GUIDELINES OF INDIA MICROFINANCE EQUITY FUND 1
CONTENTS 1. Objective - Page 3 2. Principal features - Page 3 3. Purpose - Page 3 4. Types of instruments - Page 3 5. Eligibility criteria - Page 4 6. Sanction procedure - Page 6 7. Size of investment - Page 6 8. Supervisory Board - Page 7 9. Monitoring objectives - Page 7 10. Administrative charges - Page 8 2
India Microfinance Equity Fund Objective The Fund will be utilised for extending equity or any other form of capital viz., quasi-equity or subordinated debt to Tier II (having borrowers between 50,000 and 250,000) and Tier III NBFC MFIs (having less that 50,000 borrowers) and all Non-NBFC MFIs, with a focus on smaller socially oriented MFIs/NBFCs with the objective of poverty alleviation and achieving long term sustainability of operations in unserved and underserved parts of the country. 2. Principal features Name of the Fund Fund Manager Initial Fund Size Fund Life Target rate of return India Microfinance Equity Fund SIDBI `100 crore. Further allocation to the corpus may be considered, based on experience gained/ emerging requirements of the sector. Perpetual. It would be a revolving fund. It is proposed to be a socially and development oriented initiative, with conservation of capital as the prime objective. No target rate of return has been specified. 3. Purpose The assistance will be utilised by MFIs to improve their equity base, meet CRAR requirements, if any, prescribed by regulatory authorities and leverage the same for additional debt raising and scaling-up operations, improve efficiency and build a long term commercially sustainable organisation. The assistance would help the MFIs to develop and introduce new products and micro finance services to the people and leverage funds from other social investors. The focus of the Fund would be on capital conservation. 4. Types of Instruments The fund would be used for offering 3 types of instruments to the MFIs: 3
(a) (b) (c) Subordinated debt (for Non-NBFCs / Section 25 companies) The instrument will have a tenure of 6 to 8 years with moratorium of 4-5 years. Subordinated debt could be converted into ordinary equity shares, if the entity transforms into a NBFC-MFI during the term of the debt. Valuation at the time of conversion will be at par (or on such terms as may be decided later) and subject to satisfaction of SIDBI regarding the MFI s performance at the time of conversion. In the event of non-conversion, the Subordinated debt shall be repaid as per the original terms of investment. Quasi-equity (Tier II) for NBFC-MFIs - As per existing RBI guidelines, Tier II Capital in NBFCs (preference shares, hybrid debt capital instruments and subordinated debt) can be equal to the value of Tier I Capital. The proposed quasi-equity could comprise Optionally Convertible Preference Shares or Subordinate debt by way of Non- Convertible Debentures (NCDs). Preference shares shall be optionally convertible and cumulative / non cumulative for dividend receipts, but will not enjoy ownership rights. They can be optionally convertible into equity at par, at a pre-determined price or as per mutually agreed methodology, which would take into account the performance of the company or redeemed as per the terms of investment. Subordinate debt by way of NCDs can also be considered if it helps the MFIs in meeting the capital adequacy requirements. The interest rate would be decided depending on the rating of the MFI. Equity for NBFC MFI or Sec. 25 Companies Investment would be made after carrying out due diligence and equity valuation which would depend on book value or break-up value of the company, earning potential and other relevant factors. 5. A. Eligibility Criteria (i) (ii) (iii) Tier II (having borrowers between 50,000 and 250,000) and Tier III NBFC MFIs (having less than 50,000 borrowers) and all Non-NBFC MFIs, in unserved and underserved areas. Proposal to support expansion can also be considered provided other conditions are met. Minimum outreach of 3000 poor members Minimum MFI grading norm of Beta+ of M-CRIL (and its equivalent grade for gradings by other agencies, including Bank Loan Rating). 4
(iv) (v) (vi) (vii) (viii) (ix) Existence for at least five years and / or it has a demonstrated track record of running a successful micro-credit programme at least for the last three years. It should choose clients irrespective of class, creed and religion and its activities should be secular in nature. It maintains a satisfactory and transparent accounting, MIS and internal audit system or is willing to adopt such practices; It has its accounts audited by an external auditor on annual basis It has established a separate system of accounts and monitoring for its micro finance operations; Satisfactory Credit opinions from all lenders. (x) Non-appearance of the names of the MFI, its promoters / directors / partners / trustees, group / associate concerns and their promoters/directors/ partners/trustees in the latest Caution Advices of RBI circulated internally and other lists of defaulters, non-suit filed and suit filed accounts, etc. of RBI, CIBIL, blacklisted agencies of RMK and terrorists lists circulated by UN and RBI and other relevant list (xi) Apart from the above criteria NBFCs are also required to comply with the following additional criteria:- The NBFC should have sound financial position/ performance record as assessed by SIDBI and should meet the following criteria based on the recent audited financial statements of the borrower : i. Capital Adequacy Ratio should be minimum 15%. ii. Extant RBI guidelines applicable to NBFCs shall apply and be complied with. B. Desirable Criteria : (i) Offering credit plus services such as insurance, thrift, pension, deposits, payment, remittance, counseling, advisory either directly or indirectly and as permitted by the authority regulating such services. (ii) Providing / intending to provide innovative pro-poor products and services like water, sanitation, rural housing, energy efficiency products etc. would be encouraged and given due weightage. (iii) Focussing on poor, specially unprivileged / underprivileged / disadvantaged sections of society like women, scheduled castes, scheduled tribes, minorities etc. (iv) Having transparency in lending operations including calculating and reporting to clients and in public domain, the effective interest (on reducing balance basis) being charged to the ultimate beneficiaries (v) Has commitment to continuously strive for cost reduction in a phased manner with acceptable plans to bring it down the effective interest rate charged to borrowers below 26% p. a. on a reducing balance basis or as permitted under the prevailing regulatory environment. 5
