manfest 2013 lt finesse round 2 case study

7/29/2019 Manfest 2013 LT Finesse Round 2 Case Study

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ContentsMicrofinance Overview ................................................................................................................................. 2

Recent developments in the microfinance industry ..................................................................................... 2

L&T Finances Microfinance Segment........................................................................................................... 3

Microfinance Model and Methodology .................................................................................................... 3

Background to the Case Study ...................................................................................................................... 4

Deliverables................................................................................................................................................... 5


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Microfinance OverviewMicrofinance in the Indian context is formally defined as the provision of financial credit through

loans of up to Rs. 50,000 to households that are traditionally considered not to be credit worthy,

and typically lack access to banking and related financial services.1

In the past two decades, different types of financial service providers have emerged, includingnongovernment organizations; cooperatives, community-based development institutions such as

SHGs and credit unions, commercial and state banks and MFIs.

The MFI channel includes organizations under a host of different legal forms that can be classified

into two groups: for-profit organizations and not-for-profit organizations.

The measure of a person who is poor or is living in poverty is generally classified across various

thresholds of daily income. The World Bank uses reference lines set at US$ 1.25 and US$ 2 per day

at 2005 PPP terms. While the international poverty line is assumed at US$ 1.25 a day, a less frugal

standard of US$ 2 per person per day is applied for developing countries or regions such as Latin

America and Eastern Europe.2

In 2008, the World Bank estimated that 1.4 billion people in the developing world were living on

less than US$ 1.25 in 2005, and 2.6 billion people were living on less than US$ 2.00 per day. The

World Bank also estimated that 41.6% of the population in India is below the US$ 1.25 a day PPP

and 75.6% of the population is below the US$ 2.0 a day PPP poverty line, as of 2005. On a

population of nearly 1.1 billion, this translates to nearly 832 million poor people below US$ 2.00 a

day PPP, or approximately 177 million poor households, in India, assuming an average family size

of 4.7.3

Recent developments in the microfinance industryThe state of Andhra Pradesh is said to have a unique position of leadership within Indian

microfinance, evidenced by the presence of the four largest MFIs in India in the state. The state

government made significant investments in subsidizing financial inclusion through self help group

("SHGs") programmes. However, tensions between the Andhra Pradesh government and MFIs

grew, as MFIs began to increase financing to their customers.4

As a result, on October 15, 2010, the Government of Andhra Pradesh promulgated the Andhra

Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010 (the "MFI

Ordinance") to protect women SHGs in Andhra Pradesh from exploitation by private MFIs through

usurious interest rates and coercive means of recovery by regulating money lending transactionsby MFIs and for achieving greater transparency with respect to such transactions in Andhra

Pradesh.

1Inverting the Pyramid, 2009, Indian Microfinance Coming of Age, Intellecap ("Inverting the Pyramid")

2World Bank,http://web.worldbank.org, accessed on July 4, 2011

3World Bank, http://data.worldbank.org, accessed on July 4, 2011

4Intellecap, Indian Microfinance Crisis, 2010: Turf War or a Battle of Intentions, October 2010
http://web.worldbank.org/http://web.worldbank.org/http://web.worldbank.org/http://web.worldbank.org/


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Subsequently, with effect from January 1, 2011, the Government of Andhra Pradesh introduced the

Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011 (Act No. 1 of

2011) (the "MFI Act"). The MFI Act provides for inter alia the registration and cancellation of

registration of microfinance institutions, filing of periodic returns by microfinance institutions,

limits on interest recoverable by microfinance institutions, prohibition on security for loans

provided to SHGs and prior approval for grant of further loans to SHGs.

The board of directors of the RBI, at their meeting held on October 15, 2010 formed a sub-

committee of the board (the "Malegam Committee") to study issues and concerns in the

microfinance sector in so far as they related to the entities regulated by the RBI. The Malegam

Committee submitted its report on the issues and concerns in the MFI sector on January 19, 2011.

Key recommendations set out in the report include the creation of a separate category of NBFCs

operating in the microfinance sector, such NBFCs being designated as NBFC-MFI, which should lend

to an individual borrower only as a member of a JLG and should have the responsibility of ensuring

that the borrower is not a member of another JLG. Not more than two MFIs should lend to the same

borrower and bank advances to MFIs shall continue to enjoy "priority sector lending" status.

Furthermore, the Central Government has, on July 6, 2011, released the proposed draft of the Micro

Finance Institutions (Development and Regulation) Bill, 2011, (the Draft MFI Bill) aimed at

providing access to financial services for the rural and urban poor and promoting the growth and

development and regulation of micro finance institutions. The Draft MFI Bill is subject to public

comment and further, is subject to the approval of the Indian Parliament as well as the assent of the

President of India.

