Microfinance Institution Gradings

Transcription

1 Microfinance Institution Gradings Cashpor Micro Credit mfr3 Date Assigned November 17, 2010 Mr.Yogesh Dixit Head Analytical Contacts Mr.T Raj Sekhar Sr. Manager

2 DISCLAIMER CRISIL's microfinance institution (MFI) grading reflects CRISIL s current opinion on the ability of an MFI to conduct its operations in a scalable and sustainable manner. In the case of NGO-MFIs and entities with multiple businesses, CRISIL s MFI Gradings apply only to their microfinance programmes. The MFI Grading is a one-time exercise and the Grading will not be kept under surveillance. This grading is valid for a period of one year from the date of assignment. However, CRISIL reserves the right to suspend, withdraw, or revise the MFI grading at any time, on the basis of any new information or unavailability of information or any other circumstances brought to CRISIL s notice, which CRISIL believes may have an impact on the grading. CRISIL recommends that the user of the Grading seeks a review of the Grading if the graded institution/microfinance programme experiences significant changes/events during this period which could impact the graded institution/its grading. CRISIL MFI Gradings are based on the information provided by the Institution, or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the MFI Grading is based. CRISIL MFI Grading is not a recommendation to purchase, sell or hold any financial instrument issued by the graded MFI, or to make loans and donations / grants to the institution. The MFI Grading does not constitute an audit of the graded MFI by CRISIL. The MFI Grading Report and the information contained therein are the intellectual property of CRISIL. The MFI Grading Report should not be reproduced or distributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part, for any purpose or by any means without the prior written permission of CRISIL. The MFI Grading should not be used for mobilising deposits/savings/thrift/insurance funds/other funds (including equity) from their members/clients or general public and should not be used in its external communications, promotional materials or member/client passbooks. CRISIL is not responsible for any errors and especially states that it has no financial liability, whatsoever, to the subscribers/ users/transmitters/distributors of its MFI Gradings. For the latest information on any outstanding CRISIL MFI Gradings, please contact CRISIL RATING DESK at CRISILratingdesk@crisil.com or at (+91-22) /

3 MFI GRADING mfr1 mfr2 mfr3 mfr4 mfr5 mfr6 mfr7 mfr8 CRISIL s microfinance institution (MFI) grading is a current opinion on the ability of an MFI to conduct its operations in a scalable and sustainable manner. The grading is assigned on an eight-point scale, with mfr1 being the highest, and mfr8 the lowest. The MFI grading is a measure of the overall performance of an MFI on a broad range of parameters under CRISIL s MICROS framework. It includes a traditional creditworthiness analysis using the CRAMEL approach, modified to be applicable to the microfinance sector. The acronym MICROS stands for Management, Institutional arrangement, Capital adequacy and asset quality, Resources and asset-liability management, Operational effectiveness, and Scalability and sustainability. MFI Grading Scale: mfr1 - highest; mfr8 lowest MFI GRADING HISTORY MFI Grading Assigned in mfr5 September

4 FACT SHEET Name of the MFI Cashpor Micro Credit Year of Incorporation : 2002 Certificate of Registration : October 2002 Legal Status : Not for profit company. Registered under Section 25 of Companies Act, 1956 Registered office : B/4, DIG Colony, Varanasi Uttar Pradesh Chief Executive Mr.Mukul Jaiswal (Managing Director) Corporate office & Contact Details : Dr.BB Singh Chief Finance Officer Cashpor Micro Credit B/4, DIG Colony, Varanasi Uttar Pradesh Telefax: Mobile: cfo@cashpor.in Bankers and lenders Several banks and other lending institutions Statutory Auditors : BSR and Company * *member of KPMG 4

