Micro-Finance Risk Assessment and Social Rating This rating of BWDA includes, in addition to a credit rating, a pilot of a social rating of MFIs. This is a pioneering new rating service introduced by M-CRIL and its associate, EDA Rural Systems. This rating folder includes the following: 1 BWDA Microfinance Risk Assessment and Social Rating 2 BWDA Credit Rating (3 rd update) 3 BWDA Social Rating The first document is a summary comparison of the Credit and Social Rating reports of BWDA. This is particularly noteworthy as a powerful feedback document on financial sustainability and social performance – the “double bottom line” of MFIs. The second and third documents provide the full credit rating and social rating reports. The social rating provides a graded assessment of the social performance of MFIs covering three main parameters: • adherence to social mission, • depth of outreach to low income/“unreached” clients, and • suitability of products to client needs (as indicated by client feedback) An introduction to the scope and methodology of the Social Rating is available on the M- CRIL website. It will also be shortly highlighted on the microfinance gateway. If you or your colleagues have any queries about the Social Rating product please do get in touch with Frances who leads the team responsible for it, [email protected].
Transcript
Micro-Finance Risk Assessment and Social Rating This rating of BWDA includes, in addition to a credit rating, a pilot of a social rating of MFIs. This is a pioneering new rating service introduced by M-CRIL and its associate, EDA Rural Systems. This rating folder includes the following:
1 BWDA Microfinance Risk Assessment and Social Rating 2 BWDA Credit Rating (3rd update) 3 BWDA Social Rating
The first document is a summary comparison of the Credit and Social Rating reports of BWDA. This is particularly noteworthy as a powerful feedback document on financial sustainability and social performance – the “double bottom line” of MFIs. The second and third documents provide the full credit rating and social rating reports. The social rating provides a graded assessment of the social performance of MFIs covering three main parameters:
• adherence to social mission, • depth of outreach to low income/“unreached” clients, and • suitability of products to client needs (as indicated by client feedback)
An introduction to the scope and methodology of the Social Rating is available on the M-CRIL website. It will also be shortly highlighted on the microfinance gateway. If you or your colleagues have any queries about the Social Rating product please do get in touch with Frances who leads the team responsible for it, [email protected].
Micro-Finance Risk Assessment and Social Rating
Bullock-cart Worker’s Development Association (BWDA) Villupuram, Tamil Nadu (India)
Credit rating
BWDA has maintained its good performance on governance and management while improving its financial performance. In addition to a reasonable growth in outreach, BWDA has also maintained good portfolio quality. In M-CRIL’s view, on account of significant field presence, overall good performance, commendable approach to sustainability and the growth plans of the organisation, BWDA can absorb – from all sources – funds of Rs15.5 crores (including grants of Rs50 lakhs) over the next one year for on-lending to SHGs.
Social rating
BWDA has good adherence to its social mission to ‘empower poor and vulnerable households economically and socially’ as reflected in outreach to disadvantaged groups and a substantial number of poor members of its Self Help Groups (SHGs). A moderately supportive approach to client empowerment has resulted in strong group systems but limited financial awareness among group members.
The SHG model gives group members the flexibility of directly accessing their group savings for credit, with some scope for bank linkage. BWDA offers standard products, which could be more adaptive to diverse needs and different clientele.
BWDA can improve adherence to mission among junior staff; product development and communication with clients need attention.
<3rd rating Update>
Credit Rating grade
Social Rating grade
α− alpha minus β+ beta plus
Assessment Recommended;
reasonable safety, good systems
Assessment Good adherence to social mission; reasonable
application
Visit dates 29 Nov – 5 Dec 2004
Visit dates 29 Nov – 10 Dec 2004
Validity of ratings: till December 2005
Operational head: Mr C Joslin Thambi
Micro-Finance Risk Assessment and Social Rating
Category based rating grades1
Credit Rating Grades
Social Rating Grades
A Governance aspects α− Social mission and strategy β B Managerial factors α− Depth of outreach β+ C Financial performance α Client feedback β+
Overall α− Overall β+
Risk Factors
Credit rating Social rating
1 Inadequate internal audit: The internal audit function is being developed. The internal audit team conducts random checks of the records for clerical errors, compliance with formats and the accuracy of MIS reports. Although the internal audit team is gradually increasing its scope and rigour, it will take another 6 months before it reaches an optimum level. The current internal audit process is inadequate to prevent risk of misappropriation.
2 Large size individual loans: BWDA has introduced collateral based individual lending offered by BFL with large size loans (Rs25,000 to Rs1,50,000). These loans account for 2.7% of the total outstanding portfolio. According to the planned lending, the proportion of large size loans in the portfolio of BWDA is likely to come down to less than 1% of the total portfolio. BFL out-sources the legal opinion on titles of collateral, especially in case of property loans. Nevertheless, relative inexperience of handling such loans exposes BFL to risk of low realisation from collateral in case of defaults.
1 Drought conditions in many districts for past 2-3 years have affected livelihoods; whilst tidal Tsunami effects (post-visit) may lead to welfare requirements and expectations in coastal areas of Tamil Nadu (part of BWDA’s operational area).
2 State government initiatives include
subsidised lending programmes for Scheduled Castes and a directive to form federations of SHGs. The former undermines credit discipline. The latter increases client transaction costs and is causing some confusion.
3 Inadequate systems to track outreach to
target group and appropriateness of products and services; no link between staff incentives and social performance.
1 M-CRIL’s grading sheet is attached at the end
Micro-Finance Risk Assessment and Social Rating
Programme Strengths
Credit Rating Social Rating Governance, experience and strategy Social mission
1 Good credit culture 2 Increased focus on micro finance activities 3 Good second line of leadership
1 Explicit focus on poor and vulnerable
households 2 Strategic support to groups to be
autonomous
Management and operations Outreach 1 Good MIS and accounting system 2 Effective system for tracking overdues 3 Stable and experienced staff 4 Strong groups, increasingly becoming self
reliant in terms of record keeping and accounting
1 Provision of services to those without
access to alternative formal providers or other microfinance providers
2 A substantial number of poor including very poor are SHG members
Financial Client feedback 1 Good repayment rate and portfolio quality 2 High internal loan circulation 3 Good Capital Adequacy 4 Good performance on profitability and
sustainability
1 Transparent group processes with
decisions made in consensus 2 Low interest on credit and safe/easy
option to save 3 Few drop-outs or broken groups
Supportive context factors: State of Tamil Nadu, South India
Good infrastructure and communications High literacy – including for women Relatively supportive cultural environment for women State government financed training to SHG leaders (Mahalir Thittam programme)
Micro-Finance Risk Assessment and Social Rating
Organisational Profile (as on 30 September 2004)
Legal form Years of mF Model Number of % rural Number of % women Operation SHGs SHG members
BWDA: Society BFL (BWDA Finance Ltd): Non-banking
Finance Company
7 years
SHG
5,183
90%
93,343
[15-20/SHG]
94.3%
Number of Branches
Number of Staff
% women
Active borrowers from MFI a
Active borrowers/ Staff member
9
68
84%
26,375
388
a BWDA loans are technically to the SHGs; the number here refers to SHG members who have MFI loans
Microfinance programme
Internal savings of SHGs (Rs)
(not collected by BWDA)
Outstanding borrowings of
MFI (Rs)
Loan portfolio of MFI (Rs)
Average loan size from MFI to borrowers
(Rs)
Depth ratio c
31.5 crores 4.7 crores 5.6 crores b 8,790 10.2% b of which Rs1.5 crores is under BFL c Depth ratio refers to the average loan balance as a percentage of GNP per capita. This measure is used internationally as a proxy indicator for depth of poverty outreach. A depth ratio of <20% signifies outreach to ‘poor or low-end clientele’
Key financial ratios
Portfolio at risk (>=60 days)
Cumulative repayment rate
Risk weighted capital adequacy
ratio
Weighted average cost of
funds
Yield to APR ratio
1.3% 97.6% 23.3% 10.0% 88.7%
Yield on portfolio Other income to average portfolio
Financial cost ratio Loan loss
provisioning ratio
Operating expense
ratio
16.3%* 5.2%* 11.6%* 0.33% 7.4%* Total income to
average total assets
Total expenses to average total assets
Return on average total assets
Operational self sufficiency
Financial self
sufficiency
17.4%* 15.7%* 1.6%* 110.7% 101.8% Notes 1. All figures are estimated for the BWDA’s microfinance programme as on 30 September 2004. Some of the
financial ratios have been annualised (marked with *) 2. Figures for BWDA’s microfinance programme includes lending under BWDA Welfare Scheme (BWS), which is
its old lending programme, and also lending under the BWDA Finance Limited (BFL), the new legal entity 3. BWDA has a total staff of 141. For microfinance activities, the number of staff members is estimated at 68
(including 59 field staff). Apportioning the staff on activity basis gives 17 staff for BFL (including 15 field staff) and 51 staff for BWDA NGO microfinance operations (including 44 field staff).
