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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 50874-IN
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 65.9 MILLION
(US$100 MILLION EQUIVALENT)
TO THE REPUBLIC OF INDIA
AND A PROPOSED LOAN
IN THE AMOUNT OF US$200 MILLION
TO THE SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA
WITH A GUARANTEE OF THE REPUBLIC OF INDIA
FOR A
SCALING UP SUSTAINABLE AND RESPONSIBLE MICROFINANCE PROJECT
May 3, 2010
Poverty Reduction and Economic Management
Finance and Private Sector Development Department
South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective March 31, 2010)
Currency Unit = Indian rupees (Rs)
Rs 45.14 = US$1
US$1.518 = SDR 1
FISCAL YEAR
April 1 – March 31
ABBREVIATIONS AND ACRONYMS
ACB
ADB
Audit Committee of the Board
Asian Development Bank
LIBOR
M&E
London Interbank Offer rate
Monitoring and Evaluation
AGM Assistant General Manager MFI Microfinance Institution
AML
ARCS
Anti-Money Laundering
Audit Reports Compliance System
MIS Management Information Services
CAS Country Strategy MISFA Microfinance Investment Support
Facility for Afghanistan
CDB China Development Bank MIV Microfinance Investment Vehicle
CGAP Consultative Group to Assist the Poor MIX Microfinance Information Exchange
CGM Chief General Manager MoF Ministry of Finance
CITES Convention on International Trade in
Endangered Species
MSME Micro, Small, and Medium Enterprises
CMD Chairman and Managing Director MTR Mid-Term Review
CoC Code of Conduct NABARD National Bank for Agriculture and
Rural Development
CRAR Capital to Risk-weighted Assets Ratio NBFC Nonbank Finance Company
CQS Consultant Qualification Services NCB National Competitive Bidding
DFID Department for International
Development, U.K.
NGO Non-Government Organization
DFS Department of Financial Services NMFSP National Micro Finance Support
Program
DGM Deputy General Manager NPA Non Performing Assets
DMD Deputy Managing Director NPL Non Performing Loans
DO
DPL
E&S
Development Objective
Development Policy Loan
Environmental and Social
OM
OSS
PAC
Operations Manual
Operational Self-Sufficiency
Project Advisory Committee
EHS Environment, Health, and Safety PAR Portfolio At Risk
ELA Exclusion List of Activities PCBs Polychlorinated Biphenyls
ESW Economic and Sector Work PKSF Palli-Karma Sahayak Foundation
FBS Fixed-Budget Selection PMD Project Management Department
FIL Financial Intermediary Loan PPAF Pakistan Poverty Alleviation Fund
FM Financial Management PSIG Poorest States Inclusive Growth
Program
FY Financial Year QCBS Quality and Cost-Based Selection
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GAAP Governance and Accountability
Action Plan
QPR Quarterly Progress Report
GIS Global Information Services RBI Reserve Bank of India
GoI Government of India ROA Return On Assets
GM General Manager ROE Return On Equity
GTZ German Association for Technical
Cooperation
RTI Right to Information
IAD Internal Audit Department SFMC SIDBI Foundation for Micro-Credit
IBRD International Bank for Reconstruction
and Development
SHG Self-Help Group
ICB International competitive bidding SIDBI Small Industries Development Bank of
India
IDA International Development
Association
SME Small and Medium Enterprise
IDBI Industrial Development Bank of India SMFB Specialized Micro Finance Branch
IFAD International Fund for Agriculture
Development
TA Technical Assistance
IFC International Finance Corporation ToR Terms of Reference
IP Implementation Progress UC Utilization Certificate
IT Information Technology UNDB United Nations Development Business
IUFRs Interim Unaudited Financial Reports UPS Uninterrupted Power Supply
JBIC Japanese Bank for International
Cooperation
VSL Variable Spread Loan
KfW German Development Bank WAN Wide Area Network
KYC Know Your Customer WBG World Bank Group
LAN Local Area Network
LCS Least-Cost Selection
Vice President: Isabel Guerrero
Country Director: Roberto Zagha
Sector Director: Ernesto May
Sector Manager: Ivan Rossignol
Task Team Leaders: Niraj Verma and Mehnaz Safavian
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INDIA:
SCALING UP SUSTAINABLE AND RESPONSIBLE MICROFINANCE PROJECT
CONTENTS
Page
A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 7
1. Country and sector issues........................................................................................................ 7
2. Rationale for Bank involvement ........................................................................................... 10
3. Higher-level objectives to which the project contributes ..................................................... 11
B. PROJECT DESCRIPTION ............................................................................................... 11
1. Lending instrument ............................................................................................................... 11
2. Project development objective and key indicators ................................................................ 12
3. Project components ............................................................................................................... 12
4. Lessons learned and reflected in the project design.............................................................. 14
5. Alternatives considered and reasons for rejection ................................................................ 15
C. IMPLEMENTATION ........................................................................................................ 16
1. Partnership arrangements ...................................................................................................... 16
2. Institutional and implementation arrangements .................................................................... 16
3. Monitoring and evaluation of outcomes/results .................................................................... 18
4. Sustainability......................................................................................................................... 19
5. Critical risks and possible controversial aspects ................................................................... 19
6. Loan/credit conditions and covenants ................................................................................... 23
D. APPRAISAL SUMMARY ................................................................................................. 23
1. Economic and financial analysis ........................................................................................... 23
2. Technical ............................................................................................................................... 24
3. Fiduciary ............................................................................................................................... 25
4. Social..................................................................................................................................... 26
5. Environment .......................................................................................................................... 27
6. Safeguard policies ................................................................................................................. 27
7. Policy Exceptions and Readiness.......................................................................................... 28
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Annex 1: Country and Sector or Program Background ......................................................... 29
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 40
Annex 3: Results Framework and Monitoring ........................................................................ 42
Annex 4: Detailed Project Description ...................................................................................... 48
Annex 5: Project Costs ............................................................................................................... 55
Annex 6: Implementation Arrangements ................................................................................. 56
Annex 7: Financial Management and Disbursement Arrangements ..................................... 78
Annex 8: Procurement Arrangements ...................................................................................... 89
Annex 9: Economic and Financial Analysis ............................................................................. 97
Annex 10: Safeguard Policy Issues .......................................................................................... 102
Annex 11: Project Preparation and Supervision ................................................................... 105
Annex 12: Documents in the Project File ............................................................................... 107
Annex 13: Statement of Loans and Credits ............................................................................ 110
Annex 14: Country at a Glance ............................................................................................... 115
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INDIA:
SCALING UP SUSTAINABLE AND RESPONSIBLE MICROFINANCE PROJECT
PROJECT APPRAISAL DOCUMENT (PAD)
SOUTH ASIA REGION
SASFP
Date: June 25, 2010 Team Leader: Niraj Verma, Mehnaz Safavian
Country Director: Roberto Zagha
Sector Manager/Director: Ivan Rossignol/
Ernesto May
Sectors:Micro- and SME Finance (100
percent)
Themes: Other financial and private sector
development; rural and non-farm development
Project ID: P119043 Environmental category: FI
Lending Instrument: Financial Intermediary
Loan (FIL)
Project Financing Data
[ x ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other:
For Loans/Credits/Others (US$m): 300.0
Total Bank financing (US$m.): 300.0
Proposed terms: IBRD flexible loan with variable spread with a 25 year maturity, including a
14.5-year grace period; for IDA, 35 years with 10 years‘ grace
Financing Plan (US$m)
Source Local Foreign Total
BORROWER/RECIPIENT 30.00 0.00 30.00
International Development Association
(IDA)
100.00 0.00 100.00
International Bank for Reconstruction and
Development (IBRD)
200.00 0.00 200.00
Total: 330.00 0.00 330.00
Borrower: Small Industries Development Bank of India (SIDBI) for IBRD and the Republic of
India, for IDA (to be channeled onward to SIDBI)
Responsible Agency: Department of Financial Services, Ministry of Finance, Government of
India, and SIDBI
Estimated disbursements (Bank FY/US$m)
FY 2011 2012 2013 2014 2015
Annual 70.0 80.0 80.0 50.0 20.0
Cumulative 70.0 150.0 230.0 280.0 300.0
Project Implementation Period: 5 years
Expected effectiveness date: June 30, 2010
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Expected closing date: June 30, 2015
Does the project depart from the CAS in content or other significant respects?