5 ABOUT THE MFI Lending model : Lends to joint liability groups (JLGs) ; lending only to women Products : JLG loans with an loan size of Rs.2,000-25,000 (52 weeks with a moratorium of two weeks). Clients are charged an interest rate of 13.5 per cent on a flat basis (25.76 on a reducing basis). Borrower base : 489,463 borrowers as on September 30, 2010 Employees 1684 as on September 30, 2010 Branches : 269 as on September 30, 2010 Loan outstanding : Rs.3.02 bn (including direct assignments) as on September 30, 2010 Loans disbursed : Rs.2.64 bn for (April-September) Geographical reach : Present in total 19 districts of eastern UP and Bihar and operating through 15 Districts Administrative Offices 5

6 Social Indicators and Performance Indicators As on September 30, 2010 Average loan outstanding/per capital GNI (2010 figure)* (in %) 12.5 Women staff/total staff (in %) 12.8 Women borrowers/total borrowers (in %) Effective IRR (including interest rates, processing fees & any other fees charged by the organisation? (in %) 25.8 Client drop out rate (in %)** 7.4 Are interest rate (on declining basis) communicated to clients in writing? Are processing charges communicated to clients in writing? Is an official receipt provided by the MFI to clients after repayment collections? Is access to loan of other MFIs one of the parameters to select/screen clients? Is access to loan of other MFIs/residual income one of the factors to appraise repayment paying capacity of clients? Does the MFI appraise the client's income/poverty/asset level and use it to target low income clients? Does the MFI capture and analyse reasons for client drop-out rate at the head office level? Is any head office designated contact details provided to clients as part of grievance redressal mechanism offered to clients? Yes NA# *Source: CCER computations based on Central Statistical Organisation data. Per capita GNI is in current prices. **Client dropout rate is annualized for the period April-September #Not Applicable Yes Yes Yes Yes No Yes 6

7 GRADING RATIONALE Microfinance Programme The grading of Cashpor Micro Credit (CMC) reflects the microfinance institution s (MFI s): Long track record in microfinance Adequate systems and processes in place Strong board Above-average asset quality The above-mentioned grading strengths are partially offset by: Limited Tier-I capital Concentration of portfolio Profile CMC, a company registered under Section 25 of the Indian Companies Act, 1956, was promoted in December It is a subsidiary of Cashpor Financial and Technical Services (CFTS), a company that started its microfinance programme in CFTS did not have the necessary regulatory clearances to undertake financial services and, therefore, it had transferred the microfinance operations to CMC in CMC currently operates in eastern Uttar Pradesh (UP) and western Bihar and is the largest Section 25 Company and one of India s top 10 MFIs in terms of loan outstanding and client base; as on September 30, 2010, it had loans outstanding of Rs.3.02 billion and a client base of 489,463 borrowers. CMC s mission is to identify and motivate BPL women in the rural areas, and to deliver financial and other vital credit+ services to them in an honest, timely and efficient manner, so that our Vision is realized and CASHPOR itself remains a financially sustainable microfinance institution for the Poor. The company uses a unique housing index tool to identify prospective borrowers from poor households. The company followed the famous Grameen Bank, Bangladesh, model for its microfinance operations till 2007; thereafter, it shifted to the lending model of Association for Social Advancement (ASA), Bangladesh and adopted the ASA branch system of supervision leading to Grameen-ASA hybrid model. 7

