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CASHPOR FINANCIAL AND TECHNICAL

SERVICES LIMITED

MICROFINANCE EVALUATION REPORT

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MICROFINANCE EVALUATION

A Microfinance Evaluation is CRISILs current opinion on the ability of the micro

finance institution to conduct operations in a scalable and sustainable manner.

The microfinance evaluates theperformance of the MFI on a broad range of parameters

under the MICROS methodology. It includes the traditional creditworthiness analysis

using the CRAMEL approach, modified as applicable to the MFI sector. MICROS standsforManagement, Institutional arrangement, Capital adequacy & asset quality, Resources,

Operational effectiveness and Scalability & sustainability.

Validity: This evaluation is valid for the current capital structure of the company. If this

capital structure were to change or there were to be any other significant change in thecompany or the external environment, CRISIL would recommend a review whenever

such changes take place or at the end of one year, whichever is earlier.

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CASHPOR FINANCIAL AND TECHNICAL

SERVICES LIMITED

Mirzapur, Uttar Pradesh, INDIAValidity: April 30, 2003

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ABOUT CRISIL

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Indias premier credit rating agency, CRISIL was established in

1987. A pioneer of credit rating in India, CRISIL has been

instrumental in developing the framework and methodology for

rating debt in the context of the Indian financial and regulatorysystem.

Along the way, it has added many firsts to its credit. CRISIL was thefirst credit rating agency to undertake ratings for entities such as

banks, financial institutions, utilities, municipal bodies, insurancecompanies and green-field projects as well as for new instrumentssuch as asset and mortgage backed securities and other structured

obligations.

CRISIL has an equity and strategic alliance partnership with

Standard & Poors, the world largest rating agency.

CRISILs ability to understand the risk elements in any new specialized field and segregate

the population into clearly discernible clusters has been the hallmark of all its products.

The company has a reputed board that comprises eminent professionals from various fields

of business. CRISIL employs over 350 professional analysts and has developed expertise aswell as extensive databases on various industries. Given this resource base, CRISIL features

among the top four rating agencies in the world in terms of both its coverage and analytical

strength.

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ACRONYMS

AGM Acting General ManagerAIM Amanah Ikhtiar Malaysia

ALM Asset Liability Management

CEO Chief Executive Officer

CFTS Cashpor Financial and Technical Services Limited

CGAP The Consultative Group to Assist the Poorest

CRISIL The Credit Rating Information Services of India Limited

CSR Customer Services Representative

CTS Cashpor Technical Services Sdn BHD, Malaysia

DFSM Deputy Financial Services Manager

EC Executive Chairman

FSS Financial Self Sufficiency

FWWB Friends' for World Women Banking

FY Financial Year

HO Head Office

HUDCO Housing Urban Development Corporation Limited

IT Information Technology

MF Microfinance

MFI Microfinance Institution

MIS Management Information SystemsMMBST Mirzapur Mutual Benefit Savings Trust

NABARD National Agricultural Banking and Rural Development

OSS Operational Self Sufficiency

PAR Portfolio at Risk

ROA Return on Assets

ROE Return on Equity

SHG Self Help Group

SIDBI Small Industries Development Bank of India

USAID The US Agency for International Development

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Indicator Definition

Adjusted operating expenses Operating expenses + subsidized cost of fund adjustment +

inflation adjustmentAdministrative efficiency Administrative cost /average loan portfolio

Capital adequacy Net worth / risk weighted assets

Employee productivity No of active borrowers / no of loan officers

Employee turnover Employees left during the year / total employees at the end of the

period

Financial self sufficiency Operating income / adjusted operating expenses

Fund based yield Total fund based income / average funds employed

Gross profit Gross spread + total fee based income

Gross spread Total fund based income - total interest paid

Inflation adjustments ( Average net worth - average fixed assets )

* inflation rate

Interest spread Fund based yield (interest paid/ average total borrowings)

Operating expenses Total interest paid + total expenses + Total write-offs andprovisions + depreciation

Operating income Total fund based income + Total fee based income

Operational efficiency Total expenses / average total fund deployed

Operational self sufficiency Operating income / operating expenses

Personal expenses level (Employee expenses + incentives) / average loan portfolio

PAR > 5 weeks Principal outstanding that balance that is late by more than 5

weeks / total principal outstanding

PAR > 15 weeks Principal outstanding that balance that is late by more than 15weeks/ total principal outstanding

Return on assets Profit after tax /Average total funds deployed

Return on equity Profit after tax /Average net worth

Total assets Total fund deployed +net fixed assets (own)

Total debt / net worth (Total long term borrowings + total short term borrowings) /

net worth

Total fund deployed Total investments + total current assets

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FACT SHEET (As at March 31, 2002)

Legal structure Public Limited Company

Contact person Rakesh Kumar Dubey

AGM-Finance

Cashpor Financial & Technical Services LimitedPili Kothi, Mirzapur 231001

Uttar Pradesh, India

Tel : (91)5442 64437 /64439

Fax: (91)5442 64437

Year of incorporation 1996

Geographical presence 10 branches across Mirzapur District.

(Uttar Pradesh)

Business approach Self Help GroupsActive borrowers 15,770

Total staff 117

Loan officers per unit 9

Loans outstanding (Rs million) 54.78

Avg. Loan size disbursed (Rs) 3,473

Portfolio at risk (> 5 weeks) 1.88%

Operational self-sufficiency 71.80%

Financial self-sufficiency 58.04%

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Rs million

Financial Summary

31/03/2002

Un audited

31/03/2001

Audited

31/03/2000

Audited

No of active loans 15,770 10,952 4,358

Loan portfolio 54.78 30.35 6.70Reported net worth -17.71 -14.76 -10.58

Total funds deployed 66.79 42.20 12.08

Total income 13.71 5.03 2.00

Profit after tax (Adjusted) -4.02 -3.92 -6.15

Loan loss rate 1.19% 0.92% 3.36%

Operational self-sufficiency 71.80% 36.73% 23.12%

Financial self-sufficiency 58.04% 30.53% 19.17%

Administrative efficiency 10.86% 16.87% 52.92%

Operational efficiency 23.87% 39.45% 90.20%

Portfolio-at-risk ( > 5 weeks ) 1.88% 1.12% 5.99%

Return on assets -7.37% -14.43% -71.20%

Total debt/net worth (times) -4.78 -3.90 -2.11Capital adequacy -28.71% -39.84% -103.34%

Board of Directors

Name Position

Prof. David Gibbons Executive Chairman

Mr. Sanjoy Dasgupta Director

Dr. Sharada Nagarajan Director

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David Gibbons, the Executive Chairman of

CFTS, is a Canadian-born Malaysian citizen

and is well known amongst the international

microfinance community. Prof. Gibbons is adoctorate in politics from Princeton

University (US) and was a research

Professor at the Centre for Policy Research,University Sains Malaysia, till 1995.