Ref. PAD I.C. [ ]Yes [X] No
Does the project require any exceptions from Bank policies?
Ref. PAD IV.G. Have these been approved by Bank management?
[ ]Yes [X] No
[ ]Yes [X] No
Is approval for any policy exception sought from the Board? [ ]Yes [X] No
Does the project include any critical risks rated ―substantial‖ or ―high‖?
Ref. PAD III.E. []Yes [X] No
Does the project meet the Regional criteria for readiness for implementation?
Ref. PAD IV.G. [X]Yes [ ] No
Project development objective Ref. PAD B.2, Technical Annex 3
The objective of the project is to scale up access to sustainable microfinance services to the
financially excluded, particularly in under-served areas of India, through, among other things,
introduction of innovative financial products and fostering transparency and responsible finance.
Progress towards the achievement of the project objective would be monitored using the
following indicators (refer also to annex 3):
Extent of outreach: Disbursements of loans by microfinance institutions (MFIs) to their clients relative to the amounts of financing borrowed from SIDBI
Breadth of outreach: Measured by growth rates within under-served areas
Operational sustainability: Measured by operational self sufficiency (OSS)
Responsible Finance: Measured by the percentage of beneficiary MFIs disclosing operational/ financial information on a web-based information platform
Project description Ref. PAD B.3, Technical Annex 4
Component 1: Scaling Up Funding Support for Microfinance Institutions (MFIs) (~US$290
million, plus US$30 million counterpart funding)
This component would provide funding for MFIs to scale up their operations. Funding from
SIDBI to MFIs is proposed to be structured as debt or quasi-equity, to support their operations
and growth, enhance their financial strength, and enable them to leverage and crowd-in private
commercial funds to on-lend larger amounts to the under-served. Limited equity support would
also be considered from SIDBI to MFIs. The total funding thus mobilized will enhance MFIs‘
ability to reach out to larger numbers of under-served segments of the population through
microfinance services. In particular, the quasi-equity/equity funding will also help address the
equity gap in Indian MFIs, while providing SIDBI with the leverage to promote the responsible
finance agenda among the MFIs funded by the project.
Component 2: Strengthening Responsible Finance (US$5 million)
The Component would promote transparency and responsible microfinance through the
development of an India microfinance platform. This initiative is envisaged as a common
information platform for MFIs to provide and disseminate valuable information that would
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inform policymakers, MFI managers and funders (similar, but broader and deeper than the
information available on the MixMarket – which is the leading global microfinance information
database provider - including through potential collaboration with MixMarket in India). As part
of the responsible finance initiative, SIDBI will seek to bring together a Lenders‘ Forum
comprising key MFI funders to agree on common actions which could include those on
transparency and good governance by MFIs. Additionally, once the Unique Identification (UID)
initiative of the GoI is ready for implementation, the forum will encourage MFIs to participate
and support the roll-out of this initiative, given its significant potential to improve transparency
and credit information. The Component could also potentially support the development and
piloting of a Code of Conduct (CoC) Assessment, which could serve as an innovative rating tool
measuring performance of MFIs as pertaining to their CoC adherence. Component 2 will be
cross linked with Component 1, such that MFIs accessing Component 1 will need to commit to
data sharing on the common information platform and possibly other responsible finance
initiatives defined in the Operations Manual (OM).
Component 3: Capacity Building and Monitoring Component (US$5 million)
This component would provide implementation support, which would include support to SIDBI
for (i) implementing the project, including operating expenses and costs of the monitoring work
(defined in annex 3 and elsewhere); (ii) commissioning an impact evaluation exercise (to be
carried out through an external research agency); and (iii) SIDBI‘s own capacity building. This
component would also include support for a communication strategy to help ensure the benefits
from this intervention are shared with the wider microfinance sector.
Which safeguard policies are triggered, if any? Ref. PAD D.5, Technical Annex 10
The project has been assigned an environmental screening category ―FI.‖ The following
safeguard policies are triggered: Environmental Assessment OP 4.01
Significant, non-standard conditions, if any, for:
Board presentation: None
Loan/credit effectiveness: June 2010
The condition for effectiveness will be that the Subsidiary Agreement has been executed on
behalf of India and SIDBI, and all conditions precedent to its effectiveness or to the right of the
SIDBI to make withdrawals under it (other than the effectiveness of the Loan Agreement and the
Financing Agreement) have been fulfilled.
Covenants applicable to project implementation are as follows:
i. SIDBI shall maintain an adequate organizational structure with functions, powers,
staff, and resources necessary for project implementation.
ii. SIDBI shall implement the project in accordance with the provisions of the OM
for the project.
iii. SIDBI shall monitor progress of the project in accordance with indicators
satisfactory to the Bank.
iv. The midterm review (MTR) of the project shall be carried out by December 31,
2012.
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v. SIDBI‘s on-lending activities to MFIs under the project shall be carried out in
accordance with the agreed Exclusion List of Activities (ELA), and SIDBI will
ensure that the microfinance activities under the project comply with the ELA.
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A. STRATEGIC CONTEXT AND RATIONALE
1. Country and sector issues
1. The Indian financial sector has witnessed reforms since the early 1990s resulting in improved financial performance and stability during this period. These reforms—including
interest rate deregulation, capital market development (particularly equity and government bond
markets), and opening up of the banking and insurance sectors—have facilitated increased
competitiveness in banking through the entry of new private domestic and foreign players,
introduction of new technology and products, and deepening of India‘s financial system.
2. Notwithstanding a stable, dynamic, and growing financial sector, increasing access to finance for millions of India’s financially under-served segments remains a challenge. This
challenge has further been accentuated by the financial crisis, during which—despite stable
policies, increasing efficiency, strong factor endowments, and a dynamic financial market—
India‘s economic growth slowed from 9.7 percent in 2006–07 to 5–6 percent in the second half
of 2008–09, accompanied by a slowdown in credit growth.1
3. In recent years there have been numerous initiatives to improve access to finance to financially under-served segments. Among these initiatives is the Government of India (GoI)
program to support the revitalization of the rural credit cooperatives,2 initiatives to increase
access to finance for small and medium enterprises (SMEs),3 and supporting infrastructure
finance,4 introducing enabling guidelines to support financial inclusion by, for example, opening
no-frills savings accounts for under-served clients, provisions to expand the outreach of micro-
insurance, and the use of banking correspondents to increase access.
4. However, despite these measures, access to financial services for India’s poor still remains a key development challenge, as a significant part of the population is under-served by
the formal banking sector.5 While India has a well-developed banking system and there has been
significant progress in banking sector reforms, performance, and stability, two-thirds of the
population is still estimated to have only limited or no access to financial services. Given the
large demand, in addition to the measures described above, there is a need for multiple
approaches and mechanisms to provide basic financial services to all Indians. Among such
initiatives is the use and support of microfinance initiatives that can help to deepen the
penetration of financial services among the poor and under-served.
5. The microfinance sector, which bridges the ―access gap‖ by providing thrift, credit, and other customized financial services to the under-served, with the aim to help raise incomes and
improve living standards, has been growing exponentially in India. Smaller initiatives in
1 Supported by the Bank-funded Banking Sector Support Loan (US$2 billion) that provides budgetary support to the
government for supporting capital infusion into banks, partly as a precautionary shield and partly to prevent lack of
capital from constraining good quality credit growth. 2 Supported by a Bank project on Strengthening India‘s Rural Credit Cooperatives (US$600 million).
3 Supported by a Bank project on SME Financing and Development (US$120 million) topped up recently with
additional financing in the amount of US$400 million. 4 Supported by the Bank‘s loan to the India Infrastructure Finance Company (US$1.195 billion).
