Comprehensive Social Rating

Transcription

1 May 2010 FAER S.A. Romania Comprehensive Social Rating S BB FAER SA has been created by FAER Foundation in 2005 and in 2009 it registered as a Non-Bank Financial Institution in compliance with the 2006 Microfinance Law. Today, the majority of the shares (82.7%) are owned by the founding partner (FAER Foundation), while the Post Privatization Foundation has recently joined the structure as a new shareholder (with 17.2% of the shares). The residual part is owned by 5 members of FAER personnel. As of March 2010 FAER s outstanding portfolio is worth of EUR 2.7 million, with 530 active borrowers. FAER SA is headquartered in Reghin and operates in the provinces of Mures, Bistrita and Suceava, in the Transylvania Region, through a network of 4 branches, mainly operating in rural areas. As a NBFI, FAER SA is not allowed to offer financial services other than credit. The Institution offers exclusively individual loans, targeting farmers, family businesses as well as small and medium enterprises, mainly directed to the agricultural sector (75% of the clients), but also serving trade and services activities. Legal Form Joint Stock Company Year of inception December 2005 Area of intervention Rural, urban Credit methodology Individual Financial service Credit Non-financial service - Poverty and financial exclusion, survey on clients HH without improved sanitation 78% No previous formal credit 45% Without current/ savings account 41% Poverty 1% Microfinanza Rating srl Corso Sempione, Milan Italy Tel: info@microfinanzarating.com CONTACTS FAER S.A. Str. Apelor nr. 5, Reghin Romania Tel and fax: /393 faer@clicknet.ro

2 FAER S.A. Romania May 2010 MicroFinanza Rating 2

3 FAER S.A. Romania May 2010 MicroFinanza Rating 3

4 FAER S.A. Romania May 2010 Final opinion Overall FAER demonstrates a strong commitment to the social mission, coupling a good mission dissemination throughout the institution and a well balanced social and financial approach of the BoD, with the social focus mainly represented by the two members coming from FAER Foundation. The risk of voluntary mission drift turns out to be highly minimized considering the governance structure and the fact that the approval of new equity investors is subject to their alignment with the mission. However, the strategy shows a strong focus on financial targets and leaves room for improvement in the definition and integration of social performance targets. While products design and targeting methods turn out to be suitable to reach the target clientele, monitoring system, human resource management and internal control presents scope for improvement in terms of alignment to the social goals. The overall good responsibility shown towards staff is reflected in the satisfactory labor climate and good staff retention. Even though some improvements have been made, the HR function still needs to be strengthened, especially with regards to staff appraisal and training function. Although FAER operates in a context with a limited over-indebtedness risk, the assessment of clients repayment capacity is well done and uniform across branches, its lending policies do not include ratios or limits on the level of indebtedness of clients. The written information and the oral explanations provided to the clients are adequate and uniform across branches. However, client s financial awareness turns out to be limited. In general, the price of the services does not seem to be excessive and FAER also shows the willingness to reduce the cost borne by the clients, where possible. The lower interest rate on loans in euro compared to loans in national currency contributes to the exposure of a share of clients to the exchange rate risk. Social responsibility towards clients (an partly benefiting also the whole community) is also demonstrated by the training and consulting services offered indirectly through the FAER Foundation, while SR policies and practices towards environment still need to be developed. The coverage of FAER, with operations carried out only in three counties of Romania, is currently intermediate, while the overall depth of geographic outreach is good, with a presence in regions registering a lower Human Development Index than the country average. The characteristics of the clients reached are overall in line with the social objectives, especially considering the rural and agricultural focus of the mission. However, FAER s breadth of outreach is limited, due both to the willingness to serve a target niche while keeping a regional focus, and to the slowdown of operations due to the financial crisis. Although its legal status limits FAER s offer to lending services, the overall variety of the credit supply is quite good and services seem to be adequately tailored to clients needs, with flexible conditions particularly suitable to the agricultural activities. Non financial services are also very much appreciated by clients. MicroFinanza Rating 4

5 FAER S.A. Romania May 2010 Table of contents 1. Institutional presentation...6 Institutional profile... 6 Financial performance Context...7 Socio-economic context... 7 Microfinance sector Social performance management system...10 Mission, social objectives and strategy Tracking and monitoring system Alignment of the systems to the mission Social responsibility...13 Social responsibility towards personnel Social responsibility towards clients Social responsibility towards community and environment Outreach...17 Operational areas Clients reached Quality of the services...22 Variety Adequacy Non-financial services Annex 1 - Statistics...25 Poverty lines Loan size Survey on clients Annex 2 Social indicators...28 Annex 3 Definition of acronyms and indicators...29 Annex 4 Social rating scale...30 MicroFinanza Rating 5

6 FAER S.A. Romania May 2010 Chapter 1 1. Institutional presentation Institutional profile FAER SA has been created by FAER Foundation in 2005 and in 2009 it registered as a Non-Bank Financial Institution in compliance with the 2006 Microfinance Law. Today, the majority of the shares (82.7%) are owned by the founding partner (FAER Foundation), while the Post Privatization Foundation has recently joined the structure as a new shareholder (with 17.2% of the shares). The residual part is owned by 5 members of FAER personnel. From the beginning of its operations, FAER has been supported by the Suisse International Cooperation (SIC) and EPER/HEKS (the aid agency of the Swiss Protestant Churches), through grants, soft loans, technical assistance and training. Today, FAER finances its operations mainly through long-term loans received from international stakeholders (HEKS, COOPEST) and its founder (FAER Foundation). As of March 2010 FAER s outstanding portfolio is worth of EUR 2.7 millions, with 530 active borrowers. The decreasing volume of activity (both in terms of portfolio and clients) registered since 2009 is mainly related to the effects of the global financial crisis, which has negatively affected the demand for credit. Portfolio quality worsening has also pushed the MFI to be more cautious towards loan disbursement, with a general reduction of the activity. FAER SA is headquartered in Reghin and operates in the provinces of Mures, Bistrita and Suceava, in the Transylvania Region, through a network of 4 branches, mainly working in rural areas. As a NBFI, FAER SA is not allowed to offer financial services other than credit. The Institution offers exclusively individual loans, primarily targeting farmers, family businesses as well as small and medium enterprises. Its credit supply consists of a range of products aiming at satisfying both short and long-term needs for working capital and fixed assets, mainly directed to the agricultural sector (75% of the clients), but also serving trade and services activities. Financial performance FAER has reached sustainability and profitability (OSS and ROA standing at respectively 112.2% and 2.4%) although at still low levels. Adjusted results are still negative and FSS stands at 91.3%. The main driver in the negative trend of the expenses has been identified in the loan loss provisioning, that increased over time due to the worsening portfolio quality and mainly related to the effects of the crisis. Additionally, the outstanding portfolio started to decrease since March 2009, negatively affecting economies of scale and the operating expense ratio. The funding expense ratio also shows an upward trend standing at 5.6% in the period Apr09- Mar10, due to the increasing cost of the funds received. However, the still limited impact of the financial expenses on the overall costs structure is related to the low financial leverage. Productivity levels leave room for improvement. MicroFinanza Rating 6

