Bandhan. MFI Grading Report. July CRISIL Limited

Transcription

1 Bandhan MFI Grading Report July 2007 CRISIL Limited

2 MFI Grading Bandhan mfr4 The microfinance institution (MFI) grading of mfr4 assigned by CRISIL to Bandhan s microfinance programme reflects the non-governmental organisation (NGO) MFI s good net profitability margin, well-experienced board and advisory committee, and consistent good asset quality. The grading is, however, constrained by its low capital adequacy ratio, increasing cost of borrowings, and the regulatory and financial risks associated with microfinance operations. CRISIL s MFI grading is a current opinion on the ability of an MFI to conduct its operations in a scalable and sustainable manner. The grading is assigned on an eight-point scale with mfr1 being the highest and mfr8, the lowest. The MFI grading is a measure of the overall performance of an MFI on a broad range of parameters under CRISIL s MICROS framework. It includes a traditional creditworthiness analysis using the CRAMEL approach, modified to be applicable to the microfinance sector. The acronym MICROS stands for Management, Institutional arrangement, Capital adequacy and asset quality, Resources and asset-liability management, Operational effectiveness, and Scalability and sustainability. Jul-07 1

3 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY PROFILE ANALYSIS THROUGH MICROS FRAMEWORK ANNEXURES BUSINESS OUTREACH SUMMARY HUMAN RESOURCE SUMMARY BORROWINGS PROFILE ASSET QUALITY LOAN PRODUCTS STATE WISE LOANS OUTSTANDING PRODUCT WISE LOANS DISBURSED AND LOAN OUTSTANDING FINANCIAL STATEMENTS INCOME AND EXPENDITURE STATEMENT BALANCE SHEET NET PROFITABILITY MARGIN (PRE CREDIT LOSS) KEY FINANCIAL RATIOS PROJECTED FINANCIAL STATEMENT INCOME AND EXPENDITURE STATEMENT PROJECTED BALANCE SHEET NET PROFITABILITY MARGINS (NPM, PRE-CREDIT LOSS) PROJECTED KEY FINANCIAL RATIOS GLOSSARY OF INDICATORS AND TERMS Jul-07 2

4 1. Executive Summary Strengths Good net profitability margin (NPM): Bandhan has demonstrated significant improvement in its pre-credit loss NPM to 6.80 per cent for (refers to financial year, April 1 to March 31) from 4.91 per cent for This has been driven mainly by significant improvement in its funds-based yield to per cent from during this period. Well-experienced board and advisory committee: The executive committee members of the NGO-MFI s board have good experience in micro finance, social work, banking, and finance. Also, Bandhan has a strong advisory committee for overall operations, which includes top executives from Unitus, a leading equity investor; two leading MFIs from Bangladesh; Association for Social Advancement (ASA); and Bangladesh Rural Advancement Committee (BRAC). Consistent good asset quality: Bandhan has demonstrated consistent good asset quality with its portfolio at risk (PAR) above 30 days at 0.08 per cent as on March 31, 2007, despite having a compounded annual growth rate (CAGR) of 371 per cent in its loan portfolio over the last three years. Areas that need attention Low capital adequacy ratio: Bandhan had a low capital adequacy ratio of 8.5 per cent as on March 31, This is due to an exorbitant growth rate in operations and the NGO-MFI s inability to access external commercial equity. Increasing cost of borrowings: Bandhan s cost of borrowings has deteriorated to 9.4 per cent for from 6.1 per cent for This is due to increasing interest rates in the market, and because the NGO-MFI has stopped taking deposits from its members. Regulatory and financial risks associated with operations: Currently, Bandhan is providing insurance to borrowers against the loan outstanding. Though it has tied up with insurance companies for insurance coverage in 17 branches, its rest of operations are prone to regulatory and financial risks until the insurance cover for all the borrowers is transferred from its own books. Jul-07 3