5 India: Scaling Up Access to Finance for India’s Rural Poor (World Bank 2004, 2006).
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microfinance in India date back to the 1970s, but the sector really started gaining a foothold in
the late 1990s (see also annex 1). Facilitated by a benign approach toward regulation since 1997,
and with a focus on the southern states, microfinance institutions (MFIs) have been scaling up
rapidly in recent years, although from a small base. Growth in loans outstanding to clients—now
mostly accounted for by MFIs structured as regulated nonbank finance companies—has been at
rates in excess of 65 percent per year over the past three years, and stood at around US$2.5
billion at the end of financial year (FY) 2009.
6. This growth has contributed to reducing the gap between the unmet demand for and supply of financial services for under-served households and microenterprises. Recent analysis
indicates that access to microfinance in India has contributed to the reduction in vulnerability of
poor households through asset creation, increased incomes, higher savings and employment, and
empowerment of women clientele.6
7. However, two overarching challenges remain: (i) a large unmet demand for financial services by India’s under-served segments, particularly in states where market penetration has
been extremely low; and (ii) rapid expansion, which introduces the dual challenge of
maintaining good-quality growth while promoting responsible finance among MFIs.
Conservative estimates from Sa-Dhan, the main network of MFIs, indicate an unmet credit
demand among potential microfinance clients at Rs 80,000 crores (US$17.7 billion). Rapid
expansion, however, can lead to funding gaps, potentially erode credit discipline, and introduce
risky market behavior. This could result in external interference in the sector, which could
threaten short- and medium-term sustainability.
Key Issues:
8. Scaling up microfinance and promoting responsible and balanced growth relies on tackling three key issues facing the microfinance industry in India:
9. Appropriate financing that tackles the growing equity gap and the need for more patient debt instruments: The fast-paced growth of Indian microfinance has been largely driven by
commercial bank debt to MFIs. The share of debt in total funding of MFIs exceeds 80 percent,
most of which is sourced from commercial banks at commercial rates. As a result, the fast debt-
funded growth—without sources and amounts of equity growing at a commensurate pace—has
led to a situation where many Indian MFIs face a severe shortage of equity capital, limiting their
ability to take on more debt and increase lending outreach to more clients (figure 1 and table 1
below). A recent International Finance Corporation (IFC)–Intellecap study estimates that even
with conservative assumptions, the minimum equity/quasi-equity amount needed is US$1.3
billion over the next four years.7 Bank projections show that even with conservative growth
assumptions, there is a need of US$294 million in equity funds immediately. Furthermore, with
such capital structure constraints, MFIs have less of an incentive to focus on under-served areas,
as this will increase their cost, which in turn will have a negative impact on the capital adequacy.
6 Assessing Development Impact of Microfinance Programs is a national study of Indian microfinance households
commissioned by SIDBI, in collaboration with the Department for International Development (DFID), September
2008. 7 Inverting the Pyramid (Intellecap and IFC 2008).
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MFI tiers wrt loan
portfolio Loan portfolio
Total Active
borr.
Capital
adequacy
Est. capital
shortfall
Rs. Mar-09 $ mn Mar-09 No. Mar-09 % Mar-10 $ mn
>1.5 billion port 1,936 13,165,995 13.6% 224.1
0.25-1.5 bn port 338 2,645,434 12.1% 45.9
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Therefore, as microfinance continues to grow, it will be important to ensure this growth is
inclusive, with better geographical coverage to address the demand for financial services in
under-served states and districts.
2. Rationale for Bank involvement
13. The rationale for Bank involvement essentially revolves around three main issues: (i) the contribution of the project to the goal of inclusive growth, consistent with the Country Strategy
(CAS); (ii) the long-term funding constraints that threaten continued and balanced growth of the
sector; and (iii) need for a stronger responsible finance agenda that is undertaken by the sector.
14. The World Bank Group‘s India CAS highlights the need for inclusive growth. Microfinance, by addressing the financial service needs of under-served clients, is an important
tool for poverty reduction, private sector development, and inclusive growth. Economic and
sector work undertaken11
emphasizes the need for the development of the microfinance sector in
India. The Bank has also recently completed a microfinance strategy, Financing the Bottom of
the Pyramid: Microfinance Strategy for South Asia: FY2010–12. The strategy highlights the
Bank‘s comparative advantage in supporting the microfinance agenda in the region, including
working with apex institutions to crowd in commercial finance; increase standards, reporting,
and efficiency of MFIs; and ease crisis-related liquidity constraints. The Government of India
(GoI) recognizes that scaling up microfinance in a responsible and sustainable manner will
require diverse modalities for expanding the flow of financial services to the poor. Toward this
objective, the Small Industries Development Bank of India (SIDBI) is poised to take a more
active leadership role in growing the industry to meet the unmet demand for financial services.
SIDBI is the most prominent and influential apex organization for microfinance in India and
among the better-performing microfinance apexes globally. Support to strengthen SIDBI‘s
leadership role is well suited to the World Bank‘s country and regional microfinance strategies.
15. Secondly, the role of the Bank is justified on grounds of the market failure that exists with respect to lack of appropriate funding instruments needed at this stage of development. As
mentioned above, Indian microfinance is faced with a situation where many Indian MFIs face a
severe shortage of equity capital, which limits their ability to take on more debt and increase
lending outreach to more clients. Availability of longer-term funding sources would help SIDBI
in introducing appropriate financial instruments that would contribute to strengthening the
balance sheets of the MFIs. The accumulated Bank know-how and lessons learned from previous
lending operations, both in India (for example, rural livelihoods projects, financial intermediary
loans to SIDBI directed to the financing and development of small and medium enterprises; see
annex 2 for more detail) and globally, provide useful experience to draw on. Additionally, the
project would support India in its response to the financial crisis, which has affected lending to
MFIs as observed by a slowdown in fresh disbursements to smaller and medium-size MFIs.
11
These include India: Scaling Up Access to Finance for India‘s Rural Poor‖ (World Bank 2004, 2006),
Microfinance in South Asia (World Bank 2006), India: Regulation of Microfinance (World Bank, CGAP 2006),
Inverting the Pyramid (Intellecap and IFC 2008), Bharat Microfinance Report (Sa-Dhan 2009), and Microfinance
India: State of the Sector Reports (Access Development Services 2006, 2007, 2008, 2009). For a more detailed list,
see annex 12.
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16. Thirdly, microfinance in India has entered a phase of rapid growth, but as a younger industry, it still has numerous vulnerabilities. High growth can erode credit discipline and can
potentially introduce risky market behaviors such as client over-indebtedness and poor risk
management. Timely leadership from SIDBI supported by the World Bank project to promote
more responsible finance, improve transparency, and add to new market information and
infrastructure can serve to mitigate these risks during this crucial period of expansion. Such
leadership can ensure that microfinance becomes a nationwide industry contributing to balanced
and inclusive growth across India.
3. Higher-level objectives to which the project contributes
17. The project is designed to support inclusive growth in India by supporting GoI and SIDBI‘s efforts to scale up and promote responsible and balanced growth of microfinance.
Improved access to finance would work toward this objective by contributing to sustainable
income generation and productive asset creation, poverty reduction, and growth. These are
consistent with GoI‘s development priorities as reflected in the Eleventh Five-Year Plan as well
as the Bank‘s focus on inclusive growth reflected in the CAS.
18. The project is part of the Bank's program of targeted assistance to those without access to financial services. The project addresses the lack of access of the under-served households to
financial services, an important constraint to improved productivity and incomes, particularly in
the aftermath of the global financial crisis that has affected MFIs and their clients. The project
would build on SIDBI‘s success of fostering and catalyzing growth and sustainability of the
sector since the mid-to-late 1990s, with a focus toward increasing financial outreach particularly
in under-served areas where microfinance penetration continues to be very low.
