CASHPOR FINANCIAL AND TECHNICAL

SERVICES LIMITED

MICROFINANCE EVALUATION REPORT

 CASHPOR FINANCIAL AND TECHNICAL
SERVICES LIMITED
Mirzapur, Uttar Pradesh, INDIA
Validity: April 30, 2003
MICROFINANCE EVALUATION

A Microfinance Evaluation is CRISIL’s current opinion on the ability of the micro

finance institution to conduct operations in a scalable and sustainable manner.

The microfinance evaluates the performance of the MFI on a broad range of parameters
under the MICROS© methodology. It includes the traditional creditworthiness analysis
using the CRAMEL approach, modified as applicable to the MFI sector. MICROS stands
for Management, Institutional arrangement, Capital adequacy & asset quality, Resources,
Operational effectiveness and Scalability & sustainability.

Validity: This evaluation is valid for the current capital structure of the company. If this
capital structure were to change or there were to be any other significant change in the
company or the external environment, CRISIL would recommend a review whenever
such changes take place or at the end of one year, whichever is earlier.

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ABOUT CRISIL

India’s premier credit rating agency, CRISIL was established in

1987. A pioneer of credit rating in India, CRISIL has been
instrumental in developing the framework and methodology for
rating debt in the context of the Indian financial and regulatory
system.

Along the way, it has added many firsts to its credit. CRISIL was the
first credit rating agency to undertake ratings for entities such as
banks, financial institutions, utilities, municipal bodies, insurance
companies and green-field projects as well as for new instruments
such as asset and mortgage backed securities and other structured
obligations.

CRISIL has an equity and strategic alliance partnership with

Standard & Poor’s, the world largest rating agency.

CRISIL’s ability to understand the risk elements in any new specialized field and segregate
the population into clearly discernible clusters has been the hallmark of all its products.

The company has a reputed board that comprises eminent professionals from various fields
of business. CRISIL employs over 350 professional analysts and has developed expertise as
well as extensive databases on various industries. Given this resource base, CRISIL features
among the top four rating agencies in the world in terms of both its coverage and analytical
strength.

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 ACRONYMS
AGM Acting General Manager
AIM Amanah Ikhtiar Malaysia
ALM Asset Liability Management
CEO Chief Executive Officer
CFTS Cashpor Financial and Technical Services Limited
CGAP The Consultative Group to Assist the Poorest
CRISIL The Credit Rating Information Services of India Limited
CSR Customer Services Representative
CTS Cashpor Technical Services Sdn BHD, Malaysia
DFSM Deputy Financial Services Manager
EC Executive Chairman
FSS Financial Self Sufficiency
FWWB Friends' for World Women Banking
FY Financial Year
HO Head Office
HUDCO Housing Urban Development Corporation Limited
IT Information Technology
MF Microfinance
MFI Microfinance Institution
MIS Management Information Systems
MMBST Mirzapur Mutual Benefit Savings Trust
NABARD National Agricultural Banking and Rural Development
OSS Operational Self Sufficiency
PAR Portfolio at Risk
ROA Return on Assets
ROE Return on Equity
SHG Self Help Group
SIDBI Small Industries Development Bank of India
USAID The US Agency for International Development

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 Indicator
Adjusted operating expenses
Administrative efficiency
Capital adequacy
Employee productivity
Employee turnover
Financial self sufficiency
Fund based yield
Gross profit
Gross spread
Inflation adjustments
Interest spread
Operating expenses
Operating income
Operational efficiency
Operational self sufficiency
Personal expenses level
PAR > 5 weeks
PAR > 15 weeks
Return on assets
Return on equity
Total assets
Total debt / net worth
Total fund deployed
Definition
Operating expenses + subsidized cost of fund adjustment +
inflation adjustment
Administrative cost /average loan portfolio
Net worth / risk weighted assets
No of active borrowers / no of loan officers
Employees left during the year / total employees at the end of the
period
Operating income / adjusted operating expenses
Total fund based income / average funds employed
Gross spread + total fee based income
Total fund based income - total interest paid
( Average net worth - average fixed assets )
* inflation rate
Fund based yield – (interest paid/ average total borrowings)
Total interest paid + total expenses + Total write-offs and
provisions + depreciation
Total fund based income + Total fee based income
Total expenses / average total fund deployed
Operating income / operating expenses
(Employee expenses + incentives) / average loan portfolio
Principal outstanding that balance that is late by more than 5
weeks / total principal outstanding
Principal outstanding that balance that is late by more than 15
weeks/ total principal outstanding
Profit after tax /Average total funds deployed
Profit after tax /Average net worth
Total fund deployed +net fixed assets (own)
(Total long term borrowings + total short term borrowings) /
net worth
Total investments + total current assets
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 FACT SHEET (As at March 31, 2002)

Legal structure Public Limited Company

Contact person Rakesh Kumar Dubey

AGM-Finance
Cashpor Financial & Technical Services Limited
Pili Kothi, Mirzapur – 231001
Uttar Pradesh, India
Tel : (91)5442 – 64437 /64439
Fax: (91)5442 – 64437
Year of incorporation 1996
Geographical presence 10 branches across Mirzapur District.
(Uttar Pradesh)
Business approach Self Help Groups
Active borrowers 15,770
Total staff 117
Loan officers per unit 9
Loans outstanding (Rs million) 54.78
Avg. Loan size disbursed (Rs) 3,473

Portfolio at risk (> 5 weeks) 1.88%

Operational self-sufficiency 71.80%
Financial self-sufficiency 58.04%

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 Rs million
Financial Summary
31/03/2002 31/03/2001 31/03/2000
Un audited Audited Audited
No of active loans 15,770 10,952 4,358
Loan portfolio 54.78 30.35 6.70
Reported net worth -17.71 -14.76 -10.58
Total funds deployed 66.79 42.20 12.08
Total income 13.71 5.03 2.00
Profit after tax (Adjusted) -4.02 -3.92 -6.15
Loan loss rate 1.19% 0.92% 3.36%
Operational self-sufficiency 71.80% 36.73% 23.12%
Financial self-sufficiency 58.04% 30.53% 19.17%
Administrative efficiency 10.86% 16.87% 52.92%
Operational efficiency 23.87% 39.45% 90.20%
Portfolio-at-risk ( > 5 weeks ) 1.88% 1.12% 5.99%
Return on assets -7.37% -14.43% -71.20%
Total debt/net worth (times) -4.78 -3.90 -2.11
Capital adequacy -28.71% -39.84% -103.34%

Board of Directors
Name Position
Prof. David Gibbons Executive Chairman
Mr. Sanjoy Dasgupta Director
Dr. Sharada Nagarajan Director

David Gibbons, the Executive Chairman of

CFTS, is a Canadian-born Malaysian citizen
and is well known amongst the international
microfinance community. Prof. Gibbons is a
doctorate in politics from Princeton
University (US) and was a research
Professor at the Centre for Policy Research,
University Sains Malaysia, till 1995.

