Lakshya SM

Presents

D-Street: Finance Case Challenge

How to Lend- Dilemma of a MFI

Mr. Ramaseshan was entertaining a guest in his office with traditional South Indian snacks. The
guest remarked that what he liked more than the refreshments was the plate in which they were
served. Made of areca nut leaf and an eco-friendly substitute to the plastic and Styrofoam plates that
were commonly available in the market, this plate was nifty and biodegradable. Mr. Ramaseshan
beamed at the comment. The plates were manufactured by Kokilavani, one of the several growing
number of borrowers of the Small Loans Big Dreams (SLBD Limited) helmed by him.
The jute mats on the floor of this SLBD Limited office at Coimbatore and the soft toys that
accessorized the room were all manufactured by the borrowers of SLBD Limited. Coimbatore is situated
in Tamil Nadu, South India. Known as the Manchester of South, Coimbatore is famed for its
entrepreneurial spirit and has over 25,000 small, medium and large enterprises. Apart from lending
small loans to its borrowers (aka members) as a microfinance institution (MFI), SLBD Limited offers a
multitude of training and learning programs for its members in order to help them to acquire livelihood
and vocational skills.
SLBD Limited is a microfinance institution formed in 1998 to extend credit services to under
privileged sections of the society, particularly women. SLBD Limited identifies financially disadvantaged
women and organizes them into Self Help Groups (SHG).
A quick look at the microfinance industry in India reveals it to be the worlds largest
microfinance market with gross loan portfolio of around Rs.21,245 crore in 2012-131. India's
microfinance sector accounts for more than 7 percent of the sector's worldwide loan portfolio size. As
much as 30 percent of the world's microfinance borrowers are in India2. A number of organizations with
varied size and legal forms offer microfinance service in India. Non-Banking Financial Companies
(NBFCs), Co-operative societies, Section-25 companies, Societies and Trusts, operate in the microfinance
sector and together they account for about 42 percent in terms of loan portfolio. The remaining is
serviced through Bank Self Help Group linkages3.
While majority of the organization forms operate as welfare entities, NBFC microfinance institutions and
Companies are allowed to earn profit out of micro lending. The organization model of a microfinance
institution, more often than not, becomes a guiding factor in framing the strategy. In as much as the MFI
(Micro finance Institution) pursues profits, the emphasis tends to be on operational efficiency and
increase in outreach. The socially inclined MFI might focus more on borrower welfare while also running

Source: Livemint.com/Microfinance industry gross loan portfolio grows 54% reported on 29th
November,2013/Accessed on 19th May, 2014.
2
http://www.themix.org/press-clippings/2011/01/12/some-facts-about-indian-microfinance-sector
3
http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475

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sustainable business. Hybrid goals on the line of social enterprises strive for a balance between
borrower welfare and commercial success irrespective of the organization form.
SLBD Limited was bought over in January 2013 by Mr. Ramaseshan, a banker turned
entrepreneur who had close to seventeen years of experience in commercial banking and five years in
Microfinance. Ramaseshan was co-founder member of Sun Microfinance Private Limited, a microfinance
institution headquartered in Mumbai and classified as a Non-Banking Finance Company (NBFC).Started
in 2008, Sun Microfinance had grown all over India and is now operating through 55 branches across the
country. To accelerate growth in the Southern part of the country, Sun Microfinance acquired SLBD
Limited. Months after the takeover, Ramaseshan quit Sun Microfinance to become more completely
involved in SLBD Limited. Currently he is the MD and CEO of SLBD Limited.
SLBD Limited was originally promoted by XYZ Bank and Moon Cooperative Society in 1998.
When SLBD Limited was founded in 1998, the business model focused on tying up with NGOs who, in
turn would introduce Self Help Groups to SLBD Limited. SLBD Limited would lend to the SHGs and the
receivables management and client interaction was handled by NGOs (Exhibit 1). The business model
gave rise to excessive dependence on NGOs and absence of any rapport with the end customers.
Coupled with frequent constraint for funding, inability to lend to more SHGs resulted in a diminished
business scale and consequent loss of interest on the part of NGOs to recover loans or to identify new
SHGs. The company faced huge losses owing to mounting Non-Performing Assets. The losses mounted
and SLBD Limited was unable to sustain any longer. It was thus that SLBD Limited came to be taken over
by Sun Microfinance in January 2013.The Balance Sheet of SLBD just before takeover is shown in Exhibit
3.
Saddled with huge losses, continuing establishment expenses and an employee force which
could not be made redundant, SLBD Limited was facing tough times. Compounding their woes was a
business model that was failing on the one hand and a committed yet redundant staff strength on the
other. The employees had experience in microfinance, but were otherwise not skilled. SLBD Limited
could consider the for-profit model of Sun Microfinance but that had two significant problems:
a. SLBD Limited had assets in its books whose recovery was highly doubtful
b. A microfinance institution working for profit needed capital adequacy (Exhibit 2) of 15% which
was a huge capital requirement that seemed difficult to achieve with its current state of
operations
SLBD Limited could not continue unless it reinvented itself quickly. The core of the business was
microfinance; the employee force was fairly acquainted with the business and was equipped to handle
the special needs of the clientele in a business such as this. In the backdrop of a failing business model,
alternate business models were being considered. An overview of the business models in microfinance is
given in Exhibit 4.