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Outreach Summary31/03/2002 31/03/2001 31/03/2000

Loan outstanding (Rs million) 54.78 30.35 6.70

No of active loans 15,770 10,952 4,358

No of branches 10 12 12

Loan Accounts/branch 1,577 913 363

Loan balance per loan account (in Rs) 3,473 2,771 1,536

Loan outstanding/branch

(Rs million)

5.48 2.53 0.56

Rs million

Loan Outstanding (as on March 31, 2002)

Institution Interest

Rate (%)

Outstanding

Mirzapur Mutual Benefit Savings Trust 5.5 2.00

Grameen Foundation, USA 2.0 10.45

Grameen Foundation, USA 2.0 2.47

Calvert Foundation 3.0 2.44

Grameen Trust 2.0 14.23

SIDBI 11.0 3.33

SIDBI 11.0 7.90

SIDBI 11.0 13.85

SIDBI 6.0 1.95

SIDBI 11.0 5.00

NABARD 9.0 10.00

FWWB 14.0 2.36

FWWB 14.0 2.72

FWWB 14.0 3.00FWWB 14.0 3.00

Total 84.70

Rs million

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Resources of CFTS

As at 31/03/2002

(un audited)

% 31/03/2001 % 31/03/2000 %

Net worth -17.72 -25.35 -14.77 -32.56 -10.59 -74.73

Loans from related

entity

2.00 2.86 2.00 4.46 0.00 0.00

Borrowings

Subordinated

Senior

82.70 118.36 55.51 123.90 22.34 157.81

Current Liabilities 2.89 4.13 2.06 4.59 2.40 16.92

Total 69.87 100.00 44.80 100.00 14.15 100.00

Human resources summary

31/03/2002 31/03/2001 31/03/2000

Total employees 117 118 130

Total employee left during year 10 18 36

Employee turnover 8.55% 15.25% 27.69%

Credit officers 85 89 100

Loan outstanding/credit officer

(Rs million)

0.64 0.34 0.07

Loan accounts per credit officer 186 123 44

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Portfolio Summary

Loan Outstanding in

weeks

31/03/2002 31/03/2001 31/03/2000

Rs

million

% Rs

million

% Rs

million

%

On time 53.47 97.62 29.81 98.24 6.05 90.23

< 5 weeks 0.27 0.50 0.19 0.64 0.25 3.785-15 weeks 0.53 0.97 0.10 0.32 0.12 1.75

16-25 weeks 0.40 0.71 0.10 0.32 0.15 2.24

26 weeks and above 0.11 0.20 0.15 0.48 0.13 2.00

Total 54.78 100.00 30.35 100.00 6.70 100.00

PAR (> 5 weeks) 1.88% 1.12% 5.99%

PAR (> 15 weeks) 0.91% 0.80% 4.24%

Loan Outstanding by loan product (%)Loan Segment 31/03/2002 31/03/2001

Animal husbandry 45.55 48.09

Trading 24.46 26.93

Production 13.32 12.94

Transportation 5.40 5.47

Agriculture 4.42 6.44

Emergency 0.66 0.13

Others 6.19 0.00

Total 100.00 100.00

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Assessment of CFTS using MICROS

methodology

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CENTRE MEETING

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MANAGEMENT

SUB-PARAMETER COMMENTS

History & track recordNumber of years in micro

credit CFTS was promoted by Cashpor Technical Services Sdn Bhd

(CTS), a Malaysian company, in 1996. CFTS commenced

operations in July 1997 by starting two branches and became a

public limited company in November 1999.Associate entities, their

performance

CTS provides management and field staff training, monitoring

and evaluation services to Grameen Bank replicators throughout

Asia. The company has also been publishing a quarterlynewsletterCredit for the Poorsince 1995.

CTS is currently operating two MFI programmes CFTS in

India and Moris Rasik in East TimorGrowth of MFI in thepast w.r.t programme,

geography, clients and

branches

At the time of incorporation, CFTS set itself a goal to break-

even within five years by maximizing its outreach to the poor

(assuming that funding would be available). To achieve this, afive-year outreach target plan was chartered, based on which,

CFTS established six branches by September 1997 and six more

by October 1998. To maximize group formation from thebeginning, all branches were fully staffed in the first year of the

branchs operations.

Although, CFTS is currently present in five districts of Uttar

Pradesh, its operations are restricted to Mirzapur and thesurrounding regions. The company plans to expand on a fullscaleto other districts after it achieves financial break-even.

Alliances and network

Strategic alliances(national &

international), partners

contribution, MFIs gains

through the relationship

Donor agencies support,

appreciation etc.

CFTS is part of the Cashpor Network and is well connected with

other Grameen bank replicators in Asia.

The company has been able to raise funds from international

donor agencies like Grameen Foundation, Grameen Trust and

Calvert Foundation, USA. It is also in an advanced stage ofdiscussions with USAID for grants to fund its next stage of

expansion.

Similarly, CFTS has been successful in accessing funds from

SIDBI, NABARD and FWWB. However, the company has not

been able to raise funds from commercial lending agencies.

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Documentation levels

Extent of documentationin terms of manuals on

MFIs products, policies,processes, authorizations

etc.