7 FAER S.A. Romania May 2010 Chapter 2 Socio-economic context 2. Context Over the period spanning from 2003 to 2008 Romania had experienced a high economic growth, which culminated with a GDP growth of 7.1% in Yet, Romania entered into recession by mid Indeed, the country s economy was highly affected by the global economic and financial crisis which contributed to amplify its vulnerabilities: high current account deficit, foreign currency borrowings, unstable currency exchange rate, high domestic demand mainly based on consumer loans. As a normal result of economic contraction, inflation slowed down in However, it is still higher than in the other Eastern European countries. After averaging 7.8% in 2008, consumer price inflation decreased to 5.7% in The outlook for economic recovery is rather pessimistic on the short term with a 1% GDP growth expected in In order to cope with the effects of the crisis, the Romanian government has signed a stand-by agreement 1 with the IMF, the European Union and the World Bank in March Nevertheless, due to political instability, the IMF and the European Commission have blocked the disbursement of funds between November 2009 and January Again, in May 2010 the release was interrupted until actions are taken to reduce public spending. The political turmoil began in October 2009 when the government coalition split: the Romanian interior minister (Socialist Democrat party) had been fired by the Prime Minister (PDL Party). The Prime Minister ruled in minority for two weeks, but on the 13th October the government fell after the noconfidence vote of the Parliament. The results of the elections held in December have been extremely tight: the former president Traian Basescu (PDL party) has been reelected with barely 50.33% of the votes, against his opponent, Mircea Geoana (Socialist Democrat party). However, the Constitutional Court denied the request for cancellation of the election result. Romania is experiencing a decline in its population due to its slow ageing process coupled with a low birth rate. As of the end of 2008, it is constituted by 21.5 million people. The latest Human Development Report 2 ranked Romania 63 th out of 182 countries, placing it among the high human development countries. Although, the Human Development Index has risen steadily from at the beginning of the nineties to in 2007, Romania still holds the last position within the European Union countries. The analysis of the HDI components reveals that while the education index of Romania is somehow close to the one of the EU27 3, Romania particularly falls short in terms of GDP and life expectancy indexes. The GNI per capita amounts to US$ 8,280 4 and the life expectancy at birth years, far below the EU27 benchmark (respectively US$ 38,839 and 77.6 years). Yet, Romania s HDI is notably surpassing the average for the Central and Eastern Europe and the CIS. 1 The whole assistance package amounts EUR 20 Billion 2 UN Development Programme (UNDP) (2009). 3 Average for EU27, life expectancy index: 0.877, education index: 0.958, GDP index: As of As of 2007 MicroFinanza Rating 7

8 FAER S.A. Romania May 2010 Chapter 2 The trend in poverty incidence reveals that the rapid economic growth resulted in many Romanians improving their living standards. Indeed, the national poverty rate decreased from 35.9% in 2000 down to 9.8% in It was also estimated that 37.4% and 19.3% of Romanians live below international poverty lines of US$ 5 and US$ 2.5 a day respectively. However, the analysis of the rural-urban 6 and regional breakdowns still shows considerable disparities with 7.1.% of the rural population living in extreme poverty. On the other hand, the impact of the crisis is exposing the population to a deterioration of incomes levels which could be further exacerbated by the austerity measures including cuts in public sector wages and pensions. Besides, as an effect of the crisis, the number of registered unemployed increased from 4.4% of active population at the end of 2008 up to 8.3% at the end of February 2010 with higher values registered in the eastern and southern counties. Microfinance sector The microfinance sector in Romania is dominated by NBFIs and banks. There are seven mature NBFIs with more than 15 years of activity (Express Finance, OMRO, FAER S.A., ROMCOM, LAM, Patria Credit 7 and good.bee 8 ) and 30 newly approved or in the process of approval under the new NBFI law. There is one specialized microfinance bank, Procredit Bank, which plays a major role in the delivery of micro and small loans and there are a great number of commercial banks which offer microcredits to SMEs, traditionally Banca Transilvania, Raiffeisen, BCR and Banca Romaneasca. The penetration rate of microcredit in Romania (all institutional types) is around 5% 9 of the whole population. The sector gathered approximately 20,000 active borrowers representing an outstanding portfolio worth EUR 80 million at the end of The uncovered demand within the micro enterprises sector, underserved by the formal financial sector is estimated to 700 million Euros 11. Currently the sector is undergoing major transformations with some of the larger MFIs looking to transform into banks, and smaller ones looking into merger opportunities. Patria Credit, former CAPA Finance, was planning to transform into a bank in February/March 2010, but NBR did not offer the bank license due to its equity shareholders which are funds meant to have an end in the future. Also, Erste Group entered the microfinance sector by creating a NBFI together with the former NGO foundation CDE, the new NBFI is called good.bee credit IFN SA. Due to increased competition, commercialization is the strategy of almost all medium and large MFIs. Compared to the ECA region, the Romanian mature MFIs register much higher values of average loan size. The geographical area where microfinance is most developed is Transylvania, as many MFIs focused on this area because there is a richer tradition in micro-enterprises. The second most developed area is in the surroundings of Bucharest. From all regions, the microfinance sector in ECA region has been the hardest hit by the crisis with lower demands for credit, higher risk of over indebtedness, increasing delinquency rates, rising provisioning, higher financial expenses and very low or even negative return on equity. After 10 years of legal vacuum, in July 2005, the Romanian Parliament finally adopted a microfinance law (n.240/2005). This law required Micro Financing Commercial Companies (MFCCs) to transform into a Joint Stock Commercial Company. The main provisions were: - MFCCs are not allowed to accept deposits or other repayable funds from the general public; - EUR 200,000 minimum capital requirement; - maximum loan size worth EUR 25,000 and maximum loan maturity of 60 months; - microfinance companies are not allowed to issue consumer loans; - provisions are deductible for microfinance companies; 6 Since 1968, urban areas include only municipalities and towns. 7 former CAPA Finance 8 former CDE 9 MFC, Microfinance sector in ECA, 2009 Edition 10 EMN , EIF Study, March 09 MicroFinanza Rating 8

