IndependentResearchProjectA Study on Webbased microlendingportals and itsscalability throughIndian MFI

Shivshankar. VBatch of 2007-09Post Graduate Diploma inRural ManagementXavier Institute ofManagementBhubaneswarAn independent research project completed during the fifth & sixth trimester of Post Graduate

Diploma in Rural Management Programme – 2009 at Xavier Institute of Management,Bhubaneswar. The project was completed under the mentorship of Prof. Biswa Swarup Misra

(Project Guide), Prof. Niraj Kumar & Mr. Tusar Panda (Student Research Committee Members)

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AcknowledgementI would like to express my gratitude to all those who gave me the opportunity to completethis Independent Research Project (IRP).I am deeply indebted to my project guide Prof. Dr. B. S. Misra from Xavier Institute ofManagement whose help, stimulating suggestions and encouragement helped me incompleting this project successfully.I would like to convey my sincere thanks to the student research committee members, Prof.Niraj Kumar from Xavier Institute of Management for his timely suggestions forimprovement and Mr. Tusar Panda, Chairman, Orissa State Cooperative Bank (OSCB) forgiving me an opportunity and permission to visit various Primary Agricultural CooperativeSociety (PACS) under OSCBI also want to thank Mr. Md. N. Amin, President & CEO, Adhikar Microfinance Pvt. Ltd., forgiving me permission and encouraging me to go ahead with my project on Adhikar, to dothe necessary research work and giving me permission to access their financial data. I havefurthermore to thank Mr. Lingaraj, Microfinance Manager, Adhikar Microfinance Pvt. Ltdfor his support and cooperation while doing this project with Adhikar.I also would like to thank Ms. Smitha Ramakrishna, Co- Founder & CEO, RangDe.org fortaking time from her busy schedule to clarify my doubts. With out her valuable inputs itwould have been very difficult for me to complete the project.My colleagues from the Rural Management Programme supported me in my research work.I want to thank them for all their help, support, interest and valuable hints especiallyBibhasendra Sen for all his assistance.Last but not the least I would like to convey my hear felt thanks to Prof. C. Shambu Prasad,Coordinator - PGPRM, for introducing the component of Independent Research Project inthe Curricular of PGDM(RM) for the first time ever since the inception of the course andproviding this wonderful opportunity to all of us.Shivshankar. V2nd February, 2009

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EXECUTIVE SUMMARYIn this Independent Research Project I studied the various models followed by web basedmicro-lending portals and to identify financial, technological, cultural and organizationalparameters which are pre-requisites for an Indian MFIs to partner with micro lendingportals for scaling up.In the bottom of the pyramid sector there are millions of people whose financial needs arehardly met by the institutionalized financial services. In response to this, roughly in the midof this century, a system to meet their financial need called microfinance was developed. Inthe early years of microfinance, most organizations lending to the poor were funded byprivate or government grants. In the1990s, it became apparent that microfinanceinstitutions would be unable to sustain their rapid growth rates if they depended solely ongrants for funding. Many microfinance institutions started to restructure their operationsto make themselves attractive to investors.In response to this, in 2005, through an organization called Kiva, entrepreneurs fromdeveloping country were able to attract direct funding from individuals who could viewtheir profile on line. Till few months back, more than 700,000 visitors hit the Kiva web site.The company has more than 400 volunteers. It’s now generating $1 million in funds everyseven days. Following the success of Kiva, more and more web based micro lending portalswere established.In this Independent Research Project, I have studied the models of various online microlending portals like www.kiva.org , www.microplace.com , www.rangde.org andwww.dhanax.com. Along with this the main focus to identify financial, technological,cultural and organizational parameters which are pre-requisites for an Indian MFIs topartner with micro lending portals for scaling up.Based on the study I have identified the above mentioned parameters and indicators whichcan be used for assessing these parameters. As a result of the study, I have customized anexisting microfinance rating tool and also verified the customized tool on a microfinanceinstitution which is already into successful partnership with an online micro lending portal.The findings can be useful for a partnering organization which would like to work incollaboration with a micro-lending portal. Also these parameters and indicators could beused by MFIs for self assessment and improvement before seeking partnership with anonline microlending portal.

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______________________TABLE OF CONTENTS______________________________

1. INTRODUCTION_____________________________________________ _051.1 What is microfinance?1.2 History of Microfinance1.3 Explosive Growth1.4 Microfinance goes main stream2. EXPLAINATION OF THE CONTEXT_________________ ____ ______072.1 Innovations in Microfinance2.2 Microlending portals in India3. IDENTIFICATION OF PARAMETERS & INDICATORS__________________ 103.1 Benchmark Parameters4. EXPLANATION OF PARAMETERS & INDICATORS____________________ _124.1 Governance4.2 Outreach4.3 Operations4.4 Human Resources4.5 Asset Quality & Disclosure4.6 Profitability & Efficiency4.7 Infrastructure4.8 Office Environment5. BENCHMARKING_________________________________________ ____ 205.1 Benchmarking Methodology5.2 Brief Note on Adhikar5.3 Benchmarked Organisation6. MICROFINANCE RATING TOOL________________________________ __236.1 Sample Rating6.2 Remarks & Recommendations7. CONCLUSION_ ___________ _______________________ _ ___________35

