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MSME Fund: Challenges for MFBs

MSME Fund: Challenges for MFBs. Alok Misra CEO, M-CRIL. Micro-Credit Ratings International Ltd (M-CRIL) Global Microfinance Rating Agency ( www.m-cril.com ). Agenda. Indian Experience Current Profile of MFBs MSME Fund: Eligibility criteria How will MSME fund help MFBs

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MSME Fund: Challenges for MFBs

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  1. MSME Fund: Challenges for MFBs Alok Misra CEO, M-CRIL Micro-Credit Ratings International Ltd (M-CRIL) Global Microfinance Rating Agency (www.m-cril.com)

  2. Agenda • Indian Experience • Current Profile of MFBs • MSME Fund: Eligibility criteria • How will MSME fund help MFBs • Challenges: Rating Agency Perspective

  3. Indian Experience • Started as donor funded in 1990s by NGOs • SIDBI set up lending facility in 1998 – backed by ratings; external third party ratings • 2000-2003 mainly SIDBI and donor funded • 2003 onwards – demonstration effect of ratings and SIDBI fund brought banks • Transformation of NGOs to NBFCs started in 2006; now 85% market share • As of now, 75% liabilities of MFIs from bank borrowings

  4. Current profile of MFBs • ~900 MFBs in the country with predominant urban operations • NGO-MFIs to also gradually transform to MFBs • Average loan size ~500 US$ - some up to 2,500, tenor up to 1 year • Deposits and Equity as the main source of funds • High operating costs – absence of reliable data on MIX • High cost of credit – Not part of Microfinance Transparency • Absence of Ratings

  5. MSME Fund: Main conditions • Compliance with Regulatory Capital of 10% • Compliance with prevailing Prudential Ratios- Liquidity 20%, PAR <5%, OER <15%, Micro loans <=.5 mn should be 80% • Average deposit and client growth rate of 20 % per annum(for institutions operating for over 2 years) • Risk Management Framework acceptable to the regulators • Corporate Governance Culture acceptable to the regulators • Focus on SPM especially CPP

  6. How can MSME Fund be useful for MFBs • 90% of MSME in Nigeria is MICRO – Total MSMEs 17 million, of which 80% have no financial access • Diversify Fund Basket from Deposits and Equity • More stable source of funding- Longer term allowing multiple cycles • Achieve growth based on leverage • The model used extensively in countries like India, where bank funding accounts for 80% of liabilities • In Nigeria, MSME funding may catalyse banks to look at MFBs as partners

  7. Rating Framework: Mirrors Eligibility Criteria

  8. Big Challenges- Rater perspective • Board composition – governance & management separation • Board committees – Audit Risk • Effective performance review by Board • Compensation structure • Integrated Risk Management Framework –Beyond Credit risk • Market strategy – where you go, to whom you lend • Competition strategy • Funding profile GOVERNANCE & STRATEGY

  9. Big Challenges- Rater perspective MANAGEMENT SYSTEMS • Human Resources Quality • Productivity and Efficiency • Accounting System • MIS • Control mechanism including Audit • Overdue tracking • Client Protection Principles • Financial Planning & Budgeting • Capital Adequacy & Provisioning • Portfolio quality • Profitability & Sustainability • Asset composition • ALM system • Policy on Profits FINANCIAL PERFORMANCE

  10. Thank You

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