9 FAER S.A. Romania May 2010 Chapter 2 In January 2006 a second law regulating Non-Bank Financial Institutions (NBFIs) was issued. It required MFIs to re-register with as Non-Bank Financial Institutions and to submit to the National Bank of Romania s supervisory authority. The main changes being the following ones: - EUR 200,000 minimum capital requirement (EUR for NBFIs which grant mortgage credit) - There are no limitations on the minimum or maximum loan size/loan maturity; - NBFIs may perform more lending activities than MFCCs. Such activities include consumer credits, mortgage credits, factoring, and discount, financial leasing, pledging via pawnshops, etc. - NBFI can register under three different register types. The general register is for MFIs with total assets of less than RON 50 million and an outstanding loan portfolio of less than RON 25 million. The special register is dedicated to MFI with higher total assets and a higher loan/total asset ratio and foresees a stronger supervision by the BNR. Finally the third register, the evidence register, is dedicated mainly to the credit unions Case de Ajutor Reciproc (CAR). Sometimes credit unions are included in the microfinance sector, but in Romania they mainly offer consumer credit, and only 5% of their lending operations is dedicated to credits for micro-enterprises. In April 2009 a new law regarding NBFI (nr.93/2009) has been approved. The main changes are: - Elimination of barriers regarding the ability of NBFI to run several credit activities in parallel (microfinance, financial leasing, mortgage lending) - NBFI are allowed to issue and manage credit cards for costumers, to offer consulting activities and to conduct foreign exchange activities, - The types of institutions with which NBFI of the general register can merge has been extended, and NBFI do not need anymore an agreement from the NBR for merger The overall legal framework has been proving supportive of growth and products expansion; moreover, it improved consumer protection and transparency of operations by requiring to make available to the interested parties all the necessary information regarding terms and conditions. Beginning 1 st January 2010 NBFIs enlisted with the special register are required to report to the Credit bureau (Centrala Riscurilor Bancare) which was until then reserved only to banks. There are 59 NBFIs in this situation, excluding FAER S.A. There exists another credit bureau in Romania called Biroul de Credit S.A. with 33 participating credit institutions and 16 NBFIs. Regardless the provision contained into the new Law, which allows MFIs to join the banking Credit Bureau, the access to it and the overall exchange of information even informally - is basically non-existent. Concerns about the risk of over-indebtedness are further amplified when considering the increasing competition coming from banks and the massive use of consumer lending that characterized the past few years. Apart from the Microfinance Coalition, an entity funded by the World Bank and USAID, which has been built up only for legal lobbying, there is no formal MFI s Association. This, in turn, causes negative consequences in terms of loss of opportunities to further develop external training, access to technical assistance, and exchange of best practices and experiences. FAER S.A: is member of the European Microfinance Network. MicroFinanza Rating 9

10 FAER S.A. Romania May 2010 Intent and design / Internal systems Chapter 3 3. Social performance management system Mission, social objectives and strategy MISSION STATEMENT: FAER S.A is meant to create the organizational structure adequate to accomplish the purposes of the FAER FOUNDATION, focusing on the private agricultural households and agricultural farms, and on the small and medium enterprises located mainly in the rural areas. By organizing different types of professional training for adults according to the provisions stipulated via Law No. 93/2009 viewing the non-banking financial institutions - the Company also provides financing targeted to the development and modernization of the aforementioned, as well as professional consulting to both, beneficiaries of micro-credits and economic and financial entities. Mission, ownership and governance From the inception of the company, the mission statement of FAER S.A. has remained the same. It was designed by the management and is directly derived from FAER Foundation s mission as the company itself was created to act as its financial arm. The Board of Directors (BoD) and the personnel recognise micro-entrepreneurs mainly from rural areas without access to banks as the main intended target. The mission statement makes explicit reference to the three main recognised social goals (SG) as indicated in the table below and reflects the institutional aims. The target population (SG1) is precisely identified in the mission statement. It is also mentioned on FAER S.A. s web site as farmers, small and medium agricultural enterprises, SMEs and agro-tourism projects in villages characterized by a limited access to the banking system. Regarding the offering of professional trainings and consulting services, it is devolved upon FAER Foundation which primarily serves FAER S.A. s clients but not exclusively. As for the quality of services, no specific goal has been formalized in the mission. Yet, the personnel usually cites key aspects such as the proximity to clients and knowledge of businesses, reduced time and fair interest rate. The social goal in terms of change (SG3) is referring to the positive impact of FAER on the development and modernization of enterprises. The credit policies mention the broader objective of improving the living standards of local communities, particularly rural areas. In addition, the personnel is commonly referring to job creation, economic and social development as the desired impact in the targeted rural communities. Although the mission statement appears to be exhaustive and precise, the definition of its key terms such as rural areas, small and medium enterprises is not adequately documented and formalized. The mission and the target clientele are well disseminated at all levels. Both the management and field staff show a strong social commitment. In order to comply with the law, the microfinance activities of FAER Foundation were spun off through the creation of FAER S.A. in December The company is governed by the General Assembly of shareholders that elects the BoD which meets at least quarterly. Until the end of 2009, FAER S.A. was owned at more than 99% by FAER Foundation with the management holding the remaining shares 12. Following the company s effort to attract additional concessional funding and strengthen the BoD s competences in microfinance, the Post Privatisation Foundation (FPP 13 ), a not-for-profit entity joined with 17% of shares at the beginning of Moreover, the BoD was also enriched with the presence of a microfinance expert and a financial auditor. The BoD is now composed of seven people as 12 It was meant to respond to the legal requirement on being at least constituted of 5 shareholders. 13 FundaŃia Post-Privatizare MicroFinanza Rating 10

11 FAER S.A. Romania May 2010 Intent and design / Internal systems Chapter 3 four of them repeated their commitment: two members shared with the BoD of FAER Foundation, including the chairman, a veterinary surgeon and an economist. The enlargement of the BoD to a new equity investor and independent members is translated into a strengthening of the governance structure and a more balanced social financial approach. The social focus is represented by the two members coming from the BoD of FAER Foundation that will be keeping the majority of shares 14. In the future, the risk of mission drift turns out to be highly minimized considering the governance structure and the fact that the approval of new equity investors is subject to their alignment with the mission. Indeed, the new shareholder, FPP is interested in serving the same target market as stipulated by its own mission 15. Strategy In general, the strategy appears to be in line with the mission taking into consideration the design of products together with its presence in rural areas. Yet, FAER s strategy demonstrates a strong focus on financial targets. The latest Business Plan (BP) does not include the formalization of social goals. Indeed, the social strategy is totally externalized to the Foundation which stipulates the following SMART 16 objectives for the year 2010 regarding trainings that are generally directly involving FAER S.A. s clients: - During January to April , organization of 20 training courses (one day) involving a total of 314 participants - Organization of courses for trainers (5 weeks) to obtain the license to become fully qualified teachers by the government - Organization of certified courses for different professions in agriculture (3 months) - Organization of educational tours to two national fairs The management foresees a continuous increase of the average loan size due to growing needs of farmers, tending to group together and transform into commercial farms. Moreover, a decreased share of clients in the agricultural sector is expected as a result of the willingness to diversify portfolio and the general transformation of the economy. Overall, there is scope for improvement in the definition and integration of social performance targets into the general strategy. As an illustration, although FAER identifies rural areas as priority target group, no objective of outreach has been set up in that respect. FAER s strategy is to serve a niche while keeping a regional focus thus explaining its limited breadth of outreach. The BP contemplated the opening of three branches, one per year from However, the crisis strongly affected the expansion strategy and the geographical development of the company is suspended until tangible signs of economic recovery and increase of the demand are identified. Tracking and monitoring system FAER currently relies on an integrated MIS QC microcredit, with all branches operating on-line, which appears to be adequate to perform a good level of tracking and monitoring. A brief description of the tracking and monitoring systems of the three social goals is presented below: SG1 SG2 SG3 The social information collected at the client level through the application form is relevant. It includes the following information on client: education level, occupation, work experiences, years in the business, sector of activity; household composition (age occupation and net monthly income); and the ownership of land, machinery and animals. However, it is not input into the MIS to allow for a better monitoring of the socio-economic profile of clients. Although the rural population is defined as the priority target in the mission, the company does not monitor the location of clients. There is no system in place to formally collect clients feedback. The major channel to collect information on the level of client satisfaction and the adequacy of the loan products to their needs is the informal flows of information which seems to be satisfactory given the small size of the company. Clients drop-out rate is not monitored and the reasons are not systematically investigated. To date, there is no internal system to monitor the change in client s life and businesses. The thorough study carried out in was more of an assessment on the perception that 14 The articles of association states 75% of shares. 15 FPP contributes to the development of Romanian businesses - with special focus on small and medium-sized enterprises and start-ups - through its projects on entrepreneurial education, business environment and social responsibility. 16 In the practice, assess if it is measurable, no detailed assessment of how much SMART is an objective. 17 Winter time, period in which farmers are not busy. 18 The impact of FAER and LAM Foundations on sustainable rural development. MicroFinanza Rating 11