8. LIST OF ABBREVIATIONS USED___ ___________________ _ _________36

9. REFERENCES & APPENDIX _ ____________ _____________________ _ __ _________37

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1. Introduction:1.1 What is Microfinance?In the bottom of the pyramid sector there are millions of people whose financial needs arehardly met by the institutionalized financial services. Population in the developing worldwho are lacking access to financial services is estimated to be more than 1 billion. Inresponse to this, roughly in the mid of this century, a system to meet their financial needcalled microfinance was developed. According to the recent microfinance bill to bepresented in the Indian Parliament, Microfinance means,(i) Providing financial assistance to an individual or an eligible client directly or through agroup mechanism or(A) An amount, not exceeding rupees fifty thousand in aggregate per individual, for smalland tiny enterprise, agriculture, allied activities (including for consumption purposes ofsuch individual), or(B) An amount not exceeding rupees one lakh fifty thousand in aggregate per individual forhousing purposes; or(C) Such other amounts, for any of the above mentioned purposes(ii) Financial services to an eligible client or individual borrower through the businessfacilitator or business correspondent mechanism authorized by the scheduled banks or anysuch other agency as may be permitted by the Reserve Bank of India;(iii) Life insurance or general insurance services and pension services which have beenapproved by the authority regulating such services;(iv) Any other services as may be specified by regulations made by the National Bank;1.2 History of Microfinance:Dr. Muhammad Yunus during a visit to the nearby village of Jorba was astounded to findthat a sum of $27 could radically change the lives of 42 people in the village. This was thesum of money they collectively needed to buy bamboo to make the stools they sold to makea living. He took $27 from his pocket and made 42 loans to the stool makers in this tinyvillage. They were able to pay him back with interest and take a step towards liftingthemselves out of poverty.This simple idea that the poor could use credit to lift themselves out of poverty, led Dr.Yunus to create The Grameen Rural Bank in 1983. Since its inception, it has made over

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$983 million in loans to over seven million borrowers. Its methodologies have become thecornerstone of the microfinance industry.1.3 Explosive GrowthIn the 1970s and 80s, inspired by Grameen’s success, social innovators and organizationsaround the world began to experiment with different programs to bring financial servicesto the poor.Microfinance has proven to be a highly effective poverty reduction tool in developingcountries and in more industrialized countries. Microfinance can be more effective thancharity as it provides a “hand-up” instead of a “hand-out” and let’s people work their wayout of poverty with dignity.The 2006 Microfinance Summit Campaign Report estimates that there are now more than3,000 microfinance institutions, serving more than 100 million poor people in developingcountries. The total cash turnover of these institutions world-wide is estimated at $2.5billion and the potential for new growth is outstanding.1.4 Microfinance goes MainstreamMicrofinance is targeting these unbanked people and wants to bring them mainstreamfinancial services. Access to financial services is a critical poverty alleviation driver.In the early years of microfinance, most organizations lending to the poor were funded byprivate or government grants. In the1990s, it became apparent that microfinanceinstitutions would be unable to sustain their rapid growth rates if they depended solely ongrants for funding. Many microfinance institutions started to restructure their operationsto make themselves attractive to investors.In recent years, many institutional and high net worth investors have begun to invest inmicrofinance. Attracted by the high growth rates, funds focused on lending to microfinanceinstitutions were created. Today, major banks such as Morgan Stanley, Deutsche Bank andCitigroup have begun to offer products and services that enable investments inmicrofinance.

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2. Explanation of the Context:2.1 Innovations in Microfinance: Web based micro lendingAs microfinance becomes more and more popular, more and more innovations are takingplace in this sector. One of the most interesting innovations that took place in this sector isweb based micro lending portal. Two well know online portals which offers web basedmicro lending facilities are Kiva (www.kiva.org) and MicroPlace (www. microplace.com).Though both of these portals work towards a common objective, the model followed isdifferent from each other. Kiva follows a simple P2P lending model where as MicroPlacefollows a securities model.

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A. Kiva:Kiva is the world's first person-to-person micro-lending website, empowering individualsto lend directly to unique entrepreneurs in the developing world. Kiva enables individuallenders to browse through various entrepreneurs profile and allows them to lend a smallamount to those whom the individual would like to lend to.Through Kiva, partners of Kiva upload their entrepreneur profiles directly to the site so theindividual lender can lend to them. The partners of Kiva play an important role in theworking of Kiva. The following points explain how lending cycle gets completed.1) Individual Lenders browse profiles of entrepreneurs in need, and choose someoneto lend to. When they lend, using PayPal or their credit cards, Kiva collects the funds andthen passes them along to one of our microfinance partners worldwide.2) Kiva's microfinance partners distribute the loan funds to the selected entrepreneur.Often, the partners also provide training and other assistance to maximize theentrepreneur's chances of success.3) Over time, the entrepreneur repays their loan. Repayment and other updates areposted on Kiva and emailed to lenders who wish to receive them.4) When lenders get their money back, they can re-lend to someone else in need, donatetheir funds to Kiva (to cover operational expenses), or withdraw their funds.Kiva.org allows anyone with a credit card and Internet access to make zero-interest loansto low-income entrepreneurs in over twenty countries.Till few months back, more than 700,000 visitors hit the Kiva web site. The company hasmore than 400 volunteers. It’s now generating $1 million in funds every seven days.B. MicroPlace:MicroPlace, a wholly owned subsidiary of eBay is secure platform which enables investorsto choose out of 29 countries and help them to purchase investments – for as low as $100(and as low as $ 50 from subsequent investment) from a microfinance security issuer.Through MicroPlace, investors can direct their investments in specific microfinanceinstitute in specific countries. Since the loans are securitized they can be traded. Also theinvestors can earn interest on their investments. These microfinance institutions convertthis amount in to small loans ad they lend it to their customers and subsequently collectpayments.

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Once the MFI borrowers make their payments, the institutional investors receive the loanplus interest and they in turn pay the investors (who initially purchased the securities fromMicroPlace platform)The following are the advantages of MicroPlace:1. MicroPlace is a dealer/ broker who can pay interest to its lenders2. Securitization of loans help to diversify risk and also helps in reaching second andthird tier MFIs which lacks grants or donor support.Thus, MicroPlace, is more businesslike - it offers a portal where profit-conscious investorscan get involved in microfinance without totally compromising on rate of return.2.2 Micro lending portals in India:

