of loan cases in 12 states are shown below: Name of States Geographical coverage In terms of amount disbursed In terms of no of cases West Bengal* 3.28% 1.68% Andhra Pradesh 17.59% 9.97% Maharashtra 18.70% 19.57% Bihar* 0.75% 0.40% Assam* 0.17% 0.41% Uttar Pradesh* 8.44% 9.67% 5. Jharkhand* 0.06% 0.04% Karnataka 18.37% 25.41% Madhya Pradesh* 7.39% 7.21% Odisha* 0.64% 0.71% Rajasthan* 11.58% 8.39% Tamil Nadu 13.04% 16.53% % % *Low-income states: Geographical coverage in terms of total amount disbursed totaling to 32.31%; Geographical coverage in terms of number of cases totaling to 28.51%. As seen from the SOEs submitted from time to time, the subprojects have covered various sectors such as weaving and finishing (handloom), machinery & equipment, plastic goods, fabrication of iron and steel items, trading, food, commercial vehicles, etc. Subloans were given for most of the 116 identified activities. Source: SIDBI ADB = Asian Development Bank; LOC = Letter of Credit; PFI = participating financial institutions; SIDBI = Small Industries Development Bank of India; SME = small and medium-sized enterprises; SOE = statement of expenditure.

34 26 Appendix 5 KEY PERFORMANCE INDICATORS AND RATIOS FOR SIDBI AND PFIS Table A5.1: Selected Indicators SIDBI Particulars Total Income ( 63,460 57,840 57,410 58,080 54,010 46,060 38,670 million) Net Profit ( million) 11,200 11,770 14,170 11,180 8,370 5,670 5,740 CRAR (%) Profit Ratios a) Return on Average Assets (after tax) b) Return on Average Equity (after tax) c) Return on Average Assets (before tax) b) Return on Average Equity (before tax) 2.17% 14.68% 1.77% 11.31% 2.50% 16.44% 2.24% 15.87% 1.75% 14.34% 1.39% 12.05% 1.07% 8.88% 1.09% 8.70% % of Gross/ Net NPAs to Total Loans and Advances a) Gross NPA- 1.20% a) Gross NPA- 1.51% a) Gross NPA- 1.33% a) Gross NPA- 1.86% a) Gross NPA- 0.98% a) Gross NPA- 0.69% a) Gross NPA- 0.60% Earnings per share (EPS) b) Net NPA- 0.44% b) Net NPA- 0.73% b) Net NPA- 0.78% b) Net NPA- 0.45% b) Net NPA- 0.53% b) Net NPA- 0.34% b) Net NPA- 0.28% Source: SIDBI. CRAR = capital to risk weighted asset ratio; PFI = participating financial institutions; SIDBI = Small Industries Development Bank of India. Name of PFI Electronica Finance Ltd. Fullerton India Credit Co. Ltd. Janalakshmi Financial Services Pvt. Ltd. Table A5.2: Selected Indicators PFIs Fiscal Profitability Ratios Capital Year Adequacy Return on Return on ended Ratio Average Average 31 (CRAR) Assets Equity March (RoAA) (RoAE) Baseline Earnings per share (EPS) 20.47% 3.10% 22.90% % 2.90% 23.10% % 2.60% 21.40% % 2.50% 20.80% % 1.95% 16.80% 5.72 Baseline % 2.90% 15.60% % 2.80% 15.80% % 3.40% 20.90% 1.60 Baseline % 7.52% 38.64%

35 Appendix 5 27 Name of PFI Indus Ind Bank ING Vyasa Bank Ltd. Fiscal Year ended 31 March Capital Adequacy Ratio (CRAR) Profitability Ratios Return on Average Assets (RoAA) Return on Average Equity (RoAE) Earnings per share (EPS) % 7.20% 34.85% Baseline % 1.46% 15.09% a % 1.57% 19.23% a % 1.63% 18.45% a % 1.81% 17.48% a % 1.90% 18.59% a Baseline Not 13.24% 1.26% Available % 1.20% Not Available b 17.60% 2.30% 14.8%a a Return on equity. b As of 20 November 2014, ING Vyasa Bank Ltd. was merged with Kotak Mahindra Bank. Details of FY2015 are based on Kotak Mahindra Bank Annual Report. Source: SIDBI and Annual Reports of PFIs. PFI = participating financial institutions.

36 28 Appendix 5 Table A5.3: Small Industries Development Bank of India Consolidated Balance Sheet (in ) Items 31-Mar Mar Mar Mar Mar Mar Mar Mar Mar-09 Capital and liabilities Capital 5,319,220,309 4,869,822,500 4,500,000,000 4,500,000,000 4,500,000,000 4,500,000,000 4,500,000,000 4,500,000,000 4,500,000,000 Reserves, surplus and funds 133,001,467, ,300,669,051 93,811,360,325 80,901,430,165 70,964,196,768 63,683,711,971 59,050,772,514 54,922,963,344 51,811,493,898 Deposits 239,869,217, ,751,227, ,468,167, ,282,637, ,048,719, ,341,998, ,734,276, ,720,611,211 -* Borrowings 433,824,406, ,566,851, ,728,729, ,180,316, ,491,566, ,877,688, ,888,356, ,408,041,490 -* Other liabilities and provisions 68,676,106,996 69,259,689,195 68,360,606,711 62,735,998,347 62,751,103,349 64,413,052,367 55,179,459,906 49,092,475,367 -* Deferred tax liability 216,046, ,430,482 1,225,133,111-1,170,271,745 1,377,857,073 1,117,022,805 1,515,247,423 -* Total 880,906,465, ,165,690, ,093,998, ,600,382, ,925,858, ,194,308, ,469,889, ,159,338, ,382,084,945 Assets Cash and bank balances 31,516,520,257 32,853,858,558 10,464,460,399 19,436,997,167 15,295,201,591 13,499,506,576 16,261,379,219 11,848,291,805 8,438,261,662 Investments 79,395,107,745 71,262,958,093 29,627,833,463 29,778,989,991 28,921,942,808 27,613,507,005 23,676,122,834 18,421,245,347 -* Loans and advances 742,417,939, ,737,941, ,425,938, ,706,995, ,597,573, ,850,670, ,536,334, ,023,729,955 -* Fixed assets 2,059,343,964 2,105,737,391 2,062,160,820 1,947,696,169 1,984,827,654 2,013,032,759 2,016,625,305 2,077,417,315 -* Other assets 25,517,553,891 21,205,194,951 13,513,605,222 14,729,703,907 12,126,312,194 13,217,592,088 9,979,427,057 7,788,654,413 9,216,917,021 Total 880,906,465, ,165,690, ,093,998, ,600,382, ,925,858, ,194,308, ,469,889, ,159,338, ,382,084,945 Contingent liabilities 100,119,646, ,107,698,369 76,407,679,911 65,193,587,953 52,860,602,658 50,435,349,784 23,035,487,514 15,346,102,048 -* Note: Numbers may not sum precisely because of rounding. *Breakdown is not available due to format change. Source: Small Industries Development Bank of India financial statements and Annual Reports.