8 Following an agreement in (refers to financial year, April 1 to March 31), CMC outsourced its capacity-building activities and non-financial intermediation services for four districts Saran, Siwan, Deoria, and Gorakhpur to an associate company, Cashpor Financial Services Ltd (CFSL). The outsourced services include identification of borrowers, formation of joint liability groups (JLGs) of borrowers, and training and recognition of the JLGs through group recognition tests (GRTs). Since 2007, CMC has been paying 4 per cent of the total disbursement in these areas as social intermediation fees for conducting weekly center meeting, replacing drop outs and delinquency management to CFSL. CMC has developed a Cashpor Housing Index to identify prospective borrowers. This tool is a composite index that scores the prospective client s house on certain variables, such as size of the house, its structural condition, and quality of its walls and roof. A cut-off score of total points is established to separate the houses of the poor from those of the non-poor. Since October 10, the MFI has also implemented another tool called as Progress out of Poverty Index (PPI) for targeting of loan clients below poverty line. The PPI tool also takes into account other assets of the clients apart from housing. Though loans are disbursed to individual members, each borrower has to be a part of the JLG. On an average, each JLG has 15 to 20 members. The field officer helps form the JLG, typically comprising residents of the same locality; the field officer verifies the credentials of each member, as well as of the group as a whole, and explains to them the company s policies and procedures. The entire process takes about a week s time. Following this induction period, the branch manager concerned conducts a GRT; JLGs that clear the test can apply for loans. MANAGEMENT Good softwarebased tracking of receivables Strong monitoring mechanism CMC has good software-based tracking of receivables. Accounting is integrated with the software-based MIS. The software is able to generate overdue and aging data of the portfolio. The MFI is also piloting further automation of the MIS at the front end by use of mobile-based technology. Since 2007, CMC has implemented the mini-branch model similar to ASA s operational methodology. Under this model, the organisation has hierarchy of staff at different levels with formal monitoring schedules allowing for 8

9 frequent monitoring of operations. This has not only reduced the span of control at each level but also ensured that maximum of five designations at each level have a reporting authority. This has substantially improved the MFI s internal control systems. Ability to have a strong reconciliation system at the HO level restricted by infrastructure bottlenecks Long track record of operations in one of the most underdeveloped areas Standardisation in product and operations leading to fast replication Improvement in attrition levels Although CMC has good monitoring systems, the onus of the reconciliation of due receivables and actual collections is on the field staff. The reconciliation system on a day-to-day basis is restricted by the fact that the MFI s operations are mostly in areas having limited information technology (IT) connectivity. CRISIL believes that the HO has limited capability in reconciliation and verification of fund position. Has 13 years of operations experience in providing of microfinance services in eastern part of Uttar Pradesh (UP) and western part of Bihar. Both regions are one of the most underdeveloped areas of India. The organisation has also been involved in arranging of financial literacy programmes for its clients and has begun providing health education to center members. The documentation polices adopted by the MFI are standardised across all the branches. The organisation has properly documented its policies and procedures for its overall microfinance operations. This leads to fast replication of operations in new areas with strong lending discipline. The lending decisions are decentralised with decisions taken at the branch level. CMC has been able to improve its staff attrition levels to per cent for from per cent for This has been achieved by the organisation in spite of the fact that CMS operates in difficult and relatively inaccessible areas, which restrict attraction and retention of good quality human resource. 9

10 INSTITUTIONAL ARRANGEMENT Good second line of leadership CMC has good second line of leadership leading to adequate management depth. In , CMC lost several of its middle management employees. The company, however, has been able to find lateral recruits (retired bankers) and internal staff to replace them. Several of the middle management staff is with the company for close to a decade. CMC has dedicated heads for internal audit, HR finance, training, and operations. The company has also hired the erstwhile auditor as its managing director. Strong board CMC has a strong board comprising of eminent professionals from microfinance and other domains. Mr. David Gibbons and Mr.Mukul Jaiswal are the founder-chairman and managing director of the company. The board comprises three nominated directors of Dia Vikas Capital Ltd, Ananya Finance for Inclusive Growth Private Limited and ICICI Bank Ltd. It also has two independent directors. The board of directors has extensive experience in the microfinance, corporate, banking, and development sectors. The board members provide input not only on sustainability of the organisation but also that the organisation achieves its vision and mission in terms of social indicators. CAPITAL ADEQUACY AND ASSET QUALITY Low Tier I capital CMC s Tier-I capital of Rs.0.16 billion as on September 30, 2010, is amongst the lowest for Indian MFIs of its size and the Tier I to debt (adjusted for bilateral assignments) at times as on the above date is significantly higher than most CRISIL-evaluated large and mid-sized MFIs. The MFI relies on long-term subordinated debt and bilateral assignments to manage its capital ratios. Bilateral assignments accounted for per cent of assets under management as on September 30, 2010). The low Tier-I capital is a concern as the credit 10