4. Loan loss provisioning has been done by M-CRIL based on the portfolio quality. A Loan Loss Reserve of 1% of the outstanding portfolio has been maintained.
Micro-Finance Risk Assessment and Social Rating
Outreach – operating area
State Districts Within districts
Tamil Nadu HDI 0.531
Rank in India: 3
Two districts on list of ‘150 most backward’ in India; though all above
average development ranking for infrastructure, literacy
Covers some poor pockets, drought affected areas
Outreach – client profile
Client household information, based on sample survey of recent client households [N=240]
Household access to formal financial services Disadvantaged groups Bank savings account Bank credit Scheduled
Castes/Tribes Woman headed
households
18% 13% 15% [State – 20%] 14%
Below Poverty Line
International: ‘$1-a-day at PPP’a Local – State b ‘Very poor’ c
Depth: 33% 26% 4.5%
Number of SHG members: ~ 31,000 ~ 4,100a International poverty line: $1.08 per capita/day at purchasing power parity available for end 2003 (= Rs14.99, World Bank 2004); adjusted to rural and urban costs in Tamil Nadu based on State poverty line data. State equivalents estimated at Rs12.90 rural, Rs20.01 urban b Local poverty line: rural Rs11.86, urban Rs18.78 for Tamil Nadu; available for 1999-2000 (GOI, 2002) and updated to 2004 using CPI for rural agricultural workers and for industrial workers c ‘Very poor’ category derived from PRA methods and index scoring of quality of life indicators
Client feedback
Financial awareness Group systems Satisfaction Exit
Know own savings
Women encouraged to visit banks
Strong group discipline and agreement; regular meetings
Transparent transactions
Safe place to save
Low loan interest rate
Flexibility within groups (internal lending)
Low rate of drop-out (~5%)
Low awareness of BWDA products & processes
High dependence on leaders without rotation of leadership
Low member awareness of group records/accounts
Delays in access to credit
Standard MFI products; do not match range of credit needs
Savings not withdrawablea
No systematic interviews with dropouts
Sources: FGDs in sample clusters and sample survey of recent clients, more than 6 months with BWDA. n=179 a Savings are non-withdrawable for groups less than 2 years old, but partially withdrawable for groups after 2 years
Micro-Finance Risk Assessment and Social Rating
M-CRIL’s Microfinance Rating Symbols
M-CRIL Grade
Credit Rating description
Social Rating description
α+++ alpha triple plus
Highest safety, excellent systems most highly recommended
Strongest adherence to social development values and mission with highly effective application
α++ alpha double plus
Highest safety, very good systems most highly recommended
Very strong adherence to social development values and mission with highly effective application
α+ alpha single plus
Very high safety, good systems highly recommended
Very strong adherence to social development values and mission with effective application
α
alpha
High safety, good systems
highly recommended
Very strong adherence to social development values and mission with effective application
α− alpha minus
Reasonable safety, good systems
recommended
Very strong adherence to social development values and mission with fairly effective application
β+ beta plus
Reasonable safety, reasonable systems
recommended, needs monitoring
Good adherence to social development values and mission; reasonable application
β beta
Moderate safety, moderate systems
acceptable, needs improvement to handle large volumes
Moderate adherence to social development values and mission, moderate application
β− beta minus
Significant risk, poor to moderate systems
acceptable only after improvement
Low adherence to social development values and mission
γ+ gamma plus
Substantial risk, poor systems
needs considerable improvement
Weak adherence to social development values and mission
γ gamma
Highest risk, poor systems
not worth considering
No social development values or mission; very weak adherence to social mission
Micro-Finance Rating - Risk Assessment
#
This BWDA rating relates to the lending programme of the BWDA – this includes the lending under the BWDA Welfare Scheme (BWS) and lending under BWDA Finance Limited (BFL), a Non-Banking Finance Company promoted by BWDA. Rating of BWS and BFL have also been carried out separately.
*Validity This rating is valid till the next loan proposal made by the MFI to any financial institution or till
any other significant change in the structure of the loan programme or in its external environment. A rating update (comprehensive repeat rating) is recommended whenever such changes take place or at the end of one year from the date of the initial assessment, whichever is earlier. Any substantial additional information that becomes available could also result in a rating update or a rating review (revision of rating grade based on a desk analysis).
Liability The rating assigned is a professional opinion of the assessors and M-CRIL does not guarantee
the information and cannot accept any legal responsibility for actions arising out of the recommendations made.
Bullock-cart Worker’s Development Association (BWDA)# Villupuram, Tamil Nadu (India)
<3rd rating Update>
Rating grade
α−
alpha minus
Assessment:
Recommended reasonable safety, good systems
Visit dates: 29 Nov – 5 Dec 2004 Operational head: Mr C Joslin Thambi
Maximum validity of rating*: till December 2005
Credit Rating
BWDA has maintained its good performance on governance and management while improving its financial performance. In addition to a reasonable growth in outreach, BWDA has also maintained good portfolio quality. In M-CRIL’s view, on account of significant field presence, overall good performance, commendable approach to sustainability and the growth plans of the organisation, BWDA can absorb – from all sources – funds of Rs15.5 crores (including grants of Rs50 lakhs) over the next one year for on-lending to SHGs. A cross guarantee is recommended for the loans issued to BWDA (for lending under BWS) and BFL. It is also recommended that BWDA should limit its individual loan portfolio to within 6% of total portfolio of BWDA. A rating update after one year is suggested to ascertain changes in the creditworthiness and absorptive potential of the institution. This rating is valid, subject to no other substantial inflows of loan funds into the organisation beyond the limits specified here and to no other significant changes in the organisational structure and external operating environment.
for Micro-Credit Ratings International Ltd
Sanjay Sinha, Managing Director
BWDA – 3rd update
2
Category wise rating
Category Rating grade2
A Governance aspects α− B Managerial factors α− C Financial performance α
Overall α−
Key Risk Factors
1 Inadequate internal audit: The internal audit function is being developed. The internal
audit team conducts random checks of the records for clerical errors, compliance with formats and the accuracy of MIS reports. Although the internal audit team is gradually increasing its scope and rigour, it would take another 6 months before it reaches an optimum level. The current internal audit process is inadequate to prevent risk of misappropriation.
2 Large size individual loans: BWDA has introduced collateral based individual lending offered by BFL with large size loans (Rs25,000 to Rs1,50,000). These loans account for 2.7% of the total outstanding portfolio. According to the planned lending, the proportion of large size loans in the portfolio of BWDA is likely to come down to less than 1% of the total portfolio. BFL out-sources the legal opinion on titles of collateral, especially in case of property loans. A large size loan is adequately covered by collateral valued higher than the loan sanctioned. However, relative inexperience of handling such loans exposes BFL to risk of low realisation from collateral in case of defaults.