37 Appendix 5 29 Table A5.4: Small Industries Development Bank of India Consolidated Profit & Loss (in ) Particulars 31-Mar Mar Mar Mar Mar Mar Mar Mar Mar-09 Income Interest and discount Other income Total Expenditure 65,084,900,033 58,790,790,854 54,989,261,930 56,200,821,584 51,353,201,460 44,232,718,845 37,077,561,933 29,879,139,290 -* 3,798,119,063 2,812,534,352 2,546,425,750 2,004,331,887 2,774,449,796 1,919,249,002 1,662,898,865 2,286,837,811 -* 68,883,019,096 61,603,325,206 57,535,687,680 58,205,153,471 54,127,651,256 46,151,967,847 38,740,460,798 32,165,977,101 -* Interest and financial charges 43,864,721,888 37,453,910,605 33,737,234,139 33,370,912,099 30,389,095,335 25,232,526,495 22,240,196,231 14,765,787,056 10,686,549,561 Operating expenses 5,472,419,960 4,319,042,570 4,559,483,423 3,145,024,235 3,273,508,578 2,760,129,888 2,748,728,865 2,016,018,140 -* Provisions and contingencies 915,870,357 2,348,718,729 (1,970,125,162) 6,223,450,042 8,435,781,390 7,362,750,575 5,240,075,455 6,671,501,882 -* Total 50,253,012,205 44,121,671,904 36,326,592,400 42,739,386,376 42,098,385,303 35,355,406,958 30,229,000,551 23,453,307,078 -* Profit before Tax 18,630,006,891 17,481,653,302 21,209,095,280 15,465,767,095 12,029,265,953 10,796,560,889 8,511,460,247 8,712,670,023 8,370,717,281 Provision for Income Tax 6,551,517,517 5,823,390,333 5,145,120,017 6,058,983,886 3,831,075,132 4,844,209,931 3,752,306,605 4,507,710,506 Deferred tax adjustment [(asset) / liability] (201,383,841) (807,702,628) 1,865,443,928 (1,810,581,963) (207,585,928) 260,834,268 (397,848,090) (40,118,801) 1,799,969,336 Share of earning/(loss) in associates 9,341,843 15,786,774 21,954,949 19,179,124 6,525,081 17,303,402 21,019,045 9,133,986 (10,398,888) Profit after tax 12,289,215,058 12,481,752,371 14,220,486,284 11,236,544,296 8,412,301,830 5,708,820,092 5,178,020,777 4,254,212,304 3,024,124,057 Profit brought forward 726,574, ,043, ,284, ,105, ,163, ,189,362-80,438,773 53,421,494 Total profit / (loss) 13,015,789,159 13,094,796,044 14,759,770,512 11,706,649,704 8,797,465,638 5,858,009,454 5,178,020,777 4,334,651,077 3,077,545,551 Appropriations Transfer to general reserve 10,006,000,000 10,116,600,000 11,906,049,385 9,356,600,000 5,406,500,000 3,405,500,000 3,005,100,000 2,056,574,350 1,292,292,028 Transfer to special reserve u/s 36 (1) (vii) of the income tax act, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000,000 Transfer to statutory reserve u/s 45-IC of RBI act, ,673, ,869, *

38 30 Appendix 5 Particulars 31-Mar Mar Mar Mar Mar Mar Mar Mar Mar-09 Others Transfer to investment fluctuation reserve 20,240, ,897,722 59,156,175 (321,801,399) 788,293, * Transfer to staff welfare fund 20,000,000 10,000,000 20,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 Dividend on shares 939,308, ,810,409 1,125,000,000 1,125,000,000 1,125,000,000 1,125,000,000 1,125,000,000 1,125,000, ,000,000 Tax on dividend 191,221, ,044, ,521, ,566, ,566, ,586, ,731, ,076, ,814,750 Surplus in profit and loss account carried forward 923,344, ,574, ,043, ,284, ,105, ,922, ,189, * Total 13,015,789,159 13,094,796,044 14,759,770,512 11,706,649,704 8,797,465,638 5,858,009,454 5,178,020,777 4,334,651,077 3,077,545,551 Basic/diluted earnings per share Note: Numbers may not sum precisely because of rounding. *Breakdown is not available due to format change. Source: Small Industries Development Bank of India financial statements and Annual Reports. RBI = Reserve Bank of India.

39 Appendix 5 31 Table A5.5: Small Industries Development Bank of India Consolidated Cash Flow Statement (in ) Particulars 31-Mar Mar Mar Mar Mar Mar Mar Mar Mar Cash flow from operating activities Net profit before tax as per consolidated P and L account 18,630,006,890 17,481,653,301 21,209,092,073 15,465,738,030 12,029,265,953 10,796,560,889 8,511,460,247 8,712,670,023 8,370,717,281 Adjustment for: Depreciation 201,410, ,029, ,539, ,908, ,525, ,866, ,925, ,888, ,563,314 Provision for net depreciation in investments 613,031,066 1,157,197, ,402,483 4,197,988, ,741, ,849,951 95,659,819 59,017,577 32,680,835 Provisions made (net of write back) 1,897,558,851 1,843,674,056 (1,190,749,629) 6,057,488,779 8,442,496,305 6,699,158,149 5,151,647,298 6,612,484,305 5,657,144,658 Profit on sale of investments (net) (2,348,806,643) (1,277,209,428) (1,591,975,700) (806,545,244) (1,045,878,339) (496,996,773) (450,919,114) (739,201,212) (315,115,786) Profit on sale of fixed assets (3,554,143) (3,654,403) Dividend/interest received on investments (119,896,737) (113,938,261) (163,708,548) (146,115,075) (212,713,489) (136,043,832) (122,181,150) (171,955,950) (75,391,023) Cash generated from operations (prior to changes in operating assets and liabilities) 18,869,750,235 19,236,060,632 18,944,599,679 21,109,263,500 20,148,437,839 17,667,394,683 13,341,160,945 14,477,400,834 10,504,720,159 Adjustment for net changes in: Current assets (3,359,777,242) (7,206,165,968) 1,506,357,500 (3,488,652,588) 3,091,031,943 (4,532,215,335) (2,057,623,652) 1,205,021,414 1,525,902,308 Current liabilities (4,193,768,002) 1,538,462,354 1,078,443,959 49,425,898 (9,234,476,542) 2,077,790,831 2,299,900,406 4,611,404,008 (2,696,764,944) Bills of exchange 4,048,571,508 5,689,434,285 7,757,903,839 13,908,370,439 (16,097,155,388) 195,803,893 (4,989,435,619) (6,980,425,701) (6,510,927,069) Loans and advances (58,779,688,144) (143,159,309,845) 57,256,849,021 (72,188,199,997) (7,104,870,474) (77,677,262,634) (77,615,321,341) (63,849,422,518) (102,530,328,712) Net proceeds of bonds and debentures and other borrowings 10,862,206, ,838,121,162 (49,451,586,426) 57,688,749,475 (4,386,121,510) 55,987,493,223 49,480,315,377 17,004,408,361 56,780,886,143 Deposits received 34,117,989,717 71,283,089,911 (39,814,469,425) (6,706,082,486) 23,706,721,167 12,607,721,760 34,013,665,767 41,450,055,382 45,120,712,828 (17,304,465,234) 44,983,601,899 (21,666,501,532) (10,796,389,259) (10,024,870,804) (11,340,668,262) 1,131,500,937 6,558,959,054 8,310,519,446

40 32 Appendix 5 Particulars 31-Mar Mar Mar Mar Mar Mar Mar Mar Mar-09 1,565,285,001 64,219,662,531 (2,721,901,853) 10,312,874,241 10,123,567,035 6,326,726, ,726,661,883 7,918,441,780 2,194,200,713 Payment of tax (7,494,340,588) (6,283,452,472) (6,065,312,713) (4,509,476,246) (5,842,330,850) (3,565,649,645) (3,899,810,014) (4,540,132,086) (3,838,625,354) Net cash flow from operating activities (5,929,055,586) 57,936,210,059 (8,787,214,566) 5,803,397,995 4,281,236,185 2,761,076,776 10,572,851,869 3,378,309,694 (1,644,424,641) 2. Cash flow from investing activities Net (purchase) / sale of fixed assets (151,463,380) (188,260,796) (251,076,650) (81,806,334) (101,320,471) (129,157,948) (104,133,156) (46,129,929) (390,793,116) Net (purchase) / sale / redemption of investments 17,953,479,388 (45,916,551,476) 1,219,650,081 (409,887,299) (1,288,832,469) (4,221,239,704) (4,875,894,757) 686,907,362 (5,160,013,633) Dividend/interest received on investments 119,896, ,481, ,923, ,285, ,115, ,096, ,112, ,659,573 95,580,926 Net cash used in investing activities 17,921,912,744 (45,990,331,093) 1,131,496,556 (345,408,287) (1,178,037,677) (4,215,301,084) 4,847,915, ,437,006 (5,455,225,823) 3. Cash flow from financing activities Proceeds from issuance of share capital and share premium 19,999,999,999 14,999,500, Dividend on equity shares and tax on dividend (1,139,559,966) (1,399,295,746) (1,316,818,758) (1,316,194,132) (1,307,503,493) (1,307,648,335) 1,311,848,820 (789,716,557) (789,700,214) Net cash used in financing activities 18,860,440,033 13,600,204,254 (1,316,818,758) (1,316,194,132) (1,307,503,493) (1,307,648,335) (1,311,848,820) (789,716,557) (789,700,214) 4. Net increase / (decrease) in cash and cash equivalents 30,853,297,191 25,546,083,220 (8,972,536,768) 4,141,795,576 1,795,695,015 (2,761,872,643) 4,413,087,414 3,410,030,143 (7,889,350,678) 5. Cash and cash equivalents at the beginning of the period 36,510,543,619 10,964,460,399 19,436,997,167 15,295,201,591 13,499,506,576 16,261,379,219 11,848,291,805 8,438,261,662 16,327,612, Cash and cash equivalents at the end of the period 67,363,840,810 36,510,543,619 10,964,460,399 19,436,997,167 15,295,201,591 13,499,506,576 16,261,379,219 11,848,291,805 8,438,261,662 Note: Numbers may not sum precisely because of rounding. *Breakdown is not available due to format change. Source: Small Industries Development Bank of India financial statements and Annual Reports.