The company has a detailed operational manual (both in English

and Hindi), which is updated from time to time. Each staff

member has been given a copy of the same. The operationalmanual document highlights the following:

Client targeting practices

Maintaining credit discipline at the centres

Supervision and line of control

Financial and internal control

Procedures that need to be followed

Loan products

Staff policies, office rules, internal audit

Human resources and disciplinary procedures.

The company issues circulars to all branches informing them of

any review /updation in policies. These changes aresubsequently updated in the operational manual.

Detailed documentation of employment of staff and conditions

of service (standing orders) as required by IndustrialEmployment (Standing Order) Act 1946 exists.

There are pre-designed formats available for most activities like

client exit surveys and surprise visits to branches by AGM-

Operations.Adherence of the

documented policies,

procedures etc. in day today operations

During its visits to the CFTS branches and HO, the CRISILTeam found that there was a high degree of adherence to

documented policies by CFTSs staff.

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Management

Information Systems

Credit approval

mechanism

Has well-defined loan disbursement practices

CSR verifies the credentials of each prospective member and conducts

housing index survey to determine the eligibility of the member.

A group recognition test is conducted by an officer senior to the Branc

Manager to determine the poverty status, trust amongst members and th

level of awareness of terms and conditions of the microfinance programme.

The maximum amount given to a new member is Rs 6,000 per loa

Supplementary loan is given to the same client if required after observing th payment record for 4 months. These supplementary loans are, howev

minimal and restricted to income generation loans.

From the second loan onwards, the loan size is linked to the centre size anpayment track record of the centre.

Loan and OverdueMonitoring systems

There is a regular verification of loan utilisation by CSR, the Branch Manag

and higher officials.

Repayment collection is delegated to group members, the group leader an

centre leaders at the centre meetings. Other members of the group need to pain case of default by a member that week. Peer pressure ensures payments o

time.

Surprise visits by Branch Manager and higher officials and internal audito

ensure that CSRs monitor and supervise all the transactions.

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Cash flow

management system &Fraud control

Reasonably established cash management systems are in place at all the

branches. Cash is deposited on the same day in the local banks (except oWednesdays). There are controls on expenditure too at the branch level.

The banks in the region do not conduct transactions on Wednesday. Tminimize the level of cash in hand on that day, the branches try to restrict the

scheduled disbursements to the likely collections from centres.

Emergency cash transfer between HO to branches and inter-branch cas

transfer is treated as personal advance to the Branch Managers concerned til

the time the cash reaches the branch. Disciplinary action is taken against Branch Manager who requires more than one emergency cash transfer in

financial year.

CFTS has had liquidity management problems in the past owing to delays iavailability of fresh funds. As funds are deployed to branches on first com

first serve basis, the branch, in its interest, is required to submit its fund flow

requirement on time.

HO transfers funds to branches on fortnightly basis based on the fund flow

requirement submitted by the branch.

The branches maintain different cash vaults for petty cash, loan disbursemen

and collection at present. Cash details are updated in both the cashbook anthe vault register before the end of the day.

CFTS has had few instances of fraud in the past and the company has suitabl

modified its systems immediately after detection of fraud.

CFTS currently collects voluntary savings on behalf of the Mirzapur MutuaBenefit Savings Trust (MMBST). The CRISIL Team feels that there is scop

for fraud as savings of one member can be used to adjust repayment o

another member given the inability of the illiterate clients to verify thei

savings passbooks.

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Use of IT in

operations

Extent of hardware

and softwareinfrastructure, is it

commensurate withthe scale of

operations, any

perceived benefitsafter implementation

CFTSs branch operations are computerized to a large extent. Data from

branches to HO is sent through internet / floppies. At the HO, all departmenthave a computer and they are connected through a peer-to-peer network.

The software, which has been purchased from Grameen CommunicationsBangladesh, has both loan portfolio tracking and accounting modules, which

are well integrated with each other.

The implementation of the software has resulted in timely report generatio

(reduced from two weeks to one hour in some cases), greater accuracy an

increased productivity.

The software does have limitations, which the company has asked thsoftware vendor to rectify. The branch information (portfolio and accountscannot be automatically consolidated at the HO. Instead, they are transferred

to Excel worksheets and then consolidated, which is a tedious process.

Currently, the branches are also maintaining manual books of accounts.

With the help of a tally sheet developed by the MIS department, the branch a

the end of each week checks if the loan outstanding figures in the portfoliand monitoring modules tally with the manual accounts figures. This way th

accuracy of the figures is verified.

Now that the branches are comfortable with the software, CFTS plans to stopthe manual mode of accounting.

At a later stage, the company plans to add additional modules like human

resources and client information (loan utilisation, exit interviews) to it

existing software modules.

IT operationsmanagement

security, access levels,

application controlsetc.

The security and access features of the software are good and better than the

software currently being used by most Indian MFIs.

Every user has his /her own password for entry into the software modulesThe system does not allow data editing of a prior date. All corrections

modifications can be done only under the supervision of the MIS department

Back-up data is stored in floppies so there is a danger of losing the data

Going forward, CFTS could implement a better data recovery / disaste

management process.

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Human Resource

Management

Selection &

recruitment processes

Most of the Senior Managers and Branch Managers at CFTS are Post

Graduate Diploma Holders in rural management from the Institute oEngineering and Rural Technology, Allahabad.

The minimum qualification for a CSR post is 10+2 for male candidates and10th standard for female candidates. Candidates having a rural backgroun

with similar socio-economic status as the companys clients are give

preference. The company says that it receives numerous applications from

Mirzapur and neighboring districts. Staff vacancies in Accounts and MISfunctions are advertised in the newspapers.

There have been some instances of CSRs getting promoted to Branc

Managers but these are few. Candidates with higher qualifications arrecruited for Branch Manager positions.

The company has a defined and transparent promotion policy. For example

Branch Managers are graded on the following parameters: branc

performance (weightage 50%), written test (25%), surprise visits of branchcentre (15%) and timely reporting and quality of reporting (10%).