5 2. Profile Bandhan was set up in November 2000 as an NGO, and was registered under the West Bengal Societies Registration Act, 1961, in April It started offering capacitybuilding training in microfinance to NGOs and MFIs. During 2001, it started microfinance operations and has been offering microfinance services to small traders, vendors, and dairy farmers, among others. In , it disbursed loans totalling Rs million. As on March 31, 2007, it had a loan outstanding of Rs million over an active customer base of 433,324 (please refer to annexure ) spread across four states. Bandhan s microfinance programme is based on the model developed by ASA. The model involves lending to individuals through groups, where all the processes are standardised and documented. 3. Analysis through MICROS framework Management Bandhan has been undertaking microfinance operations for the last six years. During this period, it intensified its operations in West Bengal, and also expanded to Bihar, Assam, Tripura 1, and Jharkhand. The NGO-MFI has good relations with its partners, donors, and funding agencies, resulting in regular access to operational grants from the Small Industries Development Bank of India (SIDBI), Ford Foundation, and Unitus. These grants have helped Bandhan cover its operating losses and build institutional capacity. Technical assistance from ASA has helped the organisation streamline its operations. Bandhan follows the group-based individual lending model for its credit approval and loan monitoring system, as it finds this model appropriate in its operational areas, and adds to good portfolio quality. However, with increasing competition and rising disbursements, Bandhan may have to improve its processes further. For instance, the loan verification by the same field staff may not be adequate for relatively large loans. This model has contributed to a good growth rate in Bandhan s loan portfolio and process standardisation. This has also helped improve its productivity and expansion. Commonality in regional language, Bengali, and familiarity with the ASA model has also been helpful in this regard. Bandhan has a fixed salary structure for its staff, which needs to be revised periodically to attract and retain manpower. The staff is adequately equipped to handle the present operational model. However, with the introduction of management information system (MIS) software, and computerisation, their capacity will not be adequate; hence, the NGO-MFI is in the process of imparting training to its staff. 1 The microfinance operation in Tripura has been transferred to a newly acquired NBFC, Bandhan Financial Services Pvt Ltd since Jul-07 4

6 The manual operations at field offices and lack of MIS in routine operations lead to duplication of work and limit employee productivity. Additionally, multiple hierarchies in the organisation will slow down the flow of information between head office and branches, which, in turn, will hamper the effective monitoring of operations. In CRISIL s opinion, Bandhan needs to scale up its internal audit team, especially to address new operational areas. Also, with geographically widespread operations, it needs to decentralise its team so as to improve frequency of audits. Institutional Arrangement Bandhan s executive committee members have good experience in microfinance (having worked with large MFIs in Bangladesh), social work, banking, and finance. Also, the NGO-MFI has a strong advisory committee for overall operations, which includes top executives from Unitus, two leading MFIs from Bangladesh, ASA, and BRAC. Being headquartered in Kolkata has given Bandhan an advantage of having many experienced local professionals/personalities on its executive committee. The organisation s senior management personnel also have good exposure to and experience in microfinance operations, as most of them have been promoted from lower levels. In the initial phase, the technical assistance from ASA helped to develop their capabilities. Bandhan has plans to transform itself into a non-banking finance company (NBFC) gradually, as this will help it access funds at better terms and conditions. However, as of now, it has inadequate institutional capacity for the transformation. Moreover, though it has started operations under its newly acquired NBFC, these operations are yet to be stablised. However, it follows appropriate governance practices internally and at the customer level, which will be a major factor while transforming the business and building the required financial and operational capabilities. Capital Adequacy and Asset Quality Bandhan s capital adequacy ratio, though inadequate, has increased to 8.28 per cent as on March 31, 2007, from 0.31 per cent as on March 31, 2004 (please refer to annexure 4.8.4), while its loan portfolio has increased at a CAGR of 371 per cent in the last three years since March 31, 2004 (please refer to annexure 4.1.1). Eighteen per cent of Bandhan s current net worth is constituted from cumulative reserves during this period. These have been built up mainly from grants and donations received from institutions such as Ford Foundation, SIDBI and Unitus. Bandhan has received cumulative grants of Rs million till March 31, However, being a society, it lacks the ability to raise commercial equity from other external sources. Bandhan has consistently maintained a good asset quality, with its PAR above 30 days at 0.08 per cent as on March 31, 2007, and nil a year before (please refer to annexure 4.4). This can be attributed to better understanding of customers, limited options for customers, group lending methodology for operations, flexible repayments (grace period of seven weeks), and effective loan monitoring. CRISIL expects the NGO-MFI to maintain a good asset quality in future as well. Jul-07 5