Key Programme Strengths
Governance, experience and strategy
Management and operations Financial
4 Good credit culture 5 Increased focus on
micro finance activities 6 Good second line of
leadership
5 Good MIS and accounting system 6 Effective system for tracking
overdues 7 Stable and experienced staff 8 Strong groups, increasingly
becoming self reliant in terms of record keeping and accounting
4 Good repayment rate and
portfolio quality 5 High internal loan circulation 6 Good Capital Adequacy 7 Good performance on
profitability and sustainability
2 M-CRIL’s grading sheet is attached at the end of this report.
BWDA – 3rd update
3
Organisational Profile
Legal form Years of m-f Number of operation Active
Borrowers*Staff Branches
Active borrowers/
Staff member
BWDA: Society
BFL: Non-banking Finance Company
7 years
26,375
68
9
388
*The borrowers are predominantly the members of SHGs, SHGs being the actual borrowers of BWDA.
Microfinance programme:
Internal savings of SHGs (Rs)
(not collected by BWDA)
Outstanding borrowings of
MFI (Rs)
Loan portfolio of MFI (Rs)
Loans disbursed by MFI in last 6
months (Rs)
Average loan size from MFI to
borrowers (Rs)
31.5 crores
4.7 crores
5.6 crores# 5.4 crores 8,790
# of which Rs1.5 crores is under BFL
Key financial ratios
Portfolio at risk (>=60 days)
Cumulative repayment rate
Risk weighted capital adequacy
ratio
Weighted average cost of
funds
Yield to APR ratio
1.3% 97.6% 23.3% 10.0% 88.7%
Yield on portfolio Other income to average portfolio
Financial cost ratio Loan loss
provisioning ratio
Operating expense
ratio 16.3%* 5.2%* 11.6%* 0.33% 7.4%*
Total income to average total
assets
Total expenses to average total assets
Return on average total assets
Operational self sufficiency
Financial self
sufficiency 17.4%* 15.7%* 1.6%* 110.7% 101.8%
Notes 5. All figures are estimated for the BWDA’s microfinance programme as on 30 September 2004. Some of the
ratios above have been annualised (marked with *) 6. Figures for BWDA’s microfinance programme includes lending under BWDA Welfare Scheme (BWS), which is
its old lending programme, and also lending under the BWDA Finance Limited (BFL), the new legal entity 7. BWDA has a total staff of 141. For microfinance activities, the number of staff members is estimated at 68
(including 59 field staff). Apportioning the staff on activity basis gives 17 staff for BFL (including 15 field staff) and 51 staff for BWDA NGO microfinance operations (including 44 field staff).
8. Loan loss provisioning has been done by M-CRIL based on the portfolio quality. A Loan Loss Reserve of 1% of the outstanding portfolio has been maintained.
9. BWDA has 93,343 members with 88,115 women and 5,228 men, organised into 5,183 groups
3 An upward arrow indicates an improvement over the previous rating and vice versa for a downward arrow;
a constant arrow indicates very low or no change.
BWDA – 3rd update
5
BWDA – financial overview
Portfolio at risk (>=60 days): 30 September 2004
Operating expense ratio: 1 April 2004 – 30 September 2004
Note: 1. nupper-end = 10 ndatabase = 110; Database updated as on 30 June 2003. 2. Outliers and rated NGOs with no direct lending have been removed for analysis. Upper-end figures reflect MFIs with top 10% scores. 3. The upper-end MFIs and overall database ratios represent simple averages for their respective samples. 4. The performance of either the Upper-end MFIs or all MFIs (overall database), do not necessarily reflect M-CRIL’s rating standards.
Income and expense distribution: 1 April 2004-30 September 2004
Debt and equity composition: 30 September 2004
Asset composition: 30 September 2004
Liability & net worth composition: 30 September 2004
-15
0
15
30
45
60
1 2
Concessionaldebt**
Commercial debt
Cumulativesurplus/deficit
Donated equity &grants
Paid in equity
0%
3%
6%
9%
12%% of average
portfolio
Interest income
Other income
Interest expense
Salaries
Other operatingexpenses*Provisions
* Other operating expenses include travel, depreciation and administrative expenses
** Concessional debt is borrowing+comp.savings taken at < Bank PLR & voluntary savings taken at < bank deposit rates
BWDA 2004 BWDA 2001 Upper-end M FIs Overalldatabase
Net fixed assets5.5%
Net loans outstanding
82.3%Other current
assets7.5%
Cash4.7%
Networth21.7%
Other current liabilities
0.7%
ST savings8.5%
LT debt69.1%
BWDA – 3rd update
6
1 Organisational background The Bullock-cart Workers’ Development Association (BWDA) started its work amongst bullock cart workers in 1985 and was registered in 1986 under the Societies Registration Act, 1860. BWDA began its work as a multiservice agency by organising bullock cart workers and their family members in Kanyakumari and Tirunelveli districts of Tamil Nadu. BWDA has now extended the programme to another three districts – Villupuram, Cuddalore and Kancheepuram, as well as the Union Territory of Pondicherry. BWDA has development interventions in the field of health, education, enterprise promotion and microfinance. All these development programmes (including microfinance) are no longer limited to bullock-cart worker families but are extended to other low-income families as well. The process of women’s group formation began in the year 1992 (two blocks in Villupuram district) under the IFAD-sponsored Women’s Development Programme and grew with support from the Tamil Nadu Women’s Development Corporation (TNWDC) for implementing the Mahiler Thitam programme in 1996. BWDA’s microfinance programme is run under BWDA Welfare Scheme (BWS). To get legal sanction of its microfinance operations, BWDA took over Nagercoil Prompt Finance & Investment Pvt Ltd (NPFI), an existing Non-Banking Finance Company (NBFC). NPFI started its operations as a registered NBFC in 1995 at Nagarcoil in Kanyakumari district of Tamil Nadu. It has an authorised share capital of Rs1 crore, but by 2001, its operations had closed down. The company did not have any real assets or liabilities. BWDA took over the company and renamed it as BWDA Finance Limited (BFL); the legal process was completed in August 2003. Paid up equity in BFL is held by the BFL Board members, staff of BWDA and borrowers of BFL and BWS. BWDA plans to gradually move most of its microfinance business to this company. Currently, BWDA’s microfinance programme includes lending under BWDA Welfare Scheme (BWS) and lending under BWDA Finance Limited (BFL). BWDA’s Executive Committee (EC) comprises nine members, who are all professionally qualified. The EC meets 3-4 times a year and discusses policy issues. BWDA has a Sub-Committee, for its microfinance programme, that is chaired by the CEO and includes all the management staff members. This Committee formally meets once in 2-3 months and is responsible for providing overall guidance and taking decisions related to the microfinance programme. BFL has a separate 11 member board. These members are derived from the senior staff and board of BWDA. BFL also has an ex-Chief General Manager (CGM) of RBI as one of its board members. For strategic decision-making, the Board of BFL and BWDA’s EC work in tandem.