Online micro lending in India is still fairly a new concept. There are two well know microlending portals that operates out of India to enable Indian socially responsible investors toinvest in micro enterprises.A. DhanaX (www.dhanax.com)DhanaX a Bangalore based startup provides a credible, secure and easy channel for Indiansto lend or borrow money. DhanaX provides an online market place where microentrepreneurs in need of loans can avail loans at affordable rates. The profile of theseborrowers is displayed on the website under the respective NGO. A registered lender inDhanaX can see the profiles of the members of each NGO and decide which NGO they wantto lend to at a minimum amount of Rs. 10,000. Borrowers quote the rate of interest theyare willing to pay on their loan amount. This information is posted against each borrower.All money transactions do not take place online. DhanaX allows lenders to write aCheque/DD in the name of the concerned NGO and send it to their office.Further the NGOs lend the money to individual borrowers organized under Self HelpGroups. These self help groups take loans under joint/group guarantee. Every monthrepayments (Principle + Interest) collected from your borrower/s will be transferredonline to the respective investors’ bank account. If the lending is in excess of Rs 100000/,DhanaX gives an option of taking 12 post dated cheques from the NGO for the repayment.B. Rang De (www.rangde.org)Rang De is a unique platform for individuals to become Social Investors and connect withborrowers of microcredit by lending small sums of money. At Rang De, a social investor issomeone who can lend at least Rs.1000 to an individual in need and in turn earn a nominalreturn as well as make a positive social impact. It follows a very similar model of Kivawhere an individual lender registers and become a Social Investor. He/ she have to choose

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borrowers to make a social investment. An investment can be as low as Rs 1000. Rang De’sfield partners receive and disburse loans to their borrowers. Borrower repays loanaccording to a repayment schedule. Investors receive a return of 3.5% on your socialinvestment at the end of the tenure.The investments that are made will be received by Rang De’s field partners who areresponsible for identifying borrowers, disbursing loans and collecting repayments. TheField partner incurs expenses for all this and the 5% the borrower pays is just enough tomanage these costs. Thus the borrower pays a cumulative interest of 8.5% on the loan.Thus an investor will earn an interest of 3.5% p.a on their investment. Interest is calculatedfrom the day the loan is disbursed to the borrower. This typically will be around a month’stime from the date of investment.The difference between Rang De and Kiva is that Rang De does not use a payment gatewayat all. Making a social investment on Rang De only requires you to have an online bankaccount. Rang De accept payments via credit or debit cards and cheques. A transaction costof 2% will be applicable for using credit or debit cards.C. Micro Place (www.microplace.org)MicroPlace in December - 2007 announced to offer investment opportunities in Indiathrough Oikocredit, the world's largest private financier of the microfinance sector. For thefirst time, everyday people can make investments in India's working poor by leveraging thepower of microfinance, and earn a return on their investment.With the addition of BISWA (Bharat Integrated Social Welfare Agency), a microfinanceinstitution operating in Orissa, Oikocredit aims to provide investment opportunity forinvestors to invest in Indian micro entrepreneurs through MicroPlace. BISWA operates inthe most impoverished regions of India, primarily in Orissa. Through this microfinanceinstitution and other microfinance partners in India like Adhikar, another microfinanceinstitution working primarily in Orissa, Oikocredit along with the partnership withMicroPlace will enable investors to make change in the live of the micro entrepreneurs.

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3. Identification of Parameters &Indicators:3.1 Benchmark ParametersThe basic aim of this research project is identification of organizational, financial, culturaland technological parameters that any MFI should posses for partnering with an onlinemicro lending portal. In this process we basically identified the following benchmarkingelements which can be used to identify and select microfinance institutions for the purposeof partnership.

Governance Outreach Operations Human resources Asset quality & Disclosure Profitability & Efficiency. Infrastructure Office environmentThese parameters are indentified by considering the general parameters that are usedwhile rating an MFI. In particular, MICROSOP Foundation has developed GOOHAP

(Governance, Outreach, Operations, Human resources, Asset quality & disclosure andProfitability and Efficiency) parameters to rate MFIs. For this research purpose I have referred tothe GOOHAP parameters and I have customized it according to the requirement for an onlinemicrolending portal to rate an MFI which with a partnership is desired.

Also, these parameters are decided after discussing with officials from a well known Indianonline microlending portal. After a round of discussion with them I have added and deleted fewindicators which will be used for assessing GOOHAP and along with that infrastructure is addedas one of the most important parameter and a major emphasis has been given to the same. This isbeing done because of the fact that infrastructure including technology plays a vital role in apartnership between MFI and the online microlending portal. Also, since we felt that officeenvironment is one factor that has to be added because while indentifying the cultural aspects ofthe existing partnership between an MFI and an online microlending portal.

Hence based on these parameters, certain indicators will be used to asses each of theseparameters which are explained in the next section.

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4. Explanation of the Parameters &Indicators:4.1 Governance:

Governance is a system of checks and balances whereby a board is established to manage themanagers. Governance is sometimes conceived as a virtuous circle that links the shareholder tothe board, to the management, to the staff, to the customer, and to the community at large.Boards review, confirm, and approve the plans and performance of the senior management, butthey do not usually provide vision. The board needs to know what the vision is, and then ensurethat it is maintained. Management, on the other hand, is involved in the daily operations ofputting the vision into action.

With more and more microfinance institutions emerging in the market, good governance is verymuch necessary. Hence this has been taken as a one of the most important criteria to rate an MFIfor the purpose of partnership. For this purpose I have taken the following parameters to gaugethe system of governance that is in place.

Board composition1. Board member with grass root experience / from Self Help Group.2. Specialists from Legal, Finance, Human resources Management.3. More than 50% are women Conduct of Board meetings once in a quarter Institutional association with other development agencies / departments (If link isestablished with more than 5 institutions)Relative importance will be given to each of these parameters to decide upon the system ofgovernance that is in place. The relative importance is again assigned based on therelevance of these parameters to the governance and to the partnership of the MFI with themicrolending portal.

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4.2 Outreach:Outreach is also one of the most important aspects for any MFI. Outreach directly indicatesthe operational efficiency of the MFI. Not just pertaining to the MFI which aims for apartnership with a microlending portal outreach is one of the indicators to measure thesuccess of any MFI.Hence outreach is considered as another important parameter to decide on thepartnership. To help indentify the outreach of the MFI I have considered the followingindicators: Proximity of the MFI to the people, whether the MFI head office and operations arein the same area (district, state, region) Number of villages that the MFI has covered Number of self help groups (SHG) that the MFI has formed since its inception The target segment of the MFI, whether the MFI is including people from thebackward areas and tribal region in their operations or notAlso a wider outreach is important for MFIs looking for a partnership with microlendingportal. The wider the outreach for an MFI, entrepreneurs from various parts of the countrycould upload their profile in the portal. This will help the lenders to with a much betterchoice to choose. Also the lender might want to lend to entrepreneurs from one particularstate, region or community. Hence by having a wider outreach both the MFI and themicrolending portal mutually gets benefitted.