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The income statement for the period 2011-12 is given below:

(Rs. In multiple of 1,00,000's)
2012
2011

Particulars
Income

Revenue from operations

Other Income

652
14

871
18.5

TOTAL INCOME
Expenses

666

889.5

Employee Benefit Expenses

Finance Costs
Other Expenses
Depreciation and Amortization

180
280
270
15

223
324
300
20

TOTAL EXPENSES

750

879

Profit Before Tax

-79

22.5

Employee Benefit expenses are partly fixed and partly variable with the number of borrowers.
SLBD had a total of 15 branches with an average of 20 employees per branch.
Finance costs are proportionate to the loan portfolio size
Other Expenses consist of the following:
Other Expenses
Space Costs
Travel expenses
Customer training and retention
Loan Losses written off
Electricity and utilities
Repair and maintenance
Employee training expenses
Printing and Stationery

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2012
75
45
32
58
30
15
11
4

2011
75
56
22
72
30
15
24
6

Space costs are equally distributed across 15 branches.

Travel expenses are semi variable and increase with the increase in number of borrowers.
Customer training expenses are fixed in nature. Costs will increase if the number of training
programs increase and vice versa. It does not automatically increase with increase in number of
borrowers.
Electricity and repairs vary with the number of branches
Employee training expenses are fixed in nature. It bears no relation to the number of employees
Printing and stationery are fixed expenses.

In January 2011, SLBD Limited had about 15,000 borrowers and a lending portfolio of about Rs.109
million. Alarmed by the rising NPAs, the year 2012 saw a drop in lending volumes by about 25%.
Business Processes at SLBD
Customer Sourcing
Customer sourcing is usually done by collecting data about potential borrowers from the local
government administration office. A sample set of customers are met to determine the need, potential
and the major occupation in the locality. Based on the need and the potential, a branch headed by the
Branch Manager, supported by Audit manager and five other relationship managers are put in place. In
the identified location, these relationship officers travel to new areas to identify more potential
borrowers and help them form SHGs, open bank accounts and provide them book-keeping training and
materials.
Customer Training and retention
While new borrowers are identified to increase the outreach of SLBD Limited, training needs of potential
borrowers are also assessed.
SLBD Limited has three different types of training programmes.
a. Skills Up gradation training programmes: These programmes help a beneficiary in building a
livelihood. Some examples of this kind of training programme are candle making, jewellery
making, embroidery etc.
b. Advocacy Training: These are awareness building programmes such as financial literacy,
entrepreneurship development programme etc. which build on the livelihood or skill
enhancement programmes and empower the beneficiary by offering them better perspectives.
c. Wellness: These are focussed on the general well-being of the borrower and include health
check camps, eye check-up camps etc.
Some of the common difficulties in ensuring sustained focus on learning are the cost of administering
training programmes.