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 Outreach Summary
31/03/2002 31/03/2001 31/03/2000
Loan outstanding (Rs million) 54.78 30.35 6.70
No of active loans 15,770 10,952 4,358
No of branches 10 12 12
Loan Accounts/branch 1,577 913 363
Loan balance per loan account (in Rs) 3,473 2,771 1,536
Loan outstanding/branch 5.48 2.53 0.56
(Rs million)

Rs million
Loan Outstanding (as on March 31, 2002)
Institution Interest Outstanding
Rate (%)
Mirzapur Mutual Benefit Savings Trust 5.5 2.00
Grameen Foundation, USA 2.0 10.45
Grameen Foundation, USA 2.0 2.47
Calvert Foundation 3.0 2.44
Grameen Trust 2.0 14.23
SIDBI 11.0 3.33
SIDBI 11.0 7.90
SIDBI 11.0 13.85
SIDBI 6.0 1.95
SIDBI 11.0 5.00
NABARD 9.0 10.00
FWWB 14.0 2.36
FWWB 14.0 2.72
FWWB 14.0 3.00
FWWB 14.0 3.00
Total 84.70

Rs million

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 Resources of CFTS
As at 31/03/2002 % 31/03/2001 % 31/03/2000 %
(un audited)
Net worth -17.72 -25.35 -14.77 -32.56 -10.59 -74.73
Loans from related 2.00 2.86 2.00 4.46 0.00 0.00
entity
Borrowings 82.70 118.36 55.51 123.90 22.34 157.81
Subordinated
Senior
Current Liabilities 2.89 4.13 2.06 4.59 2.40 16.92
Total 69.87 100.00 44.80 100.00 14.15 100.00

Human resources summary

31/03/2002 31/03/2001 31/03/2000
Total employees 117 118 130
Total employee left during year 10 18 36
Employee turnover 8.55% 15.25% 27.69%
Credit officers 85 89 100
Loan outstanding/credit officer 0.64 0.34 0.07
(Rs million)
Loan accounts per credit officer 186 123 44

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 Portfolio Summary
Loan Outstanding in 31/03/2002 31/03/2001 31/03/2000
weeks Rs % Rs % Rs %
million million million
On time 53.47 97.62 29.81 98.24 6.05 90.23
< 5 weeks 0.27 0.50 0.19 0.64 0.25 3.78
5-15 weeks 0.53 0.97 0.10 0.32 0.12 1.75
16-25 weeks 0.40 0.71 0.10 0.32 0.15 2.24
26 weeks and above 0.11 0.20 0.15 0.48 0.13 2.00
Total 54.78 100.00 30.35 100.00 6.70 100.00
PAR (> 5 weeks) 1.88% 1.12% 5.99%
PAR (> 15 weeks) 0.91% 0.80% 4.24%

Loan Outstanding by loan product (%)

Loan Segment 31/03/2002 31/03/2001
Animal husbandry 45.55 48.09
Trading 24.46 26.93
Production 13.32 12.94
Transportation 5.40 5.47
Agriculture 4.42 6.44
Emergency 0.66 0.13
Others 6.19 0.00
Total 100.00 100.00

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Assessment of CFTS using MICROS
methodology

CENTRE MEETING

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MANAGEMENT
SUB-PARAMETER COMMENTS
History & track record
Number of years in micro  CFTS was promoted by Cashpor Technical Services Sdn Bhd
credit (CTS), a Malaysian company, in 1996. CFTS commenced
operations in July 1997 by starting two branches and became a
public limited company in November 1999.
Associate entities, their  CTS provides management and field staff training, monitoring
performance and evaluation services to Grameen Bank replicators throughout
Asia. The company has also been publishing a quarterly
newsletter Credit for the Poor since 1995.

 CTS is currently operating two MFI programmes – CFTS in

India and Moris Rasik in East Timor
Growth of MFI in the  At the time of incorporation, CFTS set itself a goal to break-
past w.r.t programme, even within five years by maximizing its outreach to the poor
geography, clients and (assuming that funding would be available). To achieve this, a
branches five-year outreach target plan was chartered, based on which,
CFTS established six branches by September 1997 and six more
by October 1998. To maximize group formation from the
beginning, all branches were fully staffed in the first year of the
branch’s operations.

 Although, CFTS is currently present in five districts of Uttar

Pradesh, its operations are restricted to Mirzapur and the
surrounding regions. The company plans to expand on a fullscale
to other districts after it achieves financial break-even.
Alliances and network
Strategic alliances  CFTS is part of the Cashpor Network and is well connected with
(national & other Grameen bank replicators in Asia.
international), partners’
contribution, MFI’s gains  The company has been able to raise funds from international
through the relationship donor agencies like Grameen Foundation, Grameen Trust and
Calvert Foundation, USA. It is also in an advanced stage of
Donor agencies’ support, discussions with USAID for grants to fund its next stage of
appreciation etc. expansion.

 Similarly, CFTS has been successful in accessing funds from

SIDBI, NABARD and FWWB. However, the company has not
been able to raise funds from commercial lending agencies.