7 Bandhan has a satisfactory loan loss provision policy of 2 per cent of loan outstanding; it had an adequate loan loss reserve of 3.09 per cent as on March 31, 2007, as the overall repayment rate is 100 per cent. The loan loss provision ratio has improved from 1.69 per cent as on March 31, 2004 (please refer to annexure 4.8.4). Resources and ALM Bandhan has a diversified institutional borrowing profile, with a moderate cost of borrowings at 9.35 per cent as on March 31, However, it has deteriorated from 6.63 per cent for the previous period (please refer to annexure 4.8.4) and will continue to decline in future. The deterioration has been due to rising interest rates in the market. The NGO-MFI takes 10 per cent of the loan amount as an interest-free security margin form borrowers; this amounted to per cent of the institution s external funds 2 as on March 31, 2007, and contributed significantly in neutralising the higher cost of funds. Bandhan accesses about 84 per cent of funds from SIDBI, HDFC Bank, UTI Bank, State Bank of India, and ABN Amro Bank; the rate of interest on incremental funds from these sources have decreased in the past till , indicating the institution s improving credit profile. As on March 31, 2007, Bandhan had also availed of cash credit facility of Rs.10 million each from ABN Amro Bank, HDFC Bank, and UTI Bank (please refer to annexure 4.3). However, lending to the NGO-MFI by banks is still perceived as an avenue to meet priority sector lending targets; and it faces funds shortage during the beginning of a financial year. Hence the MFI is yet to develop as a commercially attractive financial entity and come over lending cycle fluctuations. Bandhan has a satisfactory asset-liability profile, as funds are accessed for a period greater than one-year and loans are advanced for 52 weeks. The profile is further strengthened by PAR above 30 days at 0.08 per cent, and overall unused cash credit facility of Rs million from UTI Bank, HDFC Bank, and ABN Amro Bank as on March 31, Operational Effectiveness Bandhan s pre-credit loss NPM consistently improved to 6.80 per cent as on March 31, 2007, from 4.91 per cent on March 31, 2004 (please refer to annexure 4.8.3), mainly due to increase in yield and operational efficiency. The NGO-MFI has demonstrated sharp and consistent improvement in fund-based yield; it was at per cent for the yearended March 2007, as against per cent as on March 31, 2004 (please refer to annexure 4.8.4). This is due to improvement in funds deployment in operations to the level of 93 per cent of total funds deployed as on March 31, 2007, compared with 66 per cent as on March 31, 2004 (please refer to annexure 4.8.2). Additionally, Bandhan has been able to improve the funds circulation through direct inter branch transfers, though with significant operational risks. 2 External funds includes institutional borrowing and security deposits from members. Jul-07 6