B. PROJECT DESCRIPTION
1. Lending instrument
19. The lending instrument is a financial intermediary loan (FIL) (as per the World Bank Operational Manual Policy Directive OP 8.30), to be financed by a combination of the
International Development Association (IDA) and International Bank for Reconstruction and
Development (IBRD) resources, in one-third and two-third proportions, respectively, totaling
US$300 million (equivalent). For the IBRD component, SIDBI has opted for a variable spread,
denominated in U.S. dollars. The IBRD part will have a final maturity of 25 years, including a
grace period of 14.5 years. The variable lending rate consists of six-month London interbank
offered rate (LIBOR) and a variable spread. The charges include a front-end fee, apart from the
contractual spread. After factoring in the benefits of sub-LIBOR funding costs, including any
applicable loan charge waivers the expected disbursement profile of the project, and amortization
schedule, the all-inclusive (blended) cost based on forward LIBOR rates and the current variable
spread (as on April 26, 2010) is estimated at 3.40 percent.12
12
The current variable spread is LIBOR + 0.24%, or 0.74% at market rates as of April 26, 2010.
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2. Project development objective and key indicators
20. The objective of the project is to scale up access to sustainable microfinance services to the financially excluded, particularly in under-served areas of India, through, among other things,
the introduction of innovative financial products and fostering transparency and responsible
finance.
21. Progress towards the achievement of the project objective would be monitored using the following indicators (refer also to annex 3):
Extent of outreach: Disbursements of loans by MFIs to their clients relative to the amounts of financing borrowed from SIDBI
Breadth of outreach: Measured by growth rates within under-served areas
Operational sustainability: Measured by operational self sufficiency (OSS)
Responsible finance: Measured by the percentage of beneficiary MFIs disclosing operational/ financial information on a Web-based information platform
3. Project components
22. The project will achieve its objective by: (i) supporting the expansion of financial services, particularly in under-served states or under-served areas within states; and (ii)
facilitating responsible and sustainable growth through the provision of more patient capital,
including longer-term debt, equity and quasi-equity instruments with funding linked to
responsible finance actions (for example, actions on transparency, good governance, and CoC
adherence).
23. The project will use an incentive approach and link the three components (annex 5 provides the project costs) described below such that maximum additionality is attained, while
also addressing the key issues (see section A above) facing the Indian microfinance sector. The
incentive approach will involve the provision of appropriate financing instruments, access to
which would be conditional not just on satisfactory appraisal of the MFI based on a detailed
appraisal system (annexes 4 and 6 and the OM), but also based on case-by-case agreements with
MFIs on responsible finance or other actions on capacity improvement that they would need to
complete to ensure continued access to funding under the project. The incentive to be used will
be a commercially priced, but attractive funding product, such as a quasi-equity/subordinate
product, which is currently not available in the India market, but will help address equity-gap
issues for Indian MFIs. In return for access to this funding, the responsible finance or capacity-
building actions could include commitments to increase MFI portfolios in under-served areas,
adoption of improved governance practices, reporting to an information platform, initiating a
CoC Assessment, and adoption of improved accounting practices where relevant. Through this
link between a financing component and a responsible finance component, project funding will
seek to contribute to the objectives of promoting sustainable and more responsible finance.
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Component 1. Scaling Up Funding Support for MFIs (~US$290 million plus US$30 million
counterpart funding)
24. This component would provide funding for MFIs to scale up their operations. Funding from SIDBI to MFIs is proposed to be structured as debt or quasi-equity to support their
operations and growth, enhance their financial strength, and enable them to leverage and crowd
in private commercial funds to on-lend larger amounts to the under-served. Limited equity
support would also be considered from SIDBI to MFIs. The funding provided under this
component to MFIs would be on commercial terms. The total funding thus mobilized will
enhance MFIs‘ ability to reach out to larger numbers of under-served segments of the population
through microfinance services. In particular, the quasi-equity/equity funding will also help
address the equity gap in Indian MFIs, while providing SIDBI with the leverage to promote the
responsible finance agenda among the MFIs funded.
25. Two kinds of leverage would be sought to be derived from such funding:
(i) Financial leverage: Equity or quasi-equity would lead to 6-7 times leverage through raising of additional debt which would contribute to significantly enhanced on-lending,
while a 4-5 year debt from SIDBI to MFIs would lead to a roll-over of around 3-4, in
terms of on-lending to final clients. Funding that is structured as quasi-equity or equity
will obtain leverage or crowding in through the MFIs raising additional debt and also
through future mobilization of additional equity. This will help create strong institutions
that are viable and able to attract and access the capital market and private sector
investors in the medium to long term, ensuring that their growth sustains beyond the
project period.
(ii) Responsible-finance leverage: As discussed above, funding to MFIs would be linked to performance criteria and actions revolving around greater transparency, responsible
expansion, accountability, growth in under-served areas, disclosure, and good governance
in the microfinance sector, thereby contributing to a responsible finance initiative, an
activity supported under Component 2 of the project (see also annex 4).13
26. The Indian microfinance sector is diverse, spanning the range of a few large, commercial, and growth-oriented institutions to midsized, second-generation institutions poised for
expansion, to start-up non-governmental organizations (NGOs), with limited capacity but an
appetite for growth. Each market segment will necessarily have different growth and governance
trajectories. The project takes into account these tiers of the market by tailoring specific
performance, outreach, and governance criteria to each tier while taking into account need and
additionality of supporting these institutions. For example, funding to a large MFI in Tier 1
would be linked to increasing outreach in under-served areas and participating in data sharing
and responsible finance initiatives supported under Component 2, whereas funding for medium-
size players would be more closely linked to increased growth, performance, and sustainability,
as well as good governance and transparency. The tiers and proposed performance criteria are
further discussed in annex 4.
13
Some of the criteria would be ex ante—before new financing is secured—and some would be ex post/ongoing to
ensure progress during the life of the new financing.
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14
27. This component will directly address the funding gap constraint, promote the responsible finance agenda, and support the continuation of a diverse range of institutions. Further, this
component would help introduce a new and much-needed innovative financial product, priced
commercially, into the Indian microfinance market, the need for which is evident from overall
data on microfinance in India (figure 1) and was reiterated during stakeholder consultations.14
In
providing such funding, the project will place an emphasis on ―importing‖ established MFIs
from developed regions in India to initiate or expand operations in the less-developed regions of
the country, a strategy that has worked very well in some Bank projects (for example, a
microfinance project in Afghanistan). At the same time, the project will support the expansion of
a few smaller MFIs (Tiers 2 and 3), including those structured as NGOs and cooperatives, that
demonstrate a potential for growth.
Component 2: Strengthening Responsible Finance (US$5 million)
28. This component would promote transparency and responsible microfinance through the development of an India microfinance platform. This initiative would be envisaged as a common
information platform for MFIs to provide and disseminate valuable information that would
inform policy makers, MFI managers, and funders (similar, but broader and deeper than the
information available on the MixMarket,15
including through potential collaboration with Mix
Market in India). As part of the responsible finance initiative, SIDBI will seek to bring together a
Lenders‘ Forum comprising key MFI funders to agree on common actions, including those on
transparency and good governance by MFIs. Additionally, once the Unique Identification (UID)
initiative of the GoI is ready for implementation, the forum will encourage MFIs to participate
and support the roll-out of this initiative, given its significant potential to improve transparency
and credit information. This component could also potentially support the development and
piloting of a CoC Assessment, which could serve as an innovative tool for measuring
performance of MFIs as pertaining to their CoC adherence. This component will be cross-linked
with Component 1, such that MFIs accessing Component 1 will need to commit to data sharing
on the common information platform and possibly other responsible finance initiatives that are
defined as performance criteria in the OM.
Component 3: Capacity Building and Monitoring (US$5 million)
29. Implementation support would include support to SIDBI for (i) implementing the project, including operating expenses and costs of the monitoring (defined in annex 3 and elsewhere); (ii)
commissioning an impact evaluation (to be carried out through an external research agency); and
(iii) SIDBI‘s own capacity building. This component would also include support for a
communication strategy to help ensure that benefits from this intervention are shared with the
wider microfinance sector.
