MSME Fund: Challenges for

MFBs

Alok MisraCEO, M-CRIL

Micro-Credit Ratings International Ltd (M-CRIL)Global Microfinance Rating Agency (www.m-cril.com)

Indian Experience Current Profile of MFBs MSME Fund: Eligibility criteria How will MSME fund help MFBs Challenges: Rating Agency Perspective

Agenda

Started as donor funded in 1990s by NGOs SIDBI set up lending facility in 1998 – backed

by ratings; external third party ratings 2000-2003 mainly SIDBI and donor funded 2003 onwards – demonstration effect of ratings

and SIDBI fund brought banks Transformation of NGOs to NBFCs started in

2006; now 85% market share As of now, 75% liabilities of MFIs from bank

borrowings

Indian Experience

~900 MFBs in the country with predominant

urban operations NGO-MFIs to also gradually transform to MFBs Average loan size ~500 US$ - some up to

2,500, tenor up to 1 year Deposits and Equity as the main source of

funds High operating costs – absence of reliable data

on MIX High cost of credit – Not part of Microfinance

Transparency Absence of Ratings

Current profile of MFBs

MSME Fund: Main conditions

Compliance with Regulatory Capital of 10% Compliance with prevailing Prudential Ratios- Liquidity 20%,

PAR <5%, OER <15%, Micro loans <=.5 mn should be 80% Average deposit and client growth rate of 20 % per

annum(for institutions operating for over 2 years) Risk Management Framework acceptable to the regulators Corporate Governance Culture acceptable to the regulators Focus on SPM especially CPP

90% of MSME in Nigeria is MICRO – Total MSMEs

17 million, of which 80% have no financial access Diversify Fund Basket from Deposits and Equity More stable source of funding- Longer term

allowing multiple cycles Achieve growth based on leverage The model used extensively in countries like India,

where bank funding accounts for 80% of liabilities In Nigeria, MSME funding may catalyse banks to

look at MFBs as partners

How can MSME Fund be useful for MFBs

Rating Framework: Mirrors Eligibility Criteria

Microfinance

Institutional Rating

Governance &

Management

Management&

Operations

Financial profile

Responsible practices

Microfinance

environment

Big Challenges- Rater perspective

GOVERNANCE & STRATEGY

Board composition – governance & management separation

Board committees – Audit Risk Effective performance review by

Board Compensation structure Integrated Risk Management

Framework –Beyond Credit risk Market strategy – where you go, to

whom you lend Competition strategy Funding profile

Big Challenges- Rater perspective

MANAGEMENT SYSTEMS

Human Resources Quality Productivity and Efficiency Accounting System MIS Control mechanism including Audit Overdue tracking Client Protection Principles

FINANCIAL PERFORMANCE

Financial Planning & Budgeting Capital Adequacy & Provisioning Portfolio quality Profitability & Sustainability Asset composition ALM system Policy on Profits

Thank You