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SUB-PARAMETER COMMENTS
Documentation levels
Extent of documentation  The company has a detailed operational manual (both in English
in terms of manuals on and Hindi), which is updated from time to time. Each staff
MFI’s products, policies, member has been given a copy of the same. The operational
processes, authorizations manual document highlights the following:
etc.  Client targeting practices
 Maintaining credit discipline at the centres
 Supervision and line of control
 Financial and internal control
 Procedures that need to be followed
 Loan products
 Staff policies, office rules, internal audit
 Human resources and disciplinary procedures.

 The company issues circulars to all branches informing them of

any review /updation in policies. These changes are
subsequently updated in the operational manual.

 Detailed documentation of employment of staff and conditions

of service (standing orders) as required by Industrial
Employment (Standing Order) Act 1946 exists.

 There are pre-designed formats available for most activities like

client exit surveys and surprise visits to branches by AGM-
Operations.
Adherence of the  During its visits to the CFTS branches and HO, the CRISIL
documented policies, Team found that there was a high degree of adherence to
procedures etc. in day to documented policies by CFTS’s staff.
day operations

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SUB-PARAMETER COMMENTS
Management
Information Systems
Credit approval  Has well-defined loan disbursement practices
mechanism
 CSR verifies the credentials of each prospective member and conducts a
housing index survey to determine the eligibility of the member.

 A group recognition test is conducted by an officer senior to the Branch

Manager to determine the poverty status, trust amongst members and the
level of awareness of terms and conditions of the microfinance programme.

 The maximum amount given to a new member is Rs 6,000 per loan.

Supplementary loan is given to the same client if required after observing the
payment record for 4 months. These supplementary loans are, however,
minimal and restricted to income generation loans.

 From the second loan onwards, the loan size is linked to the centre size and
payment track record of the centre.
Loan and Overdue  There is a regular verification of loan utilisation by CSR, the Branch Manager
Monitoring systems and higher officials.

 Repayment collection is delegated to group members, the group leader and

centre leaders at the centre meetings. Other members of the group need to pay
in case of default by a member that week. Peer pressure ensures payments on
time.

 Surprise visits by Branch Manager and higher officials and internal auditors
ensure that CSRs monitor and supervise all the transactions.

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SUB-PARAMETER COMMENTS
 Reasonably established cash management systems are in place at all the
branches. Cash is deposited on the same day in the local banks (except on
Wednesdays). There are controls on expenditure too at the branch level.

 The banks in the region do not conduct transactions on Wednesday. To

minimize the level of cash in hand on that day, the branches try to restrict the
scheduled disbursements to the likely collections from centres.

Cash flow  Emergency cash transfer between HO to branches and inter-branch cash
management system & transfer is treated as personal advance to the Branch Managers concerned till
Fraud control the time the cash reaches the branch. Disciplinary action is taken against a
Branch Manager who requires more than one emergency cash transfer in a
financial year.

 CFTS has had liquidity management problems in the past owing to delays in
availability of fresh funds. As funds are deployed to branches on first come
first serve basis, the branch, in its interest, is required to submit its fund flow
requirement on time.

 HO transfers funds to branches on fortnightly basis based on the fund flow

requirement submitted by the branch.

 The branches maintain different cash vaults for petty cash, loan disbursement
and collection at present. Cash details are updated in both the cashbook and
the vault register before the end of the day.

 CFTS has had few instances of fraud in the past and the company has suitably
modified its systems immediately after detection of fraud.

 CFTS currently collects voluntary savings on behalf of the Mirzapur Mutual

Benefit Savings Trust (MMBST). The CRISIL Team feels that there is scope
for fraud as savings of one member can be used to adjust repayment of
another member given the inability of the illiterate clients to verify their
savings passbooks.

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SUB-PARAMETER COMMENTS
Use of IT in
operations
Extent of hardware  CFTS’s branch operations are computerized to a large extent. Data from
and software branches to HO is sent through internet / floppies. At the HO, all departments
infrastructure, is it have a computer and they are connected through a peer-to-peer network.
commensurate with
the scale of  The software, which has been purchased from Grameen Communications,
operations, any Bangladesh, has both loan portfolio tracking and accounting modules, which
perceived benefits are well integrated with each other.
after implementation
 The implementation of the software has resulted in timely report generation
(reduced from two weeks to one hour in some cases), greater accuracy and
increased productivity.

 The software does have limitations, which the company has asked the
software vendor to rectify. The branch information (portfolio and accounts)
cannot be automatically consolidated at the HO. Instead, they are transferred
to Excel worksheets and then consolidated, which is a tedious process.

 Currently, the branches are also maintaining manual books of accounts.

 With the help of a tally sheet developed by the MIS department, the branch at
the end of each week checks if the loan outstanding figures in the portfolio
and monitoring modules tally with the manual accounts figures. This way the
accuracy of the figures is verified.

 Now that the branches are comfortable with the software, CFTS plans to stop
the manual mode of accounting.

 At a later stage, the company plans to add additional modules like human
resources and client information (loan utilisation, exit interviews) to its
existing software modules.

IT operations  The security and access features of the software are good and better than the
management – software currently being used by most Indian MFIs.
security, access levels,
application controls  Every user has his /her own password for entry into the software modules.
etc. The system does not allow data editing of a prior date. All corrections/
modifications can be done only under the supervision of the MIS department.

 Back-up data is stored in floppies so there is a danger of losing the data.

Going forward, CFTS could implement a better data recovery / disaster
management process.

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SUB-PARAMETER COMMENTS
Human Resource
Management
Selection &  Most of the Senior Managers and Branch Managers at CFTS are Post-
recruitment processes Graduate Diploma Holders in rural management from the Institute of
Engineering and Rural Technology, Allahabad.

 The minimum qualification for a CSR post is 10+2 for male candidates and
10th standard for female candidates. Candidates having a rural background
with similar socio-economic status as the company’s clients are given
preference. The company says that it receives numerous applications from
Mirzapur and neighboring districts. Staff vacancies in Accounts and MIS
functions are advertised in the newspapers.

 There have been some instances of CSRs getting promoted to Branch

Managers but these are few. Candidates with higher qualifications are
recruited for Branch Manager positions.

 The company has a defined and transparent promotion policy. For example,
Branch Managers are graded on the following parameters: branch
performance (weightage 50%), written test (25%), surprise visits of branch/
centre (15%) and timely reporting and quality of reporting (10%).