8 Bandhan has also improved its productivity in terms of loan outstanding per credit officer to Rs.1.05 million as on March 31, 2007, from Rs.0.38 million as on March 31, Also, the loan outstanding per borrower has improved to Rs.2910 from Rs.2099 (please refer to annexure 4.1.1) during this period. However, client retention will be a key issue for maintaining a good growth rate; otherwise, the entry of other MFIs into the operational areas could have a impact on growth rate and productivity, and hence, on profitability. Bandhan s operational self-sufficiency improved significantly to per cent as on March 31, 2007, compared with per cent as on March 31, This was due to a sharp improvement in both fund-based yield and operating ratios. Operating expense ratios improved to 7.87 per cent as on March 31, 2007, from per cent as on March 31, 2004 (please refer to annexure 4.8.4), mainly due to improvement in productivity and increase in average loan size to Rs.2910 from Rs Scalability and Sustainability Though Bandhan has been able to diversify its operations in four states, operations from West Bengal constitute per cent of its portfolio (please refer to annexure 4.6). However, being one of the largest MFIs in North East India, and having a successful track record, Bandhan is expected to sustain operations even at a larger scale. Although Bandhan has decided to transfer its operations to Bandhan Financial Services Private Ltd (BFSPL; an NBFC acquired by Bandhan), it is yet to work out the operational details. The transfer of its operations to the BFSPL will be a key challenge for Bandhan, given the fact that Bandhan is a society owned by members oriented towards development, while an NBFC will be a commercial entity. While working as an NBFC, Bandhan would have to meet the statutory requirement of the Reserve Bank of India and the income-tax department, for which, currently, it does not have adequate institutional capacity. Currently, lending to the NGO-MFI is considered as an avenue to meet the priority sector targets by financial institutions. Hence, it is able to meet the demand of funds for operations; but it needs to improve fund-accessing capability in the beginning of the financial year. Also, going forward, Bandhan needs funds at competitive rates to run its operations profitably. Although the institution has expanded its operations into four states, per cent of its loans outstanding as on March 31, 2007, were from West Bengal alone; it is yet to intensify its operations in other states. Bandhan lacks computerisation at field level and MIS in overall operations. This can have an adverse impact on the efficiency of information processing and productivity of the institution in future. This will also be a bottleneck in effectively controlling and monitoring its activities. Jul-07 7

9 4. Annexures 4.1. BUSINESS OUTREACH SUMMARY HUMAN RESOURCE SUMMARY BORROWINGS PROFILE ASSET QUALITY LOAN PRODUCTS STATE WISE LOANS OUTSTANDING PRODUCT WISE LOANS DISBURSED AND LOAN OUTSTANDING FINANCIAL STATEMENTS INCOME AND EXPENDITURE STATEMENT BALANCE SHEET NET PROFITABILITY MARGIN (PRE CREDIT LOSS) KEY FINANCIAL RATIOS PROJECTED FINANCIAL STATEMENT INCOME AND EXPENDITURE STATEMENT PROJECTED BALANCE SHEET NET PROFITABILITY MARGINS (NPM, PRE-CREDIT LOSS) PROJECTED KEY FINANCIAL RATIOS GLOSSARY OF INDICATORS AND TERMS Jul-07 8

10 4.1. Business Outreach Summary CAGR Indicator\as on March 31, Unit (%) Members No. 498, ,063 51,586 9, SHGs/Groups No. 23,033 9,061 2, Loan disbursed during the year Rs. mn 2, Loan outstanding end of period Rs. mn Active borrowers end of period No. 433, ,886 40,286 5, Women clients as a percentage of total clients % NA Districts covered No Branches end of period No Villages /towns covered end of period No ,353 5,241 1, Human Resource Summary (No.) Indicator\For the year ended on March 31, Permanent employees, end of period 1, Total employees, end of period 1, (including trainees, and temporary staff) Employees hired during period 1, Employees who left during period Branch employees end of period 1, Credit/loan/field officers, end of period 1, Attrition rate (%) Jul-07 9

11 4.3. Borrowings Profile Funding Agency Loan Amount Rate of interest (%) (Rs. million) Loan outstanding (March 31, 2007) Small Industries Development Bank of India (SIDBI) Friends of Women World Banking (FWWB) HDFC Bank ICICI Bank Rashtriya Mahila Kosh (RMK) ABN Amro Bank UTI Bank Standard Chartered Bank State Bank Of India Yes Bank Total 1, Note: the MFI also has cash credit facility from different banks (Rs. million) Name of the bank Total limit Available limit ABN Amro Bank HDFC Bank UTI Bank Total Jul-07 10