11 enhancements/guarantees for bilateral assignments/securitisation constitute per cent of the Tier-I capital as on the above-mentioned date. Ability to raise long term subordinated debt provides some comfort Above-average asset quality The MFI s demonstrated ability to raise long-term capital from various sources provides some comfort. The company raised Rs.197 million between January 2007 and September 2010 from five social funds/investors in the form of longterm subordinated debt. CMC has reported a capital adequacy ratio (CAR) of per cent as on September 30, 2010 (there are no minimum capital adequacy requirements prescribed for Section 25 companies unlike Non Banking Finance Companies (NBFCs). If one adjusts for the assets under management (bilateral assignments) and restricts Tier- II capital to 100 per cent of Tier-I capital, CAR would be lower at per cent as on September 30, CMC has projected disbursement growth of 33.8 per cent and 27.9 per cent during and This is to be funded by internal accretions, infusion of additional subordinated debt, and bilateral assignments. CMC s legal status limits its ability to attract capital. Given the constraints of the MFI s legal status, however, CRISIL expects CMC to remain highly leveraged in comparison to its peers. CMC has historically demonstrated its ability to maintain above-average asset quality, despite marginal slippage during The MFI s portfolio at risk (PAR)>90 days was 0.26 per cent as on September 30, 2010, and even on a sixmonthly lagged basis, this indicator was comfortable at 0.29 per cent for CMC as on the above date. The MFI s asset quality marginally deteriorated during end March 2007 and PAR>90 days peaked to 2.04 per cent. Most borrowers in microfinance are repeat borrowers and CMC witnessed marginal increase in delinquencies as it slowed down disbursements due to tightened liquidity conditions. 11

12 CMC s ability to control asset quality stems from its long track record of more than one decade in its geographical area of operations and its understanding of this market, which has enabled it to develop long-standing relationships with its poor customers. The company s conscious decision to focus on poor (identified using tools explained in the Management section earlier) and ensuring that it does not fund clients with sizeable multiple borrowings, has enabled CMC to minimise its credit risks. CMC has also consciously slowed down its expansion in urban regions notably Varanasi and regions of Bihar, where there is increased competition and high credit demand from clients. The company did face operational risks due to lack of bank accounts with scheduled commercial banks and some frauds in cash withdrawals by its branch staff. The systems, however, have been strengthened and there has been considerable improvement in cash management now then in the past. The MFI has indicated that it no longer maintains any account with primary agricultural credit societies. The MFI has not undertaken major expansion of its branches/districts during the past two years. It now, however, plans to add 56 branches during Given the tightening liquidity conditions, expansion to new regions, and increase in competition in the region, CRISIL expects marginal deterioration in asset quality. The PAR>90 days is, however, expected to remain well below one per cent over the medium term. Concentration risk despite loan portfolio being spread over 15 districts of two states Though CMC s portfolio is concentrated in a few regions of two large states (Bihar and Uttar Pradesh), the loan portfolio is relatively well spread. The two states accounted for 74 per cent and 26 per cent of the portfolio as on September 30, The highest single district concentration was ten per cent (Varanasi district in Uttar Pradesh) as on September 30, 12