Training  The CRISIL Team has found a reasonably good training system at CFTS.

 The company has established a training department to look after the training
needs of the existing staff and of new recruits. New recruits undergo
classroom training and need to clear a written test before being transferred to
branches for on-field training. At the end of each month, the trainee comes to
the HO for classroom training, feedback and examination. If performance is
found unsatisfactory, the training of that phase is extended.

 Training programmes are also conducted on requests from Branch Managers

and are based on the specific training needs of staffers. MFI experts are also
invited to visit CFTS to share their experiences with the company’s staff.

 Staff at the HO are sent for specialized training programmes after approval
from the Board. In the formative years, most senior staffers at the HO went
through various MFI training programmes in India and abroad.

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SUB-PARAMETER COMMENTS
Role definition  Roles of each function at both branch and HO are clearly defined.
During its discussions with the CFTS staff at both the HO and
branches, the CRISIL Team found that there is a high degree of
clarity amongst the staff about their roles and responsibilities.

 As mentioned earlier, the Operations Manual clearly defines the

activity of each function of the organizational hierarchy.
 Clear role definition has helped in each employee being made
accountable and responsible for his work. Budgetary targets are
Accountability & compared with actual performance.
responsibility,
Performance  Incentives to CSRs are based on borrower, saver and interest
evaluation income targets achieved by them. HO staff’s incentive are in turn
dependant on the incentives earned by the operational staff, which
are arrived by dividing the incentives of CSR+ Branch Managers +
Deputy Financial Services Managers (DFSM) + AGM (Operations)
with the total productive staff.

 Branch staff can earn up to 40% of their basic salary through

monthly and quarterly incentives resulting in high accountability.

 CFTS’s attrition rates have declined to 8.55% (FY 2001-2002) from

27.69% (FY 1999-2000). Deterioration in the loan portfolio quality
Attrition rates, during FY 1999-2000 had resulted in high attrition in early FY
Motivation levels 2000-2001. Also, a number of fresh recruits had left a few weeks
after joining the company.

 Annual salary increases have been at the rate of 5% (maximum)

and CFTS’s management had promised to review salaries after
achieving institutional break-even. The CRISIL Team noticed
heightened expectations of a salary hike among the staff. Any
delay in announcing a salary revision or the same not meeting
employee expectations could have an impact on their motivation
levels. As discussed later in Operational Effectiveness, relatively
low employee productivity has had a direct bearing on the company
achieving Operational Self Sufficiency, which CRISIL considers to
be an important milestone for the MFI.

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SUB-PARAMETER COMMENTS
Processes, Controls
& Audit
 HO controls are in the form of monitoring the operational and
Head office level financial performance of the branches and comparing them with the
controls targets set at the beginning of the year.
Group, Centre,
Branch office level  DFSMs and AGM (Operations) frequently make surprise visits to
control systems centres and branches.

 A purchase committee reviews all non-asset purchase decisions.

 All asset purchase decisions are approved by the Board.

 Cash and bank balances are regularly monitored by the HO. Any
deviations from the normal are immediately acted upon.

 The company's audit firm visits a few branches every year to check
Are independent if proper records are maintained. Currently, accounts are audited
audits being carried every six months.
out, nature and scope  CFTS’s auditor is also the auditor for other leading MFIs in the
of audits, quality of country. CRISIL is not comfortable, however, with the accounting
such reports, policies followed by the company. These are:
experience of auditors
in this field? • Frequent change in policy for provisioning of loan loss reserve.

• Group development expenditure, a major expense item for any

Grameen Bank type MFI, is treated as deferred revenue
expenditure and is being amortized over a period of five years,
thereby under-reporting losses. CRISIL has readjusted the
same.

Efficacy of internal  CFTS has a team of two internal auditors with branch and field
audit level experience. Typical branch audit is between two to three
weeks.

 At the end of internal audit of the branch, the audit report

containing the highlights of audit and serious breaches committed
at that particular branch. is sent to the Executive Chairman (EC) of
CFTS

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SUB-PARAMETER COMMENTS
Efficacy of internal
audit  Some of the positive feature of internal audit at CFTS are:
a) HO is also is under the internal audit purview
b) The internal audit team does an exit survey of the drop-out
clients to understand the reasons for drop-out
 Branch Manager has to sign the compliance report mentioning that
requested action has been complied within the specified date.

 The CRISIL Team feels CFTS’s internal audit is quite effective.

Some of the internal audit reports are frank in pointing out even
minor procedural deviations by Senior Managers at the HO. There
have been instances of branch staff being terminated based on the
findings of the internal audit team.
Social impact on
environment/local
impact
 A study done by an external consultant during October 2000-March
2001 revealed that 74% of CFTS’s mature clients (who have
Availability of Impact borrowed 4 times) experienced significant reduction in their
Assessment Studies poverty.

 CFTS uses a housing index to identify households below the

poverty line. Only those classified as moderately poor and very
poor are eligible to become members.

Credibility and  During visits to centre meetings and households of clients, the
conclusions of the CRISIL team found CFTS’s housing index to be effective in
Impact Assessment identifying the poor. It is therefore likely that the impact of its
Study programmes would be high

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INSTITUTIONAL ARRANGEMENT
SUB-PARAMETER COMMENTS
Management,
ownership &
governing board
Pedigree of  David Gibbons, the Executive Chairman of CFTS, is a Canadian-born
promoters, their Malaysian citizen and is well known amongst the international
experience, microfinance community. Prof. Gibbons is a doctorate in politics from
recognition in this Princeton University (US) and was a research Professor at the Centre
field, years of for Policy Research, University Sains Malaysia, till 1995. He was the
experience founder and the first Managing Director of Amanah Ikhtiar Malaysia
(AIM), one of the first replications of Grameen Bank outside
Bangladesh. In 1993, he, along with Prof. Mohammed Yunus of
Grameen Bank and others, formed Cashpor Inc.
Involvement in the
day-to-day operations  Prof. Gibbons is also currently the Executive Trustee of CASHPOR
Inc. and the Managing Director of CTS. He is also a member of the
Policy Advisory Group of CGAP since May 2001. He has to his credit,
many books and training manuals that are widely used in the
Structure of the board, microfinance sector. The Grameen Reader and Banking on the Rural
diversity of the Poor are amongst his well-known books.
technical expertise on
the board - such as  Mr. Sanjoy Dasgupta, Director of CFTS is a social development
finance, law, specialist and is also the Chief Administrative Officer of People’s
marketing etc. Institute of Development and Training, a Delhi-based NGO. Dr..
Sharada Nagarajan, the other Director of CFTS, is an IT Consultant,
Professional with a focus on software development for the MFI sector. Ms.
reputation of the Nagarajan is related to one of the partners of CFTS’s external audit
board members firm.