(vi) (vii) (viii) (ix) Has adopted transparency in its operations, communications and reporting. Has adopted and implemented tenets of Responsible Lending viz., adherence to Code of Conduct and KYC norms, not resorting to coercive recovery practices, avoidance of multiple lending, assessment of repaying ability of the borrowers, suitable grievance redressal mechanism. Indicative stipulations to ensure responsible lending are given in Annexure I. Complying with all the relevant State / Central laws. Having Code of Conduct Assessment (COCA) / Adherence to Client Protection Principles of Smart Campaign and / or External rating (in case of existing MFIs) at such levels, as may be decided. The recommendations of Malegam Committee, as accepted by RBI (for categorization of lending by banks to such MFIs, as Priority Sector Lending, details are given in Anneuxre II) would be the guiding principle while dealing with MFIs and any updations to such RBI guidelines from time to time. 6. Sanction Procedure (i) The investment proposals would be processed by SIDBI. The due diligence done on the promoters/ company at the time of providing debt assistance would also be used for investment decisions. The appraisal for on-lending support as well as due diligence process for equity / quasi equity investment could be taken simultaneously. (ii) If required, the investment process would also include acceptable rating of the MFI by an external rating agency approved by SIDBI and, as per practice followed for equity investing, may also include due diligence by a reputed firm. 7. Size of Investment (i) The assistance shall normally not exceed ` 3 crore per MFI (may go up to `5 crore in deserving cases). In the event of transformation of the Non-corporate MFI into a NBFC, the assistance could be converted into equity shares, in tranches, such that SIDBI s shareholding remains less than 20% of the overall paid up equity of the MFI after equity infusion by SIDBI, subject to regulatory requirements, if any. (ii) Assistance to NBFC-MFI or Section 25 companies, including equity assistance, shall normally not exceed ` 3 crore (may go up to `5 crore in deserving cases), subject to regulatory requirements, if any. 6
8. Supervisory Board The Supervisory Board would lay down the overall roadmap to guide the Fund, suggest changes in the policy guidelines and also monitor progress of the Fund. The Board would comprise the representatives of the following: i. Department of Financial Services, Ministry of Finance, Govt. of India ii. SIDBI iii. Senior official from a Public Sector Bank iv. One independent expert The Supervisory Board would meet at least twice a year and its recommendations would be put up to SIDBI Board for appropriate action 9. Monitoring guidelines Monitoring mechanism of the Fund would include: (i) (ii) Pre-sanction and pre-disbursement visits to the MFI This would include visit to its HO / Corporate office as well as field offices to review its systems and processes, control mechanisms, MIS, practices followed, MIS etc. While extending financial assistance to MFI, SIDBI s due diligence and decision is based on its internal assessment along with a rating/grading of the MFI by an external rating agency. However, considering the nature of investments under IMEF, where considered necessary, IMEF may arrange for a due diligence of the MFI through an external agency like a Chartered Accountants / Consultancy firm. (iii) MFIs to upload the credit information of their borrowers in any of the existing credit bureaus prescribed. Further, the credit history of MFI to be made available in any of the credit bureau and should be accepted by SIDBI. (iv) Interaction with the borrowers / clients of the MFI to check implementation and practices being followed by field/ ground level staff vis-à-vis its internal guidelines and policies which would, inter-alia, include implementation of Code of Conduct, Responsible lending practices, ethical dealing with customers, client protection guidelines, etc. 7
(v) Collecting quarterly information on MFI s operating and financial parameters. (vi) Regular follow up visits which could vary from half-yearly to yearly, based on entity s key performance parameters both qualitative and quantitative (vii) Appointing SIDBI s nominee on the Board / Managing Committee of the MFI, who would participate in the MFI s policy decision process to ensure certain threshold parameters in areas like governance and management systems. (viii) Monitoring, especially with respect to end use of the fund, will be carried out for continued eligibility through a) Visit the MFI to verify the fund utilization b) Check on random basis documents like invoices, statements of bank account, receipts, loan disbursement details including details of borrowers, evidencing fund utilization c) CA s certificate giving comprehensive details of utilization of fund d) Apart from collecting relevant data at the time of sanction and disbursements, quarterly progress would be collected from the MFI. Reports from the invested entity to ensure regular monitoring of the MFI. Administrative charges 1% p.a. of the Fund Size would be payable to SIDBI as Administrative fee during the life of the Fund. Apart from the above, any fee and charges paid to a third party in connection with investments to be made from the Fund (like fee and charges towards due diligence to be carried out by a CA / Consultancy firm, including rating fee) or towards the administration of the Fund (expenses like travel, accommodation, out of pocket and sitting fee of outside experts / representatives on Scrutiny cum Divestment Committee, Supervisory Board, cost of convening the meeting, charges of auditors, legal charges, taxes and levies by the Govt. etc.) would be paid from the Fund on actual basis. ******************** 8