Training The CRISIL Team has found a reasonably good training system at CFTS.

The company has established a training department to look after the trainingneeds of the existing staff and of new recruits. New recruits undergclassroom training and need to clear a written test before being transferred to

branches for on-field training. At the end of each month, the trainee comes t

the HO for classroom training, feedback and examination. If performance ifound unsatisfactory, the training of that phase is extended.

Training programmes are also conducted on requests from Branch Managerand are based on the specific training needs of staffers. MFI experts are als

invited to visit CFTS to share their experiences with the companys staff.

Staff at the HO are sent for specialized training programmes after approvafrom the Board. In the formative years, most senior staffers at the HO wen

through various MFI training programmes in India and abroad.

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Role definition Roles of each function at both branch and HO are clearly defined.

During its discussions with the CFTS staff at both the HO andbranches, the CRISIL Team found that there is a high degree of

clarity amongst the staff about their roles and responsibilities.

As mentioned earlier, the Operations Manual clearly defines the

activity of each function of the organizational hierarchy.

Accountability &responsibility,

Performance

evaluation

Clear role definition has helped in each employee being madeaccountable and responsible for his work. Budgetary targets are

compared with actual performance.

Incentives to CSRs are based on borrower, saver and interest

income targets achieved by them. HO staffs incentive are in turn

dependant on the incentives earned by the operational staff, which

are arrived by dividing the incentives of CSR+ Branch Managers +Deputy Financial Services Managers (DFSM) + AGM (Operations)

with the total productive staff.

Branch staff can earn up to 40% of their basic salary through

monthly and quarterly incentives resulting in high accountability.

Attrition rates,

Motivation levels

CFTSs attrition rates have declined to 8.55% (FY 2001-2002) from

27.69% (FY 1999-2000). Deterioration in the loan portfolio qualityduring FY 1999-2000 had resulted in high attrition in early FY

2000-2001. Also, a number of fresh recruits had left a few weeksafter joining the company.

Annual salary increases have been at the rate of 5% (maximum)

and CFTSs management had promised to review salaries after

achieving institutional break-even. The CRISIL Team noticedheightened expectations of a salary hike among the staff. Any

delay in announcing a salary revision or the same not meeting

employee expectations could have an impact on their motivationlevels. As discussed later in Operational Effectiveness, relatively

low employee productivity has had a direct bearing on the company

achieving Operational Self Sufficiency, which CRISIL considers tobe an important milestone for the MFI.

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Processes, Controls

& Audit

Head office levelcontrols

Group, Centre,Branch office level

control systems

HO controls are in the form of monitoring the operational and

financial performance of the branches and comparing them with thetargets set at the beginning of the year.

DFSMs and AGM (Operations) frequently make surprise visits tocentres and branches.

A purchase committee reviews all non-asset purchase decisions.

All asset purchase decisions are approved by the Board.

Cash and bank balances are regularly monitored by the HO. Any

deviations from the normal are immediately acted upon.

Are independentaudits being carried

out, nature and scope

of audits, quality ofsuch reports,

experience of auditors

in this field?

The company's audit firm visits a few branches every year to check

if proper records are maintained. Currently, accounts are audited

every six months.

CFTSs auditor is also the auditor for other leading MFIs in the

country. CRISIL is not comfortable, however, with the accounting

policies followed by the company. These are:

Frequent change in policy for provisioning of loan loss reserve.

Group development expenditure, a major expense item for any

Grameen Bank type MFI, is treated as deferred revenue

expenditure and is being amortized over a period of five years,

thereby under-reporting losses. CRISIL has readjusted the

same.

Efficacy of internalaudit

CFTS has a team of two internal auditors with branch and fieldlevel experience. Typical branch audit is between two to three

weeks.

At the end of internal audit of the branch, the audit reportcontaining the highlights of audit and serious breaches committed

at that particular branch. is sent to the Executive Chairman (EC) of

CFTS

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Efficacy of internal

audit Some of the positive feature of internal audit at CFTS are:a) HO is also is under the internal audit purview

b) The internal audit team does an exit survey of the drop-outclients to understand the reasons for drop-out

Branch Manager has to sign the compliance report mentioning that

requested action has been complied within the specified date.

The CRISIL Team feels CFTSs internal audit is quite effective.

Some of the internal audit reports are frank in pointing out even

minor procedural deviations by Senior Managers at the HO. Therehave been instances of branch staff being terminated based on the

findings of the internal audit team.

Social impact on

environment/localimpact

Availability of Impact

Assessment Studies

A study done by an external consultant during October 2000-March

2001 revealed that 74% of CFTSs mature clients (who have

borrowed 4 times) experienced significant reduction in theirpoverty.

CFTS uses a housing index to identify households below the poverty line. Only those classified as moderately poor and very

poor are eligible to become members.

Credibility andconclusions of the

Impact AssessmentStudy

During visits to centre meetings and households of clients, theCRISIL team found CFTSs housing index to be effective in

identifying the poor. It is therefore likely that the impact of itsprogrammes would be high

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INSTITUTIONAL ARRANGEMENTSUB-PARAMETER COMMENTS

Management,

ownership &governing board

Pedigree of

promoters, their

experience,recognition in this

field, years of

experience

Involvement in theday-to-day operations

Structure of the board,

diversity of thetechnical expertise on

the board - such as

finance, law,

marketing etc.

Professional

reputation of theboard members

Independence of theboard from the

management

Organisation structure

Experience of keymanagementpersonnel

Management'sunderstanding of

issues in MFI sector

David Gibbons, the Executive Chairman of CFTS, is a Canadian-born

Malaysian citizen and is well known amongst the internationalmicrofinance community. Prof. Gibbons is a doctorate in politics from

Princeton University (US) and was a research Professor at the Centre

for Policy Research, University Sains Malaysia, till 1995. He was thefounder and the first Managing Director of Amanah Ikhtiar Malaysia

(AIM), one of the first replications of Grameen Bank outside

Bangladesh. In 1993, he, along with Prof. Mohammed Yunus ofGrameen Bank and others, formed Cashpor Inc.

