Transformation of an MFI – Expectations of rating analysts Micro-Credit Ratings International Ltd 602 Pacific Square, 32 nd Milestone NH8, Gurgaon INDIA Tel: , Fax: Sa-Dhan, Goa, March 24, 2010

Ratings Credit Rating: evaluates MFI’s creditworthiness Areas of evaluation are Governance, strategy and external environment Management and systems Financial performance Social Rating: a judgement on key elements of MFI’s social performance organisational effectiveness in putting mission into practice in line with accepted social values

Transformation - Key Improvements Transformation to a well regulated legal form Prudential norms of RBI Regular reporting to and monitoring by RBI and RoC Board of Directors – increased representation of non-executive Directors/ nominee Directors Improvements in CAR, fund mobilisation and growth rates NGOsNBFCs Portfolio growth rate*16.6%99.8% Debt-Equity Ratio Capital to Risk Weighted Assets Ratio5.4%15.5% Average number of lenders 612 Comparison of performance of NBFC MFIs and NGO MFIs (as on 30 September 2008) *annualised growth rate for the six months period ending 30-Sep-2008

Concerns - Accounting Fair representation of MFI’s profitability & sustainability is a key objective of credit ratings Post transformation of an MFI - the new NBFC co- exists with the earlier NGO Benefits of relatively higher profits in one over the other: NGO (Society, Trust or Sec-25 company) NBFC Tax savings (if it holds exemption under section 12A) 1.Better equity valuations for NBFC 2.Transfer of remaining net worth from NGO

Contd.. Allocation of common expenses - Logical allocation policies and disclosure help improve ratings Salaries of the senior management Rent of office premises Depreciation on fixed assets Field staff salaries – if the branch network is common Inter-company transactions (such as loans & advances) should be at arm’s length & with proper disclosure Creation of Goodwill & other intangible assets proper disclosure on its need and valuation ignore intangible assets for computing certain ratios for the sake of comparison

Mutual Benefit Trusts A common conduit to transfer net worth from an NGO to NBFC Model ‘per-se’ in accordance with ‘Trust’ and ‘Cooperative’ principles Intends to share the surpluses and capital gains among the members MBTs should have proper and verifiable details of members documents evidencing their consent clearly interpreted rules for the distribution of benefits and decision making should not be used as a mean to mobilise deposits

Social Rating - Concerns Members’ awareness on their membership in the MBTs benefits and rights accruing to them limitation w.r.t liquidity/withdrawal of their funds Capital gains from the sale of MBT’s shares – are members passed on the benefits? Adequate representation of members among the trustees - will be a step in right direction Increased focus on margins and equity valuations – need a balance between financial and social objectives

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