12 FAER S.A. Romania May 2010 Intent and design / Internal systems Chapter 3 beneficiaries exhibited on the evolution of their household and business and can therefore be considered as a customer satisfaction survey. The current internal reporting in place is under-developed to adequately monitor the progress in achieving the social objectives since it mainly focuses on financial indicators without making the most of the social information already available in the system. The decision making process relies as well on qualitative information collected thanks to the smooth communication flows facilitated by the limited size of the company. HEKS quarterly reporting templates include breakdowns of the number of loans by branch, product and size range as well as the number of new loans. In addition, COOPEST s new reporting template requires social information both on portfolio indicators (number/value of new loans disbursed to women, average loan size disbursed to women) and impact indicators (number of jobs created/sustained). Nevertheless, the current state of FAER s social performance management system will not allow for the collection of the latter. Alignment of the systems to the mission - Product design Product design and targeting methods are suitable to allow the access of the different categories of target groups from physical persons to legal entities. Indeed, the variety of loan products, the possibility to avail a low minimum amount (EUR 500) up to an increased maximum amount (EUR 50,000) and the large maturity thanks to the transformation into a Non-Bank Financial Institution in 2008, coupled with the possibility to use the grace period at any time during the loan cycle suit the activities of the rural clientele and support the social mission. Besides, unlike banks, FAER facilitates farmers access to credit by taking into account the income generated by the agricultural activities in the repayment capacity analysis. Yet, the recent decrease in the limit for accepting guarantor as sole collateral from EUR 5,000 to EUR 3,000 could affect the most vulnerable clients. - Internal control The credit policies recalls FAER s mission and include principles of conduct towards clients such as transparency, confidentiality and non discriminatory treatment.the mission statement is not posted in the head office nor in branches. Nevertheless, consumer protection principles have been adopted at the very end of 2009 and are currently displayed only in the branch of Reghin. In every branch, a loan product catalogue explaining the target beneficiaries and the detailed conditions is available for public use. A hotline number of the Romanian Authority for Consumer Protection is displayed. Both measures stem from a law requirement. - FAER resorts to an external firm to perform the internal audit. Although branches are visited yearly the internal audit function does not seem to be tailored to the specific needs of a microfinance institution like FAER. Internal audit activities do not include visits to the clients which could enable to perform checks on the completeness of the social information collected in the loan application, the ethical behaviour of the staff and their level of satisfaction. - Human resources Overall, the alignment of the human resource systems presents scope for improvement. The hiring process gives importance to the applicant understanding of rural areas and willingness to work in the field. Nevertheless, the induction process does not include formalized methods to disseminate FAER s mission and social goals. The monthly incentive scheme in place from 2009 only concentrates on portfolio volume and quality indicators. Social indicators could enrich the current system. They need to be set up on the basis of the formalization of FAER s social performance targets. LIMITED RISK OF VOLUNTARY MISSION DRIFT - The Management and the Board members show strong social commitment. - FAER Foundation is keeping the majority of shares. The entry of new shareholders is subject to their alignment to the social mission. LIMITED RISK OF INVOLUNTARY MISSION DRIFT - FAER S.A. s strategy does not include a complete set of formalized social objectives and targets. The social strategy is devolved upon FAER Foundation. - The current internal reporting in place is under-developed to adequately monitor the progress in achieving the social objectives since it mainly focuses on financial indicators. - Consistency of human resources: the incentive scheme does not include social criteria. MicroFinanza Rating 12

13 FAER S.A. Romania May 2010 Promoted values Chapter 4 4. Social responsibility FAER shows a positive attitude towards the integration of socially responsible elements within its strategy and systems and demonstrates the willingness to formalize them within its internal policy framework. Social responsibility towards personnel As of March 2010, FAER s total staff comprises 11 employees, with a stable trend over the periods of analysis. Overall, the gender balance within the staff is good, with women representing 64% of the personnel. Moreover, the BoD enlargement was translated into an improved gender balance, with 3 female members (out of 7) in the governance body. Staff turnover has been kept under control: from inception, three employees have left the institution, namely 2 loan officers who joined banks offering better salaries and one employee leaving for personal reasons. One employee left in 2007 and one in 2008 and nobody in 2009 and in the first quarter of 2010). The good staff retention is the result of an overall good working climate and a high commitment of the staff. Staff participation and communication flow have shown to be good, thanks to the small size of the institution and the staff members knowing each other since a long time, as well as to an open door management approach. In terms of policies, although FAER has not yet elaborated a dedicated HR policy manual, some policies are captured by the internal regulations manual. Even though some improvements have been made, the HR function still needs to be strengthened, especially with regards to staff appraisal and training function. Overall, staff satisfaction seems to be good and the recent salary increase granted at the end of 2009 has further strengthened employees motivation. Despite the lack of formal tools in place, staff satisfaction is monitored through regular staff meetings and a constant communication flow, with the General Manager visiting each branch at least once a month. - Following the findings of a salary survey carried out by the BoD within the microfinance sector, the remuneration level has been recently increased by 25% for all positions and in June 2009 a monthly bonus system has been introduced for branch staff, based on portfolio amount and quality. It is worth mentioning that due to the overall worsening of portfolio quality, no employee has been eligible for the bonus over the last 12 months. An annual incentive depending on the Institution s overall performance is also granted. The adoption of a written salary scale has contributed to increase the transparency of the remuneration. Despite the recent improvements, however, the salary level still remains slightly under the financial sector level. - Contractual conditions are adequate, with all employees provided with permanent contracts, after a 6- month probation period. Additional benefits package includes professional insurance and internal loans opportunity Staff evaluation and training function still leave room for improvement. A staff appraisal system has not been developed yet and a regular training needs assessment is not carried out. Moreover, the budget allocated to training is very small and does not fit the staff needs. In particular, external training opportunities have been very limited. However, it is worth to note that in the next months FAER will benefit from capacity building and staff training within the Jasmine EU Technical Assistance Project. Due to the small size of the institution, internal career opportunities have been limited so far. 19 FAER allows the disbursement of loans to the staff, applying the National Bank interest rate, with a maximum term of 60 months and a maximum amount corresponding to 15 salaries. MicroFinanza Rating 13