12 4.4. Asset quality (Rs. million) 31/03/ /03/2006 Total outstanding balance associated with loans that are PAR % of PAR PAR % of PAR On time 1, Late (at least one payment) 1-30 days days days days days & above Total portfolio 1, Portfolio at risk (> 30 days delinquent) Portfolio at risk (> 90 days delinquent) Loan Products Characteristics\Loan products Micro loan product Micro enterprise program Purpose Income generating activity Investment in existing enterprises Emergency health loan Accidental/ emergency loan Operative / surgical loan Treatment / medical loan Loan term/duration (year) Loan amount (Rs.) Rural areas 1,000 5,000 15,000 50,000 1,000 5,000 Urban areas 1,000 7,000 Interest rate 3 (%) Repayment frequency Weekly Weekly Weekly or monthly Life time membership fee (Rs.) NA Processing fee / doc. fee (%) 1 1 NA Insurance fee / Risk fund 1 1 NA (%) Security deposit (%) 10 5 NA 3 The interest rate is 12.5 per cent for income generating activities and investment in existing enterprise; and 10 per cent for emergencey loan on flat rate basis. Jul-07 11

13 4.6. State wise loans outstanding (%) State Loan outstanding as on March 31, 2007 West Bengal Bihar 0.29 Assam 2.83 Jharkhand 0.00 Total Product wise loans disbursed and loan outstanding Loan Product\For the year ended on March 31, Disbursement Micro Credit Outstanding Micro Enterprise Programme Emergency Health Loan (%) Disbursement Outstanding Disbursement Outstanding Total Jul-07 12

14 4.8. Financial Statements Income and Expenditure Statement (Rs. million) For the year ended on March 31, Audited Audited Audited Audited Fund based income Interest income from loans Income from investments /Bank deposits Total fund based income Interest and finance charges On borrowings On savings Total interest and finance charges paid Gross spread Total fee based income Total income Gross profit Expenses Personnel expenses Administrative expenses Total expenses Write-offs and provisions for loan loss Depreciation Surplus/deficit before tax Surplus/deficit before revenue grants Add: Grants and donations Less: Expenses out of revenue grants Surplus/Deficit Net Surplus/(deficit) Jul-07 13

15 Balance Sheet (Rs. million) Particulars\For the year ended on March 31, Audited Audited Audited Audited Liabilities General fund Cumulative capital grants/donated equity Net surplus (deficit) previous period Net Surplus (deficit), current period Less: Miscellaneous expenditure not written off Net worth Long term borrowing 1, Total long term borrowings 1, Security deposit/savings from members Interest accrued but not due Other liabilities Provision for loan loss Total current liabilities Total liabilities 1, Assets Loans and advances Cash & bank balances Deposits with banks Interest receivables Other current assets Total current assets Total funds deployed 1, Net fixed assets Total assets 1, Jul-07 14

16 Net Profitability Margin (Pre credit loss) (%) Particulars\For the year ended March 31, Fund based yield (A) Interest paid/average borrowings (B) Interest spread (C=A-B) Operating expense ratio (D) Fee based income /Avg. funds deployed (E) NPM (Pre-credit loss) (F=C-D+E) Key Financial Ratios (%) For the year ended/as on March 31, Yield Fund based yield (A) Portfolio yield Fee based income /Avg. funds deployed Cost of funds Interest paid/average funds deployed (B) Interest paid/average borrowings (C) Interest spread Gross spread/average funds deployed (A) - (B) Interest spread Overheads Operating expense/disbursement Operating expense ratio Personnel expense ratio Administrative expense ratio Profitability Net profit /(deficit) on net worth Net profit / (deficit) on funds deployed Operational self sufficiency Asset quality Total Loan loss provisions / av. loan outstanding Capitalisation Total debt/net worth (times) Capital adequacy Others Portfolio turnover Jul-07 15