4. Lessons learned and reflected in the project design
30. In designing this project, the Bank has leveraged its experience with similar initiatives around the world (in Afghanistan, Bangladesh, Bosnia, Mexico, Pakistan, and Russia, to name a
14
Equity investors, MFIs, their associations, NGOs, rating agencies, and advisory firms. 15
MixMarket is the leading global information database (www.mixmarket.org), managed by the Microfinance
Information Exchange (the Mix, www.themix.org), which was founded by the Consultative Group to Assist the Poor
(CGAP, a multi-donor consortium housed in the World Bank and part of its Financial Sector Network).
http://www.mixmarket.org/http://www.themix.org/
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15
few) and with livelihoods/poverty-reduction projects in India. Additionally, the Bank has
extensive experience working with apex institutions and has incorporated lessons learned and
good practices associated with this institutional mechanism. The new model of Bank support
relies on institutions that on-lend at or near commercial rates or take equity positions that help
crowd in private sector funding and foster continued commercialization. In this model, SIDBI
leverages its position to play a role in nurturing the development of sustainable microfinance
providers by setting minimum standards and performance targets around transparency and
governance as well as more efficient financial management and internal controls.
31. The preparation team for this project included the Consultative Group to Assist the Poor (CGAP) and the International Finance Corporation (IFC). During implementation, close links
will be maintained with other initiatives. For example, the IFC‘s Technical Assistance Advisory
Services is undertaking a market assessment to identify optimal modalities and capacity-building
needs to design and implement a credit reporting platform shared among the MFI community.
The project will closely coordinate with this initiative and possibly use the findings of the study
to feed into overall project implementation. A dialogue between IFC and SIDBI and potential
future collaboration have also been initiated and facilitated. The project is also highly
complementary to the IFC agenda, which focuses primarily on equity investments in
microfinance investment vehicles (which invest in MFIs).16
Component 1 funding will likely
expand the market for IFC and other investors looking at MFI investments through crowding in
from Tier 2 capital and stabilizing MFI balance sheets, making them more investor-worthy. The
responsible finance agenda has an enormous externality effect, where reputational risks are
lowered for the IFC, other investors, and the donor community.
32. The Bank has also started discussions and will continue to coordinate with the United Kingdom‘s Department for International Development (DFID) as they implement the Poorest
States Inclusive Growth Program (PSIG). The Bank discussed the performance of the previous
DFID technical assistance (TA) project and also SIDBI‘s implementation of the SME project TA
component. In both cases, it is evident that SIDBI‘s capacity to deliver TA has developed
considerably. In any case, TA at the institutional level for MFIs would not be directly addressed
by the project; instead the project would leverage off the TA activities of programs such as the
PSIG that are being initiated through a consortium of institutions (including SIDBI) and would
focus much more on the simpler structure proposed by the project under Component 2.17
5. Alternatives considered and reasons for rejection
33. Regarding the choice of lending instrument, an FIL is deemed appropriate. The project is designed to support SIDBI‘s funding to MFIs while assuming full credit risk. The project focuses
exclusively on the MFI sector, rather than supporting a broader range of financial intermediaries.
Although the project could have looked at other financial intermediaries for implementation,
given that the focus is on MFIs, which have steadily been growing in terms of becoming the
predominant players in the microfinance sector and that SIDBI is the main intermediary that
16
The project helped to initiate discussions between IFC-SIDBI. Potential linkages are being explored between IFC
and SIDBI in close coordination with the Bank. 17
The DFID PSIG plans to cover four states. The implementing agencies for PSIG are yet to be identified. Support
from IFC and CGAP could also be explored during implementation in providing MFI and sector capacity building.
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16
lends to MFIs, the choice was natural. Although intermediaries such as banking correspondents
are not explicitly included, many MFIs are eligible to be banking correspondents. Also, there are
a number of ongoing initiatives (supported by the Bank and other donors) that support different
types of entities, such as rural cooperatives. Moreover, MFIs are now showing promise of being
able to deliver financial services on a much broader scale, and hence the project focuses on
MFIs.
34. A Development Policy Loan (DPL) instrument was also considered given the links between the financing and the responsible finance policy actions. However, because the
implementing agency (SIDBI) is a corporate entity, the DPL instrument cannot be used.
C. IMPLEMENTATION
1. Partnership arrangements
35. The project is financed only by the Bank and funds from SIDBI, but there are several other donors involved in the microfinance sector, including DFID, the Asian Development Bank
(ADB), and the German Development Bank (KfW). The Bank has consulted and made every
effort to ensure complementarities and close coordination will be facilitated by SIDBI, as it is an
implementing agency for most microfinance projects.
36. DFID‘s PSIG will be implemented by a consortium, in which SIDBI plays a critical role. The design phase of the PSIG has been initiated, which will enable SIDBI to factor in the project
design and ensure maximum complementarities between the two projects. ADB‘s project focuses
on clients above the typical microfinance-client level in terms of loan size and will also be
implemented by SIDBI. The ADB project complements the Bank‘s project by focusing on clients
that are on the higher end of the spectrum of microfinance services. KfW is providing a line of
credit and some TA to SIDBI. This will support the traditional debt products that SIDBI has been
implementing and add funding to its main business line. KfW will also have a TA component
(around US$2.5 million) that will focus on capacity building, including supporting an
information platform that would allow SIDBI to interface with its MFI clients, developing a set
of benchmark indicators for performance monitoring, and supporting SIDBI in carrying out
systems and portfolio audits. All these activities are complementary to the Bank‘s project.
Efforts will be made to meet with donors during supervision missions to facilitate effective
coordination and communication during implementation.
2. Institutional and implementation arrangements
37. SIDBI, with its vast experience of microfinance in India, will be the implementing agency for this project. Within SIDBI, the SIDBI Foundation for Micro-Credit (SFMC), which
has a dedicated and experienced microfinance team, will be responsible for implementation. The
current staffing of SFMC is around 45 officers, located in many locations. The central team is
based in Lucknow.
38. SIDBI is well placed to implement the project. It has been playing a catalytic role in supporting the Indian microfinance sector particularly since 1999, when SFMC was launched.
Apart from being an important and responsive funder, SIDBI is also regarded as a leading
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17
institution in the sector, as reflected in its involvement in the development of the broader sector
(for example, introduction of ratings and impact assessments, strengthening MFIs‘ capacity and
internal control systems) as well as in discussions of regulation-related issues. SIDBI‘s profile
has developed over the years and was facilitated through projects from 2000 to 2009 with the
International Fund for Agriculture Development (IFAD) and DFID. In both projects SIDBI was
the counterpart for the partners in the National Micro Finance Support Program (NMFSP).18
Given SIDBI‘s demonstrated capacity and track record in supporting the development of the
retail microfinance sector in India,19
the institution is ready to begin the second phase of the
development of the sector, which would address key issues listed above. SIDBI also makes for
an appropriate implementing counterpart for this project given its very good implementation
capacity, familiarity with development financing, and familiarity with Bank fiduciary and
safeguards requirements. SIDBI has done very well in implementing the World Bank‘s SME
Financing and Development Project (US$120 million), which has been recently scaled up
through additional financing (US$400 million).
39. SIDBI will be responsible for ensuring compliance of project activities to the fiduciary arrangements for the project (annexes 7 and 8). To ensure that these functions are performed
efficiently and effectively, SIDBI will provide requisite additional staffing, where necessary.
Given its financial capacity and track record (see above and annex 9), SIDBI is well placed to
implement the project. Safeguards arrangements have been agreed with SIDBI (annex 10), and
SIDBI has the capacity to ensure compliance during implementation.
40. SIDBI is fully committed to enhancing transparency under the project. Besides the on-demand disclosure of information, SIDBI has proposed to initiate proactive (suo moto)
disclosures that include the public disclosure of all key documents related to the project and,
more broadly, to its overall microfinance operations. SIDBI‘s website will highlight the project
(including project audit reports and financial management reports) and other microfinance-
focused activities. SIDBI intends to further enhance disclosures to fully comply with provisions
of the Right to Information (RTI) Act 2005 and will undertake capacity building of its staff,
including familiarization with RTI provisions through Component 3.