14 FAER S.A. Romania May 2010 Promoted values Chapter 4 Social responsibility towards clients FAER has recently adopted a written code of conduct, which integrates the 8 principles contained in the Client Protection and Organizational Principles approved by the European Microfinance Network. The document enumerates some general SR principles, such as over-indebtedness avoidance, pricing transparency, ethical staff behavior, environment protection. The code, translated in Romanian, will be soon displayed in all branches. - Consumer protection: Prevent over-indebtedness Overall, FAER s areas of operation are less subject to the risk of over-indebtedness since rural areas registers a fewer number of financial institutions. Yet, in the last years prior to the crisis banks and MFIs have aggressively entered the market with the provision of consumer loans. According to the survey results, 19.4% of FAER s clients have an additional loan outstanding, with a higher percentage (28.6%) in the urban areas. The majority of them received a credit from a bank (14.4%), while only 5% are working with another MFI. Multiple borrowers declare on average to have one additional loan, with an average amount worth of EUR 9,612, which represents a quite high value compared to FAER loan (138%). FAER s lending policies do not include ratios or limits on the level of indebtedness of clients, thus exposing the Institution to such a risk, also considering that FAER is not resorting to the Credit Bureau. On the other hand, the assessment of clients repayment capacity is well done and uniform across branches. It includes an in-depth assessment of the incomes and expenses of client s business and household and a monthly projected cash-flow analysis. Moreover, FAER only accepts first level mortgage which contributes to prevent clients multiple borrowings risk. Partial debt consolidation is allowed, depending on the client s repayment capacity. The credit policies also provide for the possibility to reschedule loans in special cases, which as of March 2010 represent only 1.3% of the total portfolio. Transparent pricing Overall, the transparency of FAER s services is satisfactory, with a declining calculation of the interest rate and a simulation of the repayment schedule provided to the client during the loan application phase. Each client receives a copy of the loan contract and the final repayment plan, where all different cost components (commissions, penalties, etc.) are properly disclosed and the effective interest rate is also calculated 20. MicroFinanza Rating 14

15 FAER S.A. Romania May 2010 Promoted values Chapter 4 The verbal explanation of all the loan conditions provided by the loan officers seems to be complete and transparent and written promotional material describing the credit products and related conditions is available at the branches. However, despite the good verbal and written communication and the relatively high client education level (all clients have completed at least the primary education), client s financial awareness turns out to be limited, with only 39.3% of surveyed clients knowing the interest rate charged and only 16% of them being aware of the interest amount paid. FAER does not carry out activities to promote the financial literacy and debt management capacity of the clients. Fair pricing The current cost structure (interest rates and Portfolio yield evolution 25.0% 5,000 commissions) is in place since the beginning of 2009, when the 19.2% 19.5% 4, % loan pricing has been slightly 16.0% 4,800 increased: the interest rate has 15.0% 12.9% 12.4% 13.0% 4,700 been increased by 2 points, while the processing fee 10.0% 4, % 6.9% increased from 0.1% to 0.3% 4, % and the up-front fee from 3% to 4, %. Over the period April 0.0% 4, March 2010 portfolio Jan07-Dec07 Jan08-Dec08 Jan09-Dec09 Apr09-Mar10 yield is worth of 19.5% and it Portfolio yield Real portfolio yield Average loan balance shows a constant upward trend since 2007, due to an increase of the loan pricing over time, which reflects the gradual increase of the cost of funds. Overall, the cost charged by FAER does not seem to be excessive and the real portfolio yield is the lowest compared to its peer groups (13%, with an inflation rate of 5.2%). In terms of profitability, although FAER has been able to keep operating expenses under control, the increase of provision and funding expenses have contributed to squeeze the margins. If the cost of inflation is considered, the minimum lending rate should be in effect 18.7%, very close to the value registered in the period Apr09- Mar10 (19.5%). In general, the price of the services is set taking into consideration the competitors on the market, but FAER also shows the willingness to reduce the cost borne by the clients, where possible. As an example, the BoD is contemplating a reduction of 1 point of the interest rate to all active loans with no arrears as of September 2010, alongside the expected reduction in the cost of funds. Such a discount on the interest rate can already be granted to old good clients. Clients are left the choice of the currency of their loan, thus bearing the exchange rate risk. The interest applied on loans in foreign currency is lower. Appropriate collection practices The code of conduct includes a principle related to debt collection practices, which must not be abusive or coercive. Yet, there is no detailed description on how to behave in front of clients at the various steps of the recovery process. In general, the loan officers, in charge of the recovery process, show a certain tolerance towards the clients and the collection practices do not seem to be aggressive. Ethical staff behavior The ethical staff behavior principle is stated in the code of conduct and the related rules are integrated in the internal regulations manual, where all employees right and duties are enumerated. The code is signed and known by the staff, who receives trainings on the expected conduct. Staff behavior and interaction with customers are only informally evaluated, since a formalized appraisal system is not yet in place. Overall, the internal audit and fraud control system 20 The calculation of the effective interest rate is required by law for consumer loans. MicroFinanza Rating 15

16 FAER S.A. Romania May 2010 Promoted values Chapter 4 leaves room for improvement with regards to the control over staff unethical conduct and eventual customer mistreatments. Mechanisms for redress of grievances FAER does not have internal formalized channels to deal with clients complaints, but a call center set up by the Romanian Authority for Consumer Protection is available and the contacts are properly advertized in each branch. At the same time, branch staff informally handles eventual problems with client, informing the management if needed. However, specific training on how to manage client complaints has not been provided to the staff. Privacy of client data Client data are protected through a written privacy policy (included in the internal regulations manual), which calls for the respect of the confidentiality of information and prevent the use of such data for personal reasons, without expressed consent from the client. The MIS in place guarantees an adequate security of the data. - Social responsibility towards clients is also demonstrated by the training and consulting services offered indirectly through the FAER Foundation. The training program consists on brief courses (1 2 days) organized in winter time and dealing with farming activities, including a theoretical class and a practical session on the field. The topics are selected following the suggestions received from the participants and each course is held by a local expert coming from the University or Research Institutes of the Region. The subjects considered include, among others: cattle breeding, agro tourism, floriculture, horticulture, organic agriculture. Courses are open to everybody, but the bulk of participants is always represented by FAER SA clients (around 70%). FAER Foundation also facilitates the participation to agricultural fairs and events organized in the region, for those attending the training. Social responsibility towards community and environment - Community: FAER SA does not directly carry out activities benefiting the community. As already mentioned, it is indirectly supporting the training activities organized by the Foundation, which are targeting the whole community, even though FAER S.A. clients represent the majority of participants. - Environment: Although the environment protection is one of the principles incorporated in the code of conduct, FAER has not yet set up a specific policy in this regards and the credit policy does not include a specific list of activities potentially damaging the environment, whose financing is prohibited. Some elements of SR towards the environment can be identified in the provision of training on the organic agriculture. MicroFinanza Rating 16