41 Appendix 6 33 ELIGIBILITY CRITERIA AND STANDARD TERMS AND CONDITIONS FOR SUBLOANS A. Eligibility Norms / Parameters for ADB Line of Credit for the Missing Middle Parameter Norm DER (Debt to Equity Ratio) 6:1 CRAR (Capital to Risk Assets Ratio) 15% PAR > 30 days 5% OSS 100% MFI Rating (exposure > 250 million) mfr3 or above Exposure/Borrower (% of Capital Funds of SIDBI) 7% Group exposure (% of Capital Funds of SIDBI) 9% Maximum exposure (% of Overall Exposure of SFMC) 15% Scheme Exposure (% of Capital Funds of SIDBI) 40% Exposure to NBFCs (% of Outstanding portfolio of SIDBI) 20% SIDBI share of Overall Borrowings of the MFI 20% Established for at least 5 years and/or have a demonstrated track record of running a successful microcredit program for at least 3 years. Achieved a minimum outreach of 3,000 poor members or has demonstrated the capability to reach this scale within a period of next 12 months. A satisfactory and transparent accounting, management information, and internal audit systems or is willing to adopt such practices with the Borrower s assistance. Accounts audited by an external auditor annually or agree to do so immediately after receipt of the Borrower s advance. Comply with SIDBI s and ADB s environmental and social safeguard policies. *Exposure norms will vary based on the legal structure of the borrower. ADB = Asian Development Bank; SIDBI = Small Industries Development Bank of India; DER = Debt to Equity Ratio; CRAR = Capital to Risk Assets Ratio; PAR = performance appraisal report; MFI = microfinance institution; NBFC = nonbank financial company. B. Standard Terms and Conditions of Assistance under the ADB Line of Credit for the Missing Middle Pre-LOI condition Total Loan Amount Purpose Interest Rate BO to: i. Obtain satisfactory banker s opinion from lenders constituting at least 50% of the outstanding as on 30 September Follow the multiple banking arrangement guidelines issued vide RiMV circular No.19/ dated 10 December 2012 regarding exchange of information. ii. Check the names of borrower, its promoters / directors, its associate and sister concerns and their promoters / directors do not appear in the latest caution / willful defaulters / CIBIL / RBI / UN Terrorists List. Term Loan under the ADB Line of Credit for the Missing Middle. For onlending to micro enterprises, as defined under MSMED Act, 2006, loans in the range of 50,000 10,00,000 for purchase of equipment/machinery/vehicles/working capital needs on secured basis in the 12 identified states under the ADB LOC, namely, Andhra Pradesh, Assam, Bihar, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal. Rate of interest at X% p.a. (fixed) payable monthly on the 10th day of each calendar month.

42 34 Appendix 6 Repayment Validity Security Upfront fee The term loan shall have tenure of X months, including an initial moratorium of X months, from the date of first disbursement. Repayment schedule can be drawn proportionately for the loan disbursed. However, terminal date for repayment shall not exceed XX months from the date of first disbursement. X months from the date of issue of Letter of Intent (LOI). Exclusive charge on the receivables/ assets created out of SIDBI s loan with a margin of 25%. The borrower shall hold in trust the assets underlying the receivables charged to SIDBI, on behalf of SIDBI, till such time the said loan is completely adjusted with all interest, further interest, penal interest, charges, costs, expenses and shall while registering the vehicle (charged to MFI/NBFC by its borrowers) also obtain an endorsement from the registering authority that the said vehicle has been and continues to be under lien / charge / hypothecation agreement with the borrower. Nonrefundable upfront fee of X% of the sanctioned loan amount payable at the time of issue of LOI. Taxes and other levies will be additional. Prepayment Penal Interest Legal and Valuation Charges Special Terms and Conditions The borrower shall not prepay the outstanding principal amount of loan in full or part thereof before the due dates except after obtaining prior approval of SIDBI in writing which may be granted subject to such conditions as SIDBI may deem fit including levy of interest on such prepayment. A charge of XX% p.a. over and above the applicable rate, by way of penal interest, will be levied for defaults in payment of principal, interest and other monies payable under the loan agreement. Arrears of penal interest shall carry interest at the same rate as is applicable to the loan. The company shall pay SIDBI s legal fees and expenses incurred in connection with documentation pertaining to the above facility, due diligence of project contracts/documents, carrying out searches, investigation of title and/or valuation of the properties to be undertaken by SIDBI in respect of the concern s/ borrower s properties, project, and other securities. Documentation: Documentation for the assistance in line with documentation executed by the bank for similar assistance for the company earlier / to other NBFCs, as per guidelines. Documents will be vetted by the legal department before disbursement. Form 8 would be filed as per guidelines. Pre-Disbursement Conditions: Prior to seeking disbursement of any part of the term loan assistance, the company shall: 1. Either follow a board approved ESSF framework and demonstrate that it has been integrated in the Borrower s credit dispensation process and agree that it would continue to do so during the duration of the SIDBI loan or finance identified environmentally benign 116 activities as per the list to be provided by SIDBI. 2. Agree to finance not more than 90% of the cost of project. 3. Submit an undertaking that the assistance shall be deployed only in the 12 identified states under ADB LOC, namely, Andhra Pradesh, Assam, Bihar, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal. 4. The MFI shall arrange for submission of a fresh capacity assessment rating report before withdrawal of assistance beyond 25%, which should not be below mfr1 or equivalent.

43 Appendix Ensure that non-microfinance assets do not exceed 15% of total net assets as per RBI circular dated 2 December Undertake that SIDBI s assistance shall be utilized only for covering loans extended to micro enterprises, as defined under MSMED Act 2006 and that SIDBI s assistance shall not be utilized for the purposes which have been restricted under the RBI guidelines. 7. Furnish an undertaking to the effect that it conforms to all the prudential guidelines and exposure norms laid down by RBI from time to time. 8. Furnish to SIDBI and also lodge with its bank where it maintains a working capital account, an unconditional and irrevocable ECS mandate, in the manner and form acceptable to SIDBI to allow SIDBI to recover its monthly dues from the said Bank electronically or submit post-dated cheques for the principal payments due under the loan agreement. 9. Agree to maintain stipulated security margin of 25% in relation to the outstanding loan at all times during the duration of the loan. 10. Agree to take comprehensive insurance cover, wherever applicable, against all risks on the assets created/securities offered for the loan, during the duration of the loan, wherever applicable/feasible. 11. The assistance under Missing Middle segment would have to be drawn before/along with assistance by way of term loan and subdebt under the Micro Credit Scheme. 12. Ensure satisfactory credit opinion from all lenders of MFI/NBFC. In case the same are not being received, BO to comply with extant RiMV guidelines. 13. Undertake that: a) the company shall not use the proceeds of SIDBI loan in any of the restricted activities as per RBI guidelines/other applicable guidelines. b) none of the company s directors and/or any of their relative(s) is/are director(s) in SIDBI. c) that there are no pending court cases initiated by any other banks/fis against the company and its directors. d) in case any contingent liability devolves during the duration of the SIDBI term loan, the same shall be met out by the borrower/promoters from their own sources. e) the dealings of the company with its subsidiaries/ associate concerns would be on commercial terms. 14. Undertake that any sum received by the company in repayment or realization of loans & advances either wholly or partly shall, to the extent allowed by SIDBI and remaining outstanding, be deemed to have been received by the company in trust for SIDBI and shall accordingly be paid by the company to SIDBI as per the repayment schedule fixed. Further, where such approval has been granted to the company, all securities held, or which may be held, by the company, on account of any transaction in respect of which such approval has been granted, shall be held by the company in trust for SIDBI. 15. Undertake that it shall make suitable arrangements, to the satisfaction of SIDBI, for providing to SIDBI, the right to collect rentals / installments, directly from the endbeneficiaries as and when called upon to do so by SIDBI. 16. Undertake that it shall forward to SIDBI a copy of the quarterly report certified by a CA, which it submits to RBI within a fortnight of such submission to RBI. 17. Agree to implement forthwith the requirement of ADB as may be advised by SIDBI. 18. If so assessed by SIDBI, at any point during the duration of the loan, execute Supplemental Agreements regarding collection of rentals / installments directly from the end borrowers or modify its existing agreement with its borrowers suitably to allow for collection of rentals directly from borrower by SIDBI / other banks.