Prof. Gibbons is also currently the Executive Trustee of CASHPOR

Inc. and the Managing Director of CTS. He is also a member of thePolicy Advisory Group of CGAP since May 2001. He has to his credit,

many books and training manuals that are widely used in the

microfinance sector. The Grameen Readerand Banking on the Rural

Poorare amongst his well-known books.

Mr. Sanjoy Dasgupta, Director of CFTS is a social developmentspecialist and is also the Chief Administrative Officer of Peoples

Institute of Development and Training, a Delhi-based NGO. Dr..

Sharada Nagarajan, the other Director of CFTS, is an IT Consultant,with a focus on software development for the MFI sector. Ms.

Nagarajan is related to one of the partners of CFTSs external audit

firm.

Except for Prof. Gibbons, the other two Directors do not have any past

experience of working in a microfinance institution.

The Executive Chairman is present at Mirzapur for a month every

quarter and spends the rest of his time in Malaysia and East Timor.

CFTS had an experienced General Manager, who was transferred to

Moris Rasik in East Timor in 1999. Since then, CFTS is beingmanaged by two Acting General Managers (AGM) looking after

Finance and Operations respectively.

Both the AGMs have been with the organisation for more than five

years.

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Corporate

governance practices

Are mainstream

corporate governancepractices sensitized in

the operations?

The Board meets every quarter to review the performance and policies

of the organisation. The documented board meetings reflect that theBoard members also discuss fund requirements and strategies for fund

mobilization.

CFTS conducts regular monthly meetings to review operations. All

HO staff and branch managers attend these meetings.

Overall assessment interms of practices,

processes and people

While the organisation does have policies and systems in place, it is

important to have a full-time CEO. The absence of an experiencedCEO is especially felt for raising funds and the overall coordination

within the organisation.

Goals & ObjectivesArticulation of Vision

- medium & long term Has a formally defined vision statement which focuses on providing

prompt and appropriate access to financial services to poor women,who would use these services to lift their families out of poverty

CFTSs mission statement focuses on identifying and motivatingpoor women in rural areas and delivering financial services to them in

an honest, timely and efficient manner so that its vision is realized and

the organisation becomes a financially sustainable MFI for the poor

Articulation of

strategies to achievestated goals

CFTS has articulated its objective to become financially self-sufficient

by September 2002.As evident from the un-audited March 2002financials, however, achieving this goal could take longer than

planned.

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CAPITALADEQUACYANDASSETQUALITYSUB-PARAMETER COMMENTS

Asset quality

Portfolio at Risk PAR (> 5 weeks) had declined to 1.12% as at March 31, 2001 from 5.99%

as at March 31, 2000.But this indicator has marginally increased to 1.88%as at March 31, 2002.

PAR (> 15 weeks) has declined to 0.91% as at March 31, 2002 from 4.24%as at March 31, 2000.

The portfolio quality improvement during 2000-01 was achieved throughincreasing staff and client incentives, increased peer pressure and through

improvement in the credit approval system.

Write-off levels Till FY 2000-01, CFTS had a policy to write-off loans outstanding only onfirst loan borrower deaths. The company did not have a policy to provide

for loan defaults.

Till FY 1999-00, the company had a policy of providing 2% on the total

outstanding portfolio. During FY 2000-01, the policy was changed to

providing a loan loss provision of 10% on the principal outstanding past

due by four weeks and 100% on the principal outstanding, where therepayment period has expired in full. While the provisions appear to be

sufficient, the company should adopt a scientific provisioning policy inline with international practices. Based on these practices, CRISIL has

provided an additional loan loss provision of Rs 0.15 million during FY

1999-2000.

Capital Adequacy

Capital adequacy Since inception, CFTS has adopted an unconventional financing strategy

as social investors were unwilling to provide capital to a new MFI. So

CFTS borrowed long term-subsidized debt to finance its deficits prior to

institutional financial break-even. While the subsidized debt enabled CFTSto grow and to attract sufficient on-lending funds according to the

projections of its business plan, the unconventional financing strategy has

translated into negative equity on the balance sheet. The CAGR of 345%in the loan portfolio during the past five years has been achieved almost

entirely through subsidized borrowings rather than equity. Therefore,

CFTS registered negative capital adequacy for the past five years. As perthe business plan, the company was not projected to register profits until

its sixth year of operation. CFTS found raising additional debt difficult, as

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its accumulated losses continued to increase. SIDBI Foundation for Micro

Credit and FWWB, Indias two main apex microfinance institutions have

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SUB-PARAMENTER COMMENTS

been the main lenders to CFTS in the past few years. The stabilization andthe increased scale of CFTSs operations appear to have drawn attention

from commercial banks. It is presently in the final stages of negotiating a

Rs 15 million loan from ICICI Bank, that will be based on a 50% guaranteefrom Deutsche Bank Microcredit Development fund (MCDF) of NewYork.

CFTSs management is confident of being able to wipe off the companysaccumulated losses through internal accruals in the medium term besides

repaying the subsidized debt on time. Despite achieving break-even in the

current financial year, it may face difficulty in raising the large amount of

additional on-lending funds; it will need over the next t few years.

Ability to raise equity In the past, the company has been able to raise long-term subsidized debtbut not equity or capital grants. Unless CFTS is able to raise significant

equity or grants, or to retain sizeable earnings, it would be difficult for theorganisation to sustain operations in the medium term.

Given its success in reaching its business Plan targets and its effectiveness

in poverty-reduction, CFTS could request for a conversion of its

subsidised debt into non-returnable grants in order to have a comfortablecapital structure.

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RESOURCES


Ability to raise

resources

Current funding

sources, adequacy ofthe same

Diversity in fundingsources

Percentage of fundingfrom members

Impact of the legal

structure of MFI inraising resources

Ability to attractdonor funds, current

relationships

The company has funding sources like SIDBI, FWWB, NABARD,

Grameen Foundation of USA, Grameen Trust and Calvert

Foundation.

