Sa-Dhan, Goa, March 24, 2010
Transformation of an MFI –
Expectations of rating analysts
Micro-Credit Ratings International Ltd
602 Pacific Square, 32nd Milestone NH8, Gurgaon 122001 INDIA
www.m-cril.com Tel: +91 124 230 9497, 426 8707 Fax: +91 124 230 9520
Ratings
Credit Rating: evaluates MFI’s creditworthiness
Areas of evaluation are
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Governance, strategy and external environment
Management and systems
Financial performance
Social Rating:
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
a judgement on key elements of MFI’s social performance
organisational effectiveness in putting mission into practice in line
with accepted social values
Transformation - Key Improvements
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•
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Transformation to a well regulated legal form
• Prudential norms of RBI
• Regular reporting to and monitoring by RBI and RoC
Board of Directors – increased representation of non-executive
Directors/ nominee Directors
Improvements in CAR, fund mobilisation and growth rates
Comparison of performance of NBFC MFIs and NGO MFIs
(as on 30 September 2008)
Portfolio growth rate*
Debt-Equity Ratio
Capital to Risk Weighted Assets Ratio
Average number of lenders
NGOs NBFCs
16.6%
99.8%
11.9
6.6
5.4%
15.5%
6
12
*annualised growth rate for the six months period ending 30-Sep-2008
Concerns - Accounting
Fair representation of MFI’s profitability &
sustainability is a key objective of credit ratings
•
•
Post transformation of an MFI - the new NBFC coexists with the earlier NGO
Benefits of relatively higher profits in one over the
other:
NGO (Society, Trust or
Sec-25 company)
NBFC
Tax savings (if it holds
exemption under section
12A)
1. Better equity valuations for
NBFC
2. Transfer of remaining net
worth from NGO
Contd..
•
Allocation of common expenses - Logical allocation
policies and disclosure help improve ratings
•
Salaries of the senior management
•
Rent of office premises
•
Depreciation on fixed assets
•
Field staff salaries – if the branch network is common
•
Inter-company transactions (such as loans & advances)
•
•
should be at arm’s length & with proper disclosure
Creation of Goodwill & other intangible assets
•
•
proper disclosure on its need and valuation
ignore intangible assets for computing certain ratios for the
sake of comparison
Mutual Benefit Trusts
• A common conduit to transfer net worth from
an NGO to NBFC
• Model ‘per-se’ in accordance with ‘Trust’ and
‘Cooperative’ principles
•
Intends to share the surpluses and capital gains
among the members
• MBTs should have
•
•
•
•
proper and verifiable details of members
documents evidencing their consent
clearly interpreted rules for the distribution of
benefits and decision making
should not be used as a mean to mobilise deposits
Social Rating - Concerns
• Members’ awareness on
•
•
•
their membership in the MBTs
benefits and rights accruing to them
limitation w.r.t liquidity/withdrawal of their funds
• Capital gains from the sale of MBT’s shares – are
members passed on the benefits?
• Adequate representation of members among the
trustees - will be a step in right direction
• Increased focus on margins and equity valuations
– need a balance between financial and social objectives
Thank You!