44 36 Appendix Loan given for the purposes of acquisition of house and loans given against security of gold are to be strictly excluded from coverage. A CA certificate this effect should be submitted alongwith utilization statement. Other conditions: i. SIDBI reserves the right to call upon the company to arrange for direct payment of rentals/ installments receivable from the beneficiaries of MFI/NBFC, covered under the loan. For this purpose, the company shall execute such undertakings and assurances and also arrange to furnish such letters, undertakings and assurances by its constituents in favour of SIDBI as may be required by SIDBI from time to time. This right shall be in addition to the right to recall the loan and shall not be exercised unless the company commits three consecutive defaults either in repayment of installments of principal or payment of interest or both. The company shall submit at half-yearly intervals, a certification by a professional, preferably a Company Secretary, regarding compliance with various statutory prescriptions that are in vogue, as per the format prescribed by RBI, applicable to NBFC-MFIs. ii. Interest tax and withholding tax, if applicable, shall have to be paid by the company in addition to interest. iii. The borrower shall submit a certificate in respect of all the beneficiaries covered under the assistance as to their MSMEs (missing middle) status duly audited and certified by a Chartered Accountant. iv. The borrower shall agree for selection of 7% of beneficiaries, from the list of beneficiaries covered under the assistance by SIDBI on random basis for unit visit for verification of MSME (missing middle) status and proper end use of funds v. The borrower shall arrange for the visit to its beneficiaries/units, from the list of beneficiaries covered under the assistance, by SIDBI officials or its authorized representatives for verification of MSME status and proper end use of funds. Wherever visit to vehicles covered under SRTO is not feasible, the borrower shall provide necessary documents to verify MSME status and end use of funds. vi. The borrower shall facilitate visit by SIDBI team to the beneficiary selected by SIDBI. vii. The borrower shall submit a certificate from a firm of chartered accountants, every half year, with regard to adequacy of underlying assets vis-a-vis outstanding assistance. viii. The borrower shall furnish annually, a CA-certified stock statement of the assets/ receivables (with no overdues) hypothecated to SIDBI for the term loan. ix. The borrower shall not induct a person in his business/company who is a director on the board of a company that has been identified as a willful defaulter in terms of RBI guidelines and that in case such person is found to be the associated with/ engaged by the borrower, it would take expeditious and effective steps for removal of the person from the company. x. The borrower shall intimate to SIDBI within 30 days of any loans having been granted to its subsidiary/ associate unit(s), at a rate of interest lower than the rate at which the borrower company has borrowed the funds from SIDBI/ its bankers/ other financial institutions, failing which SIDBI shall be at a liberty to take appropriate action against the borrower. xi. The Borrower is aware that SIDBI is required to exchange, among the banks/fis under multiple banking arrangements, the credit information and data relating to the credit facilities availed/to be availed by the borrower from SIDBI. Accordingly, the borrower hereby agrees and gives its consent to SIDBI for exchanging, among the banks/fis under multiple banking arrangements, the information and data pertaining to: (a) the borrower and its associate concern(s); (b) credit facility(ies) availed/to be availed by the borrower and the securities created / to be created/guarantees executed/to be executed in favour of SIDBI to secure due repayment of credit facility(ies);

45 Appendix 6 37 (c) irregularities/defaults, if any, committed by the borrower in discharge of it s obligations in respect of the credit facility / facilities; (d) any other information and data pertaining to the Borrower and / or its associate concern(s) which SIDBI may deem fit and appropriate to exchange among the banks/fis from time to time. Source: SIDBI ADB = Asian Development Bank; BO = Branch Office; CLPC = Central Loan Processing Cell; CIBIL = Credit Information Bureau (India) Limited; ESSF = environmental and social safeguard framework; LOI = Line of Credit; LOC = Letter of Credit; NBFC = nonbanking financial company; PFI = participating financial institutions; SIDBI = Small Industries Development Bank of India; SME = small and medium-sized enterprises; SOE = statement of expenditure; RM = relationship manager; RAM = Risk Assessment Model; RO = Regional Office; RiMV = Risk Management Vertical; RBI = Reserve Bank of India; SFMC = SIDBI foundation for micro credit.

46 38 Appendix 7 STATUS OF COMPLIANCE WITH LOAN COVENANTS Sr. No. Covenant Reference in Loan Agreement Description of Project; Use of Proceeds of the Loan 1. The Borrower shall apply at least 30% of the proceeds of the Loan, in Rupee equivalent to making Subloans directly to Qualified Enterprises for Qualified Subprojects. Section 3.02 (a) 2. The Borrower shall re-lend, in aggregate, up to 70% of the proceeds of the Loan, in Rupee equivalent to PFIs under Participation Agreements upon terms and conditions mutually acceptable to ADB and the Borrower, and cause the PFIs to apply the proceeds of the Loan to the financing of Subloans to Qualified Enterprises for Qualified Subproject, in accordance with the provisions of this Loan Agreement. 3. Each Participation Agreement shall be in form and on terms and conditions mutually acceptable to ADB and the Borrower, and shall be without prejudice to, and without limitation on, the obligations of the Borrower under this Loan Agreement. Except as ADB may otherwise agree, the terms for relending the Rupee equivalent proceeds of the Loan to the PFIs shall include interest at market rates that reflect costs of funds plus a spread that covers transactional costs and risk adjusted returns, and a repayment period not exceeding 15 years. Particular Covenants 4. The Borrower shall at all times make adequate provision to protect itself against any loss resulting from changes in the rate of exchange between Rupees and the Dollar. Section 3.02 (b) Section 3.02 (c) Section 4.02 Status of Compliance Not complied with. Of the $15.00 million allocated for direct lending, SIDBI disbursed $0.71 million. Lending to qualified micro enterprises was done through SIDBI microfinance branches upon compliance with eligibility norms. Direct lending by SIDBI was discontinued and as agreed during the TPRM held during 9-10 February The Government of India, via mail dated 15 April 2015, cancelled the amount of $14.29 million allocated for direct lending. Complied with. Of the total loan component of $50 million, $35 million (70%) allocated toward indirect lending was fully disbursed. Complied with. Participation agreements were executed by SIDBI with all the standards terms and conditions, including specific project-related conditions like ESSF, etc. SIDBI lending rates to PFIs are market-linked. Generally, the repayment period to PFIs is limited to 3 years for term loans (including moratorium). Complied with. This has been taken care of by SIDBI Resource Management Vertical (RMV).

