MicroSave Market-led solutions for financial services December 31, 2008 Rapid Institutional...

MicroSaveMarket-led solutions for financial services

December 31, 2008

Rapid Institutional Assessment of

Sanchetna Financial Services Pvt. Ltd.

bySoumya Harsh PandeyAmit Kumar Garg


ACKNOWLEDGEMENT

We thank all the staff members of Samridhi for their co-operation and support provided to the MicroSave team during the Rapid Institutional Assessment (RIA) exercise.


A simple SWOT analysis, backed with

A table of basic ratios

A table outlining the areas of strengths and weakness of the institution and where it requires additional training/technical assistance.

Rapid Institutional Assessment (RIA) is designed as a “quick and dirty” dip-stick to make a preliminary assessment of an institution’s capability and promise, as well as where it needs additional inputs/assistance.

Rapid Institutional Assessment results in Rapid Institutional Assessment framework

Board and Governance Strategic Plan Management and Systems Human Resource Management Financial Resource Management Microfinance programme

characteristics Microfinance programme

performance

RAPID INSTITUTIONAL ASSESSMENT


INTRODUCTION TO THE ORGANISATION

Chief functionary Mr. Lokesh Kumar Singh (Managing Partner)

Mission “We provide client-focused, highly responsive and cost effective financial services and business development expertise in a time bound and socially conscious manner to increase the productive capacity of the Indian poor’

Vision “We will help alleviate poverty in UP and other regions in underserved north India, by enhancing the productive capacity of both our clients and employees and being the provider of choice by upholding the highest standards of service and delivering value at every level”

Values Integrity – in every actionStewardship – for better accountability Logical Approach – towards better solutions Freedom of Expression – the right to disagree, and represent one’s beliefsDignity of Labor – for better work environment and camaraderie

Legal status (Reg. No., Date of incorporation)

NBFC 14.00025, December 1, 1995 (NBFC ‘Magauri Securities Pvt. Ltd.) was purchased and MF operations started from Oct, 08

FCRA/80 G Reg. NA

Change in legal status NA

Methodology Grameen

Area of operation Barabanki (UP)


BOARD AND GOVERNANCE

Observation Yes/No

Board composition suits microfinance

Yes

Established system of board rotation

No

Board meets atleast 4 times a year

Yes

Board has atleast 2 or 50% independent directors

Yes

Head of the organisation reports and is accountable to the board

Yes

Person with appropriate authority is heading the microfinance programme

Yes

MFI is not violating any laws of the land

No

<Others> NA

Comments

•Board members have experience in diversified fields e.g. Microfinance, Banking, Technology, Academics, Investment Firms etc.

•Since the organisation is very young it is still in the process of establishing system for board regulation.

•Overall the organisation has enough experience in senior management and board members to properly run the organisation.


BUSINESS PLAN

Parameters\Years 2008-09 2009-10 2010-11

Number of States 1 1 1

Number of Districts 1 3 8

Number of Branches 1 9 52

Number of Clients 800 6,400 62,000

Portfolio Outstanding (‘000) 60,000 529,000 5,564,000

Disbursement (‘000) 80,000 828,000 8,843,000

Analysis of assumptions

•The promoters of SFSPLPL have financed all disbursements through internal resources till date.

•Trust Microfin Network (TMN) has given its approval of loan of Rs. 1,500,000 for portfolio financing.

•The portfolio growth is based on the assumption that there is a huge potential for microfinance in the selected area of operation.

•Portfolio growth between the second and the third year is very high and is based on the rapid increase in the number of branches. However, it would also require accompanying ability to raise resource to fund both expansion of branches and growth in portfolio.


MANAGEMENT AND SYSTEMS

Observation Yes/No

Clear organisational and reporting structure exists

Yes

Roles and responsibilities commensurate with authority

Yes

Senior management team in place

Yes

SMT is staffed with people having good understanding of the target market

Yes

CEO/CFO/ FM understand financial management

Yes

Loan documents exists Yes

Organisational policies are documented

Yes

Operations Manual followed Yes

Comments

•SFSPL has prepared a Field Manual for Field Associates. However, the MicroSave team observed some deviations in the field level processes.

•SFSPL has a clear reporting structure

•All the members of senior management team of SFSPL have experience of working in different capacities in different leading MFI of India. Together they bring complementary strengths which helps in managing different functions of the organisation.

•Documentation of operational policies is at a very basic level, primarily due to SFSPL being a very young organisation. However the management appears to have clear idea on organisational policies and processes.


MANAGEMENT AND SYSTEMS

Observation Yes/No

Operations Manual is updated to reflect changes in the policy

Not

complete

Process Maps exist No

Internal Control System exists No

Internal control followed No

MIS has integration with the finance

No

MIS generates portfolio report Yes

MIS is used at the branches Yes

MIS with integration of the Branch level data exists

No

<Other>

Comments

•SFSPL has field level operations manual but it needs to develop for the organisation as a whole.

•MIS cum IT Manager is working on developing an integrated management and financial software package.