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4.3 Operations:Operations are a very important aspect of every microfinance institution. With efficiency inoperations MFI produce value for their stake holders. Hence assessing the operations of theMFI is very important. By assessing the operations we could understand the experience ofthe MFI in the microfinance operations, services provided by the MFI in the best interest oftheir clients, efficiency of the SHGs formed so far and their credit history and track record.Hence to analyse the operational efficiency of the MFI we consider the following indicatorsand through which we assess the MFI’s operations: Experience of the MFI in microfinance operations Provision of promotional support services Percentage of SHGs, which are more than 3 years of age Credit History – Size of borrowings of MFI Track record- Repayment of loan by MFIBy understanding the experience of MFI in microfinance operations we could know howlong the MFI has started working on the microfinance. Because in most cases wellestablished NGOs expand their presence in the microfinance sector also. So we canunderstand the core competency of the organization by studying their experience in themicrofinance sector.Providing promotional support services is also an important indicator. Because byproviding these services, the MFI helps in capacity building and in turn assist theircustomers in better utilization of the loan disbursed.The third indicator, age of SHG also forms an important indicator because of the reasonthat the success of the MFI institution also depends on their SHG and by assessing the ageof the SHG we can quantify the quality of the self help groups formed.

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4.4 Human Resource:It is very clear that microfinance growth need more professional human resource that ableto manage the growth. The need for professional human resource system is a must. Thedifferences of human resource practices in different form of MFIs are mainly caused by thelevel of professionalism and commercialization of the MFIs. More professional andcommercialized MFIs, the better human resource system they have.Particularly in case of an MFI looking for a partnership with an online microlending humanresource is very important. Ability to constantly upload the profiles of the entrepreneurs,keep a track of the loan amount raised for each entrepreneur, etc. needs good humanresource to manage it efficiently.Hence to check the efficiency of the human resource of the MFI the followed indicators hasbeen used. Knowledge of staff on Micro finance operations Skill sets of staff (Communication, training, SHG rating, Book keeping, two wheeler driving,computer operating skills) Attitude of Staff towards work Scope for up gradation of skills Professional management capacity among staff

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4.5 ASSET QUALITY & DISCLOSURE:Asset quality represents the risk to earnings derived from loans made by the organization.In other words, it measures the degree of risk that some of the loan portfolio will not berepaid.Most MFIs do not require formal collateral and instead base their loan decisions oncharacter, group solidarity, and past repayment history. Instead of collateral, regulatorsmay consider the best indicators of asset quality to be past performance of the portfolioand the current rate of portfolio at risk (defined as the balance of outstanding loans whichhave an amount past due).For this purpose the following ratios are considered: Portfolio At Risk (PAR30 ):PAR30 is the percentage of Total balance outstanding of all overdue loans of more than30 days to the Total portfolio outstanding. Asset allocation:Asset allocation is the percentage of Loan outstanding to the Total assets. Capital Adequacy Ratio:Capital Adequacy Ratio if the percentage of Networth to the Risk weighted assets andthe risk weights are Cash: 0%, Interest earning deposits & net fixed assets: 50%, Loanassets and other assets: 100%Similarly disclosure of financial statements by the microfinance institution is also veryimportant. This includes disclosure of audited financial statements and availability ofprofessional rating of the MFI in their official website. Availability of audited financialstatements and professional rating adds to the credibility of the MFI.

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4.6 Profitability and Efficiency:Productivity and efficiency provide information about the rate at which MFIs generaterevenue to cover their expenses. By calculating and comparing productivity and efficiencyratios over time, MFIs can determine whether they are maximizing their use resources.Both productivity and efficiency ratios can be used to compare performance over time andto measure improvements in an MFI's operations.4.6.1 Profitability Ratios:Profitability ratios measure an MFI's net income in relation to the structure of its balancesheet. Profitability ratios help investors and managers determine whether they are earningan adequate return on the funds invested in the MFI. Determining profitability is quitestraightforward -- Does the MFI earn enough revenue excluding grants and donations tomake a profit?For calculating the profitability, the following ratios are considered: Operational Self Sufficiency (OSS)Operational Self Sufficiency is indicated as the percentage of operating income to theoperating expenditure. Operational self-sufficiency thus indicates whether or not enoughrevenue has been earned to cover the MFI's direct costs, excluding the (adjusted) cost ofcapital but including any actual financing costs incurred. Financial Self Sufficiency (FSS)Financial self-sufficiency indicates whether or not enough revenue has been earned tocover both direct costs, including financing costs, provisions for loan losses, and operatingexpenses, and indirect costs, including the adjusted cost of capital. (For details referappendix) Return on Assets (ROA)The return on assets (ROA) ratio measures the net income earned on the assets of an MFI.For calculating the return on assets, average total assets are used rather than performingassets, because the organization is being measured on denominator to determine howspecific assets are performing. (For details refer appendix)

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4.6.2 Efficiency ratios:Efficiency ratios measure the cost of providing services (loans) to generate revenue. Theseare referred to as operating costs and should include neither financing costs nor loan lossprovisions. Operational Efficiency Ratio (OER)Operational Efficiency Ratio (OER) is expressed as the percentage of total of Operatingexpenses and In kind donation to the Average net portfolio. Total Cost Ratio (TCR)Total Cost Ratio (TCR) is expressed as the percentage of Total cost to the Average netportfolio4.7 INFRASTRUCTURE:Infrastructure is one of the most important parameter which has to be used to decide onthe partnership of the MFI and the microlending portal. Because MFI will have to be ratedon the basis of infrastructural capability to handle the requirements of partnering with amicrolending portal. The MFI should have minimum technological infrastructure toperform the necessary activities. For this purpose I have listed down certain indicatorswhich are very crucial for an MFI to partner with an online microlending portal which areas follows. Availability of internet Frequency of power cuts Management Information System Mobile Phone Connectivity Configuration of the computer systems available Availability of Hardware Availability of power back up systems to prevent loss of data Availability of camera Availability of basic necessary software