SIDBI and Grameen Trust & Grameen Foundation accounted for

38% and 32% of the loans outstanding respectively as at March 31,2002.

CFTS has also borrowed from Mirzapur Mutual Benefits Savings

Trust (MMBST). In FY 2000-01, the company had transferred itssavings mobilization activity to the above Trust. MMBST was

formed to mobilize deposits from its members via CFTS and then

lend a part of the mobilized deposits to CFTS. The companymanagement has admitted to the CRISIL Team that as voluntary

savings grow in size, it could be increasingly difficult to manage

these funds.

At present, the company is trying to raise additional equity to meet

the Rs 20 million requirement for becoming an NBFC. CFTSscurrent problems have more to do with its increasing difficulty in

raising on lending funds in a timely manner , which would be a

constraint factor for social investors, rather than its legal structure.

CFTS created a delivery infrastructure first anticipating an

adequate amount of borrowed funds. But delay in fresh borrowings

in FY 2001-02 resulted in the company not being able to meet itsBusiness Plan target for the end March 2002. This delay therefore

also had a direct bearing on the companys earnings.

As mentioned earlier, the company is in an advanced stage of

discussions with USAID for grants to fund its next stage ofexpansion.

CFTS is currently negotiating for soft loans and a line of credit

with local and international lending institutions. Its ability to

attract such funds on time will have a direct bearing on its currentoperations.

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Cost of funds

Average cost of funds Average cost of funds has increased to 7.17 % (FY 2001-02) from

2.81% (FY 1999-00). This is on account of higher borrowings

from FWWB at 14% and SIDBI at 11%.

Subsidizedborrowings as a % of

total liabilities

The entire borrowings are subsidised considering that the highest

interest paid is 14% (FWWB).

Liquidity & Asset

Liability

Management

Loans as a % of total

assets Loan portfolio was 78% of total assets as at March 31, 2002 as

against 47% as at March 31, 2000. Security to institutions like

SIDBI, which is held as a deposit, is the second-highest component

of CFTSs assets (7.58% as at March 31, 2002).

Asset liability

mismatch There is no ALM as all of CFTSs micro finance borrowings other

than those from FWWB (2 years) have a tenure of 4-12 years. Onthe other hand, the company lends only for a 50-week tenure to its

clients.

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OPERATIONAL EFFECTIVENESSSUB-PARAMETER COMMENTS

Office outreach and

quality ofinfrastructure

Geographical areascovered

Employeeproductivity

Client targetingpractices

CFTSs branches currently cover most of Mirzapur and small parts of

Allahabad, Bhadohi, Chandauli and Varanasi districts of Uttar Pradesh.Expansion in districts other than Mirzapur or opening up new branches

should be taken up only after the company achieves financial break-even

from the existing branches.

The loan accounts per loan officer has increased to 186 accounts as at

March 31, 2002 from 44 as at March 31, 2000. During this period, thenumber of branches has come down to 10 from 12 branches earlier (by

re-organisation) and the number of credit officers has fallen to 85 from100.

The above productivity level is low considering that no new branches

have been added. The poor choice of branch locations appears to be the

main reason for this low productivity. The CRISIL Team has observedthat most of the centres are located far from the branches resulting in

only two centre meetings a day per credit officer. There is also ample

scope for increasing the number of groups per centre. Productivity is alsolost in collecting voluntary savings for the MMBST.

Has been successful in implementing a cost-effective client targetingtechnique (housing index) to identify its clients.

Efficiency Ratios

Staff allocation ratio Loan officers to total staff as at March 31 2002 was 73% though it has

declined from 77% as at March 31, 2000.

Operationalefficiency

CFTSs operational efficiency has come down sharply to 23.9% (March

31, 2002) from 90.2% (March 31, 2001). But this is still higher than the

South Asian average of 18.5%.

The reduction in operating efficiency during the above period was

largely on account of improved employee productivity, a directconsequence of a greater number of clients. Reduction of group

development expenses has also caused the operational efficiency to fall

below the 25% level.

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Administrative cost

per loan action The average administrative costs divided by the gross portfolio declined

to 10.9% during FY 2001-02 from 52.9% in FY 1999-00. This is wellbelow the South Asian average of 16.6%.

Personnel expense

levels The ratio of personnel expenses to average assets has declined to 15.4%

(FY 2001-02) from 61.6% (FY 1999-00). But this is higher than the

South Asian average of 5.4%. Lower employee productivity than other

Indian Grameen Bank replicators and relatively higher salaries accountfor CFTSs high expenses.

Profitability

Operational self

sufficiency (OSS)

Growth in Income

An OSS of 71.80% for FY 2001-02 indicates that CFTSs credit

programme is still dependent on operational grants and subsidized debtfor meeting its operational expenses. The sharp improvement in this

indicator from 23.12% in FY 1999-00 is on account of the decline in thenumber of branches and employees and at the same time, the increase inthe number of clients.

Growth in operating income has been strong during the past twofinancial years, increasing by 152% in FY 2000-01 and by 173% in FY

2001-02 respectively over the corresponding previous years. On the

other hand the operating expenses (excluding cost of funds) increased byonly 37% and 21% respectively. The company expects to achieve 100%

plus OSS in the current financial year as the operating income is

anticipated to be higher than total operating costs.

Financial selfsufficiency (FSS)

The FSS of 58.04% for FY 2001-02 improved from 19.17% in FY 1999-

00.

Return on Equity The ratio of adjusted profit after tax to average equity has been negative for

the past three years as the company registered losses even after adjusting for

operational grants /donations. Also, the networth has been wiped off.However, these are anticipated losses and in line with the projections made

in the business plan.

Return on Assets CFTS had a negative ROA of 7.37%.

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SCALABILITY AND SUSTAINABILITYSUB-PARAMETER COMMENTS

Resource base

sustainabilityFund raising strategies inplace.

Are current efficiency,profitability levels

sustainable at larger

scale of operations,

diversity etc?

The companys inability to raise funds on time and raise the required

equity and soft loans has been a major shortcoming in the past.