13 2010. Nevertheless, the top three adjoining districts Varanasi, Mirzapur, and Chandauli account for 26.4 per cent of the portfolio as on the above date and the concentration risk will remain a key monitorable over the medium term. Adequate provisioning cover for delinquent loans CMC has a provision to PAR>90 days ratio of per cent as on September 30, CRISIL believes that the ratio is more-than-adequate for the risks faced by the MFI. CMC s advances are unsecured and short term (less than one year) and thus, its loan loss provisioning is higher than the minimum provisioning required according to prudential norms for NBFCs. Under the provisioning policy, CMC provides 0.10 per cent on standard assets, 10 per cent of provisioning for overdue from five to 25 weeks, 50 per cent for 26 to 50 weeks and 100 per cent for more than 50 weeks. The MFI writes-off loans that are overdue for more than 100 weeks. RESOURCES AND ASSET LIABILITY MANAGEMENT Diversified borrowings profile CMC has diversified institutional borrowings profile during the past few years. The MFI has borrowings from more than 25 lenders as on September 30, This includes subordinated debt from four social funding sources. The maximum exposure to any lender was 17 per cent as on September 30, The MFI s borrowings from public sector banks constituted 28 per cent of borrowings as on the above date as against seven per cent in The share of private sector banks has come down to 48 per cent of the total borrowings compared to 77 per cent a few years ago. Given CMC s high reliance on wholesale funding, however, CRISIL believes that the MFI s cost of borrowing will remain susceptible to volatility in interest rate movement over the medium term. 13

14 CMC has experience in tapping the assignment route, thereby opening an additional window to augment its resource capacity. The company has diversified its portfolio buyers and till September 2010 had sold its portfolio to more than seven banks/institutions. As on September 30, 2010, direct assignments accounted for 15 per cent of the MFI s advances (26 per cent in March 31, 2010). CMC expects direct assignments to account for 25 to 30 per cent of its loan portfolio during the next two to three years. Any change in direct assignment transaction guidelines, however, could impact CMC s ability to raise resources through this route. However, raising debt in the medium term is expected to be a key challenge CRISIL expects adequacy of resources to be a key challenge for Indian MFIs over the medium term. A recent unfavourable ordinance in Andhra Pradesh (a state with a large microfinance portfolio) is expected to constrain the flow of funding to the entire sector from the banking system. As with other MFIs, CMC has significant dependence on bank borrowings (76 per cent of the borrowings as on September 30, 2010). Consequently, liquidity and growth prospects of many MFIs, including those operating outside Andhra Pradesh, are expected to be affected. CMC has a track record of repaying its lenders on time since its inception. CRISIL expects the reduced access to funding from the banking sector to limit fresh disbursements in the second half of OPERATIONAL EFFECTIVENESS Improvement in productivity levels CMC has shown consistent improvement in productivity levels. As a strategy, the MFI attempts to saturate an entered district (by opening of the maximum number of branches in the district) before expanding its operations to another district. Between March 2009 and September 2010, CMC s number of operational districts has remained constant at

15 The MFI has also been attempting to increase the productivity of its branches, whereby in the same period (March 2009 and September 2010) the number of branches has remained nearly constant from 252 to 269. The above has led to increase in the number of borrowers per credit officer and branch to 430 and 1, 820, respectively, as on September 30, 2010 from 370 and 1,550 as on March 31, Earnings profile to weaken from levels CMC s ratio of net profit to average assets improved significantly during to 3.04 per cent from 0.22 per cent in the previous year benefiting largely from change in the accounting policy in respect of recognition of income on assigned loans. As a result, the net profit improved to Rs million from Rs.4.19 million during this period. As per the MFI s revised accounting policy, the difference between the consideration received and the book value of the loan portfolio assigned is accounted as a gain in the year in which the assignment takes place. Earlier, the gain on the assignment was amortised over the tenor of the assignment repayment. The net profit includes portfolio assignment gain of Rs million, a prior period item. Thus, if one did not factor the upfront gain on assignments, the ratio of net profit to average assets for would have been much lower. CRISIL expects net profit to average assets to be supported by direct assignments over the medium term. CMC s profitability, however, is expected to decline in the next one year because of various factors. The MFI has reduced its effective lending rates (30.4 per cent to 25.8 per cent with effect from July 2010). The additions of new branches and increase in personnel expenses (due to salary revision) during and anticipated slowdown in disbursement growth over the medium term on account of tightened liquidity is expected to result in no further decline in 15