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4.8 OFFICE ENVIRONMENT:To improve the morale and productivity it is very necessary to have a right officeenvironment. This could be the deciding factor in a failure or success of a business. It hadbeen seen that normally only the large companies are paying attention to the design theinterior of the workspace or offices, but it is also important for the MFIs to give importanceto the working space so that working environment can be improved. Hence this is alsogiven importance and it is considered as one of the parameter while assessing the MFIalthough comparatively a lesser weight age is assigned.For this purpose I have taken the following indicators: Location of the office (whether it is in designated office space Residential space) Availability of the individual and common spaces within the office space

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5. Benchmarking:5.1 Benchmarked OrganisationBased on the parameters discussed above, I have customized the rating tool developed byMICROSOP Foundation. This rating tool which is developed by MICROSOP Foundation isavailable free of cost and the objective is to promote transparency and familiarize smallMFIs with the concept of rating. Taking leads from this free source I have tried to customizethis rating tool and develop a fully customized rating tool which can be used by MFIs whichwould like to partner with an online microlending portal. These MFIs can use this tool forthe purpose of self assessment and they can internalize the process of rating before beingactually rated by the microlending portal.After undertaking this exercise, I hope that the MFI can self asses their operations and theycan improve those areas where improvement is needed before actually being rated by themicrolending portal.Also, I have used this customized rating tool on Adhikar Microfinance Pvt. Ltd. Adhikar is aBhubaneswar based MFI and they have successfully partnering with Microplace – one ofthe worlds well know online microlending portal. Hence small MFIs can use the resultsobtained by Adhikar as a bench mark and they can compare the results obtained by therespective MFI. A brief of Adhikar Microfinance Pvt. Ltd. is as follows:5.2 Brief Note on Adhikar (partnering withwww.microplace.com)Adhikar is an organization committed to social cause of protecting human rights of thepoor and the down trodden, particularly of rural women. It is a voluntary organizationinvolved in a multitude of activities with a relentless and selfless serving attitude,committed to an integrated community development through a process of empowermentof rural people in general and the women folk, in particular.Journey started as human rights defending organization with a group of young activists andvolunteers, now its name is being echoed in the rural Orissa as an organization which ispro-poor and truly committed to selfless service for the down trodden.Adhkar has fought, over the years, for the cause of displaced slum dwellers ofBhubaneswar; extended a unique remittance system for the migrant workers of Orissaworking in industrial cities of Surat and Ahmedabad; extended full fledged legal support to

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Burmese repatriates of Ranapur of Nayagarh Block in obtaining a rehabilitation packagefrom the government; promoted various SHGs among urban and rural women with aspecialized and unique Banking system for the poor women so as to improve their savinghabit and make them self reliant through a sustainable scheme for financing their variousneeds; took a lead role in converting the SHGs in to Self Help Cooperative Societies in thepost-Slef Help Coop Act’2001 phase; introduced a kind of its own, well organized trainingand Human Resource Development Institute in the name of MFRDC ; organized indepthseminars, programes forums, discussions, events, melas etc to attract, invite train andeducate people at all levels apart from carrying out various sensitization programmes forGovernment officials, Bankers, Lending institutions, NGOs and Social welfare organizations.5.3 Methodology for bench marking:This rating tool will help the online micro lending portals and can use them to rate the MFIbefore getting into partnership. This rating tool will examine the MFI on the basis of thenine parameters. This rating tool has been used with the MFI which is already in tosuccessful partnership with online microlending portals. Hence we can safely assume thatthe results obtained by this MFI can be used as a bench mark by the online microlendingportals to partner with other organizations.For assessing each parameter, sub-parameters / indicators have also been evolvedand used in the rating tool. The rating process involves the following steps1. Discussion with the Board & Senior Management personnel,2. Discussion with various departments within the organisation3. Interaction with the employees4. Visits & getting feedback from SHG member - clients,5. Analysis of financial statements

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Against every indicator the maximum score is mentioned. Based on the results emergingout of the above processes each indicator will be rated on a specified scale. At the end ofeach parameter sub total of the score obtained will be calculated and ultimately grand totalwill be calculated which will be the total of all the sub total score obtained by eachparameter. The maximum grand total that could be obtained is 1000On the basis of the grand total score obtained MFIs will be classified into four categoriesviz. ‘A’, ‘B’, ‘C’ & ‘D’.If the MFIs falls in the category of ‘A’ or ‘B’ then the MFI posses all the pre-requisite forpartnership and a partnership can be executed confidently. IF the MFI falls in the categoryof ‘C’, partnership can be executed immediately now but can happen at a later stage if theMFI improves the required sectors. If the MFIs falls in the category of ‘D’ then the MFI hasinadequate Systems & Procedures, there is high risk and very low creditworthiness. Hencethe MFI can not enter into partnership with microlending portal.

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6. Microfinance Rating ToolFor the purpose of benchmarking this customized rating tool has been used on AdhikarMicrofinance Pvt. Ltd. and they have successfully partnering with Microplace – one of theworlds well know online microlending portal. Hence small MFIs can use the resultsobtained by Adhikar as a bench mark and they can compare the results obtained by therespective MFI.6.1. Sample Rating on Adhikar Microfinance Pvt. Ltd.

Name of the MFI: Adhikar Microfinance Pvt. Ltd.

