NRSP transformation story

Rashid Bajwa

NRSP Holding

Pakistan

About Pakistan:

• Population – 180 M estimated; 15% MF clients (estimated); current 3 M

• GDP per capita – 3,100 $ (2013 est) – Country comparison to the world 177*

• Gross national saving: – 12.7% of GDP (2013 est.) – Country comparison to the world 120

• GDP - composition, by sector of origin Vs Labor force participation – Agriculture 25.3% Vs 45.1% – Industry 21.6% Vs 20.7% – Services 53.1% Vs 34.2%

*https://www.cia.gov/library/publications/the-world-factbook/geos/pk.html

About NRSP Holding • NRSP (NGO MFI); NRSP Bank; NRSP IRM (Not profit)

• Largest MFI+ in Pakistan – 23% market share amongst active borrowers

• Specialized product – MF as farm credit for small and landless farmers

– Average credit size $ 200 - $ 400

– Tenure 6 months bullet repayment

• Transformation as part of the GoP MF policy – Disinvestment in Govt. owned MF Bank (Khushaalibank)

– Transformation of NRSP into a MF Bank

Kech (Turbat)

FATA

Dera Ismail Khan

Ghizer

Gilgit

Astore

Diamer

Skardu

Dera Ghazi Khan

Rahim Yar Khan

Tando Allah Yar

LEGEND

NRSP Field Unit

NRSP Hub Office

NRSP Holding Footprint in Pakistan

NRSP District Office

NRSP Programme District

NRSP Bank Districts

Carving out the Bank: 2010

Southern

Punjab

Sindh

Why transformation

2.27 3.31 4.97 11.42

22.87

61.33

42.25

55.28

29.43

-20

-10

0

10

20

30

40

50

60

70

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(Budgeted)

Amount disbursed (NRSP)

USD

in m

illio

n

Transformation in the Pakistan context

• From NGO MFI to… – Non Bank Finance Institution

• Non deposit taking • For profit • Equity

– MF Bank

• For us, getting independent of commercial financiers was the key – But is deposit easy – What is the cost of deposit Vs borrowing cost? – What is and should be the deposit mix

• Sticky deposit with IRR of %Vs corporate TDRs of IRR 12+%

Who are the investors

• Why are they investing

– Share holders agreement

– PUT option

– Supermajority voting powers for greater control

– Share holders Vs Board powers

– Board seats

• What about the “sweat equity”

• Client acquisition cost

Fit and proper criteria by Central Bank of the Board of Directors and Management

Fit and proper criteria by Central Bank of the Board of Directors and Management

Who brings what on the table

• Share holders selection was based on

– Alignment to the Bank’s mission – Value they bring to the table

• IFC – Global brand in Micro Finance – Global knowledge about MF – Best practices in Corporate Governance – TA/advisory for institutional assessment and business plan – Debt

• KFW – TA of 1 M Euros – Very strong on details – 7 M Euro as subordinated debt (in process)

• ACCUMEN – Strong on social mission

Who are the Directors?

• Wrong selection will make crocked walls – Selection has to be merit based – Are they driven towards double bottom line

• Independent directors – Ex Bankers Vs ex development professionals

• Are they serious; is there a meaningful participation • Do they have time • Are they pushing CVs all the time

– NRSP Bank has two independent directors • One heads the Internal Audit committee • One heads the HR and remuneration committee

What is the business model of the new entity

• Loan product continues to be the same – Although the size has increased by three times

– What is your five; seven and ten year business plan

• Cost of doing business increases almost two folds – Regulatory and prudential requirements

– Tax status changes from a non profit to a “for profit”

Tax treatment of the transaction

• The NGO MF was Tax exempt

– All pre incorporation expenses borne for the transformation were therefore tax exempt

• However, since these expenses can be amortized, this becomes irrelevant except for – Cost of capital

– Cash flow as amortization is 20% per annum

Tax treatment of the MF Bank • Pakistan Income Tax

Ordinance 2001 Sec. 25 “allows deduction for any pre-commencement expenditure. o To be amortized on a straight-

line basis at the rate of 20%. o Maximum amortization limit is

total amount of the expenditure.