17 4.9. Projected financial statement Income and expenditure statement (Rs. million) For the year ended Fund based income Interest income from loans , , , ,831.7 Income from investments Other income Total fund based income , , , ,843.8 Interest paid On borrowings , ,645.8 Finance charges Total interest paid , ,647.4 Gross spread , , ,196.4 Total fee based income Total income , , , ,866.0 Gross profit , , ,218.6 Operating Expenses Personnel expenses Administrative expenses Total expenses ,157.2 Provision for loan loss Total Depreciation Surplus/deficit , ,913.4 Jul-07 16

18 Projected Balance Sheet (Rs. million) For the year ended on March 31, Liabilities Donated equity/grants General Reserves Net Surplus (deficit), current period , ,913.4 Net worth , , ,810.2 Total long term borrowings 2,612.74, , , ,425.4 Security deposit from borrowers , , , ,351.1 Other current liabilities Provision for loan loss Total current liabilities , , , ,175.4 Total liabilities 3,859.56, , , ,411.0 Assets Loans and advances 3,483.65, , , ,755.5 Cash & bank balances Bank Deposits Interest receivables Other current assets Total current assets , , ,571.6 Total funds deployed 3,846.76, , , ,327.1 Net fixed assets Total assets 3,859.56, , , ,411.0 Jul-07 17

19 Net Profitability Margins (NPM, Pre-credit loss) (%) Particulars\ For the year ended on March 31, Fund based yield (A) Interest paid/average borrowings (B) Interest spread (C=A-B) Operating expense ratio (D) Fee based income /Avg. funds deployed (E) NPM (Pre-credit loss) (F=C-D+E) Projected Key Financial Ratios (%) For the year ended/as on March 31, Yield Fund based yield Portfolio yield Fee based income /Avg. funds deployed Cost of funds Interest paid/average funds deployed Interest paid/average borrowings Interest spread Gross spread/average funds deployed (A) - (B) Interest spread Overheads Operational efficiency Personnel efficiency Administrative efficiency Profitability Return on net worth Return on funds deployed Operational self sufficiency Asset quality Loan loss provisions /av. loan outstanding Capitalization Total debt/net worth (times) Capital adequacy ratio Jul-07 18

20 Glossary of Indicators and Terms Indicators and Terms Average borrowings, loan outstanding, net worth, funds deployed and debt Fund based yield Portfolio yield Fee based income Cost of funds Cost of borrowings Interest spread Operating expense/disbursement Operating expense ratio Personal expense ratio Administrative expense ratio Net profit on net worth Net profit on funds deployed Capital adequacy Debt to equity ratio Employee turnover Funds deployed Portfolio turnover Definition The average for these indicators has been estimated as follows: [ (value at the beginning of the year + value at the end of the year)/2 ] Income from funds deployed/av. funds deployed Interest income on loans/av. loans outstanding Fee income from operations/av. funds deployed Total interest and finance charges paid/av. total funds deployed Total interest and finance charges paid on borrowings/av. total funds deployed Fund based yield-cost of borrowings Total operating expense/disbursement during the year Total operating expense/ Av. total funds deployed Total personal expense/ Av. total funds deployed Total administrative expense/ Av. total funds deployed Net surplus /Av. net worth Net surplus /Av. funds deployed Net worth / Risk weighted assets Risk weight for cash and bank balances assumed to be zero and 100% for all other assets as at balance sheet date. Total debt / Net worth Employees left during the year / (employees at the beginning of the year + new employees joined during the year) Total assets - Net fixed assets Disbursement/Total funds deployed Jul-07 19

21 Disclaimer CRISIL has taken due care and caution in the preparation of this report. Information has been obtained by CRISIL from sources it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions for the results / opinions obtained from the use of such information. CRISIL especially states that it has no financial liability whatsoever to the users of this report. This grading assigned cannot be considered to be a proxy for timely payment of interest and principal. Nor is it a recommendation to purchase, sell or hold any debt instrument. The microfinance grading also does not involve an audit by CRISIL. No part of this report may be reproduced by any means without CRISIL s prior written approval. Jul-07 20