Sanchetna Financial Services Pvt.

Ltd.March 2011

This Document is CONFIDENTIAL and its circulation and use are RESTRICTED

• Introduction

• People

• Products

• Opportunity

• Business Model & Core Business

• Field Innovations & Support Systems

• Key Partners

• Operational & Financial Performance

• Projections

• Utilization of Funds

• Regulatory Aspects & Impact

Management of Sanchetna is run by young professionals and yet very experienced and qualified individuals. With over 31 years of combined relevant management experience, the mandate of the organization is to reach the poor unbanked clients in some of the poorer states of India. The organisation has so far reached out to over 8000 families in 5 districts of Central Uttar Pradesh. Currently, it provides micro-credit services bundled with loan cover insurance. In the very first year of its operations, it was rated by M-CRIL. A year later (in 2010), it was upgraded to +.

 

Key Parameters as on 28th Feb 2011

Particulars Detail

Date of formation 8th June 2008

Areas of Operation Uttar Pradesh

Portfolio outstanding INR 45.7 Million

No. of Members 8075

No. of Active Borrowers 6611

Number of branches 7

No. of Loan Officers 20

Portfolio At Risk > 30 days (%) 0.3%

MISSION STATEMENT

“To increase the productive capacity of the underserved people by providing sustainable financial and market led business services, in a socially responsible manner”

VISION STATEMENT

“To be the most preferred MFI to the stakeholders by reaching One lakh clients by the year 2015”

Lokesh Kumar Singh- Managing Director: • Around 7 years of professional experience in different fields.

• Led operational expansion at SKS Microfinance Pvt. Ltd. (India’s largest NBFC-MFI) between 2004 and 2007 in 12 states including UP, MP, Rajasthan & Bihar

• Built and managed a loan portfolio of over Rs. 200 crores with 100% repayment rate

• Recruited and managed over 1200 staff from field assistants to senior management MBAs

• Postgraduate Diploma in Rural Management from IRMA, 2004.

Nagendra Singh Rajawat – Manager Finance & Accounts: • Around 7 years of professional experience

• At HDFC Bank, handled clients of the Microfinance division of the bank in the Eastern India, including Bandhan, Arohan, Village Financial Services, RGVN (Rashtriya Gramin Vikas Nidhi) etc. Successfully exited from many unprofitable and defaulter clients. Later, looked after the Risk Management function for the Microfinance division of the Bank

• Started & consolidated microfinance operations for SKS Microfinance Pvt Ltd in the state of Rajasthan

• Postgraduate Diploma in Rural Management from IRMA, 2004.

Senior Management :• All senior staff (in all departments) have Field level microfinance experience in various geographies

i.e. AP, MP, Jharkhand, Maharashtra, Odisha, Rajasthan, UP etc.

• Are professionally qualified; and are Equity-holders in the company

Biswanath Swain – Manager Operations: • 8 years of experience in microfinance operations in various geographies

• Worked as City Manager with Nirmaan Bharati (NB) from Nov ‘06 to June ’08. Set up NB’s Varanasi operations acquiring 11,000 members, managing a loan portfolio of Rs. 8 crores & recruiting over 40 staff

• Worked with Adhikar Microfinance since inception in 2003 to 2006; As Area Manager at Adhikar, helped acquire over 15,000 clients with loan portfolio of Rs. 2 crores & 99.9% repayment rate

Niraj Pareek – Manager Human Resources: • Around 4 years of professional experience in different fields.

• As HR Analyst at Accenture India in Bangalore, recruited for over 150 different IT skill sets.

• Was Area Manager at Nirmaan Bharati and looked after Varanasi and Dehra Dun operations.

• Post Graduate in HR from XLRI – Accenture HR Academy, 2007.

Deepak Kumar Nay ak– Executive Internal Audit:

• Over 5+ years of microfinance experience

• Worked with various MFIs such as Adhikar, Biswa and Chaitanya

• Worked in various functions such as Internal Audit, Operations, Finance and HR

• Was responsible for managing the operations at Chaitanya in his last assignment

• PG in NGO Management from EDII, Ahmedabad

• Prabal K Sen, Professor-Economics, XLRI:

Prof. Prabal Sen has served as a senior public sector banker for over two decades. He has offered consultancy services, among others, to the Ministry of Rural Development, Government of India & SIDBI Foundation for Micro Credit. Also taught at Burdwan University & IRMA (Institute of Rural Management, Anand).