47 Appendix 7 39 Sr. No. Covenant 5. The Borrower shall not, and shall ensure that no PFI shall, make a Subloan to any Qualified Enterprise unless such Qualified Enterprise has at its disposal, or has made appropriate arrangements to obtain as and when required, all local currency funds, including adequate working capital, and other resources which are required by such Qualified Enterprise for the carrying out of its Qualified Subproject in respect of which the Subloan is to be made. 6. The Borrower shall maintain records and accounts adequate to record the progress of each Qualified Subproject (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the Borrower, as part of the records and accounts referred to in Section 6.04 of the Loan Regulations. 7. The Borrower shall have its accounts and financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and shall, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, furnish to ADB (i) certified copies of such audited accounts and financial statements and (ii) the report of the auditors relating thereto (including the auditors' opinion on the use of the Loan proceeds and compliance with the financial covenants of this Loan Agreement), all in the English language. The Borrower shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. 8. Withdrawals from the Loan Account may be made for reimbursement of reasonable expenditures incurred Reference in Loan Agreement Section 4.03 Section 4.05 Section 4.07 (a) Section 4.10 Status of Compliance Complied with. All the subloans covered under the loan comply with the criteria of qualified subproject. Complied with. Monthly progress reports were maintained by SIDBI at the concerned branch office. These reports are used for monitoring & follow-up. Complied with. The annual accounts of SIDBI, being a central PSU are audited by Statutory Auditors appointed as per approved policy. All the documents required by ADB have already been submitted by SIDBI to ADB from time to time. Complied with.

48 40 Appendix 7 Sr. No. Covenant under the Project before the Effective Date, but not earlier than 6 months before the date of this Loan Agreement, subject to a maximum amount equivalent to 20 percent of the Loan amount; provided (i) such expenditures shall have been incurred in full compliance with the Procurement Guidelines, and safeguards policies, and (ii) suitable provisions, shall be included in the existing Subloan agreements to reflect the relevant provisions of this Loan Agreement. Reference in Loan Agreement Procurement for Goods and Works, Selection of Consulting Services 9. The Borrower shall cause, and ensure that the PFIs shall cause, Qualified Enterprises to: (a) ensure that the Goods and Works to be financed by Subloans shall be purchased at a reasonable price, due account also being taken of relevant factors such as economy and efficiency, time of delivery, efficiency and reliability of the goods, and their suitability for the Qualified Subproject and, in the case of consulting services, of their quality and the competence of the parties rendering them, and (b) adopt, to the extent possible, internationally competitive bidding procedures when the amount of the investment is unusually large and economy and efficiency can be gained by following such procedures. Implementation Arrangements 10. Repayments from Qualified Enterprises in respect of Subloans shall be re-lent to MSMEs so as to ensure that the outstanding amount of MSME lending by the Borrower at any time and from time to time shall be higher than the amount then outstanding in respect of the Loan. Schedule 2 para. 3 Schedule 3, para. 6 Status of Compliance Withdrawal applications were submitted to ADB as per the agreed covenants. Complied with. Procurement under the project were done as per ADB s procurement guidelines and in consultation with/approval of ADB. Complied with. PFI Eligibility 11. A. PFIs that are scheduled banks shall comply with the following requirements: (a). must have lending policies related to MSMEs and a track record of performance in Schedule 3, para. 7 A. (a) to (d) Compliance with all the conditions was ensured at the time of sanction of loan to banks.

49 Appendix 7 41 Sr. No. Covenant MSME subsector/ microfinance lending; (b). compliance with all applicable prudential regulations and guidelines of RBI. In addition, in case a financial instrument has been issued by the Scheduled Bank then it must at least have a domestic credit rating of A or equivalent to be maintained for the duration of the project; (c). demonstrate compliance with RBI s measures for corporate governance of banks and financial institutions strategies, and techniques; (d). demonstrate capability for proper risk management with adequate processes and/or procedures.. as well as market risks; (e). agree to have an environmental and social safeguards management syste.. and ADB s environmental and social safeguard policies. Reference in Loan Agreement Status of Compliance (e) ESSF was put in place by SIDBI subsequent to the initial withdrawals under the ADB line of credit and ING Vysya Bank, which was covered as a PFI. B. (a) PFIs that are NBFCs shall be registered with RBI for a minimum period of 3 years and as minimum CR4 (b) PFIs that are MFIs shall have (i) been established for atleast 5 years after receipt of the Borrower s advance; (c) Any new NBFC or MFI that wishes to initiate a micro credit programme may also be considered as a PFI by the borrower.. internal rating tools as minimum CR4. Qualified Enterprise 12. Each Qualified Enterprise shall either be a start-up MSME or an existing MSME undertaking expansion, modernization or diversification. Qualified Subproject Schedule 3, para. 8 B. Of the total 5 PFIs, 3 NBFCs were covered under the loan component. Compliance with all the conditions was ensured at the time of sanction of loan to NBFCs NBFC-MFI. Complied with.

50 42 Appendix 7 Sr. No. Covenant 13. A Qualified Subproject shall: (i) be economically and financially viable; (ii) be for start-up, expansion, modernization or diversification activities in any of the eligible subsectors as agreed between the Borrower and ADB; (iii) comply with the Borrower's and ADB's environmental and social safeguard policies; (iv) not involve financing of items or activities on ADB's list of Prohibited Investment Activities List, as set out in Supplementary Appendix C to the RRP; and (v) be in one of the Targeted States. Subloan 14. The Borrower shall ensure that any Subloan shall not finance more than 90% of the cost of the Qualified Subproject. 15. Subject to the provisions of paragraph 10 of this Schedule 3 to the Loan Agreement, the Borrower shall not approve any Subloan which is below 50,000 or more than 1,000,000 for a single borrower, or has a term exceeding 7 years. 16. The Borrower shall ensure that it shall apply all relevant appraisal systems in respect of any proposed subloan to be financed from the proceeds of the Loan, which will utilize an internal rating system, credit appraisal and rating tool for smaller Subloans and a rating appraisal model for larger Subloans. Such appraisal system shall include a qualitative assessment of the Qualified Enterprises' credentials and background and quality of management. The Borrower shall, and shall procure that the PFIs shall, ensure that it charges interest on Subloans at rates that reflect their cost of funds plus a spread that covers transaction costs and risk adjusted returns. Reference in Loan Agreement Schedule 3, para. 9 Schedule 3, para. 10 Schedule 3, para. 11 Schedule 3, para. 12 (i) Complied with. (ii) Complied with. Status of Compliance (iii) & (iv) All the subprojects covered were following 116 environmentally benign activities. (v) Loan were disbursed in the targeted states. Complied with. Complied with. Complied with.

51 Appendix 7 43 Sr. No. Covenant 17. The Borrower shall ensure and shall procure that the PFIs shall ensure that qualified female entrepreneurs are given preference in accessing financing under the Project. In addition, the Borrower shall ensure that in respect of its direct lending under the Project, a minimum of 30% of its Subloans shall be provided to women entrepreneurs. 18. The Borrower shall ensure a wide geographical and sectoral dispersion of the Subloans within the Targeted States and give preference to underdeveloped areas and priority sectors as agreed with ADB. Safeguards 19. The Borrower shall ensure and shall cause that each PFI shall ensure, that no Qualified Subproject is financed that could have a significant adverse environmental impact, and which can be classified as a Category A subproject pursuant to ADB's Environment Policy (2002), or which could have any resettlement impact under ADB's Involuntary Resettlement Policy (1995), or affect indigenous peoples under ADB's Policy on Indigenous Peoples (1998). Reference in Loan Agreement Schedule 3, para. 13 Schedule 3, para. 14 Schedule 3, para. 15 Status of Compliance Substantially complied with. The PFIs disbursed 60% to women entrepreneurs versus the target of 30%. However, SIDBI, through its direct lending facility, only disbursed about 27% based on submitted figures to women entrepreneurs. Only $0.71 million of the loan was disbursed as the rest was cancelled. Complied with. Name of States Geographical coverage (%) In terms of amount disbursed In terms of no of cases Bengal Andhra Pradesh Maharashtra Bihar Assam Uttar Pradesh Jharkhand Karnataka MP Odisha Rajasthan Tamil Nadu Substantially complied with. Most of the subprojects covered under the LoC were in line with the list of 116 benign activities agreed to by ADB and SIDBI. ESSF was put in place by SIDBI subsequent to the initial withdrawals. Environment and Social Safeguards Audit (ESS Audit) was commissioned by SIDBI in November 2012 to ascertain the eligibility of subloans in terms of ESSF covered under the ADB Line of Credit.