Location: Bhubaneswar

State: Orissa

S. No. Parameter/ Sub parameter/ Indicator Maximum

Points

Points

Awarded

1 Governance

1.1 Board composition1. Board member with grass root experience /from Self Help Group.2. Specialists from Legal, Finance, Humanresources Management.3. More than 50% are women101010

101001.2 Conduct of Board meetings once in a quarter 20 201.3 Vision & strategic plan evolved 20 101.4 Institutional association with other developmentagencies / departments (If link is established withmore than 5 institutions) 30 0

SUB TOTAL 100 50

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2 OUTREACH

2.1 Proximity of Micro Finance Institution to people:i. If MFI’s Head office is based & functioning inlocal area (30)ii. If MFI’s HO is based elsewhere & alreadyfunctioning in the area (20)iii. If the MFI is a new one (10)30 30

2.2 Number of villages coveredAbove 100 villages (30)76-100 (20)50-75 (10)Below 50 villages (0)30 30

2.3 No. of Self Help Groups (SHGs) formedi. Above 600 SHGs (30)ii. 200 to 600 SHGs (20)iii Below 200 SHGs (10) 30 302.4 No. of members enrolledi. above 10,000 members (30)ii. 3001 to 10,000 (20)iii. Up to 3000 (10) 30 302.5 Geographical distribution of SHGsi. Targeting in backward & remote areasii. Geographical distribution of SHGs – If operatingin more than one state

1515 150SUB TOTAL 150 135Notes:_________________________________________________________________________________ ___________________________________________________________________________________________________________________________________________________________________________________________________________________________

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3 OPERATION

3.1 More than two years of experience in micro creditlending operations - (20)If less than 2 years of experience - (0) 20 203.2 Provision of promotional support services (e.g.enterprise management training, skill training,SHG management & book keeping training,Marketing support)i. If users pays the cost of services (20)ii. If the services are offered free of cost (10)

20 20

3.3 % of SHGs, which are more than 3 years of agei. Above 75% (30)ii. 50% to 75% (20)iii Less than 50% (10)30 10

3.4 Credit History – Size of borrowings of MFIi. More that one crore per year (30)ii. Between 50 lakhs to one crore (20)iii. Less than 50 lakhs (10) 30 303.5 Track record- Repayment of loan by MFIi. If 100% repayment paid on due date (30)ii. If 100% repayment with some delays (20)iii. If principal or interest arrears remain orrepayment not yet commenced (0).

30 30SUB TOTAL 130 110Notes:_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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4. HUMAN RESOURCES

4.1 Knowledge of staff on Micro finance

operations/ SHG promotioni. Knowledge level is more than 75% (30)ii. If it is between 50% & 75% (20)iii. If it is less than 50% (10)30 30

4.2 Skill sets of staff (Communication, training, SHGrating, Book keeping, two wheeler driving,computer operating skills)i. If skill level is more than 75% (30)ii. If it is between 50% & 75% (20)iii. If it is less than 50% (10)30 20

4.3 Attitude of Staff towards worki. If Attitude level is high (30)ii. If it is Medium (20)iii. If it is Low (10) 30 304.4 Scope for up gradation of skillsi. Staff sent to external trainings often (20)ii. Internal trainings offered every quarter (10)iii. If trainings are not offered regularly (0) 30 204.5 Professional management capacity among staffi. High (30)ii. Medium (20)iii. Low (10)

30 30SUB TOTAL 150 130Notes:________________________________________________________________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________

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5 ASSET QUALITY AND DISCLOSURE

5.1 Portfolio At Risk (PAR30 )i. If Less than 2% (20)ii. If between 2% and 5% (10)iii. If more than 5% (0)20 20

5.2 Asset allocation- Loan portfolio as % of total

assetsi. If more than 80% (20)ii. If between 60% and 80% (10)iii. If less than 60% (0)20 10

5.4 Adequacy Ratioi. If more than 20% (20)ii. If between 8% & 20% (10)iii. If less than 8% (0)20 10

5.4 Availability of financial statementsi. Latest audited financial statements (20)ii Latest un-audited financial statements (10) 20 205.5 Rating by professionals & info for public viewi. Professional Rating info put on websites (20)ii. Professional rating done & not put on web (10) 20 0

SUB TOTAL 100 60Notes:____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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6 PROFITABILITY & EFFICEINCY6.1 Operational Self Sufficiency (OSS)i. If more than 135% (20)ii. If between 100 and 135% (10)iii. If less than 100% (0)20 10

6.2 Financial Self Sufficiency (FSS)i. If more than 100% (20)ii. If between 80 and 100% (10)iii. If less than 80% (0) 20 206.3 Return on Assets (ROA)i. If above 3.5% (20)ii. If between 2 & 3.5% (10)iii. If less than 2% (0) 20 206.4 Operational Efficiency Ratio (OER)i. If less than 20% (20)ii. If between 20 & 30 % (10)iii. If above 30% (0) 20 06.5 E – Total Cost Ratio (TCR)i. If less than 30% (20)ii. If between 30 & 40 % (10)iii. If above 40% (0)

20 20

SUB TOTAL 100 70Notes:____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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7. INFRASTUCTURE:7.1 Availability of internet:High speed (1 mbps and above) 30Low speed (below 1 mbps) 20Not available 030 30

7.2 Frequency of power cuts:Between 0 to 5 hours (30)i. Between than 5 hours to 10 hours (20)i. Between 10 hours to 15 hours (10)i. More that 15 hours a day (0)30 30

7.3 Management Information Systemi. Fully computerized systems (30)ii. Adequate manual system (20)iii. Moderate manual system (10)iv. Inadequate manual system (0)30 30

7.4 Mobile Phone Connectivity:i. Yes (10)ii. No (0) 10 107.5 Computer systems available:Computer system with latest processor (Pentium4 or above or its equivalent) – 30Between Pentium 2 and 3 or its equivalent – 20Lower than Pentium 2 or equivalent – 10No computer available – 0

30 30

7.6 Availability of Hardware: Availability of printer,scanner, Photocopying machine, Fax, CD/DVDwriter, USB portAvailability of all - 30Availability of any 4 to 6 - 20Availability of any of the 1-3 – 1030 10

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Availability of none – 07.7 Availability of power back up systems to

prevent loss of dataYES (30)No (0)30 30

7.8 Availability of cameraDigital Camera (30)Analogue (20)None (0) 30 307.9 Availability of basic necessary software for

partnering with microlending agencies like

photo-shop etc.i. Yes 30ii. No 20

30 30

SUB TOTAL 250 2308 OFFICE ENVIRONMENT

8.1 Is the office located in a:i. Designated office space (10)ii. Residential space (0) 10 108.2 Are there common spaces available in the

officei. Equal amount of individual and common spaces(10)ii. Highly divided or no individual space (0)10 10

SUB TOTAL 10 20GRAND TOTAL 1000 735

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Point Range Grade Comments

800 Points & above A Prudent operative systems& procedures, Low risk,High Creditworthiness.600 - 799 Points B Moderate systems &Procedures, Medium, risk,Medium Creditworthiness.