Without fresh infusion of funds, CFTS will not be in a position toincrease its loan portfolio and therefore, improve employee

productivity. Hence, the immediate priority for CFTSs management

would be to raise additional funds.

CFTS needs to look out for ways to cover its costs. The company

absorbs significant capacity building expenses, which could be passedon to clients. The company has significant pre-payments and it could

consider imposing penalty charges to improve its yields.Organizational

sustainability - Ability to

develop into a

mainstream financial

institution

Legal Structure

Issues The company plans to remain a corporate entity as commercial lenders

are more comfortable with corporate entities rather than trusts and

societies. Since CFTS is unable to raise additional equity to transform

into an NBFC, the Board is considering forming a Section 25company, which will take over the operations of CFTS and raise equity

from CFTSs clients. As Section 25 companies are not allowed to shareprofits, the client shareholders are to be charged lower interest rates

than normal clients.

In reality, however, CFTSs high-cost microfinance programmes maynot allow it to offer differential interest rates to clients. The ability to

raise substantial equity from the poor also needs to be demonstrated.

Corporate Governance

Issues There is a need to have a full-time CEO given Prof Gibbons other

engagements. There is a clear need for a person who can focus ondeveloping the right credit product and appropriate credit delivery

mechanisms, raise funds and monitor the companys overall

performance on a monthly basis.

The Board needs to be broad-based with participation from lending

agencies like SIDBI and FWWB. It is important to have on Board, people with fund-raising capabilities besides some microfinance

practitioners who could offer useful insights.

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Succession Issues Though the frequent absence of Prof. Gibbons has, in a way, enabled

the development of the two young AGMs, who manage the day-to-day

operations, CFTS needs to have a CEO in command to overlookcrucial roles such as coordination and monitoring.

Human Resources As mentioned earlier, the CRISIL Team has noticed that the staff hashigh expectations of a salary increase. CFTSs current financial health

does not permit such salary revisions. It is important for the company

to keep its staff motivated while at the same time keeping its personnel

costs low.

The company is overstaffed for its current level of operations. It needsto study whether there is a possibility of downsizing the number of

branches and increasing the group size or number of groups per centre

so that employee productivity goes up.

Programmesustainability - Ability to

sustain operations on a

larger scale

Sectoral expertise has

been built In the past, CFTS had tried a credit plus approach in the poultry sector

wherein clients were provided with the necessary technical inputs

besides poultry loans. The company quickly shelved this approach

when it realized that it had neither the time nor resources for a credit

plus approach.

Past track record to enter

new segments,geographical areas

CFTSs priority should be achieving financial break-even with the

existing operations before it can expand to new districts or open newbranches.

The company has operated in both drought-prone and fertile regions inand around Mirzapur in the past and it should not be difficult for the

organisation to expand to other districts in Uttar Pradesh and Bihar, if

funds for such expansion were available.

Long term outlook ofprogrammes are clearly

envisioned

CFTS hopes to achieve financial break-even by third quarter of current

financial year. Hence, any expansion plans (to new districts) would bedecided after that.

CFTSs medium-term and long-term outlook clearly depends on the

availability of grants or equity.

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SIGNIFICANT ACCOUNTING POLICIES FOR THE COMPANY

Method of accounting

The accounts have been prepared under historical cost conventions and on accrual basis, exceptas otherwise stated.

Revenue recognition

1. Interest on loans is recognized on accrual basis, calculated on a flat rate basis on the loans

disbursed.

2. Income on non-performing assets is recognized only when realized and on interest on such

assets which have remained past due for more than six months at the end of the accounting

period is treated as income.

Fixed assets

1. They are stated at cost.

2. Depreciation is provided on the straight-line method at the rates specified in Schedule XIV of

the companies Act, 1956 on the proportionate period of use.

Loans and advances

In tune with the nature of business of the company, (collateral free loans to groups of rural poorwomen) and portfolio experience, provisions for loan losses are made on basis of 100% on the

principal outstanding where the repayment period has expired in full and 10% on the principal of

all outstanding where the loans have become past due by four weeks. Such provision is largerthan the provision required under the Non Banking Financial Companies Prudential Norms

(Reserve Bank) Directions 1998.

Retirement Benefits:

Contribution to provident fund and gratuity are accounted on actual liability basis.

Preliminary, pre-incorporation and pre-operative expenses

Will be fully written off on the generation of profits in the first instance.

Deferred revenue expenditure

The company has the policy of writing of in five years time in equal installments form the year in

which the development expenditure was incurred, whereas CRISIL has adjusted these as

expensed incurred during the year.

Write off policy

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The institution writes off loans, which are overdue since one year and those without any

payment of interest or principal during the year. Considering that the loan tenure is usually oneyear, CFTSs write-off policy appears reasonable and far stringent than those followed by non-

banking financial companies in India. Hence no additional write-off adjustments have been done

by CRISIL.

LOAN LOSS PROVISION

PORTFOLIO

CLASSIFICATION % 31/03/2002 PROVISION 31/03/2001 PROVISION 31/03/2000 PROVISION

Current Portfolio 0 53.47 0.00 29.81 0.00 6.04 0.00

Current RescheduledLoan Portfolio 10 0.00 0.00 0.00 0.00 0.00 0.00

< 5weeks 10 0.27 0.03 0.19 0.02 0.25 0.03

5-15 weeks 30 0.53 0.16 0.10 0.03 0.12 0.04

16-25 weeks 60 0.39 0.23 0.10 0.06 0.15 0.09

Beyond 26 weeks 100 0.11 0.11 0.15 0.15 0.13 0.13

Portfolio in Legal

Recovery 100 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio 54.78 0.53 30.35 0.25 6.70 0.28

Balance Sheet LoanLoss Provision (prior

to current year

CRISIL Adjustment) 0.82 0.54 0.13

CRISIL Loan LossProvision (2) 0.53 0.25 0.28

Difference to Adjust(2) - (1) -0.29 -0.29 0.15

Add additional Loan

Loss Provision 0.00 0.00 0.15

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INCOME AND EXPENDITURE STATEMENTS