17 FAER S.A. Romania May 2010 Results Chapter 5 5. Outreach Operational areas Through its network of four branches located in three different counties, out of the 41 of Romania, FAER operates in three development regions 21. FAER s clientele is well distributed among the oldest branches of Reghin, Iernut and Câmpulung Moldovenesc in Suceava county. Yet, the area covered by Câmpulung Moldovenesc branch represents 30% of active clients but only 20% of outstanding portfolio since it is more remote and characterised by lower loan amounts due to the smaller size of financed activities. Indeed, this region consists of mountains with wood and dairy industries as well as ecotourism. On the other hand, the most recent branch only accounts for 8% of active clients and 7% of outstanding portfolio. Its opening in Bistrita in September 2008 was meant to improve the monitoring of the existing portfolio previously managed from Reghin and develop the geographical outreach in the county. FAER s overall depth of geographic outreach is good, with a presence in regions registering a lower Human Development Index than the country average. Considering extreme poverty, the level registered in the development regions covered by FAER is in line with the national incidence. Moreover, although not tracked, the bulk of active clients and outstanding portfolio (approximately 75% and 72%) is concentrated in rural areas where it turns out that living standards and access to financial providers are less developed. The estimate of the proportion of clients living in rural areas is based on the percentage of clients performing agricultural activities. Such a proxy tends to underestimate the share of rural clients as trade services and production sectors are also present in rural areas. Besides, the unemployment rates registered within FAER s counties of operation appear to be higher than the national average. Clients reached 22 FAER s breadth of outreach is limited both in absolute and relative terms with 530 active clients and an outstanding portfolio worth EUR 2.77 million as of March Indeed, considering both the regional peer group of Eastern Europe and Central Asia MFIs 23 and the national players, FAER is among the small institutions 24. Such limited breadth of outreach is mainly imputable to FAER s strategy of serving a niche while keeping a regional focus. As far as the growth strategy is concerned, the projections contemplated in the Business Plan have been affected by the crisis and the institution concentrates its efforts in recovery while disbursing 21 The development regions are not administrative divisions but refer to the eight regional divisions created in Romania in 1998 in order to better co-ordinate regional development as Romania progressed towards accession to the European Union. 22 The information is mainly based on a survey on recent clients integrating, when relevant, data from MIS. See annex 2 for more details. 23 Mix Market 2008, median number of active borrowers of 2, only surpassing RomCom as for the number of active borrowers. MicroFinanza Rating 17

18 FAER S.A. Romania May 2010 Results Chapter 5 loans at a careful pace. Indeed, as illustrated by the trend in growth rates, the year 2009 has suffered from a 4% contraction in the number of active borrowers while the outstanding portfolio remained at the same level. Over the last year (April 2009 March 2010) the figures show that the situation is not stabilized yet with a further decrease both in terms of numbers of borrowers and portfolio (-9% and -6% respectively). Overall, FAER s depth of outreach can be considered fair taking into account the institution s outreach to the rural households characterized by a more limited access to services in general. The depth is confirmed by the financial support provided to rural microenterprises, mainly dedicated to the agricultural production that do not have easy access to business loan from banks as most of them cannot give proof of fixed sources of income. The depth of outreach is further illustrated by the limited scale of activities supported in terms of number of employees and turnover compared to the European context, together with the low annualized loan size. Considering the profile of target group included in the mission statement, the actual outreach can be considered overall in line with the stated objective (SG1). Social vulnerability and household profile - On average, FAER clients are 44.4 years old (median 42.8) 25. The average number of household members is slightly above the national average (3.9 against 2.8 nationally). On the other hand, the number of people typically not in the labour force compared to those of working age is low as shown by a 38% age dependency ratio 26. GENDER OVERVIEW Female borrowers represent 11.5% of the client base 44% of female clients exert a full control over the loan use and 56% a partial control (consultation with husband/relative). 60% of female clients are household head. Indeed, the share of the population below 15 and above 65 years appears to be less significant among clients households than the national average (43% 27 ). Households of recent clients rely on an average number of 2.8 sources of income. Such a figure should however be put into perspective since 25% and 24% of income sources are related to agriculture and livestock respectively which tend not to be constant income sources throughout the year. Salaries and pensions represent a relevant part of the household additional income sources (22% and 16%) while the rest is made of revenues from nonagricultural activities (11%), 1% remittances and 1% rents. - The gender composition of the clientele shows that women are underrepresented over the years, accounting for 11.5% of total clients as of March Such data does not seem to reveal the true state of the outreach to women since most loans are extended to subsistence farming activities involving the family as a whole. Both the husband and wife are required to sign the contract while the MIS only recalls the head of household. Among the women served, the majority are head of the household (60%). Then, when it comes to analysing who took the decision to invest FAER s money, 44% of women exert full control on loan use while 56% have partial control (consulting their husband or relatives). - The education level of recent clients is intermediate: 9% of them have a university degree, 49 % only completed high school, 34% up to lower high school, 6% lower secondary and 1% have only completed primary school. The education level attained by household children is slightly better than the national average. Indeed, the share of primary/lower secondary school attendance is 95% relative to the national figure of 94% 28 while 96% of household members in age are attending school compared to the 73% of net enrolment in secondary school in Romania. 25 Information on the physical persons having a loan as of March 2010 (476). Does not include legal entities. 26 defined as the total number of young and old dependents divided by the population of working age persons aged under 15 and over 65 divided by persons aged WB, Romania WB, Romania Corresponding to upper secondary/vocational school MicroFinanza Rating 18

19 FAER S.A. Romania May 2010 Results Chapter 5 Business activities and employment support - Although FAERs credit offering includes a product dedicated to start-up activities introduced in 2009, it involves only one single client as of March It is worth noting that, that its features are not particularly designed to support new activities as they should have been set up for a minimum of six month before qualifying for a loan compared with the one year for the other products. Rather, such a product seems to be meant to attract businesses operating for a short period of time, category which is under-represented within FAER s clientele. Indeed, from the survey results, it turns out that the bulk of recent clients (92%) have been operating their business for more than three years, 5% for one to three years and 3% for six to twelve months. - As far as the legal form of the activities financed by FAER is concerned, the bulk of the loans are extended to clients operating as physical persons (85%) while legal entities accounts for the remaining 15%. The Romanian regulation has pushed forward the formalization of all income generation activities that are required to be registered. The vast majority of FAER s recent clients is composed of Agri-producer (72%), followed by registered physical persons (15%), limited liability companies and family associations respectively 10% and 3%. Active loans by sector, Mar-10 - In terms of sector of activity, given FAER s rural scope, loans have been historically concentrated in agriculture representing a steady percentage of active loans (from 76.7% at the end of 2007 to 75% as of March As far as the outstanding portfolio is concerned, the share of agriculture decreased from 80% down to 72.3% over the same period of analysis). This slight decreasing participation of the agricultural sector reveals both FAER s willingness to diversify the risk and the general trend of the Romanian workforce structure. The second largest sector fall under services (18% of active loans) while the remaining share of activities financed are composed of trade, production and internal loans extended to the personnel (respectively 5%, 0.5%, 0.9% of active loans as of March 2010). The MIS provides a more detailed picture of the sectors financed on active loans as of the end of 2009: agricultural mechanization 28%, livestock 19%, agricultural building 11%, various small industries 10%, sheep farming 7%, agro-tourism 5%, other commercial activities 5%, other services 3%. The remaining 12% is broken down into categories representing respectively less than 2%. - Regarding the use of the loan, the survey results show that although the bulk of clients are investing the whole loan in their income-generating activity (81%), a significant share of clients (14%) reported using the loans for other purposes (house improvement 6%, household expenses 5%, 2% in a mix of consumption expenses, 1% in education and 1% in others) while 4% combined the investment in the income generating activity with consumption expenditure. - Considering the limited size of clients activities coupled with the fact that the majority are family businesses, the contribution to job support is intermediate with 3.26 people (including the client) on average working in the activities financed, out of which 2.23 are family members and 1.03 are non family members. - For what concerns the size of the activities supported by FAER, 10% of businesses have a monthly turnover between EUR 61 and 122; 23% between EUR 122 and 245; 19% between EUR 245 and 490; 29% between EUR 490 and 1,223 and 20% over 1,223. These figures 30 reveal the heterogeneous profiles of activities financed from physical persons to legal entities. Yet, in all, businesses financed fall into the very low end of the European Union s category of microenterprises which includes businesses that employ less than 10 people, with an annual total turnover of less than EUR 2,000,000. Trade Services Agriculture Production Internal loans 75% 0.5% 0.9% 5% 18% 30 Figures might be underestimated since some individuals tend not to declare to avoid paying tax. MicroFinanza Rating 19