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Employee Training
Employees are put through a series of training programs to help them understand the client needs.
Trainers are hired and majority of the training expenses pertain to the travel and staying expenses of the
trainers and participants stay and food costs.
The immediate concerns for Mr. Ramaseshan are as follows:
a. Short term Cost reduction measures necessary to sustain the organization
b. Identification of a sustainable business model that would meet the stated objectives of the
business
c. Direct lending to customers versus the choice of functioning as business correspondent to one
or more banks
d. The outlook for the next 10 years in either of the business models
Permitted Assumptions
1. The MFI operates in a Tier 2 City
2. An additional investment of Rs. 100 million is proposed to be made in the business
3. You can assume that there are no constraints in choice of organization form. Irrespective of
whether the firm lends directly or acts as Business Correspondent, the firm can be a Trust, NGO,
Company or any other form described in Exhibit 3
4. You can assume that a Business Correspondent earns a spread of 5% of the amount lent
5. Combination of organization structures(NBFI/Bank/NGO) not permitted
6. You can assume any number of branches within the given capital constraint
7. You should define a strategy and link it to the form of organization and business model
8. The data pertaining to various forms of organization are attached in the excel file. You can use
this information to identify cost structures and returns relative to different organization types

NOTE: Please download the Data on Micro Finance Institutions here https://drive.google.com/file/d/0B_d92aVCk-OqQVdQZjZ0YUJJZWs/edit?usp=sharing

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Exhibit 1- The lending model of SLBD Limited

SHG 1
NGO
SHG 2

SLBD
Limited
NGO

SHG 3

Exhibit 2- A note on capital adequacy

Financial Institutions lend money from borrowed capital. To ensure safety of capital RBI has mandated a
Capital Adequacy Ratio (CAR). CAR is a proportion of net worth to risk weighted assets. RBI has
stipulated capital adequacy of 15% for microfinance institutions. The fundamental of CAR is to maintain
the quality of assets in a financial institution. The most important of assets are primarily money lent to
borrowers called as loans and advances and investments. Loans and advances are assigned risk weights
on the basis of repayment probability and investments are assigned risk weights on the basis of safety of
the investment. In order to ensure the credibility of the financial system, it is essential that loans should
be returned to the banks on time and investments should be stable. This guarantees the safety of capital
for the bank. It is assumed that capital comes from deposits collected from the public and therefore the
regulator ensures that the capital of the financial institution is safe by stipulating a minimum capital
adequacy requirement.

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Exhibit 3 Balance Sheet

SLBD
Balance Sheet as on 31st March 2012
(Rs. in '00,000)
31-03-2012
31-03-2011
Equity and Liabilities
Shareholder's funds
Share Capital
Reserves and Surplus

60
95

60
174

396

1548

Short term Borrowings

Other Current Liabilities

_
1266

33
1020

Total

1817

2835

30
7
9
315

40
11
7
1245

Cash and Cash Equivalents

Short Term Loans and Advances
Other Current Assets

435
993
28

465
1043
24

Total

1817

2835

Non-Current Liabilities
Long Term Borrowings
Currrent Liabilities

ASSETS
Non-Current Assets
Fixed Assets
Tangible Assets
Intangible Assets
Deferred Tax Assets
Long Term Loans and Advances
Current Assets

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Exhibit 4- Forms of Microfinance Institutions in India

Charitable Institutions/ NGO
These are societies registered under Societies Registration Act, 1860 and Trusts registered under Trust
Act, 1882. They work on grants. They do not handle funds of SHGs or act as an intermediary beyond a
level. They are not allowed to raise equity and mobilize deposits. These structural restrictions limit the
availability of capital to these MFIs. Often, these institutions are found to survive on foreign grants.
Co-Operatives
Co-operatives have legal sanction to work as financial intermediaries. The activities of State Cooperatives are restricted in the State. Their activities are heavily controlled by the controlling authority,
Registrar of the Cooperative Societies and the State Government. National Co-operatives need lesser
Government Control than State Cooperatives for multi-state operations. Co-operatives are allowed to
raise share, to mobilize deposits. No tax is charged on Co-operatives. They can get foreign debt but are
not allowed to raise foreign equity. The New Generation Cooperative Act (for example, Mutually Aided
Cooperative Societies Act, 1995 in Andhra Pradesh) has become a landmark legislation. It has been used
by other organizations and as well as by associations like SHGs, Grameen joint liability groups. According
to this Act there is less government control on mutually aided co-operative Societies but they can be
incorporated within a state only. Presently co-operative societies in nine states (Andhra Pradesh,
Jharkhand, Bihar, Jammu & Kashmir, Madhya Pradesh, Chhattisgarh, Orissa, Karnataka and Uttaranchal)
are registered under this new Act. This Act reduces the role of the Registrar; gives greater flexibility in
savings mobilization and fund utilisation and allows the co-operative to set up subsidiary organizations.