• Rajesh K Aithal, Associate Professor-Rural Marketing, IIM Lucknow:

Rajesh is Fellow-IRMA. Rajesh has close to a decade of professional experience, in which three years are in sales and distribution and the remaining in teaching.

• Sachi Shenoy, Innovations Manager, Co-founder, Upaya Social Ventures:

Sachi holds a B.A. in Economics and an M.B.A. in Finance and Entrepreneurship from the University of Chicago. Sachi has also worked at New York-based CDVCA, JP Morgan Chase, and Price Waterhouse LLP. Also worked as Innovations Manager at Unitus for about 4 years.

• Manoj Sharma, Deputy Program Director, MicroSave India - A development finance and SME specialist with more than 15 years of experience. Coordinates MicroSave’s India operations. During his time at SIDBI, Manoj was part of the SME financing team which negotiated a USD 225 million assistance package.

• Mohammad Amin, CEO , Adhikar - He has vast experience in the field of development and has so far authored 4 books on Microfinance. Currently serving as Executive board member of Sanhati (Network of NGO) in Orissa.

• Krishnan Rajaram - Krishnan has over 8 years of experience in the IT and financial services industry focused on institution building, change management and managing business operations. Krishnan is a Chartered Accountant, Certified Financial Planner and an alumnus of the Indian Institute of Management, Bangalore. He currently lives in London.

• Krishna Tiwary – Lead Partner in a CA firm, Krishna Anurag and Company, based in NOIDA. Providing advisory services to ICICI Bank, Power-Grid Corporation of India, and Sphere Partners.

State Total Microfinance Clients

Share of state to

total clients

(%)

State Populati

on

% share of

population

Number of Poor

(2004-05)

% share of poor

Microfinance

Penetration Index

Microfinance

Poverty Penetratio

n IndexUttar Pradesh

3,613,118

6.10

180,990,0

00

16.43

59,003,000

19.56

0.37 0.31

Uttarakhand 337,625

0.60

9,123,000

0.83

3,596,000

1.19

0.69

0.48

Rajasthan 2,335,369

3.90

61,525,00

0

5.59

13,489,000

4.47

0.70

0.88

Bihar 1,455,981

2.50

89,776,00

0

8.15

36,915,000

12.24

0.30

0.20

Madhya Pradesh

1,312,668

2.20

65,605,00

0

5.96

24,968,000

8.28

0.37

0.27

Total 15.30 36.96 45.74

Comparison                Andhra Pradesh

13,061,436

22.00

80,147,00

0

7.28

12,610,000

4.18

3.03

5.27

• UP, Uttarakhand, Rajasthan, Bihar & MP are among the most populous states in India

• They are also some of the poorest – almost 45% of India’s poor are in these states

• However, microfinance penetration in these states is amongst the lowest in India

• Therefore, starting Operations in UP was a result of a compelling business logic.

Source: Sa-Dhan Microfinance Report 2008

• Western & Central UP

• Population: Around 4.5 Million

• Maximum of 3 other MFIs operating in these areas

Microfinance Outreach in Uttar Pradesh

Clients outreach

533,041

Portfolio outstanding Rs. 347 crore Number of districts served 36Number of poorest districts 15

Source: Sa-Dhan Microfinance Report 2008

Proposed Expansion Area

Current Area of Operation

Revenue

Stages % Margin (of Loan Portfolio)

Current Projection

Group Training 1.3% 0%

Loan Disbursement 2% 2%

Loan Repayment 25.2% 24%

+ Margin in Asset Loan 1.5% 2%as Rickshaw and Pushcart

Ass: 10% of total Assets

Grand Total 30% 28%

Costs

Stages % Margin (of Loan Portfolio)

Current Target

Ops. Expenses 15% 10%

Financial Exp. 11% 13%

Loss Provision 0% 1%

Gross Margin 3% 4%

Ass. Leverage of Debt/Equity – 5.67

ROE 6.67% 26.68%Revenue: Interest on loans; other financial income

Costs: High operating costs due to door-step delivery, small ticket size, shorter repayment frequency