BWDA – 3rd update
7
2 Microfinance operations
2.1 Background of microfinance operations BWDA is working in 5 districts of Tamil Nadu and the Union Territory of Pondicherry through its 9 branches. Four branches are in north Tamil Nadu, operating under the directions of the head office in Villupuram. Another 5 branches in south Tamil Nadu (southern branches) operate under the control of a regional office at Thucklay. The Director of BWDA handles its microfinance operations, with support from two regional coordinators. These people constitute the senior management team. In addition to the regional coordinators, there are functional heads for various activities. The regional coordinators are supported by branch managers for handling branch operations. The Branch Managers are supported by an accountant and field officers to carry out day-to-day lending operations. The SHG animators support the field officers in recording SHG level data. Both BWS and BFL use BWDA staff and infrastructure for its lending programme. BWS lends only to SHGs for on-lending to their members. BFL also lends to the SHGs supported by BWDA. Apart from lending to SHGs, BFL also offers individual loans. These loans are offered to spouses of SHG members, BWDA staff and other individuals in the areas of operations of BWDA. BWDA has 93,343 members with 88,115 women and 5,228 men organised into 5,183 groups. BWDA has shown steady growth over the past few years. It has grown both in terms of outreach and portfolio outstanding. This growth is illustrated in the graphs presented here. The number of clients have increased steadily from 33,835 in December 2000 at the time of first rating to 93,343 in September 2004 – a growth of ~33% p.a. The client savings have also grown during the same period from Rs3.6 crores to Rs31.5 crores – a growth of ~80% p.a. The number of active clients increased from about 1,455 in December 2000 (first rating) to around 8,327 in March 2004 (rating update-2), registering a growth of ~75% per annum. Since then, the active clients have grown more than three times to 26,375 within 6 months (April – September 2004). Of these, BFL serviced 1,702 borrowers as on 30 September 2004. This growth has been on account of BWDA managing to mobilise external funds to meet the high
loan demand from the clients. These growths in outreach and client savings have increased the circulation of internal loans within the federations of groups. Internal circulation has increased over the years steadily. This has been coupled with the growth in external loans as well. The share of internal loans and external loans including BWDA and BFL loans in the 9 branches of BWDA is illustrated in the graph here. For the organisation, the share of internal loans and loans from external sources is given in parenthesis along with the legends in the graph below
For its operations, BWDA (under BWS and BFL) has availed loan funds from various sources. The information about the loan funds received by BWDA is presented in the following table Source of funds Cumulative amounts
received(Rs lakhs)
Outstanding on 30 September 2004
(Rs lakhs)
Rate(s) of interest
SIDBI 120.0 47.9 11.0%Indian Overseas Bank 128.1 25.0 11.5%Rashtriya Mahila Kosh 59.0 30.3 8.0%FWWB *110.0 79.2 11% - 13.5%HDFC 30.0 14.9 9.0%State Bank of Travancore 360.0 268.9 9.0% - 10.5%Vallalar Grama Bank 147.1 Nil 10.5%Total 954.2 466.2*60 lakhs lent to BFL @11% - 11.5% p.a.
0%
20%
40%
60%
80%
100%
Rasap
alaya
m
Cheng
ottai
Ambai
Villupu
ram
Alangu
lam
Panag
udi
Kolliya
nguna
m
Thuck
alay
Achara
pakk
am
BFL (4%)
BWS (29%)
SGSY (5%)
Bank Directly (13%)
Internal Savings (48%)
BWDA – 3rd update
9
The flow of funds to and from the microfinance programme is shown in the following diagram:
@10.0% pa. * @15%declining @15%declining Equity in BFL @15% Subscription declining (Re1-100) *the dotted line shows only one-off case of lending to PLF 2.2 Microfinance policies The organisation’s operational polices are largely the same as observed during the last rating in June 2004. Lending is mainly through groups (15-20 members each). There is a well-defined and formalised process of identification, formation and regularisation of the groups. The SHGs are organised into 311 panchayat level federations (PLFs) and 80 cluster level federations (CLFs) including 11 Block level federations. These are federations of SHGs in a panchayat village/municipal ward. On average, PLFs/CLFs comprise 15 women’s SHGs.The SHGs are represented by their Convenor and Joint Convenor. Elected representatives, President, Secretary and Treasurer, are responsible for the functioning of PLFs/CLFs. There are monthly meetings of the PLFs/CLFs, that are attended by BWDA staff. The transactions at the meeting include disbursement and collection of loans extended by the PLFs/CLFs to the SHGs, reporting of group activities and collection of monthly subscriptions from the SHGs (ranging from @Re 1 per member in the PLFs/CLFs of Northern Branches to Rs100 per member in some of the Southern branches). The collection of subscription from members helps in creating a fund at the PLF, to manage their expenses and provide loans to SHGs that need additional finances. Men’s SHGs are not federated and do not subscribe to the PLF/CLF funds. Savings BWDA does not collect savings from its clients. Savings are collected at the SHG level and these are internally circulated amongst the members. The SHGs decide the amount of savings of members and the frequency of savings (weekly/fortnightly/monthly) based on the propensity to save. This amount varies from Rs10-50 per head in the northern branches to Rs100-150 per head in the southern branches. Apart from regular fixed savings in the groups, SHG members also have the facility of voluntary savings.
Financial Institutions
BWDA (microfinance programme, BWS + BFL)
SHGs
Panchayat Level Federations
BWDA – 3rd update
10
Loan products BWDA lends both under BWS and BFL. Loan products offered by BWDA are -
Loan product Loan size Repayment
period Recommendation Collateral
SHG loans (offered under BWS and BFL both)
Rs25,000 -Rs150,000 for 5 to 10 members of SHG
1-2 years
by SHGs (resolution) and field staff of BWDA
Group joint liability (in lieu of collateral)
Staff loans (offered by BFL only)
Rs5,000 – Rs25,000 Maximum 2 years
by the regional coordinators
Repayments through deductions from staff salaries (in lieu of collateral)
Enterprise loans (offered by BFL only)
Rs15,000 – Rs50,000 to spouses of SHG members
Maximum 3 years
by SHGs (resolution) and staff of BWDA
No group liability. Collateral on case to case basis
Property loans (offered by BFL only)
Rs25,000 – Rs1,50,000 to individuals
Maximum 4 years
by SHGs (resolution) and staff of BWDA, along with legal opinion on title of collateral
Asset hypothecation in favour of BFL
All the loans are charged an interest of 15% declining. All loans are issued through cheques. Repayment of SHG loans is collected in group meetings and for staff loans, repayments are collected through salary deductions. Repayment of enterprise and property loans is through post-dated cheques (PDCs) collected at the time of disbursal. In case of prepayments, interest is not charged on the prepaid amount and there is no prepayment penalty either. There is a minor difference between the loan products offered under BWS and BFL – - Under BWS, lending is done only to the SHGs for onlending to the SHG members. A
caution deposit of 5% of the loan amount is taken for every loan disbursed. Additionally a 2% deduction is made (1% risk fund + 1% processing fee). The risk fund is adjusted against the last payment. The 5% caution deposit is withdrawable after completion of loan term. If it is not withdrawn, the borrower has the option of either contributing it as equity in BFL or earning an interest of 5% per annum payable after three years.
- In BFL loans, before the loan is disbursed, a 5% equity contribution for BFL is collected
from the clients. Property loans are for addition to existing property (eg construction on land, house extension) Not more than 90% of project cost is funded by BWDA. BFL is likely to rethink on its policy of collecting 5% equity contribution from borrowers.
Insurance
BWDA has taken a corporate agency of the Life Insurance Corporation of India (LIC). The distribution of policies to individual clients is done by those field staff, which have IRDA certification.
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3 Observations 3.1 Governance & strategy BWDA continues to perform well on governance with a grade of α−. This is the same as achieved in the last rating. It reflects the increasing experience of the organisation and a continued focus on growth, credit discipline and sustainability.
Strategy for microfinance operations BWDA is a multi-service organisation, with significant experience of working in its operational area. It has a clear demarcation of senior staff involved in microfinance, although the field staff delivers both microfinance and other development services. It has a good microfinance delivery strategy. It has successfully mobilised the local community with focus on women and created local institutions (PLFs/CLFs of SHGs). BWDA’s loan products are priced considerably low compared to other MFIs in India. APR from the loan products offered BWS is 18.4% and those offered by BFL is 15%. Its policy of not charging any interest/penalty on prepayments also reduces higher potential earnings. Although BWDA has achieved financial self-sufficiency, a higher APR on loans would help BWS earn higher returns from its operations.