52 44 Appendix 7 Sr. No. Covenant 20. The Borrower shall ensure, and shall cause that each PFI shall ensure, that prior to its approval of any Subloan it has (i) established or updated its environmental and social safeguards system to comply with the ESMS; (ii) identify and train an environmental safeguard specialist as staff or consultant; and (iii) train and deploy adequate number of its staff to conduct environmental due diligence, review, monitoring, and reporting in accordance with the ESMS in respect of Qualified Subprojects. 21. The Borrower shall, and shall cause that the PFIs shall, monitor compliance with the ESMS and submit annual environmental compliance monitoring reports in respect of the Project to ADB within agreed time periods. Gender Action Plan 22. In so far as it relates to the Project, the Borrower shall ensure that (i) the gender action plan for the Project attached as Appendix 8 to the RRP, prepared in consultation with the Borrower and approved by ADB, is implemented in accordance with its terms; (ii) adequate resources are allocated for the implementation of such gender action plan; and (iii) key gender outcome and output targets are monitored regularly and achieved. Financial and Operational Matters 23. The Borrower shall promptly inform ADB of any major proposals or decisions such as mergers and acquisition, changes in key management officers or any other material event that may have a significant adverse impact of its organization and operations. 24. For the duration of the Project, the Borrower shall be in compliance with all applicable prudential rules, regulations and guidelines of the RBI applicable to it, including but not limited to all mandatory financial ratios. 25. The Borrower shall ensure that, the independent auditors appointed in pursuance of Section 4.06 of the Loan Reference in Loan Agreement Schedule 3, para. 16 Schedule 3, para. 17 Schedule 3, para. 18 Schedule 3, para. 19 Schedule 3, para. 20 Schedule 3, para. 21 Status of Compliance Not complied with. PFIs did not have an ESMS at the outset of the program and before any subloan was given. PFIs later adopted SIDBI s ESSF (Complied with delay) Complied with. Complied with. GAP implementation was successful as out of 13 GAP activities, 12 were completed successfully. GAP achievement was 92% and all 4 quantitative indicators were all achieved, with 100% met. Complied with. Complied with. Complied with.

53 Appendix 7 45 Sr. No. Covenant Agreement, shall prepare and certify to ADB on an annual basis and in a format acceptable to ADB, that at the end of any relevant financial year, the Borrower is in compliance with all applicable prudential rules and regulations and guidelines of the RBI and detail all relevant financial ratios and thresholds in such certificate. 26. The Borrower shall ensure that accountability and transparency are maintained in its operations throughout the duration of the Project, and internal procedures and controls are instituted, maintained, and complied with to prevent any corrupt, fraudulent, collusive, or coercive practices and to ensure conformity with ADB's Anticorruption Policy (1998 as amended to date). The Borrower shall ensure that all contracts financed by ADB in connection with the Qualified Subprojects specify the right of ADB to review and examine the records and accounts of the PF1s, subborrowers, suppliers, and contractors as they relate to the Project. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to examine and review any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. Reference in Loan Agreement Schedule 3, para. 22 Project Performance Monitoring and Evaluation 27. Within 3 months of the Effective Date, the Borrower shall (i) develop a Project performance monitoring and evaluation system acceptable to ADB and the Borrower; (ii) adopt key performance indicators based on the design and monitoring framework for the Project; (iii) establish a baseline for each indicator; and (iv) prepare and submit to ADB Project progress reports which, Schedule 3, para. 23 will cover key progress including progress on indications as referred to in subparagraph (ii) above and recommendation for improving performance. Reporting 28. The Borrower will provide ADB (i) a quarterly report on the operational and financial performance of the Borrower Schedule 3, para. 24 Complied with. Status of Compliance Complied with. As a part of the project performance monitoring and evaluation system, half-yearly reports were submitted to ADB to monitor and evaluate the project s progress and achievements in relation to the DMF. (i) Complied with. (ii) Complied with. (iii) Complied with.

54 46 Appendix 7 Sr. No. Covenant and Project implementation within one month after the end of each quarter; (ii) a projected annual disbursement schedule broken down by quarters by 15 December of each year; and (iii) updated 12-month financial projections of the Borrower by 31 March of each year. Reference in Loan Agreement Status of Compliance ADB = Asian Development Bank; DMF = Design and Monitoring Framework; ESSF = environmental and social safeguard framework; ESS = Environment and Social Safeguards Audit; MFI = microfinance institutions; NBFC = nonbanking financial company; PSU = public sector undertaking; PFI = participating financial institutions; RRP = report and recommendation of the President to the Board of Directors; RMV = resource management vertical; RBI = Reserve Bank of India; SIDBI = Small Industries Development Bank of India; SME = small and medium-sized enterprises.

55 Appendix 8 47 A. The Project GENDER ACTION PLAN IMPLEMENTAION AND ACHIEVEMENTS 1. The project envisaged supporting several capacities building initiatives, including business development services and financial literacy, which targeted low-income female entrepreneurs in the informal sector in semi-urban and urban settings. This was based on a recognition that the availability of affordable financial resources is not sufficient to promote microenterprises and that access to such resources by underserved low-income entrepreneurs is essential. An additional capacity building grant of $3 million by Japan Fund for Poverty Reduction (JFPR) was pursued in parallel with the project to provide greater access to skills and technology for microenterprises run by women and address the various gender-related constraints they face. 2. Innovation. The project focused on the several innovative features, including encouraging collateral-free lending to female micro-entrepreneurs: (i) developing an integrated approach to microenterprise development through the identification of livelihood opportunities, selection and motivation of female microentrepreneurs; (ii) and technical training, and establishment of market links for inputs and outputs; and (iii) developing a cadre of female enterprise promoters and developers known as livelihood enterprise learning advisors (LELAs). 3. A Two-Pronged Approach to Address Gender-Related Issues. The project adopted a two-pronged approach to address gender-related issues: (i) through an ordinary capital resources loan, at least 30% of which was earmarked for lending to qualified female micro and small entrepreneurs; and (ii) support through JFPR grant for a capacity building to develop capacity. On the demand side, the grant aimed to institutionalize and thereby promote on a long-term, sustainable basis gender-related policies for microfinance. On the supply side, it introduced sustainable improvements through capacity building by developing financial literacy, leadership and communication skills, and business development training for the targeted women microentrepreneurs with JFPR grant support. 4. Participatory Approach. The project design required implementation of the project in consultation with relevant central and state government agencies and through interactive consultations with the gender and/or women s sections of the relevant industry associations, chambers of commerce, PFIs, and on the national level nongovernment organizations (NGOs). 5. Project Resources. The project provided resources for a national resource organization and national research institute subcontracted by SIDBI to conduct institutional capacity and situation assessment, develop a baseline, collect and analyze relevant information and data in the selected states, and support SIDBI in monitoring the set of agreed targets. In addition, training and capacity-building organizations to carry out the range of financial literacy, business development services, and other related training activities. In addition, the project provided one individual consultant, advocacy and communication outreach specialist to develop strategies advocacy and dissemination. 6. Gender Categorization. The project was categorized as gender equity. A comprehensive time-bound measurable gender action plan (GAP) was included in the loan design and provided an extensive and detailed gender strategy with specific actions to promote gender and poverty focused capacity building to poor women micro-entrepreneurs during the project implementation.