Service: Financial Services – Micro-credit (large volume of small ticket loans to those not served by formal financial sector); Door step delivery; primarily weekly collections; Simple paperwork

Funds: Investors’ money; leveraging this to raise debt funds from banks

Risk Mitigation: Loans spread across large population (granular portfolio); Loan cover life insurance

Loan Purpose Design

Group Loans Group based loan for providing working capital

Rs. 2,000 – 15,000 @ 12.5% flat45 weeks repaymentIncreasing by Rs. 2000 every loan cycle

Top Up Loans To meet additional fund requirements after successful repayment for 23 weeks

Upto Rs 6,000Increasing by Rs 1,000 every loan cycle

Individual After minimum two loan cycles to individuals for enterprise development

Rs. 30,000 and aboveMonthly repayment @ 24% per annum

Loan cover insurance

Cover the client and spouse against death for the loan outstanding

@ Rs. 7/1000 Rs. Among the best deals in the microfinance space

• Video recording of Sanchetna Eligibility Test (SET)• Financial literacy : SFSPL undertake financial literacy drive for its clients.

They include aspects like need for ethics and discipline with financial commitments, basic arithmetic of financial transactions and awareness on savings

• Credit plus Activities (philosophy behind setting up Samridhi)• Inculcating savings habit among clients: Providing piggy-banks to clients

to indulge in voluntary savings. These savings are managed by the clients themselves

• Clear client communication: Transparent way of declaring loan terms during the 3 day Financial Literacy Training (FLT)

• Teaching members to sign their names

Organizational culture of open discussions and quick decisions making coupled

with young, dynamic & experienced team fosters experimentation:

• Loan to male members

• 3-member JLGs (Joint Liability Groups) instead of the prevailing practice of

forming 5-member JLGs

• Enterprise Loans with bigger ticket size about 200 in number of quantum Rs.

30,000 – 50,000

• Conducted feasibility analysis of providing short-term agricultural loans

• Piloting the loans at field with monthly repayments

• The loans given by Sanchetna are used for a variety of activities, which diversifies the risk to the portfolio.

• About 16% of the portfolio is into livestock & Sanchetna has planned some business support around dairying.

• Similar profiling in future would help Sanchetna to shortlist an activity for such business support.

• Using in-house developed software from day One of Inception, therefore can be customized to accommodate newer products / services

• Updated branch-level / field-level transactions on a daily basis

• Client level records could be fetched

• Portfolio-related transactions automatically get updated in the Accounting software

• Trials of a new software which would be run over the web would start in April-11; using this, real-time data of the branches would be available; it would be fully rolled-out in 1st of FY 2011-12

• In house built HRMS software taking care of various needs such as recruitment, pay roll, attendance, database management, etc.

• High focus on Training and Development with a training calendar in place

• Incentive structure focusing on both quality and quantity

• Alignment of salary levels across the organization

• Equitable HR Policies such as travel and reimbursements are almost similar across levels

• Shared ownership – Entire management holds stakes in the company

Sanchetna gains valuable insights and inputs through collaboration with other best-in-class institutions, association with whom helps to build advisory, capacity building funding support and insurance needs for its core needs:

• NABARD has provided us with a subordinated loan / tier 2 capital support as well as debt funds.

• Trust Microfin Network (TMN) is our strategic partner and has been our oldest & biggest funder.

• Ananya’s (formely FWWB) support during our initial stages has been instrumental in our continued growth.

• HDFC Bank, the first private sector bank to get associated with us.

• IDBI Fortis has partnered us to insure all the clients, while Birla Sun Life Insure is taking care of the spouses of the clients.

• We have tied up with Reliance General Insurance for covering all our employees under the Personal Accidental and Health Insurance. The company has also done Fidelity and Cash-in-Transit Insurance to mitigate any theft or disaster.

Key Partners

• In the first quarter of FY 2011-12, it shall surpass the milestone of having 10,000 clients. • Since Sept-10 when the crisis unfolded, most MFIs have registered a de-growth. However,

Sanchetna’s loan book grew from Rs 38 Million in Sept-10 to about Rs 50 Million by March-11.

• Sanchetna currently has 5 lenders & has a borrowings of Rs 41.89 Million as on 29-March-2011.