41. Components 2 and 3 may involve procurement of consultancies and training and goods. Procurement will be undertaken by SIDBI in line with agreed procurement procedures for this
project (annex 8). For support in the implementation of Component 2, SIDBI will hire a firm
where required that can provide operational support for the responsible finance component. One
example of such support could revolve around supporting the information platform, where the
work would entail, among other things, collating and following up on data submission from
18
The main features of NMFSP were to provide customized, need-based packages of loans, grants, and to a lesser
extent, equity to partner MFIs to develop into large and sustainable institutions; capacity building of clients, MFIs,
and the sector; and capacity-assessment ratings and capacity-building needs assessments. All aspects of the program
were based on a market-driven, flexible approach for credit delivery with a focus on financial sustainability. The
program closed in March 2009 and reportedly received the highest rating possible from DFID‘s assessment of its
global microfinance program. 19 From the Forbes list of Top 100 MFIs, seven Indian institutions were included in the list—all of them partner organizations of SIDBI—testifying to the high impact of SIDBI in supporting and nurturing the microfinance sector
in India.
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18
MFIs, analyzing and cleaning the data and preparing comparative reports, maintaining the
website for disclosure of the information shared on the responsible finance initiative, developing
templates for reporting on this platform, and maintaining the platform.
42. An Operations Manual (OM) acceptable to the Bank has been prepared by SIDBI. The OM includes, among other things, the agreed financial management (FM) and disbursement
arrangements; procurement arrangements; guidelines on Preventing and Combating Fraud and
Corruption in Projects Financed by IBRD Loans and IDA Credits (dated October 15, 2006); a
Governance and Accountability Action Plan (GAAP); and a detailed framework for the
continuous measurement and monitoring of outcomes (annex 3), a key element in ensuring
effective implementation.
43. Arrangements will be put in place to ensure adequate project supervision, covering fiduciary and safeguards aspects, with semi-annual supervision missions. The supervision team
will draw on expertise from the Bank as well as external experts, where necessary. Meetings
with other concerned stakeholders engaged in microfinance, including donor agencies, will be
undertaken during supervision missions.
44. IBRD funds will flow to SIDBI, which will channel them for the project components. IDA funding will flow to GoI, and from GoI to SIDBI for implementing project components.
Disbursements will be made on a reimbursement basis using interim unaudited financial reports
(IUFRs)—evidencing actual expenditures—prepared by SIDBI. IUFRs will be submitted on a
quarterly basis, but SIDBI would have the flexibility to seek reimbursement earlier than the
quarterly intervals by submitting reports for shorter periods. The disbursement percentage will be
a defined percentage of the gross expenditures as reported by SIDBI through the IUFRs.
Retroactive financing up to an amount of 20 percent of the total loan and credit amount may be
made available for all eligible expenditures in all components incurred after July 1, 2009. The
retroactive financing will be applied as follows: up to US$15 million will be drawn against the
IBRD loan and up to US$45 million equivalent will be drawn against the IDA credit.
3. Monitoring and evaluation of outcomes/results
45. A strong monitoring and evaluation (M&E) framework to track inputs, outputs, and outcomes in a systematic and timely fashion has been developed and agreed with SIDBI (annex
3). Project outcomes and outputs will be monitored through periodic reporting by SIDBI—which
has developed considerable capacity in monitoring through implementing the earlier DFID and
IFAD projects—and via project supervision using data from several sources, including (i)
reported data from SIDBI; (ii) data from MFIs; (iii) data collected by the agency that will be
responsible for the microfinance information platform; (iv) auditors; (v) Bank staff
implementation support missions; and (vi) the long-term impact assessment that will be
undertaken by an independent, external impact evaluation agency (under Component 3). The
Midterm Review (MTR) of the project will entail an update of an institutional assessment of
SIDBI/SFMC, including its management, its appraisal standards, and its portfolio and business
strategy for microfinance. Further, within the first two–three years of implementation, either as
part of the MTR or otherwise, an update of the corporate governance of SIDBI and a review of
governance issues in the project will be undertaken.
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19
4. Sustainability
46. The sustainability of the project‘s outcomes, defined as scaling up sustainable and responsible finance, will depend on how well the project is implemented by SIDBI in terms of
leveraging the funding component (Component 1) with the responsible finance component
(Component 2), while supporting SIDBI‘s capacity and project-implementation activities
(Component 3). Four factors bode well for ensuring sustainability of project outcomes: (i)
SIDBI‘s track record in the microfinance sector, in particular its pioneering role in Indian
microfinance and its successful implementation of past, large donor projects (DFID and IFAD);
(ii) SIDBI‘s commitment to the project structure with its incentive-based approach through links
between financing and responsible finance actions, as well as its commitment to implement this
project—as demonstrated by its active participation in the preparation of the project and
proactive approach to developing/researching the ideas that the project intends to support; (iii)
SIDBI‘s commitment to the microfinance sector as reflected in its annual reports, progress of
supporting the microfinance sector over time, and its business plan to increase staffing and focus
on this area over time; and (iv) GoI‘s strong commitment to promoting sustainable microfinance
and increasing the outreach of financial services to under-served areas/segments. GoI‘s
commitment is reflected in its various policy statements in support of the microfinance sector
and its support of this project.
47. Other factors that will have an impact on the sustainability of project outcomes relate to the participation of other key stakeholders in supporting the project objectives. In particular,
participation of MFIs in Components 1 and 2 will be critical. This will be ensured through
linking access to funding in Component 1 to actions committed by each MFI under Component
2. Stakeholder consultations and individual meetings with MFIs have indicated that SIDBI—on
account of its position in the lending market and given the attractive long term funding, including
quasi-equity available under Component 1—will be able to derive sufficient leverage from
Component 1 in getting action on Component 2. The participation of other lenders in requiring
similar action as under Component 2 could also further bolster project sustainability, and the idea
of the Lenders‘ Forum in Component 2 will help facilitate this.
5. Critical risks and possible controversial aspects
48. A detailed analysis of the potential risk areas and proposed or existing mitigation measures was undertaken and is reflected in the GAAP (see annex 6; GAAP is also included in the OM). The
table below describes the potential risks, the degree of risks, the mitigation measures, and residual
risks. While overall risks are moderate, the following risks will need particular focus: (i) FM risks at
the MFI level; (ii) risks related to over-fast growth and lack of capacity of MFIs to handle this,
leading to fall in quality of lending by MFIs; and (iii) potential external interference in
microfinance. The GAAP includes mitigation measures and timelines/milestones for dealing with
these risks drawing significantly from Component 2, which focuses on responsible finance and
SIDBI‘s ongoing activities in the sector that help mitigate these risks. These risks will be reviewed
to determine how they may have changed during implementation and allow the team to focus
implementation support resources on the evolving risk areas.
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20
Risks Risk
Rating
Risk Mitigation Measures Risk
Rating
with
Mitigation
To project development objective:
Selection of beneficiaries: Selection of
beneficiaries by MFIs could be subject to
―mission drift.‖
M Clear definition of under-served areas, emphasizing financing to such areas (through
linking Components 1 and 2), and monitoring
mechanisms (for impact evaluation) to be used to
ascertain targeting of clients (drawing on lessons
from successful programs in India, Bangladesh,
Indonesia, and so forth) have been agreed and
will be used in project implementation. Further,
MFIs themselves have developed clear criteria
and have fine-tuned mechanisms for identifying
clients. This is monitored by SIDBI as part of its
current post-disbursement checks.
L
Overheated growth: Excessively high
growth rates and possibility of over-
financing by MFIs, especially in
saturated markets.
S
The risk of excessive growth will be mitigated
through use of the incentive approach taken in
the project, which links funding to MFIs under
Component 1 to actions centered on more
responsible finance supported under Component
2. For example, MFIs, particularly large MFIs,
could be supported if they are willing to commit
to a certain growth rate in under-served areas of
the country. This will help mitigate the risk of
over-financing in saturated markets and also
support expansion in under-served areas, which
will lead to more balanced growth. Further, MFIs
supported under the project will commit to share
information on their operations, financial
performance, outreach, branches, clients, interest
rates, and so forth to the information platform
that would be supported through Component 2.