Strategy for growth The microfinance program of BWDA continues to grow steadily. BWDA’s strategy of continuing expansion, while maintaining an excellent credit performance and profitable operations is commendable. BWDA also facilitates the PLFs/CLFs to take loans directly from the local banks. BWDA’s taking over of an NBFC is step towards segregating the microfinance program from other social development activities. This is a good move since incorporating a new NBFC would have called for a higher equity investment. Over a period of three-five years, BWDA intends to transfer most of its microfinance activities to BFL. This is being carried out under the guidance of the ex-CGM at RBI, a BFL Board member. The growth in outreach is likely to continue in the areas of operation of BWS. With the completion of transformation and stabilisation of operations of BFL, the portfolio of the NGO’s programme is likely to start reducing after two years.
Competition management
BWS displays good geographical concentration by focusing on clients spread over 5 districts in Tamil Nadu and the Union Territory of Pondicherry. BWDA operates in the blocks allocated under the Mahiler Thitam program of Tamil Nadu Corporation for Women’s Development (TNCWD) in the northern region. BWDA does not face direct competition in these areas. In the southern region, it operates in areas, which are not covered by other microfinance organisations. There is further scope to improve its coverage within the current operational area. Large unmet credit demand of low-income clients in BWDA’s area of operation can prompt other MFIs to enter there. With the same view, BWDA has started servicing non-SHG clients by
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offering them individual loans through BFL. Offering loans at low interest rate is a good strategy to meet competition from any new microfinance service provider in BWDA’s area of operations.
Funds mobilisation BWDA has managed to mobilise substantial amount of external funds for lending to the SHGs. BWDA can meet credit demand of its clients from BWS and also from BFL. It has been only one year since legal transfer and renaming process of BFL concluded. BWDA has been able to mobilise enough equity (over Rs1 crore) and the strategy to collect 5% loan amount as equity contribution towards BFL is commendable. However, mobilisation of debt under BFL has been rather low. To meet credit demands of clients, BWDA has mobilised external debt under BWS and it has already over leveraged it. For BWS and BFL taken together, the capital adequacy is at a comfortable level of over 23%. Lately there has been a huge demand of credit from the SHG members as the groups have started maturing. BWDA needs to focus on meeting increased credit demand of its clients by raising more external funds. With good capital adequacy, this should not be difficult, however, BWDA would also need to mobilise grants to maintain a comfortable capital adequacy position.
Experience of Institution, Board and leadership BWDA has completed 19 years of operations since its official registration in 1985 and has 7 years of experience in running the microfinance programme. It has learnt quite a lot in these years with support from SIDBI and TNCWD initiative in forming groups. The board members have long experience of development activities and good knowledge of the local area. Apart from catering to the strategic needs of the organisation, the board also provides useful inputs for the capacity building of staff members. BWDA staff and other board members do not have substantial experience of running an NBFC. Despite being a development oriented microfinance programme, BFL would have to comply with strict RBI guidelines and meet the statutory requirements. This has made the organisation dependent on the advice of a single board member and external consultants. BWDA has completed the legal process of taking over and renaming of NBFC successfully. It also needs to develop internal competencies to manage new business of individual lending through BFL. Some of these areas are - legal skills especially for assessing for collateral based lending, more rigorous internal auditing, computerisation of MIS. Till these competencies are developed, this could be a source of risk for the organisation.
Over 7 years of microfinance operations, BWDA has developed a strong second line of leadership. Most of the senior staff members – Regional Coordinators and functional heads – have been in BWDA since inception and have a good understanding of operations. Some of them are on the Board of BFL, since they have invested equity in it. They can manage the organisation in the absence of the Managing Director, if the need arises.
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3.2 Management factors BWDA displays reasonable performance on managerial factors with a grade of α−. This is the same as the previous rating grade and reflects the consistently good quality of BWDA’s human resources and its good management systems.
Human resource quality and management
BWDA has qualified and experienced management staff. The recruitment, training and induction system for all staff members is systematic and thorough. The understanding of the staff of the various operations and procedures is adequate. The field staff productivity (borrowers per field staff) has improved from 40 in December 2001 to 447 in September 2004. This is despite intensive efforts to facilitate high internal loan circulation. Although there is considerable improvement in the efficiency of staff, there is further scope for improvement, since the SHGs have started becoming self-reliant in terms of maintaining books and carrying out regular lending activities. Commitment and motivation at all staff levels is high and there have been very few dropouts in the past year. The attrition rate is very low, since the staff is local. BWDA staff also earns an incentive based on the number of insurance policies they sell to the microfinance clients. The programme can manage its growth with relatively few staff at the field level, due to the delegation of record keeping to the SHG animators and federation leaders. There is a need for more people for internal control and accounting at the head office. BWDA also needs staff with skills in legal areas to manage issues related to individual lending especially for big ticket (above Rs25,000) collateral based lending.
Accounting and MIS
At present, BWDA follows a project based accounting system, wherein each activity (including micro-credit) is treated as a project and separate ledgers are maintained for it. These are then merged at the end of the year, to present the consolidated organisational accounts. Separate financial statements for the micro-credit programme are prepared, although they do not take into account cross-subsidisation from other projects and allocation of office overheads. For BFL, separate books are maintained. BFL accounting also does not take into consideration the cross subsidisation from the NGO operations. BWDA has good accounting and MIS. At present, the record keeping is manual but it is being computerised in all the branches and at the head office. The computerised system is having some teething problems. It needs to be fine-tuned further and bugs needs to be removed. BWDA is working with the software vendor in this regard and the system is expected to be fully operational by the end of this financial year. Till it becomes fully reliable, manual record keeping would continue. All the clients have passbooks, which indicate the current status of loans and savings. SHGs maintain the records of all transactions in their registers: cash book; loan ledger; savings ledger and minute books of the meetings held. These registers were designed for the Mahiler Thitam programme of TNCWD. This gives a good recording system at the SHG level. During the last rating, it was observed that these registers did not have a provision for cumulating the figures. The recording system has been strengthened further and the figures
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are cumulated in the respective ledgers and compared. This would help the SHG animators in detecting errors, if any, even before the cross checks done by field staff. The branches have records of SHGs including membership details. Apart from these, records of sanctioned loans and repayments are maintained group wise. The same data is passed on to the head office, where it is consolidated from time to time. BWDA issues loans to groups vide cheques. The disbursement amount is entered in the loan disbursement ledger and also in the month-wise and group-wise loan ledgers. There are separate loan ledgers for each lender (RMK, FWWB, WDC SIDBI, IOB, VGB). The organisation provides a clear repayment schedule to the group (and the original copy is kept at the Head Office). The groups make repayments into BWDA accounts at various bank branches. The triple challan system acts as vouchers for records of deposits. The southern regional office is treated as a profit centre. The financial statements prepared at the southern regional office reflect all expenses, including the cost of funds transferred by the Head Office. However, there is no system of allocating head office overheads to the regional office. To get a better picture of comparative performance of the two regions, financial statements should also be prepared for the northern region and head office costs should be apportioned to the two regions. BWDA creates loan loss provisions based on the ageing of its portfolio. Loans overdue for more than a year and a half are written off. The field officers are not told about the write off policy in order to maintain the pressure of recovery on the groups.
Tracking system for overdues
The tracking system of BWDA is reasonably good. Each branch office maintains very detailed Demand Collection Balance statements (DCB) and a Chitta book (basic book of data entry on loans at the branch level). Age-wise analysis of overdues is done and the overdues are tracked group-wise. The names of delinquent SHGs are mentioned in the monthly PLF/CLF meeting. This acts as a deterrent for the delinquent SHGs. During the rating team’s visit to some of the SHGs, instances of internal default by members were observed. In all such cases, the internal savings of the group had been used for ensuring the timely repayment of loans by the SHG to BWS. Although the tracking of delinquent SHGs is diligent, tracking of delinquent individual borrowers is not adequate. This is not likely to have a negative effect on the repayments to BWS in the short run. However, if internal default increases and goes unnoticed by BWS, it may increase the incidence of delinquent individual borrowers and adversely affect the good credit culture of the programme. This can cause a reduction in circulation within the SHGs and their federations in the long run. BWS should also track internal circulation within the SHGs and prevent any abnormal rise in internal defaults. The recording of pre-payment collections in DCB is not appropriate. Collections more than the scheduled (demand) amount are added to the demand figure. This inflates the demand figure. It is not an alarming practice since interest on loans is charged on declining balance basis. No charge is made on the prepayments. However in terms of information for decision-making, it hides prepayments and also marginally inflates the repayment rates.