56 48 Appendix 8 B. Contribution of Gender Equality Results to Project Effectiveness Table 1: Summary of GAP Achievements Activities Achievements Comments on Implementation Output 1: Enhance credit delivery through SIDBI and PFIs in the MSME subsector (i) Earmark a portion of the proceeds under the OCR loan to be used by SIDBI's for its direct lending operations for lending to qualified women micro and small entrepreneurs. Indicator: 30% of the proceeds under the loan As of 30 June 2015, the total number of subprojects was 9,007, with 84 under direct financing and 8,923 under indirect financing, benefitting an estimated 5,371 women entrepreneurs (or 60% of the total against target of 30%). Details are as below: Particulars Amount No. of No. of ($ million beneficia women ) ries 1. Direct route of lending (27%) 2a. Indirect route of Electronica Finance Ltd (23%) 2b. lending ING Vysya (22%) Bank Ltd. 2c. Indus Ind Bank (11%) 2d. Fullerton India Credit Co. Ltd. 2e. Janalakshmi Financial Services Pvt. Ltd. (85%) (89%) 2f. Total (60%) Total (60%) In all, $ 0.71 were utilized under direct lending benefitting 27% women. $14.29 million were cancelled from direct lending component of the loan. Loan disbursed $35 million for the indirect financing through which 60% women benefitted. In substance, a total of $21 million (=$35.71M / 9007 x 5371) was estimated to be provided to women borrowers, well exceeding the target of $15 million, i.e., 30% of total loan $50M (only number of Completed.

57 Appendix 8 49 Activities Achievements Comments on Implementation women clients by ex-post data collection was available, but not amount). This is considered as substantial achievement. (ii) Collect baseline information and data on women's entrepreneurship in selected states on factors that enable women to, or constrain them from, becoming effective entrepreneurs in selected industries. Indicator: Baseline survey conducted a on enabling factors and constraints faced by entrepreneurs in selected industries in the service states (iii) Establish mechanisms (i.e. Credit Guarantee Scheme) to support innovative proposal targeting women entrepreneurship in selected states. Indicator: 1200 women entrepreneurs While women beneficiaries were 27% of direct lending and 60% of indirect lending, combined result under the project showed that 60% of all beneficiaries and the total proceeds of loans (i.e., $21 million [est.] out of $35 million) were provided to women beneficiaries. Insight Development Consulting (IDCG) Private Limited was contracted as the National Research Institute (NRI) under the JFPR grant to conduct baseline and end line studies. The baseline phase involved interactions with a set of women borrowers at Lucknow to understand their profile and its possible implications on the structure and language of the data collection instruments. This was followed by the preparation of data collection instruments. The instruments were pilot tested and then submitted for approval to SIDBI. The baseline survey was conducted between January and February Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up in 2000 by Ministry of Micro, Small and Medium Enterprises, Government of India (GoI) and SIDBI to the Micro and Small enterprises, who are generally considered to be a high-risk lending, especially in the absence of collateral. It facilitates access to finance for un-served and under-served geographies, making availability of finance from conventional lenders to new generation entrepreneurs and under privileged, who lack supporting their loan proposal with collateral security and/or third-party guarantee. CGTMSE introduced the Credit Guarantee Scheme (CGS) for Micro and Small Enterprises (MSEs) which guarantees credit facilities up to INR 200,000 which are not backed by collateral security and / or thirdparty guarantees. Partial credit guarantee could not be implemented (PCR main text, para. 37). Indian Institute of Micro Finance contracted as National Training Institute (NTI) under the JFPR grant conducted training of 1,384 women entrepreneurs in 42 batches across five states against the target of The women were clients of 12 PFIs of SIDBI. Completed. Completed.

58 50 Appendix 8 Activities Achievements Comments on Implementation Not achieved. Not completed. (iv) Develop technologies and business processes to reduce delivery costs of financial services to low-income women entrepreneurs. Indicator: Technologies and business processes in place to reduce delivery costs of financial services to low-income women entrepreneurs. (v) Develop cadre of Livelihood Enterprise Learning Advisors (LELA) at participating retailers to provide personal guidance to women entrepreneurs in accessing microcredit and other financial services. Indicator: 10 LELAs recruited. 1 After material change in microfinance legislation in Andhra Pradesh in October 2010 (so called the Andhra Pradesh crisis ), SIDBI slowed down its microfinance direct lending, and resulted in cancellation of loan of $14.29 million. The crisis resulted into MFIs not forthcoming to avail benefits of the project and were more concerned towards stabilizing their existing operations 10 LELAs recruited The innovative concept of LELA at participating retailers to provide personal guidance to women entrepreneurs in accessing micro-credit and other financial services received acceptance among SIDBI and the PFIs to the extent that the PFIs expressed their intent to continue with their services beyond the project period. The PFIs managed the work well with 10 LELAs and its internal expertise available. Output 2: Increase of MSME productive and managerial capacity and related new jobs created for new markets Completed. (i) Take stock of banking policies, strategies, and programs related to the promotion of women entrepreneurship in SIDBI and PFIs. Indicator: (i) Technical report on stocktaking exercise reviewed and disseminated; Deloitte Touche Tohmatsu India Private Limited (DTTIPL) was contracted through a competitive process as National Resource Organization (NRO) under JFPR grant. NRO under the project carried out a comprehensive stocktaking exercise to assess existing genderresponsive banking policies, strategies, and programs and submitted the inception report with categorically indicating actions to institutionalize gender-responsive policies. The situational analysis report listed social/cultural barriers, financial barriers, economic barriers and legal/political barriers faced by women microentrepreneurs that were result of individual, household/societal and institutional norms and perceptions. The report further provided policy level suggestions for promotion of MSME and for micro-finance in terms of schemes and benefits for women micro-entrepreneurs. During project implementation, 5 combined dissemination and lateral learning workshops, were organized in Lucknow, Mumbai, Bhubaneswar, Jaipur and Bhopal, for both PFIs and SIDBI. The Completed. 1 As agreed between ADB and SIDBI in review mission fielded during 29 April-17 May 2014, 10 LELAs were to be fielded by SIDBI by June ADB agreed in the Mission that there would be no further recruitment of LELA since the duration of LELA support will be too short to be meaningful. Hence the GAP target is revised in the assessment.

59 Appendix 8 51 Activities Achievements Comments on Implementation series of workshops disseminated key findings of the various surveys and assessment conducted under the project. (ii) Carry out capacity needs assessment in selected PFIs in terms of gender awareness in selected states. Indicator: Training and capacity development assessment carried out in selected districts (iii) Train senior and middle level managers, staff, and other stakeholders from SIDBI and retailers involved in the provision of credit to women Entrepreneurs. The training and capacity development assessment by NRO, Deloitte Touche Tohmatsu India Private Limited (DTTIPL) contracted under JFPR Grant covered 25 PFIs in five states. 2 The assessment report studied SIDBI, selected Non-Banking Financial Companies (NBFCs), Mahila (Women) Urban Cooperative Banks, Urban Cooperative Bank, Regional Rural bank, Credit Cooperative Societies and non-governmental organization (society/trust/section 25 companies). 3 Report included performance summary and suggested areas for improvement. The report included best practices on (i) gender focused policy planning; (ii) business strategies targeting women; (iii) gender focused business practices, gender-sensitive institutional HR development; (v) monitoring and evaluation related to gender aspects and (vi) international benchmarking on best practices. 164 SIDBI and PFI officials trained on gender and social inclusion aspects in micro-entrepreneurship (2 batches) and enterprise financing (2 batches). Completed. Completed. Indicator: Training program conducted and gender content in training modules developed and integrated. (iv) Conduct exchange and lateral learning initiatives organized among PFIs. 5 combined workshop exchange and lateral learning initiatives organized one in each state. The series of workshops disseminated key findings of various surveys and assessment conducted under the project helped disseminate key barriers faced by women entrepreneurs and problems faced by PFIs in attracting and lending to women entrepreneurs. The participants feedback shows that workshop was useful in developing insights into policies, programs, products systems at for equal development and ensuring financial inclusion in a complete manner. Total 125 participants participated in exchange and lateral learning initiative, including 30 from SIDBI, 40 from retailers, 20 Government officials, 20 donors and 15 other stakeholders. Key findings from the situation assessment report were shared with SIDBI and its partner Completed. 2 Madhya Pradesh, Maharashtra, Orissa, Rajasthan and Uttar Pradesh 3 A Section 25 company is registered under Section 25 of the Companies Act, This section provides an alternative to those who want to promote charity without creating a Trust or a Society for the purpose.