500 – 599 C Systems & Procedures needto be fine tuned, High risk,Low CreditworthinessBelow 500 Points D Systems & Proceduresinadequate, Higher risk,Very Low CreditworthinessGrade Comments

A & B Can enter into partnershipC Cannot enter into partnership now but canwait for the MFI to improve in the requiredsectorsD Cannot enter into partnershipNotes:_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ __

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6.2 Remarks and Recommendations:

6.2.1 Governance:Adhikar has started the Microfinance operations since 2004 after a decade and a half longexperience in grass root development activities in the field of human rights, socialdevelopment and financial inclusion in the state of Orissa.Legal statusIn 1991 Adhikar is registered under the Societies Registration Act of 1860, addition to thisthe other registrations like Foreign currency Reregulating Act under Ministry of Homeaffairs & 12A under Income Tax Dept. of Govt. of India was done to address the legalformalities.VisionBe a first choice resource in improving the quality of life of 5 lakh clients and their familiesby 2012.MissionWith commitment, integrity and transparency, we provide financial and related services ina sustainable manner, to enable the poor to achieve social and economic empowerment.Adhikar has qualified and experienced people on board. President & Chief Executive Officerof Adhikar, Mr. Md. N. Amin is a well known personality in the field of social developmentin Orissa. Recently Adhikar has appointed Mr. Sarangi as its Chief Financial Officer.Mr.Sarangi has rich experience in the field of banking and finance and he is a CharteredAccountant by profession. Also to add to its list of professionals Adhikar has got qualifiedCompany Secretaries and legal professionals on board.Some of the linkages that Adhikar has got are with ABM Amro, HDFC Bank, ICICI Bank,Friends for Women World Banking – to name a few for lending purpose and for investmentneeds Adhikar Partners with Unitus India and Calvert Foundation, USA.6.2.2 Outreach:The head office of Adhikar is located in Bhubaneswar and its operations are through outOrissa covering all the vulnerable sections of rural Orissa. Also Adhikar has wellestablished field offices which directly report to the head office and these field offices inturn look after regional operations pertaining to that area.Till now Adhikar has covered a total of 855 Villages through its microfinance operations.Adhikar’s product and services are formulated on the following four major heads namely,

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Joint Liability Group (JLG) model, Cooperative model, Remittance model and Bankingcorrespondent model.In Adhikar each JLG group has an average of five members in each group and till dateAdikar has achived successful formation of 5825 JLG groups. So a total of 29125 membersapproximately are enrolled in the Adhikar’s microfinance operations.Adhikar works with all the vulnerable sections of the society with major focus on dalits,tribals, women and migrants.Although the microfinance operations of Adhikar is only in Orissa, through the remittancemodel they also help the migrants of Orissa located in Gujarat and Maharashtra6.2.3 Operations:Adhikar has successfully completed four years of microfinance operations, althoughAdhikar has a rich decade long experience in the fields of Human Rights & SocialDevelopment.Adhikar does not offer any support services as apart of the microfinance services. Butotherwise Adhikar help its clients to improve their livelihood through community farming,community orchids and high land cultivation.Since the microfinance operations of Adhikar is just four years old not many of the JLGsthat are formed are more that 3 years of age.But as far as the credit history of Adhikar is Adhikar is concerned they have good credithistory and they claim to be the best rated MFI in Orissa. Adhikar is also proud about itstract record with respect to repayment of loan to its lenders.6.2.4 Human Resources:Adhikar takes utmost care in maintaining the quality of human resources. For the purposeof constantly updating the knowledge on microfinance sector, Adhikar provides excellentopportunity to its employees. Every year on the 1st of May, Adhikar organizes a conferencefor motivation and knowledge sharing. On this occasion, eminent personalities from thefield of microfinance, banking & insurance are invited for a guest lecture.Apart from this Adhikar imparts technical knowledge to its employees through trainingsessions conducted by EDA Rural Systems, UNITUS India, FWWB, Sa-Dhan – to name a few.Adhikar also has a well designed induction programme for new joinees. Every joinee is putinto a rigorous 7 days intensive training programme and after which they will be in threemonths probation period. During this probation period the new joinee will be under super

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vision by their seniors. Along with this every employee is provided with a microfinancemanual which contains in-depth details about the microfinance related information. Thismanual is constantly updated according to industry standards.As explained earlier, Adhikar believes in categorization of roles and they have well definedroles and responsibilities. The finance department of Adhikar has experienced bankerswhile the Audit and company affairs departments have qualified Charted Accountants andCompany Secretaries.6.2.5 Asset Quality & Disclosure:

Portfolio at Risk (PAR 30) = 0.25% Asset Allocation – Loan Portfolio as a % of total assets = 72% Capital Adequacy Ratio = 9.8% Adhikar has latest audited financial statements done through SRB & Associates,Chartered Accountants Adhikar has no professional and it is not put on the web

6.2.6 Profitability & Efficiency: Operational Self Sufficiency = 116% Financial Self Sufficiency = 111% Return on Assets = 12% Total cost Ration on Portfolio = 6.3% Total cost Ration on Assets = 4.5%