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BFL/BWDA is likely to correct this practice since it has taken note of this anomaly during the feedback session with the rating team.
Financial planning and control systems
BWDA has an informal financial planning and control system. Financial planning is a bottom-up system, in which annual targets are set by the Branch Managers in consultation with the Regional Coordinators, depending upon the needs felt at the field level. The estimates are added up region wise and communicated to the head office for sourcing external funds. BWDA has recently prepared very elaborate business as well as financial plans with inputs from the Strategic Business Plan workshop conducted by FWWB. Although, the targets are very stiff in comparison with the trend shown by the organisation in the past 5 years, they are achievable. The usefulness of this planning exercise also depends on the ability of BWDA to undertake variance analysis and its ability to modify business plans as well as the performance targets in light of the achieved performance. Cash planning starts at the branch, wherein each month the Branch Manager estimates the requirement based on disbursement demands. This is communicated to the regional coordinator. It is then consolidated at the HO. If required, the HO transfers funds to the branch on a fortnightly basis. Excess cash at a branch can be directly transferred to another branch after obtaining Head Office approval. But for the consolidation of branch requests, no separate projections of cash inflows and outflows are made. BWDA has a moderate internal control mechanism and a number of internal checks to detect and prevent accounting errors and misappropriation at the head office level. A team comprising a full time internal monitor and two assistant internal monitors have started carrying out the internal audit function from April 2004. This auditing team conducts random checks of the records at the branch level and the head office level. The internal audit process focuses on clerical errors, compliance with formats (lack of voucher numbers, ledger folio etc) and accuracy of MIS reports. At the branch level, the data is reconciled with the records at the head office however the records at the branch level are not tallied with the SHG vouchers. There is the need to increase the rigour and depth of internal audit in order to reduce the potential for fraud and misappropriation by staff members. External auditors appointed by the SHGs, audit the records at the SHG level annually. The head office staff audits the accounts at the PLFs/CLFs. All the projects of BWDA are audited annually after preparation of final accounts.
Quality of clients/member groups
Visited member groups showed good performance on repayment of loans and overall discipline. Some of the PLFs/CLFs have been refinancing loans to SHGs. During the rating visit, it was observed that there are instances of internal defaults within groups. This is off-set by using respective member savings. Group meetings concentrate largely on financial transactions and are conducted efficiently. In addition, awareness about the organisation’s rules/norms is very high and members display a clear understanding of loan products, amounts, instalments and interest rates. This reflects the high degree of consistency in policies of the organisation and their effective and quick dissemination at the lowest level.
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BWDA tried to lend to SHGs through PLFs/CLFs. However this experiment did not work since the group leaders in the federations tried to prioritise their personal credit requirement over the requirement of other group members. Therefore, BWDA continues to lend directly to the SHGs. In the older SHGs, group leaders have started maintaining the group records. The role if BWDA staff in record keeping at the SHG level is reducing gradually. However, as the scale of operations grow and the volumes of lending increase, there is a need for increasing the monitoring of groups by the staff.
Infrastructure
BWDA has an adequate infrastructure base for its microfinance programme. As on 30 September 2004, it had a net fixed asset base of Rs37 lakhs for the microfinance programme. This includes computer hardware and software, vehicles, furniture and fixture at branches and at the head office. Six of the branches operate from rented premises. The current level of infrastructure is adequate and is being employed effectively in the overall management of the microfinance programme.
3.3 Financial performance The financial performance grade of BWDA is reasonable at α. This is an improvement over α− achieved during the last rating. It reflects good performance on portfolio quality, repayment rate, profitability and sustainability.
Credit performance and asset quality
BWDA has good credit performance. It reports no defaults in payments to its lenders. On its own portfolio, the cumulative repayment rate is 97.6% and PAR60 was 1.3% on 30 September 2004. This shows a marked improvement over the last 3 years (cumulative repayment rate of 92.3% and PAR60 of 9.9% reported in December 2001). The performance is good despite rapid expansion and handling huge volumes of transactions. This is due to a strong credit culture and high levels of discipline among clients and at all levels of staff.
BWDA’s portfolio is reasonably well diversified with about 34% of loans in trade, 30% in animal husbandry, 30% in agriculture and the rest in other activities, comprising health related emergencies, education and property loans.
Mobilisation of funds
BWDA has succeeded in mobilising funds from apex lending institutions (RMK, SIDBI, FWWB), private banks like HDFC, as well as from local bank branches of Indian Overseas Bank, State Bank of Travancore and Vallalar Grameen Bank. Repayments to these financial institutions have been timely. With diversified lending sources, BWDA is now in a position to negotiate for lower interest rates on funds for on-lending. For BFL, the growth in portfolio has been constrained by the mobilisation of funds. It has been only one year since the legal process of taking over and renaming was completed. Since then, BFL has mobilised Rs60 Lakhs from FWWB. After September 2004, BFL has
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obtained another Rs45 lakhs from FWWB and got a sanction of Rs3 crore from SIDBI. The weighted average cost of funds (including caution deposits) is 10% while the weighted average cost of borrowings is 10.8%. Subsidised loans from RMK are likely to reduce in volume as the microfinance operations gradually move under BFL. However, the overall cost of borrowings is likely to remain the same due to improving terms from other lenders. FWWB is a consistent lender of BWDA, which lends at a cost of over 14% p.a. (effective). With an APR of 18.4% and current OER of 7.4%, sourcing loan funds from FWWB for on-lending to groups is a loss making preposition.
Equity mobilisation for BFL has been fairly good so far – with Rs1 crore mobilised from Board members, staff and SHG members. In the near future, BWDA intends to improve this by educating its SHG members about the returns they can earn from investment in BFL. Apart from this, BWDA has also obtained grants from TNCWD for the formation of groups and from SIDBI for capacity building.
Asset, liability and equity composition
BWDA has 82.3% of its assets in the portfolio and a reasonable 4.7% as cash. The proportion of idle funds (9.3% in December 2001) has gone down, due to consolidation of the multiple bank accounts previously held for BWDA’s microfinance program. On the liability side, the organisation has relied mainly on external debt (69.1%) for funds. The risk weighted capital adequacy ratio has shown an improvement from 13.4% (first rating update in December 2001) to 30.4% in the previous rating (March 2004). This has been leveraged to obtain external debt and the capital adequacy now is 23.3%. The increase in capital adequacy over last three years can be attributed to the equity investment in BFL by the SHG members, staff and Board members of BWDA (Rs1 crore) and also the infusion of grants by SIDBI (~Rs10.5 lakhs) during the last financial year. Going by the growth plans of BWDA, as it mobilises external debt, it would require more grants under the microfinance programme to maintain a healthy capital adequacy.
Profitability and Sustainability
The organisation has improved its overall performance on profitability. It had a positive average Return on Assets (RoA) of 0.2% as on 31 March 2004 compared to –47% as on 31 December 2001. This has further improved to 1.6% as on 30 September 2004. While its yield on portfolio is good (16.3%), its operating expenses are relatively low (OER at 7.4%), which show an improvement over the previous rating (OER at 11.3%). This reflects a marked improvement in staff productivity and reduction of head-office overheads. A good Operational Self-Sufficiency (OSS) of 111% and Financial Self-Sufficiency
101%
23%17%
111%
24%
18%
1.6%
-118.5%
-47.7%
10%
30%
50%
70%
90%
110%
Dec-00 Dec-01 Sep-04-200%
-150%
-100%
-50%
0%
50%
100%
FSSOSSRoA
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(FSS) of 101% show that BWDA’s microfinance programme is sustainable.