Microfinance industry has got some positive indicators during the past one year. Most of the mid

and large micro-finance institutions have registered moderate portfolio growth for current

financial year. The much awaited micro-finance constitution bill is waiting for cabinet nod in the

parliament. Bank loans to MFIs have reasonably improved; RBI has deferred and relaxed the

qualifying asset norm for another year i.e. 1st April 2013. Internal commitments by MFIs to self

regulate and imbibe discipline within the system gradually seems to be visible. MFIs have started

providing client information to credit bureaus like HIGH MARK and EQUIFAX. Major MFIs are

diversifying into unrelated products. The overall scenario looks lot better than a year before.

L&T Finances Microfinance SegmentL&T Finance, commenced its microfinance operations in June 2008, and it is integral to its aim of

contributing to financial inclusion in the Indian economy in a commercially viable manner. The

operations of microfinance segment are currently spread over seven states, namely, AndhraPradesh, Tamil Nadu, Maharashtra, Karnataka, Gujarat, West Bengal and Orissa.

Microfinance Model and Methodology

L&T Finances lending model is in the nature of direct lending and disbursement of loans to its

customers, as opposed to the "intermediary model", where funds are lent to self-help groups, or

non-governmental organizations that have microfinance operations. As such, the lending business

is based on a Joint- Liability Group or JLG model, which has been used by MFIs for over 30 years


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internationally, including in Bangladesh. The operations of microfinance segment are premised on

the belief that the poor, who form the customer-base for microfinance products, have skills that are

under-utilized, and that if they are given access to credit, will be able to identify new income-

generating opportunities and grow existing business activities such as operating local retail shops

(known as kirana stores), tailoring, basketweaving and rearing of livestock. We believe that by

providing access to microfinance loans, the economic opportunities for poor families can besubstantially enhanced. Since inception of this business in June 2008, we have disbursed

approximately one million loans.

The microfinance operations comprise the following elements:

Village Identification and Appraisal: Field staff identifies various villages which are apotential source of business for the microfinance segment. As such, L&T Finances field staff

conducts surveys in order to determine whether or not a particular village is suitable for

lending business before we commence operations in that area. Such a survey includes an

evaluation of local conditions and operational suitability based on the total population and

economic profile of the village, transportation links (primarily roads), political stability andsafety and security.

Joint-Liability Group Formation and Individual Credit Appraisal: A JLG is an arrangementunder which microfinance loan borrowers are grouped together in order to guarantee each

others' loans, which we believe helps to engender a culture of mutual support between

borrowers and presents a lower risk of default. As such, potential members of a JLG are

individually assessed and appraised, and if approved, are formed into JLGs with other

individuals.

Documentation and Disbursement: Once a JLG is formed, all requisite documentation iscompleted and the loans are disbursed at one of the meeting centers.

Collections: Following disbursement of the loan, the field staff travels to the villages wherethe various JLGs are based in order to collect payments, dependant on the repayment

schedule of the loans for each JLG.

Background to the Case StudyFor us, FY 2012 has been a year of consolidation for MFI business. We view microfinance business

as robust, predictable, profitable & scalable business offering multiple small denomination products

and services to the financially excluded poor population of India for the purpose of enhancing their

income generation capacity. Considerable efforts have been put in robust quality control and risk

management systems to ensure that the business risks remain within predefined acceptable

metrics and the overall business is compliant with all regulations.

Credit, Surveillance and training teams were strengthened. System and Process improvements

were made to check various risks involved in the microfinance business. Transaction level risk is

taken care by screening every application under internal credit check ( a set of rules based on

credit policy ) and external credit check ( by sending all the applications which pass the internal

credit check to credit bureau and analyzing the credit history of every applicant ). Portfolio level


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risk is measured based on set parameter which are mentioned in the credit policy like the credit

concentration (percentage of population covered in a district), credit triggers (PAR and arrears

rate) etc., Central collection team takes care of the default risk by continuously monitoring the

debtors, preventing roll forwards, resolving NPA cases and initiating legal actions against the

defaulters. Surveillance team basically keeps a check on fraud risk. Borrower audit, Meeting

centre audit, Disbursement audit and Collection audits are conducted to keep a watch on theprocess risk together with the fraud risk and security risk. We continuously monitors various other

risks like the macroeconomic, regulatory, political, inefficiency, interest rate, asset & liability,

commercial and social mission related risks.

Deliverables

L&T Finance is aiming substantial growth in the Microfinance business within the next 3 to 5 years.

As a means to this, entry into product offerings other than JLG is envisioned. You are expected to

present a business plan for at least one new product that can be offered through the Microfinance

channel.

You are expected to clearly demonstrate:

1. The product that you are recommending and the selection methodology2. Product design and promotion strategy3. Organization structure design, considering your product to be delivered through a

standalone structure

4. Portfolio quality monitoring mechanism5. Projection of financials to demonstrate viability of your business model (the business

should broadly breakeven within the second year of operations)

manfest 2013 lt finesse round 2 case study

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