balancing financial and social returns frances sinha, director, eda rural systems (india) and board...

Balancing Financial and Social Returns

Frances Sinha, Director, EDA Rural Systems (India) and board member of SPTF

Alok Misra, CEO, M-CRILDecember 2, 2014

Agenda •Introduction to Microfinance Institutional

Rating and Social Rating•Case Study: Balancing Financial and

Social Returns•Q&A

Introduction to microfinance rating•Frances Sinha

▫MD, EDA Rural Systems▫Co-promoter M-CRIL▫SPTF Board member

The purpose and benefits of rating•Provided mostly by specialist rating

agencies created to bridge a market and technical gap left by corporate credit rating agencies

•Recognise essential features and potential viability of microfinance – as a service to the BOP

•Respond to emerging market requirements, debt and equity funding, and need for responsible practice

Evolution •4 microfinance specialist rating agencies

•‘Financial ratings’

•Convergence for 2 types of rating:

Social rating Microfinance institutional rating-MIR

Start:Late1990s

2005

2012

Organisational and financial analysis

Aligned to USSPM

Social Rating. An opinion on capacity to achieve social mission and goals in line with social values

MIR an opinion on long term institutional viability and credit-worthiness, based on comprehensive assessment of risks

Details in the Rating Guides

Published by the Rating Initiative, with contributions byM-CRIL, Microfinanza Rating, Microrate, Planet Rating

Useful for•Investors – as a second opinion in the

investment decision-making process; providing transparent and objective information on risks and performance

•Financial institutions – a tool not only to access capital but to improve operations, by benchmarking, and identifying areas for improvement

Balancing Financial & Social Performance –Time to Walk the Talk

Alok Misra, CEO, Micro-Credit Ratings International Ltd602 Pacific Square, 32nd Milestone NH8, Gurgaon 122001 INDIA

alokmisra@m-cril.com Tel: +91 124 405,0739, 426 8707

Context of MFI• Geographical focus: The MFI operates in relatively

less developed districts of South India• Model: Self Help Group model; 10-20 women form a

group. Balanced development approach, microfinance as a catalyst

• Services: A range of client-centric products and services▫ Credit ▫ Savings – as a Business Correspondent of banks▫ Insurance – innovative insurance product at very low cost to

clients▫ Pension – aggregator for Pension Regulatory authority▫ Development activities – sustainable farming, education, etc.

• Outreach: Microfinance programme focuses on low-income women in less developed rural areas.

Comparison of financial performance Key Financial Ratios MFI PeersCapital Adequacy Ratio (CAR) 8.2% 16%

Operating Efficiency Ratio (OER) 6.8% 9%Financial Cost Ratio (FCR) 12.2% 14.5%Portfolio Yield 20.0% 27%

RoA 0.6% 4.2%

• Low CAR

• Service oriented staff, and efficient model, has resulted in a low OER.

• Low cost fund from lenders owing to MFI’s goodwill

• Low Yield, owing to low rate of interest charged

Social Performance aspects• Diverse services to suit low-income,

financially excluded client segment – Credit, Savings (as a BC), Micro-insurance, Pension (Govt scheme), other development activities

• Good client retention – Low client dropout (8% as against ~25% for peers) as diverse needs of clients are met from single source

• Good performance in Client Protection – Appropriate products, good performance in transparency and prevention of over-indebtedness – Service oriented staff, clients treated with respect. – Responsible pricing - APR of 20%, against 26% by peers

• Satisfied staff with high mission orientation. Management highly approachable and sensitive to personal needs of staff.

Points to consider for funders-Will you fund it or prefer peers?

Positive Negative• Good social performance

as seen in mission orientation, responsibility to staff and clients

• Low interest rates• Good portfolio quality• Profitable – Not loss

making• Committed Board• CEO to LO salary ratio

1:15

• Low profitability• CAR low as retained

surplus the main source• Board does not have

“professionals” but social workers

• Committed to pass gains to clients- not interested in increasing profitability

The real picture• Being a “real” case (with some changes to

mask identity), the facts are• Private lenders (Commercial banks in India and

International funders) have kept away • Still, it has grown big and has very diversified

debt sources from 13 Public sector commercial banks and 2 social investors

• Are funders more concerned about profitability than social performance – even in debt funding?

• Do “normal” financial numbers give more confidence?

Social Aspects Ignored in Peers•High LO productivity – 650 borrowers per staff•HR stress (80% staff)•LO:CEO compensation 1: 40•High staff turnover (~25%)•Risk mitigation through plain vanilla products

and keeping loan size low•Pricing focused on regulatory cap•Not focused on providing complete suite of

financial services (pensions, savings through BC)

Q&A