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4 Conclusions
Strengths Weaknesses
Organisational
Good credit culture Increased focus on micro finance activities Good second line of leadership
Organisational
Relatively less experience of NBFC management
Managerial
Good MIS and accounting system Effective tracking system for overdues Stable and experienced staff SHGs increasingly becoming self reliant in
terms of record keeping and accounting
Managerial
Relatively weak internal audit process Absence of legal team Computerisation still not operational Instances of internal default in the
groups
Financial
Good repayment rate and portfolio quality High internal loan circulation Good Capital Adequacy Good performance on profitability and
sustainability
Financial
5 Creditworthiness
BWDA has achieved a rating grade of alpha minus (α−).4 In terms of creditworthiness this implies reasonable safety. On governance, management and financial aspects, BWDA shows reasonable performance. BWDA’s success in having good credit performance and a reasonable profitability, while at the same time growing at a good pace, is commendable. With the completion of transformation and stabilisation of operations of BFL, the performance of the organisation is likely to improve in the future.
In M-CRIL’s view, on account of significant field presence, overall good performance, commendable approach to sustainability and the growth plans of the organisation, BWDA can absorb – from all sources – funds of Rs15.5 crores (including grants of Rs50 lakhs) over the next one year for on-lending to SHGs. A cross guarantee is recommended for the loans issued to BWDA (for lending under BWS) and BFL. It is also recommended that BWDA should limit its individual loan portfolio to within 6% of total portfolio of BWDA. A rating update after one year is suggested to ascertain changes in the creditworthiness and absorptive potential of the institution. This rating is valid, subject to no other substantial inflows of loan funds into the organisation beyond the limits specified here and to no other significant changes in the organisational structure and external operating environment.
4 The Rating Grade given measures performance on the rigorous standards established by M-CRIL. The
assessment uses an instrument designed specifically for the conditions and nature of MFIs operating in Asia and is comparable with other ratings done by M-CRIL in this region.
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Financial statements for BWDA’s microfinance operations
Balance Sheet as on 30 September 2004 30 September 2004 31 March 2004Assets Rs Rs Rs Current assets Cash in hand and bank 31,91,715 26,58,730 Interest bearing deposits 13,87,500 13,87,500 Advances to other projects 34,17,998 23,83,455Deferred expenditure 2,62,347 3,60,000 Loans outstanding Gross loans outstanding 5,61,00,559 3,25,85,739 (Loan loss reserve) (5,61,006) (4,87,902)Net loans outstanding 5,55,39,553 3,20,97,837
Total current assets 6,37,99,114 3,88,87,521 Long term assets Net property and equipment 37,08,528 30,53,206
Total long term assets 37,08,528 30,53,206
Total Assets 6,75,07,642 4,19,40,727 Liabilities and Networth Current liabilities Caution deposits from borrowers 52,41,843 43,93,670 Risk fund 4,87,375 4,32,095 Other current liabilities 1 1,76,443 57,991 Other current liabilities 2 2,55,016 4,92,317 Deferred Taxes 69,746 69,746
Total current liabilities 62,30,423 54,45,819 Long term liabilities Long term debt SIDBI 47,86,320 65,48,090 IOB 24,99,220 34,93,900 RMK 30,37,887 38,00,000 FWWB 79,20,465 36,30,000 HDFC 14,92,639 20,00,000 SBT/VGB 2,68,86,103 53,95,817
Total long term liabilities 4,66,22,634 2,48,67,807Net worth Paid in equity 1,06,97,990 86,79,840 Statutory reserve 18,746 2,797 Donated equity 1,24,31,982 1,25,26,853Capital grants for fixed assets 21,80,697 16,00,000 Retained net surplus/(deficit) (1,10,87,517) (1,11,00,729)Current net surplus/(deficit) 4,12,685 13,212
Total net worth 1,46,54,585 1,16,27,102
Total Liabilities and Net Worth 6,75,07,642 4,19,40,727
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Income Statement
for the period 31 March 2004 – 30 September 2004
Income Rs Rs Interest and fees on loans 36,12,052 Other income 11,42,747
Total income 47,54,799 Financial costs Interest on borrowings 22,99,850 Processing fee for loans 2,80,000
Gross financial margin 21,74,949 Provision for loan losses 73,104
Profit before tax (PBT) 4,58,134 Tax 29,499 Profit after tax (PAT) 4,28,636
Appropriations Statutory reserve 15,951 Deferred tax for previous years Transferred to Balance Sheet 4,12,685
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Notes to the financial statements
1. The Financial Statements have been estimated for the microfinance operations and represent an
approximate picture only. This has involved appropriate modifications to the existing financial statements using data gathered and assumptions made during the rating exercise and also allocations based on an estimation of the degree of use of overall fixed assets and the value of the total staff time being spent on microfinance activities. Such modifications can result in differences between the income statement and balance sheet prepared by the organization itself and the statements presented above.
2. The components from the statements of BFL have been included in the financial statements 3. Income includes interest income, fees and earnings from other microfinance related services offered by
the MFI rated. All loan portfolio related income is recognised only when it is actually received (cash basis). Grants allocated to the organisation’s microfinance programme are treated as donated equity in the balance sheet (and not regarded as operational income).
4. Financial costs (interest on borrowings and savings, if any) and operating costs are calculated on an accrual basis. Loan loss provisioning expense and the corresponding balance sheet entry (loan loss reserve) has been computed based on the quality of the portfolio.
Glossary 1. Cumulative repayment rate
Ratio of cumulative principal recovered (net of pre-payments) to the cumulative principal due till the date of measurement.
2. Portfolio at risk (PAR60) Ratio of the principal balance outstanding on all loans with overdues greater than or equal to 60 days to the total loans outstanding on a given date.
3. Yield on portfolio The interest income on loans divided by the average loan portfolio for the year.
4. Other income to average portfolio Total income other than from the interest on loans divided by average portfolio.
5. Financial cost ratio Total interest expense for the year divided by the average portfolio.
6. Loan loss provisioning ratio Total loan loss provisioning expense for the year divided by the average portfolio.
7. Operating expense ratio Ratio of salaries, travel, administrative costs and depreciation expenses to the average loan portfolio.
8. Average loan portfolio This represents the average loan outstanding for the year computed on a monthly basis.
9. Average total assets This represents the average total assets for the year calculated on an annual basis.
10. Operational Self-Sufficiency Ratio of total income to total costs for the year.
11. Financial Self-Sufficiency Ratio of total income to total adjusted expenses for the year. Adjustments have been made for subsidised cost of funds (w.r.t. market interest rate), equity (w.r.t. inflation) and in-kind donations.
12. Risk weighted capital adequacy ratio Ratio of networth to risk weighted assets (Risk weights: 100% for all assets except the following: fixed assets & interest bearing deposits: 50%; cash 0%).
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Projected Cash Flows and Financial Statements for five years The following assumptions and projections - derived from the limited information available from the
organisation on its future financial projections – are tentative in nature. These should not be viewed in isolation nor be regarded as a basis for investing in the future - only the main risk rating report provides an opinion on investments.
All assumptions are based on the data gathered during the rating exercise and the savings and credit methodology used by the organisation.
1 Basic Assumptions (see also Notes to Cash Flow Projections below)
For the year ending: Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 SHG members, ‘000 93 112 131 151 170 187Repayment rate from groups 97.6% 97.7% 97.8% 97.9% 98.0% 98.1%Loan loss reserve ratio 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Number of active loans/borrowers 26,375 31,960 41,117 48,873 56,214 65,938Number of loans disbursed 31,169 40,158 47,639 54,748 64,251 Average loan size to borrowers (Rs) 8,790 9,564 9,932 10,137 10,251 10,321
For the year ending: Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Operational self-sufficiency 110% 135% 147% 154% 159%Return on average assets 1.3% 3.1% 3.5% 3.6% 3.7%Operating expense ratio 2.9% 1.8% 1.6% 1.5% 1.5%Average outstanding/borrower (Rs) 8,289 9,662 9,160 8,708 8,667Portfolio growth rate 372.2% 49.9% 12.7% 9.3% 16.8%Savings to total assets 3.9% 3.0% 2.1% 1.0% 0.2%Debt/equity 9.7 7.9 5.4 3.8 3.1Risk weighted capital adequacy ratio 10.0% 11.8% 16.4% 21.6% 25.1%
6 Notes to the projections 1. The Operating expense ratio is based on current levels and is projected based on changes in
overall productivity, delivery mechanism and growth in staff, branches and portfolio. 2. Estimated external borrowings are subject strictly to performance based on the findings of this
microfinance capacity assessment (credit rating). 3. Interest income is taken as [yield on portfolio*average portfolio for the year]. Yield movements
are projected to stay the same, as there is not likely to be any change in the overall interest structure.