20 FAER S.A. Romania May 2010 Results Chapter 5 Economic poverty - The survey results on recent clients reveal that FAER s outreach in terms of monetary poverty is limited registering a lower poverty incidence compared to national and international benchmarks. However, in absolute terms, it is worth mentioning the significant likelihood of households (27%) 31 to be below 200% of the national poverty line which shows somehow that some clients are at risk of poverty. The outreach to the poor is marginal with 1% of FAER s recent clients estimated to be below the national poverty line. Looking at international poverty measurement standards, 10% and 3% of recent clients fall below the US$ 5/day 2005 PPP and US$ 3.75/day 2005 PPP lines. The analysis of the area breakdown shown that rural clients are generally more than 2 points poorer than the urban ones. - When it comes to the clients vulnerability, a significant part have experienced periods of shortage of income to cover food expenses in the last 12 months (16%) while 9% did not have enough income to cover medical expenses. The main coping strategies for households experiencing income shortages include using savings, reducing expenditure and help from friends and relatives. Asset property - The vast majority of households (99%) own the house they dwell in. FAER s rural focus is confirmed by the fact that 81% of households own land (86% of rural clients, 52% of urban) with an average dimension of 8.36 hectares. The rural outreach is also illustrated by the ownership of animals: on average, clients households own 12 cows and 25 goats/sheep, 6 pigs and 102 heads of poultry. - The majority of clients household owns a car (81%) far above the national average of 28% 32. Nearly all households possess a colour TV set in line with the national average of 96% in Besides, the relative majority of clients (44%) declares possessing less than RON 500 (EUR 122) as monetary savings, 21% have between RON 500 and 1,000, 20% between RON 1,000 and 5,000, 10% between RON 5,000 and 15,000 and only 5% state putting aside more than RON 15,000 (EUR 3,670). - As far as the type of collateral offered by FAER s clients is concerned, 68% of the active loans as of March 2010 are covered by mortgage, 30% by guarantor, while the rest consists in pledge (1%) or no guarantee at all (1%). Access to basic services The share of clients without access to improved sanitation is relevant both in absolute and relative terms and is higher than the national benchmark: 78% and 72% respectively. This picture confirms the FAER s rather deep outreach mainly dealing with the rural population that experiences some limitations in accessing basic services (84% of rural clients do not have access to improved sanitation). Access to financial services - The financial inclusion effect of FAER appears fair: less than half (45%) of the recent clients declare not to have had access to formal and semi-formal credit before joining the institution while a significant share had access to banks (39%). Nevertheless, it is worth noting that the majority of loans from banks were dedicated to consumption purposes since banks are reluctant to extend credits to finance small 31 Using the Progress Out of Poverty Index 32 NIS, 2008 MicroFinanza Rating 20

21 FAER S.A. Romania May 2010 Results Chapter 5 scale businesses particularly in the agricultural sector. 41% of the clients interviewed do not have a current/saving account and 49% do not have a credit or debit card. - Not surprisingly, urban clients are more likely to have had access to formal and semi-formal credit prior to FAER (71%) due to the presence of a wide range of formal financial providers in urban areas. Loan size analysis - The analysis reflects the good depth of outreach of FAER, confirming that the institution is providing credit facility to small size activities. Considering the disbursed amount of all loans active as of March 2010, the average loan is worth EUR 3,241 while the median amount stays at EUR 2,375. It is interesting to disaggregate the figures by typology of clients. The average loan size analysis shows different features for physical persons (EUR 2,931) and legal entities which register an average of EUR 4,997 illustrating the higher financial needs of the latter. - The good depth of outreach is further confirmed through an analysis of the relative measure of median loan size over GNI per capita which stands at 42%. Expressed in purchasing power parity ($PPP), the median loan size is 4,511 and drops to 1,287 when annualized to take into account the large loan terms of nearly four years on average. The median loan size on GNI similarly decreases to a low level (12%) in the annualized figures. - The trend over the past years shows a steady value over time with a slight decrease over the last period (January March 2010). This is imputable to FAER s cautious approach within a context of crisis characterized by a worsening of repayment indicators coupled with the seasonal pattern of investments in agriculture starting mainly in April. MicroFinanza Rating 21

22 FAER S.A. Romania May 2010 Results Chapter 6 6. Quality of the services Variety - As a Non Bank Financial Institution, FAER is only entitled to provide credit services. On the other hand, the overall variety of the credit supply is quite good and services seem to be adequately tailored on clients needs. Its credit products are mainly directed to finance fixed assets and investments in agriculture (buildings, animal breeding, agricultural mechanization), but to a limited extent FAER is also financing non-agricultural investments (trade, services) as well as short term working capital. Agriculture accounts for 75% of the active borrowers, while trade and services represent 24% of clients (the remaining clients fall in the production sector). A consumption loan had also been designed, but as a prudential measure to face the current financial crisis it has not been launched yet. As already mentioned, the credit supply also comprises internal loans for staff, characterized by better conditions. In terms of methodology, FAER offers exclusively individual loans, since the group lending does not seem to be adapted to the Romanian context. In 2009 a product directed to start-up businesses has been launched, directed to activities having at least 6 months operations. It must be noted that as of March 2010 the product involves only one single client due to the limited general demand for credits. FAER s future strategy does not foreseen the development of new products, the aim being the improvement and adaptation to its clients need of the existing services, through some slight changes in the current conditions, especially with regards to the agricultural loans, which represents FAER s competitive advantage. Adequacy The overall adequacy of FAER s credit offer is good, showing flexible conditions particularly suited to financing agricultural activities. The grace period which can be used by the client at any time during the loan MicroFinanza Rating 22