M
External interference: Risks associated
with interference or loan forgiveness or
interest-rate caps. With rapid expansion
of the sector and anecdotes of over-
indebtedness, lack of transparency, and
client coercion, the sector could
potentially face instances of external
interference.
S GoI‘s current view of microfinance is well understood. GoI has formally recognized and
appreciated the role of microfinance as
demonstrated through various budget
announcements and otherwise.
The potential for imposing interest-rate ceilings
or intervening in other counterproductive ways is
mitigated by the fact that most MFIs are under
the regulatory purview of the Reserve Bank of
India (RBI), which makes decisions on policy
matters independently and has consistently
maintained a policy of market-determined
interest rates.
M
To component results:
Effectiveness of project management
structure: Risks may arise from SIDBI‘s
oversight and regulation arrangements,
M SIDBI has been operating in the microfinance
sector for many years and was a pioneer in terms
of financing to MFIs, a model which today has
L
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Risks Risk
Rating
Risk Mitigation Measures Risk
Rating
with
Mitigation
in case of insufficient institutional
capacity to handle the project activities,
in particular for the increased policy
advocacy and analysis roles envisaged
by SIDBI with TA support under this
project.
become the predominant model in microfinance
in India. During this period it has obtained
excellent experience of lending to MFIs. SIDBI
has put together its various operating practices
developed over the years into a Credit Manual,
which feeds into the Bank project‘s final, specific
implementation arrangements captured in the
OM.
Lack of capacity of MFIs: Risks may
arise from the lack of capacity of MFIs
in handling growth and carrying out the
project-supported activities.
S MFIs have demonstrated their capacity to
undertake microfinance activities at scale over
the past decade, as evidenced in the growth and
quality of financial and outreach indicators;
nonetheless, there are differing capacities. SIDBI
places considerable emphasis on assessing
capacity of MFIs to on-lend through the capacity
assessment ratings. Further, through Component
1, MFIs can use funding provided for quasi-
equity/equity for further capacity development, if
needed. Basic eligibility criteria have been
agreed, and the selection of MFIs under the
project is likely to center mostly on larger and
midsize MFIs (Tier 1 and Tier 2), which have
greater demonstrated capacity. Lastly, there are
sufficient other sources of funding for capacity
building (including self-funding).
M
Financial Management-Related Risks:
The FM risks may not be identified or
may not be adequately documented by
SIDBI during appraisal of MFI
proposals.
Weak FM systems of MFIs could impair
their capacity to provide fiduciary
assurance on usage of Bank funds and
keep track of a large number of end
beneficiaries.
Determination of mitigation measures
may be generic and/or a specific plan for
addressing the weaknesses and the
expected timeline may not be developed
and agreed upon between SIDBI and the
MFI. SIDBI may impose special
conditions on the MFIs in the terms of
sanction for addressing these
weaknesses, but in the absence of an
agreed plan to resolve issues,
benchmarking and measuring progress
made may be difficult.
S FM risk assessment of the applicant MFIs is done
by SIDBI during appraisal of the MFI proposals.
Identified critical FM risks are documented in the
Detailed Appraisal Note of SIDBI whereby this
process will be further strengthened.
Based on the critical risks or weaknesses
identified during MFI appraisal, SIDBI imposes
suitable conditions on the MFI to address these.
SIDBI‘s appraisal procedures require the
appraising SIDBI office to discuss these
weaknesses and obtain an undertaking from MFI
to satisfactorily address them. This specific
clause has also been included in the OM to cover
critical risks/weaknesses identified during
appraisal. SIDBI agrees to strengthen this further
and agree on a specific action plan with the MFI
to mitigate the identified critical, FM
risks/weaknesses, which will form part of the
Detailed Appraisal Note and the terms of
sanction.
System of monitoring progress of compliance
with the terms and conditions of sanction and
ensuring end use of funds is in place and
M
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Risks Risk
Rating
Risk Mitigation Measures Risk
Rating
with
Mitigation
Assessment of the MFIs‘ FM systems in
terms of scalability of the operations
may not be accompanied by a strategic
plan to address the gaps.
Progress made by the MFI in the risk
areas including compliance with specific
condition/s imposed by SIDBI in the
sanction note may not be adequately
captured in the documents generated by
SIDBI during follow up and monitoring.
documented in the Credit Manual. SIDBI agrees
to further strengthen this system and ensure that
the compliance by the MFI of the agreed action
plan on FM risks is recorded appropriately.
Procedures for appraisal, selection and
monitoring of MFIs have been included in the
OM which has been agreed at negotiations. The
cases that will be brought under the project will
need to meet the minimum eligibility criteria
agreed with SIDBI and documented in the OM.
Compliance by SIDBI with the above
requirements will be reviewed and commented
on by the project external auditors and will be
reviewed by the Bank regularly.
Normal fiduciary risks of economy,
efficiency (and timeliness), transparency,
and fairness: Procurement will be
involved only in Component 2,
Strengthening Responsible Finance, and
in Component 3, Capacity Building and
Monitoring.
M For Components 2 and 3, a dedicated
procurement team in SIDBI will carry out all
procurement under the project. Capacity already
exists at SIDBI; a dedicated procurement
specialist responsible for implementation under
the Bank SME project will provide cross-support
to SFMC for the purposes of this project.
Supervision will be carried out periodically, and
Prior and Post Review Plans will be developed
and adhered to ensure procurement meets all
required standards of the project
With regard to MFI client-level procurement, the
project-preparation phase would ensure
significant vertical accountability mechanisms
exist—thorough checks undertaken by MFIs'
operational staff and their internal audit/control
team members, through external audits and
checks, including random checks undertaken on a
sample basis by SIDBI—as well as horizontal
accountability mechanisms driven by the
microfinance clients, where internal group-level
processes provide an additional oversight on the
use of funds and their recovery.
L
Inadequate environmental and social
(E&S) safeguards: Capacity at SIDBI to
address E&S safeguards.
L E&S risks are estimated to be low given the
nature and small size of the loans that are
ultimately provided to clients. A negative list has
been formulated and a nodal person in SIDBI‘s
project management team will be responsible for
oversight, coordinating implementation of the
framework, and for compliance with the
monitoring and reporting requirements agreed
with the Bank.
L
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Risks Risk
Rating
Risk Mitigation Measures Risk
Rating
with
Mitigation
Lack of donor coordination: Arising
from the multiple donors interested and
involved in microfinance.
M The approach chosen, which involves early
identification of other donors and consequently
their inclusion in project preparation, should
mitigate this risk. The proposed project, a follow-
on to earlier support provided to SIDBI by DFID
and IFAD (line of credit and TA), directly builds
on the lessons learned from these successful
programs.
L
Overall risk rating M M
6. Loan/credit conditions and covenants
49. The condition for effectiveness will be that the Subsidiary Agreement has been executed on behalf of India and SIDBI, and all conditions precedent to its effectiveness or to the right of
SIDBI to make withdrawals under it (other than the effectiveness of the Loan Agreement and the
Financing Agreement) have been fulfilled.
50. Covenants applicable to project implementation are as follows:
i. SIDBI shall maintain an adequate organizational structure with functions, powers, staff, and resources necessary for project implementation.
ii. SIDBI shall implement the project in accordance with the provisions of the OM for the project.
iii. SIDBI shall monitor progress of the project in accordance with indicators satisfactory to the Bank.
iv. The MTR of the project shall be carried out by December 31, 2012. v. SIDBI‘s on-lending activities to MFIs under the project shall be carried out in
accordance with the agreed ELA, and SIDBI will ensure that the microfinance
activities under the project comply with the ELA.