Independence of the  Except for Prof. Gibbons, the other two Directors do not have any past
board from the experience of working in a microfinance institution.
management
 The Executive Chairman is present at Mirzapur for a month every
Organisation structure quarter and spends the rest of his time in Malaysia and East Timor.
CFTS had an experienced General Manager, who was transferred to
Experience of key Moris Rasik in East Timor in 1999. Since then, CFTS is being
management managed by two Acting General Managers (AGM) looking after
personnel Finance and Operations respectively.
Management's  Both the AGMs have been with the organisation for more than five
understanding of years.
issues in MFI sector

21
 SUB-PARAMETER COMMENTS
Corporate
governance practices
Are mainstream  The Board meets every quarter to review the performance and policies
corporate governance of the organisation. The documented board meetings reflect that the
practices sensitized in Board members also discuss fund requirements and strategies for fund
the operations? mobilization.

 CFTS conducts regular monthly meetings to review operations. All

HO staff and branch managers attend these meetings.

Overall assessment in  While the organisation does have policies and systems in place, it is
terms of practices, important to have a full-time CEO. The absence of an experienced
processes and people CEO is especially felt for raising funds and the overall coordination
within the organisation.
Goals & Objectives
Articulation of Vision  Has a formally defined vision statement which focuses on “ providing
- medium & long term prompt and appropriate access to financial services to poor women,
who would use these services to lift their families out of poverty”

 CFTS’s mission statement focuses on “ identifying and motivating

poor women in rural areas and delivering financial services to them in
an honest, timely and efficient manner so that its vision is realized and
the organisation becomes a financially sustainable MFI for the poor”

Articulation of  CFTS has articulated its objective to become financially self-sufficient

strategies to achieve by September 2002.As evident from the un-audited March 2002
stated goals financials, however, achieving this goal could take longer than
planned.

22
CAPITAL ADEQUACY AND ASSET QUALITY
SUB-PARAMETER COMMENTS

Asset quality
Portfolio at Risk  PAR (> 5 weeks) had declined to 1.12% as at March 31, 2001 from 5.99%
as at March 31, 2000.But this indicator has marginally increased to 1.88%
as at March 31, 2002.

 PAR (> 15 weeks) has declined to 0.91% as at March 31, 2002 from 4.24%
as at March 31, 2000.

 The portfolio quality improvement during 2000-01 was achieved through

increasing staff and client incentives, increased peer pressure and through
improvement in the credit approval system.

Write-off levels  Till FY 2000-01, CFTS had a policy to write-off loans outstanding only on
first loan borrower deaths. The company did not have a policy to provide
for loan defaults.

 Till FY 1999-00, the company had a policy of providing 2% on the total

outstanding portfolio. During FY 2000-01, the policy was changed to
providing a loan loss provision of 10% on the principal outstanding past
due by four weeks and 100% on the principal outstanding, where the
repayment period has expired in full. While the provisions appear to be
sufficient, the company should adopt a scientific provisioning policy in
line with international practices. Based on these practices, CRISIL has
provided an additional loan loss provision of Rs 0.15 million during FY
1999-2000.

Capital Adequacy
Capital adequacy  Since inception, CFTS has adopted an unconventional financing strategy
as social investors were unwilling to provide capital to a new MFI. So
CFTS borrowed long term-subsidized debt to finance its deficits prior to
institutional financial break-even. While the subsidized debt enabled CFTS
to grow and to attract sufficient on-lending funds according to the
projections of its business plan, the unconventional financing strategy has
translated into negative equity on the balance sheet. The CAGR of 345%
in the loan portfolio during the past five years has been achieved almost
entirely through subsidized borrowings rather than equity. Therefore,
CFTS registered negative capital adequacy for the past five years. As per
the business plan, the company was not projected to register profits until
its sixth year of operation. CFTS found raising additional debt difficult, as

23
its accumulated losses continued to increase. SIDBI Foundation for Micro
Credit and FWWB, India’s two main apex microfinance institutions have

24
SUB-PARAMENTER COMMENTS
been the main lenders to CFTS in the past few years. The stabilization and
the increased scale of CFTS’s operations appear to have drawn attention
from commercial banks. It is presently in the final stages of negotiating a
Rs 15 million loan from ICICI Bank, that will be based on a 50% guarantee
from Deutsche Bank Microcredit Development fund (MCDF) of New
York.

 CFTS’s management is confident of being able to wipe off the company’s

accumulated losses through internal accruals in the medium term besides
repaying the subsidized debt on time. Despite achieving break-even in the
current financial year, it may face difficulty in raising the large amount of
additional on-lending funds; it will need over the next t few years.
Ability to raise equity  In the past, the company has been able to raise long-term subsidized debt
but not equity or capital grants. Unless CFTS is able to raise significant
equity or grants, or to retain sizeable earnings, it would be difficult for the
organisation to sustain operations in the medium term.

 Given its success in reaching its business Plan targets and its effectiveness
in poverty-reduction, CFTS could request for a conversion of its
subsidised debt into non-returnable grants in order to have a comfortable
capital structure.

25
RESOURCES
SUB-PARAMETER COMMENTS
Ability to raise
resources
Current funding  The company has funding sources like SIDBI, FWWB, NABARD,
sources, adequacy of Grameen Foundation of USA, Grameen Trust and Calvert
the same Foundation.