60 52 Appendix 8 Activities Achievements Comments on Implementation Indicator: Exchange and lateral learning initiatives organized. finance institutions (PFIs) with a focus on micro-entrepreneurship lending to women clients, more specifically in the missing middle segment. (v) Train low-income women entrepreneurs in financial literacy, leadership and communication, and business development services. Indicator: 1200 Low-income women entrepreneurs trained The program was successful in achieving its objective by way providing a platform for government representatives, ADB and SIDBI representatives; local gender experts to exchange successful practices by PFIs across project states. The workshop also invited some successful women entrepreneurs as the panelists who shared their experiences. Indian Institute of Micro Finance, contracted as National Training Institute (NTI) under the JFPR grant conducted training needs assessment exercise for low-income women entrepreneurs based on secondary data sources, field visits in Rajasthan and Madhya Pradesh to understand micro-enterprise clusters, and workshops in Uttar Pradesh and Rajasthan; developed training module for field-level training covering financial literacy, business development, leadership and communication, and money and debt management. Completed. Four-day training were carried out for 1,384 women entrepreneurs in 42 batches across five states against the target of The women were clients of 12 PFIs of SIDBI. These were from the states of Madhya Pradesh (287), Maharashtra (255), Odisha (245), Rajasthan (298) and Uttar Pradesh (265). NTI s post training results showed a substantial improvement in various parameters of the understanding by women micro-entrepreneurs related to thematic areas in which training was provided. Output 3: The PFIs will increase their MSME portfolio through the use of ADB's PCG (i) Ensure that PFIs assess and review their overall credit lending procedures and proactively support lending products targeting the specific needs of women entrepreneurs. Indicator: PFIs credit lending procedures assessed. Monitoring and Evaluation of social and gender-related results 25 PFIs credit lending procedures were assessed. This included SIDBI, selected Non-Banking Financial Companies (NBFCs), Mahila (Women) Urban Cooperative Banks, Urban Cooperative Bank, Regional Rural bank, Credit Cooperative Societies and nongovernmental organization (society/trust/section 25 companies). Completed. (i) Established Project Performance Monitoring System for monitoring of the social and gender-related targets and indicators set out in the DMF. Achieved. Completed.

61 Appendix 8 53 Activities Achievements Comments on Implementation Indicator: PPMS include gender-related DMF targets and indicators As a part of the project performance monitoring and evaluation system, half-yearly reports were submitted to ADB to monitor and evaluate the project s progress and achievements in relation to the DMF. (ii) Collect sex-disaggregated results and incorporate in relevant project reports. Indicator: Sex-disaggregated results and incorporated in relevant project reports. Overall GAP assessment: Successful 4 SIDBI provided regular update on the total number of beneficiaries and women beneficiaries in progress reports to ADB. This included beneficiaries through direct as well as indirect lending. A comprehensive end line survey conducted, and report submitted. The end-line phase activities included the end-line survey of women borrowers as well as both baseline and end-line surveys for LELAs appointed under the project. SIDBI provided sex-disaggregated data of the activity completed under direct and indirect lending through project progress updates. Completed. ADB = Asian Development Bank; DMF = design and monitoring framework; MSME = micro, small, and medium enterprise; OCR = ordinary capital resources; PFI = participating financial institution; PCG = Partial Credit Guarantee; SFMC = SIDBI Foundation for Microcredit; SIDBI = Small Industries Development Bank of India out of 13 GAP activities were completed successfully (92%) and 4 out of 4 quantitative targets were achieved (100%).

62 54 Appendix 8 C. Summary of Findings from Gender Perspective 7. Relevance. The project design was backed up by various empirical research and evidence collected during the fact-finding mission for the project. It envisaged moving low-income microentrepreneurs out of the economic crisis which had caused acute shortage of credit plus services. It adequately addresses gender mainstreaming objectives relevant to MSME subsector. The project documents included a brief analysis of key social and gender issues relevant to the promotion of women entrepreneurs in the sector and prescribed support to women entrepreneurs. The Poverty Reduction and Social Development section of the report and recommendation to the President (RRP) has project gender inclusive features strongly supporting provision of greater access to skills and technology for microenterprises run by women, and address various gender related constraints they face. The RRP also includes a detailed GAP and a separate annex on gender. 8. Effectiveness. The sector indicators on impact and outcomes were basically fulfilled. The number of MSMEs established from 2008 rose by 282% against the 5% outcome expected. Employment in MSME subsector increased by 165% against the expected increase of 5% under the DMF. The GAP was implemented successful and 12 out of 13 activities assessed were successfully completed. However, due to the cancellation of direct lending component of $14.29 million, the outcomes indicators related to direct lending, i.e., (i) 20% increase in direct lending to MSMEs by SIDBI and (ii) annual increase of 20% in the number of successful applications by lowincome female entrepreneurs at SIDBI, no longer relevant as they were cancelled. However, the expected output was 6,000 subprojects supported by 2015 under the ADB loan, which showed a substantial increase as the number of supported projects was 9,007. As of June 30, 2015, 5,371 women benefited under the loan out of 9,007 beneficiaries, approximately 60% of the total. In substance, total $21 million were estimated to be provided to women borrower, well exceeding the target of $15 million, i.e. 30% of total loan $50million (only number of women clients by ex-post data collection were available, but no amount). Hence, the project was able to achieve substantial and significant results, especially for the low-income women. In addition, while the cancellation of the direct lending component of the project may have hampered the prospect of extending the reach to a greater number of low-income women, the project was able to compensate by extending credit to women through indirect lending covering 60% women beneficiaries, as against a target of 30% which is a remarkable achievement. 9. Efficiency. A project advisory committee comprising Executive Director, SIDBI, the Chief General Manager (CGM), SIDBI Foundation for Micro-Credit, sector experts and one representative from ADB, India Resident Mission was constituted to oversee and provide support to the JFPR implementation. Manager, SIDBI Foundation for Micro Credit was the focal point for oversight and monitoring of GAP implementation. In addition, three thematic national level consulting firms and 1 individual consultant, advocacy and communication outreach specialist to develop strategies advocacy and dissemination were mobilized and assigned responsibility for implementation of different GAP activities in the respective themes. To conclude, adequate resources and technical support to implement gender mainstreaming interventions were provided and utilized effectively in the project. The assessment reveals that the quality of implementation, monitoring, and frequency of reporting GAP progress was adequate but faced some delay in rolling core GAP activities subsequent cancellation of amount for direct lending. 10. Sustainability. Some activities were implemented to sustain the gender mainstreaming objectives of the project through institutional commitments. The results of some interventions training of 1,384 low-income women micro-entrepreneurs versus a target of 1,200. The PFIs disbursed 60% to women entrepreneurs versus the target of 30%. The key gender equality results selected under the project to assess sustainability were (i) the number of MSMEs established by

63 Appendix 8 55 low-income women entrepreneurs, (ii) baseline and end-line survey reports, (iii) outcome of the need assessment, result of situation analysis, lateral learning dissemination workshops, and (iv) recruitment of enterprise learning advisors in the participating states. The project helped empower low-income women entrepreneurs in the long run and improved income generation opportunities and financial inclusion. The project provided meaningful recommendations for policy reforms and suggested actions for improvements in practices that facilitate increased access to credit for women. D. Evidence of Project Outcomes on Women Entrepreneurs 11. Capacity building for women entrepreneurs was intended to help ease access to credit and help open better business opportunities for them and sensitize SIDBI, the PFIs, donors, the government and other stakeholders on gender considerations. The project contributed largely to capacity building among women entrepreneurs and in sensitizing SIDBI and PFI participants regarding gender considerations and the promotion of women entrepreneurs. It apparently had a positive impact on women entrepreneurs based on selected indicators as revealed by the end line survey carried out by national research institute. The national resource organization (NRO) carried out a comprehensive stocktaking exercise to assess existing gender-responsive banking policies, strategies, and programs submitted the inception report with categorically indicating actions to institutionalize gender-responsive policies. The project, on one hand, assessed policy and prescribed plausible action points towards policy change, on the other hand, through the situation analysis, and lateral learning and dissemination of findings of the various other analyses suggested a way forward to build a positive environment for transformation of the MSME subsector into a more conducive one for women entrepreneurs. Source: SIDBI Annual Report ADB = Asian Development Bank; JFPR = Japan fund for poverty reduction.