D. APPRAISAL SUMMARY
1. Economic and financial analysis
Economic Analysis
51. The project is expected to provide significant economic benefits through providing needed financing to MFIs, particularly patient forms of capital that will allow MFIs to invest in
long-term growth; any quasi-equity or equity provided will also enable leverage through raising
additional debt for using the funding generated in on-lending to clients. As MFIs increase
outreach, more of the under-served and poor segments of the population will have access to
financial services that will allow them to invest in income-generating activities such as
agriculture and livestock, handicrafts, retail, services, and so forth. A strong microfinance sector
contributes to improved productive capacity and, thus, poverty alleviation through increased
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income for the poor. An extensive study conducted by SIDBI found that poor households with
access to microfinance increased income by 69 percent over seven years, while those without
microfinance increased income by 31 percent. There is also a strong gender development
component as approximately 95 percent of microfinance borrowers in India are women. Women
who access microcredit have reportedly increased social status and a higher rate of personal and
joint ownership of assets. MFI expansion will also support businesses, providing increased
employment opportunities.
Financial Analysis
52. An extensive review of SIDBI was undertaken to determine its compliance with
eligibility criteria under OP 8.30 and OP 10.02. The review concluded that SIDBI met the
following criteria and qualified to act as a conduit for relending Bank funds to the Indian
microfinance sector. SIDBI has:
Adequate profitability, capital adequacy, asset quality, and liquidity in accordance with accounting and auditing principles acceptable to the Bank
Acceptable levels of loan collections
Appropriate capacity, including staffing for MFI project appraisal and monitoring and for overall project implementation
Adequate managerial autonomy and commercially oriented governance
Appropriate prudential policies, administrative structure, and business procedures
53. The extensive review of SIDBI was accompanied by an extensive, on-site analysis of three MFIs—BASIX (Tier 1), Bandhan (Tier 1), and BSS (Tier 2)—and an off-site analysis of an
additional eight MFIs. In all cases, standards of risk management, operational practices,
profitability, capital adequacy, and liquidity were sufficient to meet the criteria under OP 8.30
and OP 10.02. This does not mean all MFIs in the sector would have no operational weaknesses;
indeed, areas of improvements were identified in the review, but broad compliance with the core
requirements is likely, especially considering that the majority of the funding will go to Tier 1
and Tier 2 institutions. MFIs face many challenges, including coping with growth, potential
client over-indebtedness, hiring and retaining qualified staff, and high reliance on commercial
debt that can be costly and can affect growth and financial performance. However, the reviews of
the MFIs and the overall sector performance as evidenced in various reports and sector data20
indicate that many MFIs are capable of properly managing potential funds provided by SIDBI
and that such funds on-lent to end clients would generate economic benefits for them.
2. Technical
54. The project‘s technical design has benefited from an extensive body of analysis, including SIDBI‘s and the GoI‘s own analyses and reports and the Bank‘s Economic and Sector
Work (ESW) and lending operations across many countries, including several microfinance
projects in the South Asia Region. An OP 8.30 review has been carried out for the financial
20
See annex 1 for a list of reports on the sector performance, including the IFC‘s Inverting the Pyramid,
Microfinance India annual reports, Sa-Dhan‘s annually produced Quick Report, M-CRIL‘s periodic reports, and the
MixMarket‘s South Asia data sets and MicroBanking Bulletins.
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intermediary (SIDBI), and the project meets the OP 8.30 guidelines. Some of the key principles
underlying the project design include consideration of: (i) appropriate financing instruments that
meet the requirements of SIDBI, enabling it to channel innovative products to MFIs, which in
turn are able to leverage the relatively longer tenure of equity/quasi-equity funding available to
attract additional funding from other lenders/investors, ultimately enhancing their ability to scale
up financial services to the end clients; and (ii) links between the financing component
(Component 1) and the responsible finance actions (Component 2), enabling a responsible
finance leverage, as discussed above. The project structure, therefore, furthers both scaling up of
microfinance in India and promoting responsible finance activities, including enhanced
transparency and disclosure by MFIs and increased in-lending portfolios in under-served areas,
thereby supporting a more healthy and inclusive microfinance sector.
3. Fiduciary
55. SIDBI has an FM system that is considered adequate to account and report for project resources and expenditures. Its MFI loan appraisal, sanction, and monitoring policies and
procedures are documented in a Credit and Operations Manual for Micro Finance which has
been shared with the Bank, finalized, and hosted on its intranet and made effective. As part of its
due diligence, SIDBI will ensure that all MFI proposals meet the agreed minimum eligibility
criteria (annex 4, 7 and OM). They will also be subject to appropriate external audits as per their
acts/statutes. An assessment done by an independent consultant affirms SIDBI‘s compliance with
Bank requirements under OP 10.02. The beneficiary MFIs will also need to comply with the FM
requirements under OP 10.02. The FM arrangements for the Bank project are included in the
project OM. Disbursement will be through the reimbursement method on the basis of Interim
Unaudited Financial Reports (IUFRs), for which the minimum frequency is quarterly. This will
be consolidated by SIDBI through its mainstream FM system. This has been reviewed and
SIDBI appears to be well-equipped to generate these IUFRs in pre-agreed formats to provide
sufficient information to monitor the use of funds. Accounting of expenditures under the project
would be done on SIDBI‘s existing mainstream computerized system with separate account
codes to capture the project expenditures. Retroactive financing will be on the basis of a stand-
alone audited IUFR that will certify the actual expenditure incurred that is being claimed under
the retroactive financing facility.
56. To meet the fiduciary requirements, SIDBI will submit (i) a project audit report/audited project financial statements; and (ii) an entity annual audit report of SIDBI. In the initial two
years of the project, the project audit reports will be submitted on a half-yearly basis within 90
days from the end of the half year and thereafter annually within six months from close of the
financial year, and it will include project financial statements, certified IUFRs, and a
management letter. The entity annual audit report will be submitted within six months of the
close of the financial year. The project will be audited by independent auditors acceptable to the
Bank under Terms of Reference (ToRs) agreed between the Bank and SIDBI (and reflected in
the OM). The Internal Audit Department of SIDBI will, as part of its work, audit the project and
ensure that agreed operational, accounting, payment, and procurement procedures are followed
in implementation of the project. The internal auditors will use the regular checklist/ToRs
developed by SIDBI for its microfinance activities and will also make recommendations for
strengthening internal controls and improving any systemic issues, if identified.
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57. Procurement management under the proposed project draws from the strengths and lessons learned by SIDBI, the implementing agency from an earlier association with the Bank
through the SME Project and its association with other development partners like DFID in the
microfinance sector. The procurement regime in the SME Project has developed adequate
systems and processes within all levels to meet Bank requirements in this regard. Under
Component 1, small-value loans ranging from Rs 5,000 (around US$100) to Rs 250,000 (around
US$5,000) can be given to self-help groups (SHGs) and microfinance clients for livelihoods
purposes like agriculture-related activities, petty trade, tailoring, livestock, microenterprises, and
so forth, and in some instances education and other consumption purposes. Under this
component, procurement by clients is expected to be undertaken in a prudent manner because
this will amount to using the proceeds of a loan on which the beneficiary will also pay interest.
Hence it is intended that procurement procedures would be based on established private sector or
commercial practices, which are acceptable to the Bank (under provisions of para 3.12 of
Procurement Guidelines). Reliance would be placed on the significant vertical accountability
mechanisms that exist thorough checks undertaken by MFIs' operational staff and their internal
audit/control team members through external audits and checks, including random checks
undertaken on a sample basis by SIDBI—as well as on horizontal accountability mechanisms
driven by the microfinance clients where internal/group-level processes provide an additional
oversight on the use of funds and their recovery.
58. For Components 2 and 3 implemented by SIDBI, procurement of all goods, works, and services will be carried out in accordance with the World Bank‘s Guidelines: Procurement under
IBRD Loans and IDA Credits dated May 2004 and revised October 2006 (Procurement
Guidelines) and Guidelines: Selection and Employment of Consultants by World Bank
Borrowers dated May 2004 and revised October 2006 (Consultancy Guidelines). For
procurement oversight and supervision, in addition to post-review of a 10-percent sample of
contracts issued every year, SIDBI‘s internal control measures carried out by its Internal Audit
Department (IAD) and supervised by the Audit Committee of the Board (ACB) will also be used.
4. Social
59. The proposed project will not finance a specific set of pre-identified investments. Funds will be intermediated to a number of MFIs to microfinance clients. No specific sector has been
identified, and financial intermediaries will undertake on-lending on market principles. No
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