NRSP Bank absorbed its pre-commencement expenditures amounting to PKR 39 million in its first year of business i.e. 2011

• Second Schedule Sec 66, XVIII exempts total income of MF Banks for a period of five years starting from first day of July 2007 o Provided the Banks

shall not issue dividends to their share holders

NRSP Bank is contesting this “sunset clause”. If accepted, there will be a boost in the retained earnings

What about the Portfolio Take over Vs Fresh Portfolio

NRSP Loan portfolio in Bahawalpur….region that was transformed

2.27 3.31 4.97 11.42

22.87

61.33

42.25

55.28

29.43 0.00

46.59

67.35

112.61

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(Budgeted)

Amount disbursed (NRSP) Amount disbursed (NRSP Bank)

USD

in m

illio

n

HR

• Training

– Set up a separate training unit well before the commencement

– Outsourced entire training to Central Bank’s training unit

• Biggest nightmare

– How to combine ex NGO staff with new specialized recruitment….

Technology

• What is the core Banking solution – Is it a “condition precedent” as was the case of IFC

– Dilemma is buying a Jet with no pilot or a motorcycle

• Does the cost paid includes – Customization

– Alternate Delivery Channels

– Branchless Banking

– Islamic Module

Performance

2011 2012 2013 2014

(projected)

Profit before tax (PKR millions) 37 143 338 355

Profit after tax (PKR millions) 36 164 244 262

Profit before tax (PKR millions); 355

Profit after tax (PKR millions); 262

0

50

100

150

200

250

300

350

400

2011 2012 2013 2014 (Projected)

Performance

Equity; 2,178

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 (Projected)

2011 2012 2013 2014

(projected)

Equity

Share capital 840 1,000 1,000 1,500

Reserves and profits 62 269 450 678

Equity 902 1,269 1,450 2,178

Performance

2011 2012 2013 2014

(projected)

Portfolio (PKR millions) 2,588 3,747 5,712 7,645

Outreach (numbers of borrowers) ‘000

127 177.8 205.3 260.5

Deposits (PKR millions) 633 1,763 3,619 4,000

Portfolio (PKR millions); 7,645

Deposits (PKR millions); 4,000

Outreach (numbers of borrowers); 260,527

0

50,000

100,000

150,000

200,000

250,000

300,000

0

2,000

4,000

6,000

8,000

10,000

12,000

2011 2012 2013 2014 (Projected)

NRSP Bank as of today

• The Bank has remained profitable since very first year of operation, year 2011.

–All pre-incorporation expenditures were absorbed through profit and loss since very first year.

• In year 2012, we managed to get tax benefit by properly managing grants in relevant years.

• In 2014, shareholders inducted new equity through rights issue of 50% so that the bank may serve maximum outreach possible, meeting CAR requirements of the Central Bank.

• One of the main objective to transform into a regularized bank was to get benefit from deposit mobilization.

– The outreach over the years remained very positive, both in terms of loan portfolio as well as deposit mobilization.

Story of the NGO

• NRSP NGO continued with its MF operations outside the operational area of the Bank

• NGO learned from the Banking regulations • Adopted same prudential guidelines

• Same write off policy

• Internal Audit

• ALCO

What happened to the NGO MFI

58,547

67,090

60,187

70,395

88,397

122,267

196,858

299,460

575,740

410,525

440,902

401,697

347,364

409,978

492,388

99,860

110,849

175,893

220,862

-

100,000

200,000

300,000

400,000

500,000

600,000

Jun-00Jun-01Jun-02Jun-03Jun-04Jun-05Jun-06Jun-07Jun-08Jun-09Jun-10Jun-11Jun-12Jun-13Jun-14

No

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f A

cti

ve

Bo

rro

we

rs

What would I do differently if I have to redo

• Take advantage of the Pre incorporation expenditure to be adjusted – Invest heavily in technology

• CBS compliant with ADC and BB

• Bank today has 55 branches – Ideally, it should be no brick and mortar branch

• Should CEO be from the NGO MFI or a Banker??

• Bank will reverse asset liability ratio by 2018 – Should have been within three years

Thank you

Questions?