•Video recording at GRT, Disbursement at Branch, Disbursement to Group are some of the innovations through which SFSPL is trying to build a system of internal controls

•Field monitoring system for developing internal control systems is proposed

SFSPL is working on development of more sophisticated software which would help in automatically updating the branch level data


HUMAN RESOURCE MANAGEMENT

Observation Yes/No

Job responsibilities exits for all positions

Yes

Appropriate staff exist for positions and responsibilities

Yes

Service rules exists for staff Yes

Recruitment procedure in place Yes

Staff rules with regards to service conditions exist

Yes

Policy for HR development exists Yes

Clear staff remuneration/incentive schemes exist

Yes

Remuneration/incentive schemes implemented in a fair manner

Yes

Staff appraisal and promotion systems exists

Yes

Comments

•SFSPL has developed a Human Resource Manual

•Total Staff is classified into four categories; (1) Associates, (2) Executives, (3) Managers, and (4) Directors.

•Salary (inclusive of incentives) increases in the proportion of 2.5 times for every higher level, with Associate being the lowest level.

•There is a separate incentive scheme for field staff and head office staff. Incentive of field staff is based on (a) number of groups formed, (b) number of loan clients managed subject to centre strength. Incentive of head office staff is based on achievement of self set goals.

•SFSPL has a system of providing two months of induction training to the new staff.


FINANCIAL MANAGEMENT

Observation Yes/No

Accounting entries have supporting documents

Yes

Accounting treatment is properly done

Yes

Accounting records are properly maintained:

–Complete

–Accurate

–Transparent

–Uptodate

Yes

Yes

Yes

Yes

Internal audit systems exist NA

Internal audit systems appropriate

NA

Internal Audit is independent NA

Statutory external audits have been done for all the years

NA

Comments

•Since SFSPL started its operations just three months back therefore no external or internal audit has been completed.


FINANCIAL MANAGEMENT

Observation Yes/No

Organisation has diversified source of fund

No

Portfolio report match with the accounting reports

NA

Organisation has never missed payment to funders

NA

There is no difference between the Head office and the Branch accounts

No

Bank reconciliation is regularly done

Yes

Others

Comments

•SFSPL has not taken any external funds till date. All establishment and disbursements have been financed through internal sources raised by the promoters of SFSPL.


MICROFINANCE CHARACTERISTICS

Observation Yes/No

Organisation has a defined credit policy

NA

PAR is calculated properly NA

Ageing Analysis of the portfolio done correctly

NA

Comments

•Since the operations of SFSPL has started in October 2008, and do far it has not developed a credit policy.

•Again SFSPL does not report any PAR, however, the MIS is capable of generating PAR values.

Product features General Top-up

Loan Size Up-to Rs. 12,000 Rs. 4,000 – Rs. 6,000

Loan Term 50 weeks 50 weeks

Repayment frequency Weekly Weekly

Client Profile 100% women clients in rural areas, who are engaged in any economic activities i.e. loan is given for only income generation purposes.

Top-up loan is provided to existing loan clients on top of existing loan after 16th weeks.

Pricing

-Interest Rate

-Processing fee

-Membership fee

29.25% (RBM1)

1.5% of the loan amount

Rs. 120 (one time fee collected as training fee)

29.25% (RBM)

1.5% of the loan amount

NA


MICROFINANCE CHARACTERISTICS

Observation Yes/No

PAR is reported in organisational reports

NA

Does the policy provide guidelines for delinquency management

No

Does the policy provide for provisioning in case of bad debts

No

Portfolio reports are regularly generated

Yes

Portfolio report match with the audited financial statements

NA

Necessary loan documentation is done

Yes

Staff are aware of credit, delinquency and write-off policies

NA

Others

Comments

•There has not been any case of delinquency.

•Senior Management team is working on developing delinquency management strategy and process thereof.


MICROFINANCE PROGRAMME PERFORMANCE

Parameters December 31, 2008

Number of groups 47

Number of members 235

Number of loan clients 155

Portfolio outstanding Rs.1, 390,000

Cumulative disbursement Rs. 1,468,000

# of days taken from group formation to loan disbursement 10-14 days

Comments

•SFSPL uses the typical Grameen model of microfinance and has weekly repayments.

•Eligible persons are first enrolled as members of SFSPL and then other products & services are offered.

•As of date, all disbursements have been financed by promoters of SFSPL.

•Number of days taken from group formation is ideally 10. However, loan disbursement do vary based on the availability of funds.


MICROFINANCE PROGRAMME PERFORMANCE

Profitability 2008-09 2009-10 2010-11

OSS 22.8% 88.0% 144.0%

FSS 21.8% 71.4% 127.0%

ROA -35.0% -4.0% 7.0%

Efficiency

Cost per client 2,728 1,060 431

Clients/Loan Officer 133 160 250

Loan O/S per Loan Officer (in Rs. Lakh) 10 13 24

Operating Cost Ratio 44% 21% 9%

Operating Expense Ratio 80% 27% 10%

Other ratios

PAR > 30 days NA 0.2% 0.2%

Debt /Equity 8% 140% 440%

Fixed Assets/ Total Assets 7% 10% 7%

O/s Portfolio/Total Assets 94% 69% 93%

Liquid Ratio 8.33 8.33 0.83(1)

Comments

•Average assets have been used for calculating operating cost ratio; whereas average portfolio has been used for calculating operating expense ratio.