Rs million

For the period ended 31/03/2002 31/03/2001 31/03/2000

12 months 12 months 12 months

Un audited Audited Audited

Fund based incomeTotal interest income from loans 12.86 4.48 1.31

Other income 0.62 0.46 0.50

Total fund based income 13.48 4.94 1.81

Interest paid

On bank borrowings 5.10 2.34 0.46

Total interest paid 5.10 2.34 0.46

Gross spread 8.39 2.61 1.34

Fee based income

Other fee based income 0.23 0.09 0.20

Total fee based income 0.23 0.09 0.20

Total income 13.71 5.03 2.00

Gross profit 8.61 2.69 1.54

Expenses

Personnel expenses 7.32 3.26 3.11

Administrative expenses 4.62 3.13 2.47

Group development and capacity 1.07 4.32 2.20

Total expenses 13.01 10.71 7.79

Write-offs and provisions

Provision for exchange rate variation 0.08 0.15 0.00

Write-off of bad debts 0.37 0.02 0.09

Provision for loan loss 0.28 0.25 0.13Add provision for Loan Losses (adj. by CRISIL) 0.00 0.00 0.00

Total 0.73 0.43 0.25

Depreciation on owned assets 0.26 0.22 0.16

Profit before tax -5.38 -8.66 -6.66

Tax 0.00 0.00 0.00

Profit after tax (reported) -5.38 -8.66 -6.66

Add: Grants and donations 1.37 4.75 0.51

Profit after tax (adjusted) -4.02 -3.92 -6.15

Accretion to reserves (adjusted) -4.02 -3.92 -6.15

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BALANCE SHEET

Rs million

Liabilities 31/03/2002 31/03/2001 31/03/2000

Un audited Audited Audited

Share capital 0.81 0.81 0.81Share application money 0.72 0.72 0.72

Loan Loss Reserve 0.00 0.00 0.00

Accumulated, net surplus (deficit), previous periods -15.21 -11.29 -5.15

Net Surplus (deficit), current period -4.02 -3.92 -6.15

Less: Miscellaneous expenditure not written off -0.01 -1.08 -0.81

Net worth (reported) -17.71 -14.76 -10.58

Subsidized Loans 82.70 54.68 21.42

Bank loans 0.00 0.82 0.92

Loan from related entity 2.00 2.00 0.00

Total long term borrowings 84.70 57.51 22.34

Sundry creditors 1.09 0.45 0.25Savings from borrowers 0.04 0.00 0.83

Interest Accrued but not due 0.00 0.60 0.36

Other liabilities 1.09 0.46 0.64

Statutory liabilities 0.00 0.13 0.16

Provision for interest tax 0.00 0.03 0.03

Provision for loan loss 0.67 0.39 0.13

Total current liabilities 2.89 2.06 2.40

Total liabilities 69.87 44.80 14.15

Assets

Cash & bank balances 2.55 3.10 0.63Deposits with banks 5.30 3.90 2.65

Total 5.30 3.90 2.65

Loans & advances 54.78 30.35 6.70

Inventory 0.00 0.09 0.12

Loans to Staff 0.33 0.75 0.64

Other Current Assets 3.83 4.03 1.34

Total current assets 66.79 42.20 12.08

Total funds deployed 66.79 42.20 12.08

Net fixed assets (own) 3.09 2.60 2.08

Total assets 69.87 44.80 14.15

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Economic Indicators used for Operating Expense Adjustment

31/03/2002 31/03/2001 31/03/2000

Inflation 3.6% 7.1% 3.3%

Commercial rate for the

Institution

14.50% 15.50% 15.50%

KEY FINANCIAL RATIOS

Year ended 31/03/2002 31/03/2001 31/03/2000

Yield

Fund based yields 24.74% 18.22% 20.91%

Cost of funds

Interest Paid/Average funds deployed 9.35% 8.62% 5.36%

Interest Paid/Average borrowings 7.17% 5.86% 2.81%

Interest spread

Gross Spread/Average funds deployed 15.39% 9.60% 15.55%

Interest spread 17.57% 12.36% 18.11%

Overheads

Operational efficiency 23.87% 39.45% 90.20%

Personnel expenses level 15.39% 27.94% 61.61%

Administrative efficiency 10.86% 16.87% 52.92%

Profitability

PBT/Average funds deployed -9.88% -31.93% -77.15%

BPAT/Average Net worth * NM NM NM

Return on equity NM NM NMBPAT/Average funds deployed -9.88% -31.93% -77.15%

Return on assets -7.37% -14.43% -71.20%

Operational self sufficiency 71.80% 36.73% 23.12%

Financial self sufficiency 58.04% 30.53% 19.17%

Loan loss rate 1.19% 0.92% 3.36%

Capitalization

Total Debt/Net worth -4.78 -3.90 -2.11

Capital adequacy -28.71% -39.84% -103.34%

* NM = Not Meaningful

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Disclaimer

This report is a product of CredibilityFirst (CF), a division of CRISIL. CF has taken due care andcaution in the preparing the report. CF has obtained the information from sources which it

considers reliable. However, CRISIL and CF do not guarantee the accuracy, adequacy or

completeness of any information and are not responsible for any errors or omissions for the

results / opinions obtained from the use of such information. CRISIL and CF are not responsiblefor any errors in transmission and especially states that it has no financial liability whatsoever to

the users of this product. The rating grade also does not involve an audit by CF.

This evaluation is a capacity assessment opinion and hence 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.

CRISIL may revise, suspend or withdraw the evaluation as a result of information changes in

circumstances or unavailability of information. This is a private copy and no part of this report

may be published / reproduced /distributed in any form without CRISILs prior written approval.

CredibilityFirst and CRISIL are the registered trademarks of THE CREDIT RATING

INFORMATION SERVICES OF INDIA LIMITED.

Copyright2001 by CRISIL. All rights reserved. No part of this report may be reproduced in

any form, without permission in writing from CRISIL

cashpor apr 2002

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