6.2.7 Infrastructure:Adhikar has a very good infrastructure as far as the technology aspect is concerned. All thecomputer systems in the office have high speed internet connectivity. The configuration ofthe computer system is highly advanced with pentium – IV processors. The managementinformation system is fully automated and computerized. Also avoid data loss they have acentralized data back up system which is connected all the computers in the head officeand any data loss can be retrieved from them centralized data back up system.In the head office and also in the field office, there is a printer and all the sytems haveCD/DVD writer along with USB ports. Along with this every system is compatible for

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uploading necessary softwares required for partnering with an online microlending portal.There is no much problem with respect to power cuts also. Adhikar makes it a point tolocate the field offices only in those areas where there is mobile connectivity and hence allthe field offices can be instantly contacted through mobile phones. Along with this all theemployees of Adhikar are provided with CUG connections for easy connectivity.6.2.8 Office Environment:The head office of Adhikar microfinance is located in Khandagiri which is 10 Kms awayfrom Bhubaneswar. The office is located in a three floored building with closed cabin forthe senior officials. Also, each employee has a partitioned cabin with a personal computersystem. The office building is located in the designated office space and equal common andpersonal spaces within the office space. The office space also has a kitchen common diningarea where the employees can choose to have lunch and snacks with other colleagues. Theoffice space also has a library and a reading section attached to a balcony where employeescan spend their leisure time.7. ConclusionBy using the rating tool on Adhikar, which is already into successful partnership withMicroplace.com, we can judge the credibility of the rating tool based on the results.Through this exercise, the results obtained for Adhikar is 735 on a scale of 1000. Thecorresponding grade for this score will be ‘B’. According to the rating tool when amicrofinance institution gets ‘B’ grade it means that the MFI has Moderate systems &Procedures, Medium risk & Medium Creditworthiness. Based on this judgment the MFI canbe considered for partnership with a microlending portal. Since Adhikar is already intosuccessful partnership with microplace.com, we can conclude that this rating tool verifiesall the required areas for a successful partnership with an online microlending portal.Hence based on the results obtained the online microlending portal can decide whether togo ahead with partnering with the microfinance institution or not.Also, this rating tool can be used by small MFIs to self asses their potential beforeapproaching an online microlending portal. Based on the results obtained they can improvethe required areas to make the deal successful.

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8. LIST OF ABBREVIATIONSDD - Demand DraftMFI - Micro Finance InstitutionNGO - Non Government OrganizationSHG - self help groupsJLG - Joint Liability GroupPAR - Portfolio at RiskCAR - Capital Adequacy RatioOSS - Operational Self SufficiencyFSS- Financial Self SufficiencyROA - Return on AssetsOER - Operational Efficiency RatioTCR - Total Cost RatioCGAP – Consultative Group to Assist the PovertyUSB - Universal Serial BusDVD - Digital Video DiscMBPS - Mega Bytes per SecondFWWB - Friends of Women World BankingMFRDC - Micro Finance research and Development CentreBISWA - Bharat Integrated Social Welfare AgencyGOOHAP - Governance, Outreach, Operations, Human resources, Asset quality & disclosureand Profitability & EfficiencyMICROSOP - Microcredit School of Practitioners

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9. ReferencesLedgerwood, Joanna, (1999), Microfinance Handbook: An Institutional and FinancialPerspective, World Bank Publication, ISBN – 0-8213-4306-8Micro Financial Sector (Development and Regulation) Bill 2007, Bill No 41 of 2007 (Asintroduced by the Union Finance Minister in Lok Sabha on 20th March 2007)Thompson, Cale, (2006), Delft University of Technology, Appropriate Technology for EastAfrica: People Driven Solution for Online Microlending.Seidman, Ellen, & Tescher, Jennifer, (2006) Joint Center for Housing Studies, HarvardUniversity. From Unbanked to Homeowner: Improving the Supply of Financial Services forLow- Income, Low-Asset Customers.Jayaseelan N, (2006), Microcredit School of Practitioners Foundation, Madurai,Microfinance Rating Toolhttp://www.microfinancegateway.com/content/article/detail/34027The Global Development Research Centre (2009), Effective Governance for Micro-financeInstitutions. http://www.gdrc.org/icm/govern/effective-govern.htmlAdhikar (2008) https://www.adhikarindia.orgMicroplace (2008), https://www.microplace.comKiva (2008), https://www.kiva.orgDhanaX (2008), https://www.dhanax.comRang De (2008), https://www.rangde.orgCGAP (2008), http://www.microfinancegateway.comUnited Nations Development Program (UNDP), China (2008) http://www.undp.org.cnEquity Bank (2008), http://www.equitybank.co.keAllianz Knowledge (2008), http://knowledge.allianz.com/enNext Billion (2008), http://www.nextbillion.netMicrocapital Monitor (2009), Working Toward Transparency in Microfinance Investment.http://microcapitalmonitor.com/cblog/index.php?/archives

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10. AppendixS. No. Financial ratios calculation*1 Total balance outstanding of all overdue loans of more than 30 daysPAR30 = ------------------------------------------------------------------------------------------ x 100Total portfolio outstanding2 Loan outstandingAsset allocation % = --------------------------- x 100Total assets

3 Net worthCapital Adequacy Ratio = --------------------------------- x 100Risk weighted assetsRisk weights: Cash :0%, Interest earning deposits & net fixed assets: 50%Loan assets and other assets : 100%4 Operating incomeOSS = ------------------------------------- x 100Operating expenses5 Operating incomeFSS = --------------------------------------------------- x 100 =** Adjusted Operating expenses** i. Unadjusted operating expenses =ii. Inflation adjustment =(Average equity – Ave. net fixed assets) X inflation rateiii. Subsidized cost of funds adjustment =( Ave. funding liability X commercial rate )- Interest paid on depositsiv. In kind donation adjustment =Notional cost for staff cost met by the parent body-NGO / donor --------------Adjusted Operating Expenses (Total of i. to iv.) = ---------------6 Operating profitReturn on Assets = ----------------------------------- X 100Average total assets7 Operating expenses + In kind donationOER = --------------------------------------------------------------- x 100Average net portfolio8 Total costTCR = ------------------------------------------- x 100Average net portfolio

* As given by MICROSOP Foundation: Partly confirming to CGAP standards & partly adopted tolocal context