16 operating expense levels. Increase in cost of borrowings amid constrained external funding is also expected to result in lower profitability during the next one year. SCALABILITY AND SUSTAINABILITY Structurally, the regulatory jurisdiction and framework for MFIs remains unclear, with actions by multiple authorities increasing the challenges for the industry. Unless urgent steps, including regulatory intervention, are taken to address these issues, these developments have the potential to materially weaken the business and financial risk profiles of MFIs. The flow of funding to the entire sector from the banking system is expected to remain severely constrained over the short to medium term unless the above issues are addressed. Consequently, CRISIL expects liquidity and growth prospects of many MFIs, including CMC, to be impacted over the medium term. CRISIL, however, believes that CMC will remain sustainable and an important player in its area of operations. This opinion is based on several factors, including commitment of operating in un-served rural areas of eastern Uttar Pradesh and Bihar, attracting social funding sources, strong governance, and robust middle management. The MFI has been able to nurture several home-grown managers over the past decade and this has it enabled to successfully withstand strong exodus of its key management personnel during

17 BUSINESS INDICATORS 3,200 Business Growth Business Outreach 2, Rs. million 1, No.million No Mar-09 Mar-10 Sep-10 Loan outstanding (including managed) No. of borrowers 0 Mar-09 Mar-10 Sep-10 Branches Districts covered Rs.million Capitalisation level Mar-09 Mar-10 Sep-10 Tier I Subordinated debt Debt/equity* No. Share holding pattern as on September 30, 2010 Cashpor Financial and Technical Services 100% No. 2,000 1,500 1, Productivity indicators 1,820 1,550 1, Rs.million Borrowing Profile as on September 30, 2010 PSU Banks 32% Apex MFIs 13% 0 Mar-09 Mar-10 Sep-10 Borrowers/ credit officer Borrowers/branch Loan outstanding/credit officer 0.0 Private Banks 55% 17

18 FINANCIAL INDICATORS Income and expenditure statement Rs. million For the year ended Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Projected Audited Fund based income Interest income from loans Gain on assignment Income from investments /bank deposits Other income Total fund based income Interest and finance charges On borrowings Total interest and finance charges paid Gross spread Fee based income Non fund income 3 Total fee based income Total income Gross surplus Expenses Personnel expenses Administrative expenses Total expenses Write-offs and provisions Write-off of bad debts Provision for loan loss Total Depreciation Profit before tax Tax Add: Prior period and extraordinary items Net surplus / (deficit)

19 Balance Sheet Rs. million Balance sheet as at Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Liabilities Projected Audited Capital Capital grants Reserves and surplus / (deficit) Net worth Long term subordinated Debt Borrowings from banks and FIs Unsecured loans Total long term borrowings Risk fund collected from the borrowers Loan loss reserve Other current liabilities Total current liabilities Total liabilities Assets Total loan portfolio Less: loan outstanding (managed) Loans outstanding Investments 50 Cash & bank balances Fixed deposits with banks Advances and other receivables Total current assets Total funds deployed Other current assets Net fixed assets Total assets

20 Ratios ` In per cent Year ended Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Yield Projected Audited Fund based yield (A) Portfolio yield Fee based income /Avg. funds deployed 0.11 Total income / avg. funds deployed Cost of funds Interest paid/average funds deployed (B) Interest paid/average borrowings (C) Interest spread Gross spread/average funds deployed (A) - (B) Spreads on lending (A) - (C) Overheads Operating expenses / disbursements Operating expense ratio Personnel expense ratio Administrative expense ratio Profitability Net profit /(deficit) on net worth NM Net profit / (deficit) on funds deployed Operational self sufficiency (OSS) Asset quality Net write-offs / average loan outstanding Loan loss provisions / average loan outstanding Total loan loss rate Provisioning / average loan outstanding NM=Not Meaningful 20