4. Other income is the income that the organisation earns on membership fees, sale of pass books, and service charges.
5. Disbursements are taken as the [number of loans disbursed during the year*average loan size to borrowers].
6. Estimates on growth in outreach and demand for loans from the organisation have been made based on current growth levels and future expansion potential and capacity.
7. Repayments to lenders is 33% per annum on the projected liability structure and the actual repayments due on the present outstanding debt.
8. Interest paid is taken as the [average cost of external funds * the average external borrowing liability figure].
9. In the projections the net worth figure includes donations and equity, retained surpluses and current surplus.
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M-CRIL’s Microfinance Rating Symbols
M-CRIL Grade Description
α+++ alpha triple plus
Highest safety, excellent systems most highly recommended
α++ alpha double plus
Highest safety, very good systems most highly recommended
α+ alpha single plus
Very high safety, good systems highly recommended
α
alpha
High safety, good systems
highly recommended α− alpha minus
Reasonable safety, good systems
recommended β+ beta plus
Reasonable safety, reasonable systems
recommended, needs monitoring β beta
Moderate safety, moderate systems
acceptable, needs improvement to handle large volumes
β− beta minus
Significant risk, poor to moderate systems
acceptable only after improvement γ+ gamma plus
Substantial risk, poor systems
needs considerable improvement γ gamma
Highest risk, poor systems
not worth considering
BWDA – Social rating
Bullock Cart Worker’s Development Association (BWDA) Villupuram, Tamil Nadu (India)
Social Rating
β+ beta plus
Assessment
Good adherence to social mission; reasonable application
BWDA has a clear statement of social mission, targeting the ‘poor and vulnerable’ with good adherence reflected in outreach to disadvantaged groups and a substantial number of the poor as members of Self Help Groups (SHGs). A moderately supportive approach to client empowerment has resulted in strong group systems but limited financial awareness among group members. BWDA lacks adequate systems to track its social performance and responsiveness to the financial needs of its target group. The SHG model gives group members the flexibility of directly accessing their group savings for credit, with some scope for bank linkage. BWDA offers standard products, which could be more adaptive to diverse needs and different clientele. Issues that need immediate attention are new product development and effective communication systems with clients to improve their awareness of the microfinance services BWDA offers.
for Micro-Credit Ratings International Ltd
Frances Sinha, Director
BWDA – Social rating
2
Social rating Assessment5
A Social mission and systems β B Depth of outreach β+ C Client feedback β+
Overall β+
Context factors: State of Tamil Nadu, South India
Supporting features Good infrastructure and communications High literacy – including for women Relatively supportive cultural environment for women State government financed training to SHG leaders (Mahalir Thittam programme)
Risks - Drought conditions in many districts over 2-3 years - Tidal Tsunami effects (post-visit) - welfare requirements in some areas of Tamil Nadu - State government initiatives undermine credit discipline (subsidised lending programmes for
Scheduled Castes) and increase costs to clients (federations).
Sample for social rating
The findings for this rating are based on review of BWDA records and operations manual, discussions with management and field staff, and questionnaire based interviews and focus groups of clients. The client sample was selected as follows: Sample Frame BWDA operates mainly in the following five districts of Tamil Nadu: Villupuram, Cuddalore, Kancheepuram, Tirunelveli and Kanyakumari. Clients are 95% women, in groups which are mainly rural (90%).
Field Sample: • In the five main districts of operation, 7 villages and 2 areas in municipal towns were drawn at
random from a list of branches having both new groups (functioning for less than 2 years) and some older groups.
• In each area, Focus Group Discussions (FGDs) were held with members from both recent and older groups. The FGDs covered issues relating to group functioning, client satisfaction and empowerment.
• From the 9 areas, a sample of 240 clients was drawn (using random numbers) from recent groups (formed within the previous two years) for a questionnaire, which covered socio-economic indicators of the household and awareness questions about BWDA. Coverage of recent clients serves to reflect current targeting of the programme.
• A sample of 240 provides a precision of within 0.05 percentage points, at a statistical confidence level of 95%.
5 M-CRIL’s grading sheet is attached at the end of the report.
BWDA – Social rating
3
Organisational Profile
(as on 30 September 2004)
Legal form Years of mF Model Number of % rural Number of % women Operation SHGs SHG members
BWDA: Society
BFL (BWDA Finance Ltd): Non-banking Finance Company
7 years
SHG
5,183
90%
93,343 [15-20/SHG]
94.3%
Microfinance programme
Internal Loan Borrowers Average loan Depth Staff savings
of SHGsa (Rs)
portfolio of MFIb
(Rs)
from MFIc
size from MFI to borrower
(Rs)
ratiod Total % women
31.5 crores 5.6 crores 26,375 8,790 10.2% 68 84%
a internal savings maintained in group accounts and not collected by BWDA. b of which Rs1.5 crores is under BFL c members of SHGs (BWDA loans are technically to the SHGs) d Depth ratio refers to the average loan balance as a percentage of GNP per capita. This measure is used internationally as a proxy indicator for depth of poverty outreach. A depth ratio of <20% signifies outreach to ‘poor or low-end clientele’
Social mission
Mission Tracking systems Client empowerment
Clear statement of social mission
Stronger adherence among senior staff
Inadequate systems to track achievement of social mission or to assess financial needs of target
group
Supportive to women clients
Initial guidance to groups but inadequate follow-up;
Ad-hoc linkages to other support programmes
Outreach – operating area
State Districts Within districts
Tamil Nadu HDI 0.531
Rank in India: 3
Two districts on list of ‘150 most backward’ in India; though all above
average development ranking for infrastructure, literacy
Covers some poor pockets, drought affected areas
BWDA – Social rating
4
Outreach – client profile
Client household information, based on sample survey of recent client households [N=240] Household access to formal financial services Disadvantaged groups
Bank savings account Bank credit SC/ST Woman headed households
18% 13% 15% [State – 20%] 14%
Below Poverty Line
International: ‘$1-a-day at PPP’a Local – State b ‘Very poor’ c
Depth: 33% 26% 4.5%
Number of SHG members: ~33,000
~ 4,400a International poverty line: $1.08 per capita/day at purchasing power parity available for end 2003 (= Rs14.99, World Bank 2004); adjusted to rural and urban costs in Tamil Nadu based on State poverty line data. State equivalents estimated at Rs12.90 rural, Rs20.01 urban b Local poverty line: rural Rs11.86, urban Rs18.78 for Tamil Nadu; available for 1999-2000 (GOI, 2002) and updated to 2004 using CPI for rural agricultural workers and for industrial workers c ‘Very poor’ category derived from PRA methods and index scoring of quality of life indicators
Client feedback
Financial awareness Group systems Satisfaction Exit
Know own savings
Women encouraged to visit banks
Strong group discipline and agreement; regular meetings
Transparent transactions
Safe place to save
Low loan interest rate
Flexibility within groups (internal lending)
Low rate of drop-out (~5%)
Low awareness of BWDA products & processes
High dependence on leaders without rotation of leadership
Low member awareness of group records/accounts
Delays in access to credit
Standard MFI products; do not match range of credit needs
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