• Of the total debt, Rs 10 Million & Rs 7.5 Million has a moratorium of one year and two years respectively. It helps us to manage the cash flows.

 Financial Year2009-10(Actual)

2010-11(Provisiona

l)

2011-12(Projecte

d)

2012-13(Projecte

d)

2013-14(Projecte

d)Outreach Number of Active clients 3245 7200 20,063 36,985 58,705Gross Loan Portfolio (INR Mn) 20.32 50.00 147 291 506Number Of Branches 4 7 13 23 33Number of Loan Officers 12 19 46 82 122Caseload per Loan Officer 270 379 436 451 481Loan Outstanding per Loan Officer (INR Mn) 1.69 2.63 3.19 3.55 4.15Financial PerformancePersonnel & Admin Cost Ratio (wrt Avg Portfolio) 41.6% 16.4% 15.4% 12.6% 9.9%Financial Cost Ratio 12.4% 8.8% 11.3% 12.3% 12.3%Net Profit before Tax (INR Mn) (-1) 1 7.04 13.55 39.2Operational Self Sustainability (OSS) 76% 108% 149% 140% 157%Equity Infusion in the Year (INR Mn) 0 5.2 30 0 40Total Equity, including Surplus (INR Mn) 5.01 11.1 59.9 68.0 131.5Return on Equity (-37%) 11% 14.5% 16.5% 25.3%Capital Adequacy Ratio 23% 27% 41% 23% 26%

• Primarily, the infused equity would be used to grow the loan book of the organization, which is the main revenue-earner.

• The equity infusion would help Sanchetna to leverage it to mobilize further debt funds.

• As debt funding in microfinance is normally earmarked specifically for on-lending only, part of equity may help Sanchetna in the following:◦ To be used as working capital

◦ To invest MIS improvement

◦ To hire qualified manpower at the managerial level

◦ To undertake field-level research for impact assessment, to undertake new product development and to pilot new products

• Around Sept-Oct’2010, crisis unfolded for microfinance organizations after an Ordinance was promulgated by the AP state govt. Subsequently, RBI (Reserve Bank of India) constituted Malegam committee. The committee has come out with the following recommendations:

Recommendations Impact / ResponseRBI to be the single regulator for the microfinance NBFCs.

Positive as it opposes dual regulation.

Minimum 90% assets into microfinance loan portfolio.

As Sanchetna does only microfinance, it already complies with this.

Capping gross margin at 10%, interest rates at 24% p.a. & processing fee at 1%; no other charges to be levied

Sanchetna reduced interest rates in the past one year from 29.25% to 27.2%, which is lower vis-à-vis many competitors. It still generates surplus at these rates, mainly due to a tight control over the Admin costs. Proposed monthly repayments (currently, it is weekly) would further unlock staff productivity & drive down the costs.

Recommendations Impact / ResponseTenor not less than 12 months for Loans upto Rs 15000; for higher loans, tenor not less than 24 months

Currently, most of the loans carry a tenor of 45 weeks. Therefore, easy to abide by this.

Annual income of client not to exceed Rs 50,000

Would be difficult to asses for most of the microfinance organizations. Even, the government does not have this data. However, a rough estimation would be done.

Loan cannot be more than Rs 25,000 As most of the current loans are even less than Rs 15,000 only, this would not have any material impact on Sanchetna.

All loans without collateral Unlike many other microfinance organizations, Sanchetna does not take any collateral / security for the loans.

At least 75% loans for income-generating purpose only

All of Sanchetna’s loans are for income-generation purpose only.

Repayment frequency not to be regulated As Sanchetna would also be experimenting with monthly repayments, it may shift all its loans to monthly repayments.

Sanchetna Financial Services Pvt. Ltd. (SFSPL)Catalyst for change

5/82, Vipul Khand, GomtinagarLucknow, Uttar Pradesh- 226010Tel / Fax: + 91 522 4076 350

Website – www.sanchetnaindia.com

For more information, contact: info@sanchetnaindia.com

Visit us:We welcome you to visit our field areas to witness the impact of our work. To schedule a visit, email us @ lokesh.singh@sanchetnaindia.com with details of your visit. We shall be happy to host you at Sanchetna