Companies
MFIs have to have Rs.2 crore as its initial funds if these are operating as Non-Banking Financial
Companies (NBFC). These MFIs are required to obtain a registration certificate from RBI (under Section
45-1A of the RBI Act) after satisfying the initial conditions. They are allowed to mobilize deposits after
satisfying conditions stipulated by RBI. After two years of their operations, they have to obtain minimum
investment grade or other specified credit rating for fixed deposits from any one of the RBI recognised
credit rating agencies at least once a year. They are then required to forward it to the RBI along with the
annual returns. They are allowed to collect foreign equity up to 51% of US$ 0.5 million; more than 51%
to 75% of US$5 million and 100% of US$50 million.

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A NBFC is also exempted from RBI registration if it does not deliver credit of more than Rs.50000 for a
business enterprise and Rs.25000 for meeting the cost to raise the level of income of a poor person. This
NBFC is licensed under Section 25 of the Companies Act, 1956. It is not allowed to accept public
deposits. Recently seven categories of NBFCs are exempt from RBI registration. Housing Finance
Companies, Mutual Benefit Financial Companies (Nidhis), Insurance Companies are important in these
exempted categories. The exemption is because they are regulated under other laws.
Banking Institutions
The MFIs who are operating as banks are registered under RBI but it is very difficult to obtain this
registration. These institutions are regulated by RBI on daily affairs. To set up a MFI as a bank it would
require initial capital from Rs.100 to 300crore. For Local Area Bank the amount is Rs. 5 crore. Local Area
Banks are permitted to operate on three contiguous districts in a state. These are also highly
management and technology intensive to achieve sustainability. These MFIs are permitted to deliver
credit, to mobilize savings and to give insurance (under the regulation of IRDA).
Significantly, each of the above organization form is regulated by different regulators- banks are
governed by the Reserve Bank of India, Cooperatives is governed by the respective State Governments
and trusts are governed by the Charity Commissioner of the respective State out of which the trusts
operate. There is no common legislation governing the microfinance activities, so far. A logical step in
this direction is the Microfinance Bill, 2011.
Business Correspondent
Under the 'Business Correspondent' Model, NGOs/ MFIs set up under Societies/ Trust Acts, Societies
registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States,
section 25 companies, registered NBFCs not accepting public deposits and Post Offices may act as
Business Correspondents. In engaging such intermediaries as Business Correspondents, banks should
ensure that they are well established, enjoying good reputation and having the confidence of the local
people. Banks may give wide publicity in the locality about the intermediary engaged by them as
Business Correspondent and take measures to avoid being misrepresented. The scope of activities to be
undertaken by the Business Correspondents will include (i) disbursal of small value credit, (ii) recovery of
principal / collection of interest (iii) collection of small value deposits (iv)sale of micro insurance/ mutual
fund products/ pension products/ other third party products and (v) receipt and delivery of small value
remittances/ other payment instruments. The activities to be undertaken by the Business
Correspondents would be within the normal course of the bank's banking business, but conducted
through the entities indicated above at places other than the bank premises. (Excerpts from
http://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=2718)
NOTE: Please download the Data on Micro Finance Institutions here https://drive.google.com/file/d/0B_d92aVCk-OqQVdQZjZ0YUJJZWs/edit?usp=sharing
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Rules and Guidelines

It is mandatory for all the teams to perform registration process on Avartan website
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The team size should be of maximum 2 people from the same institute

A participant cannot be a part of more than one team participating for the same case.
However one can participate in more than one Case

The participants are allowed to form different teams for different modules

The solution should not exceed 2000 words inclusive of all exhibits and appendices As
mentioned earlier, clearly indicate assumptions and support them with suitable reasons
under separate headings

Solution format:

Font Size 12,

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The file should be a Microsoft Word Document/PDF

The front page should carry only

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Please attach your excel sheets/calculations to the mail if any

Send your entries to lakshwiz@gmail.com with the document name & email subject as
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candidates of Round I will be informed via e-mail.

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All the Best
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