Diversity in funding  SIDBI and Grameen Trust & Grameen Foundation accounted for
sources 38% and 32% of the loans outstanding respectively as at March 31,
2002.
Percentage of funding
from members  CFTS has also borrowed from Mirzapur Mutual Benefits Savings
Trust (MMBST). In FY 2000-01, the company had transferred its
savings mobilization activity to the above Trust. MMBST was
formed to mobilize deposits from its members via CFTS and then
lend a part of the mobilized deposits to CFTS. The company
management has admitted to the CRISIL Team that as voluntary
savings grow in size, it could be increasingly difficult to manage
these funds.
Impact of the legal
structure of MFI in  At present, the company is trying to raise additional equity to meet
raising resources the Rs 20 million requirement for becoming an NBFC. CFTS’s
current problems have more to do with its increasing difficulty in
raising on lending funds in a timely manner , which would be a
Ability to attract constraint factor for social investors, rather than its legal structure.
donor funds, current
relationships  CFTS created a delivery infrastructure first anticipating an
adequate amount of borrowed funds. But delay in fresh borrowings
in FY 2001-02 resulted in the company not being able to meet its
Business Plan target for the end March 2002. This delay therefore
also had a direct bearing on the company’s earnings.

 As mentioned earlier, the company is in an advanced stage of

discussions with USAID for grants to fund its next stage of
expansion.

 CFTS is currently negotiating for soft loans and a line of credit

with local and international lending institutions. Its ability to
attract such funds on time will have a direct bearing on its current
operations.

26
SUB-PARAMETER COMMENTS
Cost of funds
Average cost of funds  Average cost of funds has increased to 7.17 % (FY 2001-02) from
2.81% (FY 1999-00). This is on account of higher borrowings
from FWWB at 14% and SIDBI at 11%.

Subsidized  The entire borrowings are subsidised considering that the highest
borrowings as a % of interest paid is 14% (FWWB).
total liabilities
Liquidity & Asset
Liability
Management
Loans as a % of total  Loan portfolio was 78% of total assets as at March 31, 2002 as
assets against 47% as at March 31, 2000. Security to institutions like
SIDBI, which is held as a deposit, is the second-highest component
of CFTS’s assets (7.58% as at March 31, 2002).

Asset liability  There is no ALM as all of CFTS’s micro finance borrowings other
mismatch than those from FWWB (2 years) have a tenure of 4-12 years. On
the other hand, the company lends only for a 50-week tenure to its
clients.

27
OPERATIONAL EFFECTIVENESS
SUB-PARAMETER COMMENTS
Office outreach and
quality of
infrastructure
Geographical areas  CFTS’s branches currently cover most of Mirzapur and small parts of
covered Allahabad, Bhadohi, Chandauli and Varanasi districts of Uttar Pradesh.
Expansion in districts other than Mirzapur or opening up new branches
should be taken up only after the company achieves financial break-even
from the existing branches.

 The loan accounts per loan officer has increased to 186 accounts as at
March 31, 2002 from 44 as at March 31, 2000. During this period, the
number of branches has come down to 10 from 12 branches earlier (by
re-organisation) and the number of credit officers has fallen to 85 from
Employee 100.
productivity
 The above productivity level is low considering that no new branches
have been added. The poor choice of branch locations appears to be the
main reason for this low productivity. The CRISIL Team has observed
that most of the centres are located far from the branches resulting in
only two centre meetings a day per credit officer. There is also ample
scope for increasing the number of groups per centre. Productivity is also
lost in collecting voluntary savings for the MMBST.

Client targeting  Has been successful in implementing a cost-effective client targeting

practices technique (housing index) to identify its clients.

Efficiency Ratios
Staff allocation ratio  Loan officers to total staff as at March 31 2002 was 73% though it has
declined from 77% as at March 31, 2000.

Operational  CFTS’s operational efficiency has come down sharply to 23.9% (March
efficiency 31, 2002) from 90.2% (March 31, 2001). But this is still higher than the
South Asian average of 18.5%.

 The reduction in operating efficiency during the above period was

largely on account of improved employee productivity, a direct
consequence of a greater number of clients. Reduction of group
development expenses has also caused the operational efficiency to fall
below the 25% level.

28
SUB-PARAMETER COMMENTS
Administrative cost  The average administrative costs divided by the gross portfolio declined
per loan action to 10.9% during FY 2001-02 from 52.9% in FY 1999-00. This is well
below the South Asian average of 16.6%.

Personnel expense  The ratio of personnel expenses to average assets has declined to 15.4%
levels (FY 2001-02) from 61.6% (FY 1999-00). But this is higher than the
South Asian average of 5.4%. Lower employee productivity than other
Indian Grameen Bank replicators and relatively higher salaries account
for CFTS’s high expenses.

Profitability
Operational self  An OSS of 71.80% for FY 2001-02 indicates that CFTS’s credit
sufficiency (OSS) programme is still dependent on operational grants and subsidized debt
for meeting its operational expenses. The sharp improvement in this
indicator from 23.12% in FY 1999-00 is on account of the decline in the
number of branches and employees and at the same time, the increase in
the number of clients.
Growth in Income
 Growth in operating income has been strong during the past two
financial years, increasing by 152% in FY 2000-01 and by 173% in FY
2001-02 respectively over the corresponding previous years. On the
other hand the operating expenses (excluding cost of funds) increased by
only 37% and 21% respectively. The company expects to achieve 100%
plus OSS in the current financial year as the operating income is
anticipated to be higher than total operating costs.

Financial self  The FSS of 58.04% for FY 2001-02 improved from 19.17% in FY 1999-
sufficiency (FSS) 00.

Return on Equity The ratio of adjusted profit after tax to average equity has been negative for
the past three years as the company registered losses even after adjusting for
operational grants /donations. Also, the networth has been wiped off.
However, these are anticipated losses and in line with the projections made
in the business plan.

Return on Assets  CFTS had a negative ROA of – 7.37%.