Annexure I Tenets of Responsible Lending Practices 1. MFI to obtain cash flows / examine repayment capacities of individual beneficiaries. 2. A suitable grievance redressal mechanism is put in place by the MFI and both field level personnel as well as clients are aware of the same. 3. MFI to comply with KYC guidelines of RBI and that multiple lending is not being resorted to. 4. MFI not to employ any agent to run its microfinance operations and does not employ any coercive recovery methods. 5. There is no overlap between beneficiaries of SHGs of banks and JLGs of the MFI. 6. Remuneration of senior management including CEO of the MFI is as per the accepted practice. 7. Agree to furnish financial and operational data in the specified format to the India Microfinance Platform (IMFP) within reasonable timelines and with accuracy. 8. Agree to undergo a third party Code of Conduct Assessment with a view to assess the degree of adherence to the voluntary microfinance Code of Conduct through accredited agencies. 9. Agree to undergo a Systems and Portfolio Audit involving detailed examination of operational systems and procedures, funds utilization, assessment of loan portfolio in respect of the risk parameters, finance as well as planning and control, etc. by an external agency. 10. Agree to ensure transparency and uniformity in calculating and reporting (to clients and in the public domain) the effective cost (on reducing balance basis) being charged to the ultimate beneficiaries. 11. Agree to prepare a Board / Management Committee approved note on recovery practices that would be displayed in local language at each branch and to give an undertaking to take steps to ensure responsible and non-coercive loan recovery practices at the field level. 12. Agree to develop a Board / Management Committee approved strategy to check multiple lending / over indebtedness amongst clients and implement it thereafter and also obtain annual affirmation of the strategy by its Board. 13. Agree to take steps to ensure that some acceptable form of electronic, written or printed acknowledgement of financial transactions is left with the individual borrower or the group/its representative. 14. Agree to furnish regularly, accurate and comprehensive data about beneficiaries to Credit Bureaus. 9
15. Agree to participate and furnish information to the Unique Identification (UID) initiative of the GOI, and 16. Agree to ensure that it maintains a satisfactory financial management system, and prepares satisfactory financial statements in accordance with consistently applied Indian accounting standards as issued by the Institute of Chartered Accountants of India; and (ii) has such financial statements audited by independent auditors in accordance with consistently applied auditing standards generally accepted in India, and promptly furnishes the audited statements to SIDBI. *********************** 10
Annexure II Details of qualification of loans to MFIs as Priority Sector Lending The RBI guidelines define as Qualifying Assets those loans by an MFI satisfying the following criteria: i. The loan is extended to a borrower whose annual household income does not exceed `60,000 in rural areas and `1,20,000 in non-rural areas. ii. The loan size does not exceed `35,000 for first cycle and `50,000 for subsequent cycles. iii. iv. The borrower s total indebtedness does not exceed `50,000. The loan tenure is not less than 24 months when the loan size is above `15,000 with borrower having the right to prepay without penalty. v. The loan has no collateral security. vi. The loan is repayable by weekly, fortnightly or monthly instalments as per the Borrower s choice. Loan assistance to any MFI to comply with the following caps on margin and interest rate as also other pricing guidelines, to be eligible to classify these loans as priority sector loans: a) MFIs to ensure a margin cap of 12% in respect of their loans. For this purpose, MFIs interest cost will be calculated on average fortnightly balances of outstanding borrowings and interest income calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets. b) All MFIs to have an interest cap on individual loans at 26% per annum. Interest to be calculated on reducing balance basis. c) MFIs shall include only three components in pricing of loans viz., (a) processing fee not exceeding 1% of gross loan amount, (b) interest charge and (c) insurance premium. d) Processing fee is not to be included in margin cap / interest cap of 26%. e) Only the actual cost of insurance i.e. actual cost of group insurance for life, health and livestock for borrower and spouse can be recovered. Administrative charges to be recovered as per IRDA guidelines. f) There should not be any penalty for delayed payment. g) No Security Deposit/ Margin is to be taken by the MFI. MFIs should submit, at the end of each quarter, a Chartered Accountant s Certificate stating, inter-alia, that (i) 85% of total assets of the MFI are in the nature of Qualifying Assets, (ii) the aggregate amount of loan, extended for income generation activity, is not less than 75% of the total loans given by the MFIs, and (iii) pricing guidelines are followed. ********************** 11