•Cash was constituting major proportion of total assets because idle cash of Rs. 3.1 million was available before purchasing NBFC. Therefore, OCR is less than OER.

•Portfolio has not been included in Current Assets for the purpose of calculating Liquid Ratio. However, repayment of all the debts have been assumed to be within 12 months from disbursement; hence, have been included in current liabilities.

•Equity infusion of Rs. 250 million is planned for March, 2010.


SWOT MATRIX

STRENGTHS

1.Experienced senior management Team

2.Robust IT system

3.Clear and well defined HR policy

4.Infusion of own equity - commitment from promoters

5.Process innovation

6.Clarity and good understanding of vision

7.Transparency at all levels

8.Plans for value added and livelihood support services (LDS)

9.Shared ownership

WEAKNESSES

1. Limited resources

2. Micro managing

3. Start up organisation; therefore, yet to institutionalise the standard processes

4. Attracting/Holding on to the staff till the time we become established players

5. Refine the processes for growth

OPPORTUNITIES

1. Huge Potential Market

2. Scope of introducing livelihood related services

3. Financial crunch is helping organisation to be cost conscious and effective

4. IT systems

THREATS

1. Financial crisis

2. Increasing competition

3. Increasing competition

4. Poor banking infrastructure

5. Political instability


STRENGTH

Experienced senior management Team

Robust IT system in the form of an integrated MIS for a start-up MFI

Clear and well defined HR policy

Infusion of own equity shows commitment from promoters (who are also part of core management team)

Process innovation

Clarity and good understanding of vision among all staff

Transparency is maintained at all levels

Planning to offer various value added and livelihood support services (LDS) through partnership model with other institutions in near future

Shared ownership in the form of ESOPs (Ownership 2.5 times at par)

Description of strengths

•Senior management comprises of people with microfinance

•Beyond loan related processes-detailed planning and implementation of performance appraisal, fund management, effective HRM and in-house developed MIS gives lot of flexibility and strength.

•All core team members are well acquainted with basic knowledge of MIS related software and Branch level MIS can be integrated to HO MIS and information from all the areas in SFSPL can be consolidated at HO level.

•Newly joined staff, after induction is given two months of on the job training. A comprehensive bi-annual performance appraisal system has been developed.

•Monthly reports and clients profile and basic information is published on the website


WEAKNESSES

Limited resources

Micro managing

Start up organisation; therefore, yet to institutionalise the standard processes

Attracting/Holding on to the staff till the time we become established players

Refine the processes for growth

Description of weaknesses

•SFSPL is a very young organisation therefore the level of trust for external funding is less.

•Since the operations have just started the Head office team appears to be top heavy. However, things will balance out with the expansion of operations.

•Organisational policies and processes need to be documented at the organisational level

•Though the organisation is clear on what it wants to do and where it wants to go yet a detailed road map for the for future needs to be mapped.


OPPORTUNITIES

Huge Potential Market

Scope of introducing livelihood related services

Financial crunch is helping organisation to be cost conscious and effective

IT systems

Description of opportunities

•Western Uttar Pradesh (eight selected districts of UP), where the organisation plans to grow, has huge untapped microfinance market

•As per the common knowledge of the senior management of SFSPL the proposed operational area has huge potential for both microfinance and micro enterprise.

•Since SFSPL is developing its own MIS it gives it great flexibility and strength.


THREATS

Financial crisis

Poor law & order situation in UP

Increasing competition

Poor banking infrastructure

Political instability

Description of Threats

•Due to long lasting financial crisis, arranging funds has become difficult.

•Though SFSPL has not faced any problem till date; it is aware of the poor law and order situation in the state.

•SFSPL sees a different threat in terms of competition. It feels that competition is good for building the understanding of the target population yet practices like group poaching and not following the process to get more clients would negatively affect the market.

•Potential political instability in the state is another threat that SFSPL foresees


ORGANISATION FITS ADDITONAL CRITERIA TO BE SELECTED AS ‘AAFI’ PARTNER

Parameters Yes/No

Organisation has positive net equity Yes

Does not have access to other ongoing technical assistance support

No

Agree to attend workshops at selected MFIs from previous rounds

Yes

Agree to set up microfinance operations under a more regulated form (section 25/NBFC)

Already

NBFC

Agree to return any savings mobilised to the clients of microfinance

NA

Ensure organisations can meet their funding liabilities through its loan portfolio

Yes

CEO/Head of the organisation is committed to microfinance and is willing to commit time

Yes

SFSPL can be taken as AAFI partner for technical support.


RECOMMENDATIONS FOR TECHNICAL ASSISTANCE

Governance

Monitoring and Internal Controls

Process Mapping

Finance and Accounts

Managerial Trainings

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