29
SCALABILITY AND SUSTAINABILITY
SUB-PARAMETER COMMENTS
Resource base
sustainability
Fund raising strategies in  The company’s inability to raise funds on time and raise the required
place. equity and soft loans has been a major shortcoming in the past.
Without fresh infusion of funds, CFTS will not be in a position to
Are current efficiency, increase its loan portfolio and therefore, improve employee
profitability levels productivity. Hence, the immediate priority for CFTS’s management
sustainable at larger would be to raise additional funds.
scale of operations,
diversity etc?  CFTS needs to look out for ways to cover its costs. The company
absorbs significant capacity building expenses, which could be passed
on to clients. The company has significant pre-payments and it could
consider imposing penalty charges to improve its yields.
Organizational
sustainability - Ability to
develop into a
mainstream financial
institution
Legal Structure  The company plans to remain a corporate entity as commercial lenders
Issues are more comfortable with corporate entities rather than trusts and
societies. Since CFTS is unable to raise additional equity to transform
into an NBFC, the Board is considering forming a Section 25
company, which will take over the operations of CFTS and raise equity
from CFTS’s clients. As Section 25 companies are not allowed to share
profits, the client shareholders are to be charged lower interest rates
than normal clients.

 In reality, however, CFTS’s high-cost microfinance programmes may

not allow it to offer differential interest rates to clients. The ability to
raise substantial equity from the poor also needs to be demonstrated.
Corporate Governance  There is a need to have a full-time CEO given Prof Gibbon’s other
Issues engagements. There is a clear need for a person who can focus on
developing the right credit product and appropriate credit delivery
mechanisms, raise funds and monitor the company’s overall
performance on a monthly basis.

 The Board needs to be broad-based with participation from lending

agencies like SIDBI and FWWB. It is important to have on Board,
people with fund-raising capabilities besides some microfinance
practitioners who could offer useful insights.

30
SUB-PARAMETER COMMENTS
Succession Issues  Though the frequent absence of Prof. Gibbons has, in a way, enabled
the development of the two young AGMs, who manage the day-to-day
operations, CFTS needs to have a CEO in command to overlook
crucial roles such as coordination and monitoring.

Human Resources  As mentioned earlier, the CRISIL Team has noticed that the staff has
high expectations of a salary increase. CFTS’s current financial health
does not permit such salary revisions. It is important for the company
to keep its staff motivated while at the same time keeping its personnel
costs low.

 The company is overstaffed for its current level of operations. It needs

to study whether there is a possibility of downsizing the number of
branches and increasing the group size or number of groups per centre
so that employee productivity goes up.
Programme
sustainability - Ability to
sustain operations on a
larger scale
Sectoral expertise has  In the past, CFTS had tried a credit plus approach in the poultry sector
been built wherein clients were provided with the necessary technical inputs
besides poultry loans. The company quickly shelved this approach
when it realized that it had neither the time nor resources for a credit
plus approach.

Past track record to enter  CFTS’s priority should be achieving financial break-even with the
new segments, existing operations before it can expand to new districts or open new
geographical areas branches.

 The company has operated in both drought-prone and fertile regions in

and around Mirzapur in the past and it should not be difficult for the
organisation to expand to other districts in Uttar Pradesh and Bihar, if
funds for such expansion were available.

Long term outlook of  CFTS hopes to achieve financial break-even by third quarter of current
programmes are clearly financial year. Hence, any expansion plans (to new districts) would be
envisioned decided after that.

 CFTS’s medium-term and long-term outlook clearly depends on the

availability of grants or equity.

31
SIGNIFICANT ACCOUNTING POLICIES FOR THE COMPANY

Method of accounting

The accounts have been prepared under historical cost conventions and on accrual basis, except
as otherwise stated.

Revenue recognition

1. Interest on loans is recognized on accrual basis, calculated on a flat rate basis on the loans
disbursed.

2. Income on non-performing assets is recognized only when realized and on interest on such
assets which have remained past due for more than six months at the end of the accounting
period is treated as income.

Fixed assets

1. They are stated at cost.

2. Depreciation is provided on the straight-line method at the rates specified in Schedule XIV of
the companies Act, 1956 on the proportionate period of use.

Loans and advances

In tune with the nature of business of the company, (collateral free loans to groups of rural poor
women) and portfolio experience, provisions for loan losses are made on basis of 100% on the
principal outstanding where the repayment period has expired in full and 10% on the principal of
all outstanding where the loans have become past due by four weeks. Such provision is larger
than the provision required under the Non Banking Financial Companies Prudential Norms
(Reserve Bank) Directions 1998.

Retirement Benefits:

Contribution to provident fund and gratuity are accounted on actual liability basis.

Preliminary, pre-incorporation and pre-operative expenses

Will be fully written off on the generation of profits in the first instance.

Deferred revenue expenditure

The company has the policy of writing of in five years time in equal installments form the year in
which the development expenditure was incurred, whereas CRISIL has adjusted these as
expensed incurred during the year.

Write off policy

32
 The institution writes off loans, which are overdue since one year and those without any
payment of interest or principal during the year. Considering that the loan tenure is usually one
year, CFTS’s write-off policy appears reasonable and far stringent than those followed by non-
banking financial companies in India. Hence no additional write-off adjustments have been done
by CRISIL.

LOAN LOSS PROVISION

PORTFOLIO
CLASSIFICATION % 31/03/2002 PROVISION 31/03/2001 PROVISION 31/03/2000 PROVISION
Current Portfolio 0 53.47 0.00 29.81 0.00 6.04 0.00
Current Rescheduled
Loan Portfolio 10 0.00 0.00 0.00 0.00 0.00 0.00
< 5weeks 10 0.27 0.03 0.19 0.02 0.25 0.03
5-15 weeks 30 0.53 0.16 0.10 0.03 0.12 0.04
16-25 weeks 60 0.39 0.23 0.10 0.06 0.15 0.09
Beyond 26 weeks 100 0.11 0.11 0.15 0.15 0.13 0.13
Portfolio in Legal
Recovery 100 0.00 0.00 0.00 0.00 0.00 0.00
Total Portfolio 54.78 0.53 30.35 0.25 6.70 0.28
Balance Sheet Loan
Loss Provision (prior
to current year
CRISIL Adjustment) 0.82 0.54 0.13
CRISIL Loan Loss
Provision (2) 0.53 0.25 0.28
Difference to Adjust
(2) - (1) -0.29 -0.29 0.15
Add additional Loan
Loss Provision 0.00 0.00 0.15