23 FAER S.A. Romania May 2010 Results Chapter 6 cycle, the simplicity of procedures and the good relationship with the loans officers are particularly appreciated by the clients. On the other hand, the loan processing time leaves room for improvement (although it is not seen as a disadvantage by clients) and the cost is perceived as a bit high by the borrowers, especially compared with banks. According to the survey results, 77% of client judge FAER s services as very good and 19% consider them good, while they are poor or very poor only for 1% of the clients. - Service delivery is adequate, since clients receive money in their bank accounts and can repay their loan either through the bank or in cash at the branch office. This is particularly appreciated by some clients who can thus avoid queuing up at the bank. - The less bureaucratic procedures compared to banks and the active support received from the branch staff in filling the application and providing the required documentation are very much appreciated by the clients. Loan processing time, ranging from 3 days up to 10 days (depending on whether the applicant is an old or a first time client), leaves room for improvement especially if compared with its competitors, even though it is not perceived as a problem by the clients. - Collateral policy is generally adequate, with personal guarantors accepted for loans up to EUR 3,000 and real estate required for higher amounts. It is worth noting however, that the recent decrease in the minimum amount requiring a real collateral from EUR 5,000 to EUR 3,000 might represent a barrier to the access to credit for the most vulnerable segments of clients. - Repayment schedule is very flexible and suited to clients needs. Particularly appreciated are the grace period which can be used at any time during the loan cycle and the maximum loan maturity which has been extended to 84 months (instead of 60 months) for agricultural investment loans. The monthly repayment frequency is also perceived as adequate to the business and income cycles of the clients. - The loan amount ranging from EUR 500 up to EUR 50,000 (it has been recently increased from EUR 25,000) enables the Institution to reach very diversified segments of population. - Some dissatisfaction has been expressed by the clients with regards to the cost of the services especially because they compare it with the banks. However, it must be noted that FAER pricing is in line with the other MFIs and old good clients can benefit from a discount in the interest rate (by 1%). Loans in foreign currency are charged a lower interest, which counterbalances the currency risk born by the client. - Overall, clients express a high degree of satisfaction with the service offered by the branch staff and they especially appreciate their support during the loan application phase. - Client drop-out rate is worth of 22.1% over the period April09-March10, which represents an acceptable level, even if showing a slightly increasing trend. Such figure is somehow underestimated as the average loan term of nearly four years entails a lower yearly rotation of clients and some new clients are included who have not yet reached a decision point. The reasons for drop out are not internally tracked, but according to the management the decreasing demand due to the financial crisis has affected client retention. Higher interest rates compared to banks is another reason pushing the clients with access to the banking sector to leave. The share of clients by cycle, with the bulk of clients (60.1%) concentrated in the first loan cycle suggests that client drop-out is an issue, which need further investigation. MicroFinanza Rating 23

24 FAER S.A. Romania May 2010 Results Chapter 6 Non-financial services Non financial services offered to clients only include the training courses indirectly provided through the Foundation. Each year the Foundation sends the training program to the clients, who can freely choose the courses they wish to participate, paying a small symbolic fee. Each session lasts 1-2 days and comprises a theoretical and a practical part, dealing with diversified agriculture related topics. The quality of the service is regularly monitored through a questionnaire submitted to the participants at the end of each session. The overall adequacy of the training seems to be good and the topics developed are tailored on clients needs. MicroFinanza Rating 24

25 FAER S.A. Romania May 2010 Annex 1 Annex 1 - Statistics Poverty lines The following table presents the value, in local currency, of the national and international poverty lines used to assess the profile of clients. The Romanian national poverty line is defined as the total expenditure observed for households whose food consumption equals the cost of a 2,550-calorie food basket observed for people in the second and third quintiles of expenditure. In December 2007 prices, the national line is RON 7.65 per day per adult equivalent. The USAID extreme line is defined as the median expenditure of individuals below the national line. Loan size To increase the relevance of the most commonly used proxy of outreach depth, the loan size analysis includes the following adjustments: - Dividing the loan size by the GDP per capita - Expressing the loan size in $PPP - Normalizing the loan size to one year term - Considering not only the average loan size, but also the median and other moments of the distribution (1 st and 3 rd quartile) The analysis is based on the complete list of loans active as of March 2010 (disbursed amount). The following table corresponds to loans disbursed to physical persons: MicroFinanza Rating 25

26 FAER S.A. Romania May 2010 Annex 1 The following table corresponds to loans disbursed to legal entities: MicroFinanza Rating 26

27 FAER S.A. Romania May 2010 Annex 1 Survey on clients In order to provide a complete description of the poverty outreach, a survey on recent clients has been realized. Recent clients are defined as those clients with an active status at the date of the evaluation, who took their fist loan with the MFI in the 24 months preceding the social rating (April March 2010). The formula used to calculate the sample size, based on the binomial theorem, is the following: (z²) (r)(1-r) (f) / e² z: level of confidence r: estimate of the key parameter f: design effect e: margin of error Sample characteristics: - Design: multiple steps cluster - Size: 140 clients - Branches included: Reghin, Iernut, Bistrita, Câmpulung Moldovenesc Definitions applied: - Household: people living together and entirely or partly contributing to the income and expenditure budget, for at least 6 months per year, people eating and sleeping under the same roof (also includes elderly people or other people under the household s care, children the family is taking care of, hosted people or those hired for housekeeping works). - Head of the household: person who takes the majority of the decisions in the household. In addition to those included in the report, some other findings of the survey on clients are presented below. MicroFinanza Rating 27

28 FAER S.A. Romania May 2010 Annex 2 Annex 2 Social indicators MicroFinanza Rating 28

29 FAER S.A. Romania May 2010 Annex 3 Annex 3 Definition of acronyms and indicators Acronym / indicator Operational self-sufficiency (OSS) Financial self-sufficiency (FSS) Return on equity (ROE) Return on assets (ROA) Portfolio at Risk (PAR30) Definition / formula (Financial revenue + Other operating revenue) / (Financial expenses + Loan loss provision expenses + Operating expenses). (Adjusted financial revenue + Other operating revenue) / (Adjusted financial expenses + Adjusted loan loss provision expenses + Adjusted operating expenses) Net income before donations / Average equity Net income before donations / Average assets Portfolio at Risk > 30/ Gross outstanding portfolio Financial Performance Context Write-off ratio Risk coverage ratio (>30 days) Loan loss reserve ratio Funding expense ratio Operating expenses ratio Loan officer productivity Borrowers Staff productivity Borrowers Debt/Equity ratio HDI GDP GNI GDI WB FMI UNDP MDG $PPP Write-off of loans / Average gross portfolio Accumulated reserve / Portfolio at risk >30 days Accumulated reserve / Gross portfolio Interests and fee expenses on funding liability / Average gross portfolio Operating expenses / Average gross portfolio Number of active borrowers / Number of loan officer Number of active borrowers/ Number of staff Total liability / Equity Human Development Index Gross Domestic Product Gross National Income Gender-related Development Index World Bank International Monetary Fund United Nations Development Program Millennium Development Goals International dollar, based on Purchasing Power Parity Social Social Goal. Social goal 1 = reaching target client; Social goal 2= Performance SG meeting clients needs; Social goal 3 = creating change Management system SMART Specific, Measurable, Achievable, Realistic, Time-bound Social responsibility Outreach Quality of the services Staff turn-over rate Portfolio yield Real portfolio yield Average outstanding loan Average disbursed loan Average outstanding loan on per capita GNI Median loan disbursed on GDP pc Annualized disbursed loan Disbursed loan, $PPP Client drop out rate Staff who left during the period / Average staff at in the period Interest income from portfolio / Average net portfolio (portfolio yield inflation) / (1 + inflation) Outstanding portfolio / number of active loans Amount issued in the period / Number of loans issued (Outstanding portfolio / number of active loans) / GNI per capita 50 th percentile of loans issued in the period / GDP per capita Amount disbursed * (12 / months of loan term) Amount disbursed in local currency * $PPP conversion factor (number of active clients at the beginning of the period + number of new (first time) clients entering during the period clients written-off during the period number of active clients at the end of the period) / (number of active clients at the beginning of the period) MicroFinanza Rating 29

30 FAER S.A. Romania May 2010 Annex 3 $ Annex 4 Social rating scale MicroFinanza Rating 30