33
 INCOME AND EXPENDITURE STATEMENTS
Rs million
For the period ended 31/03/2002 31/03/2001 31/03/2000
12 months 12 months 12 months
Un audited Audited Audited
Fund based income
Total interest income from loans 12.86 4.48 1.31
Other income 0.62 0.46 0.50
Total fund based income 13.48 4.94 1.81
Interest paid
On bank borrowings 5.10 2.34 0.46
Total interest paid 5.10 2.34 0.46
Gross spread 8.39 2.61 1.34
Fee based income
Other fee based income 0.23 0.09 0.20
Total fee based income 0.23 0.09 0.20
Total income 13.71 5.03 2.00
Gross profit 8.61 2.69 1.54
Expenses
Personnel expenses 7.32 3.26 3.11
Administrative expenses 4.62 3.13 2.47
Group development and capacity 1.07 4.32 2.20
Total expenses 13.01 10.71 7.79
Write-offs and provisions
Provision for exchange rate variation 0.08 0.15 0.00
Write-off of bad debts 0.37 0.02 0.09
Provision for loan loss 0.28 0.25 0.13
Add provision for Loan Losses (adj. by CRISIL) 0.00 0.00 0.00
Total 0.73 0.43 0.25
Depreciation on owned assets 0.26 0.22 0.16
Profit before tax -5.38 -8.66 -6.66
Tax 0.00 0.00 0.00
Profit after tax (reported) -5.38 -8.66 -6.66
Add: Grants and donations 1.37 4.75 0.51
Profit after tax (adjusted) -4.02 -3.92 -6.15
Accretion to reserves (adjusted) -4.02 -3.92 -6.15

34
 BALANCE SHEET
Rs million
Liabilities 31/03/2002 31/03/2001 31/03/2000
Un audited Audited Audited
Share capital 0.81 0.81 0.81
Share application money 0.72 0.72 0.72
Loan Loss Reserve 0.00 0.00 0.00
Accumulated, net surplus (deficit), previous periods -15.21 -11.29 -5.15
Net Surplus (deficit), current period -4.02 -3.92 -6.15
Less: Miscellaneous expenditure not written off -0.01 -1.08 -0.81
Net worth (reported) -17.71 -14.76 -10.58
Subsidized Loans 82.70 54.68 21.42
Bank loans 0.00 0.82 0.92
Loan from related entity 2.00 2.00 0.00
Total long term borrowings 84.70 57.51 22.34
Sundry creditors 1.09 0.45 0.25
Savings from borrowers 0.04 0.00 0.83
Interest Accrued but not due 0.00 0.60 0.36
Other liabilities 1.09 0.46 0.64
Statutory liabilities 0.00 0.13 0.16
Provision for interest tax 0.00 0.03 0.03
Provision for loan loss 0.67 0.39 0.13
Total current liabilities 2.89 2.06 2.40
Total liabilities 69.87 44.80 14.15
Assets
Cash & bank balances 2.55 3.10 0.63
Deposits with banks 5.30 3.90 2.65
Total 5.30 3.90 2.65
Loans & advances 54.78 30.35 6.70
Inventory 0.00 0.09 0.12
Loans to Staff 0.33 0.75 0.64
Other Current Assets 3.83 4.03 1.34
Total current assets 66.79 42.20 12.08
Total funds deployed 66.79 42.20 12.08
Net fixed assets (own) 3.09 2.60 2.08
Total assets 69.87 44.80 14.15

35
 Economic Indicators used for Operating Expense Adjustment
31/03/2002 31/03/2001 31/03/2000
Inflation 3.6% 7.1% 3.3%
Commercial rate for the 14.50% 15.50% 15.50%
Institution

KEY FINANCIAL RATIOS

Year ended 31/03/2002 31/03/2001 31/03/2000

Yield
Fund based yields 24.74% 18.22% 20.91%
Cost of funds
Interest Paid/Average funds deployed 9.35% 8.62% 5.36%
Interest Paid/Average borrowings 7.17% 5.86% 2.81%
Interest spread
Gross Spread/Average funds deployed 15.39% 9.60% 15.55%
Interest spread 17.57% 12.36% 18.11%
Overheads
Operational efficiency 23.87% 39.45% 90.20%
Personnel expenses level 15.39% 27.94% 61.61%
Administrative efficiency 10.86% 16.87% 52.92%
Profitability
PBT/Average funds deployed -9.88% -31.93% -77.15%
BPAT/Average Net worth * NM NM NM
Return on equity NM NM NM
BPAT/Average funds deployed -9.88% -31.93% -77.15%
Return on assets -7.37% -14.43% -71.20%
Operational self sufficiency 71.80% 36.73% 23.12%
Financial self sufficiency 58.04% 30.53% 19.17%
Loan loss rate 1.19% 0.92% 3.36%
Capitalization
Total Debt/Net worth -4.78 -3.90 -2.11
Capital adequacy -28.71% -39.84% -103.34%
* NM = Not Meaningful

36
Disclaimer

This report is a product of CredibilityFirst (CF), a division of CRISIL. CF has taken due care and
caution in the preparing the report. CF has obtained the information from sources which it
considers reliable. However, CRISIL and CF do not guarantee the accuracy, adequacy or
completeness of any information and are not responsible for any errors or omissions for the
results / opinions obtained from the use of such information. CRISIL and CF are not responsible
for any errors in transmission and especially states that it has no financial liability whatsoever to
the users of this product. The rating grade also does not involve an audit by CF.

This evaluation is a capacity assessment opinion and hence cannot be considered to be a proxy
for timely payment of interest and principal. Nor is it a recommendation to purchase, sell or hold
any debt instrument.

CRISIL may revise, suspend or withdraw the evaluation as a result of information changes in
circumstances or unavailability of information. This is a private copy and no part of this report
may be published / reproduced /distributed in any form without CRISIL’s prior written approval.

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INFORMATION SERVICES OF INDIA LIMITED.

Copyright ©2001 by CRISIL. All rights reserved. No part of this report may be reproduced in
any form, without permission in writing from CRISIL

37