Project Report on“Micro Finance to Poor women for sustainable development”

Organization: CASHPOR MICRO CREDIT

Submitted to:Learning Centre: 1815 of

Sikkim Manipal Universityof Health, Medical & Technological Sciences Manipal

SUBMITTED BY Guidance By Mr. Bragesh Bahadur Prem Kumar (Roll No. 510934083) District Accounts Manager. NRHM, Kheri.

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Student Declaration

I here by declare that the project report entitled “Micro Finance to Poor women for

sustainable development” its policies, to provide micro loan to rural & urban women”

with special reference / purview of CASHPOR MICRO CREDIT submitted in partial

fulfillment of the requirement for the degree of Masters of Business Administration to

Sikkim Manipal University, India, is my original work and not submitted for the award

of any other degree, diploma, fellowship or any other similar title or prizes.

Place :

Date : (Bragesh Bahadur)Reg. No. – 510934083

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CERTIFICATE

Certified that Mr. Bragesh Bahadur of Master of Business Administration

(MBA, Final Semester) has completed his dissertation entitled “Micro Finance to

Poor women for sustainable development”, its policies, to provide micro loan to

rural & urban women” from CASHPOR MICRO CREDIT under my supervision.

To the best of my knowledge and belief the work is based on the investigation

made, data collected and analyzed by him.

We want to wish him every success his life.

Prem KumarDistrict Accounts Manager. NRHM, Kheri.

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ACKNOWLEDGEMENT

For successful completion of this report, I extend my sincere thanks to my

teachers without his support this success would not been possible.

I would like to thanks to Mr. Mithilesh Maurya (Deputy General

Manager-Finance) and Mr. Bipin Kumar Singh (Asst. General Manager-

Operation) of CASHPOR MICRO CREDIT Varanasi .

In addition to this, I would also like to extend my heartiest gratitude to my

family and friends who has supported me a lot to complete this project.

Also, I would like to thanks to my class fellows who also extended their

help when ever it was needed. All of above deserve credit what is right about

this project any error or omissions are my self alone.

(Bragesh Bahadur)

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INDEX

Introduction

Role of Microfinance in social uplifting

Commercial Banking and Microfinance

The CAHSPOR India Brand of Micro Credit

Organizational Culture and Values

Identification and Motivation of poor

Operational & Financial performance

Product or Service Offering

Group formation & Process

The Lending Process

Strict Credit Discipline

Delinquency Management

Monitoring and Supervision

Accounting Process

Individual Loan - a new Concept

Microfinance in India

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PREFACE

Marketing research is a systematic design, collection, analysis and

reporting of data findings relevant to specific marketing situation faced by the

company.

This project a written presentation with observation and inferences derived

from the market research conducted in Mirzapur and Ghazipur District in order

to search the "Individual Loan”

This report starts by giving an industry profile, internal view about the

company its product line then follows the marketing research concept,

methodology, recommendations and its limitations which remind every reader of

the value of the research in business and also help in better understanding of

report.

In order to achieve the objective and better understand the problem of

industry, it was decided to conduct a market survey.

The study has possible due to the cooperation of consumers. It has had

been a lot to learn about the problems faced during the market survey. Moreover

it was a new experience and a lot of exposure doing this project.

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Microfinance in India became known mainly through NABARD SHGs

bank linkage program and the Microfinance Institutions working through

Grameen and JLG models. Microfinance has been used as an important tool for

poverty alleviation. It refers to making financial services (credit, saving and

insurance) available to the poor who don’t have access to regular banks or

finance/insurance companies. The recent Task Force on Micro Finance defined

Microfinance as "provision of thrift, credit and other financial services and

products of very small amounts to the poor in rural, semi urban or urban areas,

for enabling them to raise their income levels and improve living standards".

However, at present credit forms the bulk of micro finance activity. The term

“Micro” literally means “small”, but RBI’s recent guidelines for priority sector

have defined loans up to Rs. 50,000 as micro-credit.

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Rural Credit Scenario

Performance of public sector banks in particular, along with their

sponsored RRBs, has indeed been satisfactory in increasing flow of credit to

farm sector, improving recovery and containing over dues & NPAs. Their

involvement in financing weaker sections of the society and beneficiaries under

Differential Interest Rate scheme & Government sponsored programs [SJGRY

&PMRY] has also improved. However, the share of institutional credit declined

to 57% in 2001 as compared to 64% in 1991. Moreover, debt sourced from

money lenders, the very informal agents the institutionalization of credit was

designed to replace, increased in overall share of rural debt from nearly 18% in

1991 to nearly 30% in 2001. According to recent Survey, formal institutional

credit provision in India now accounts for just 27% of total cultivator debt &

that this reduces to just 20% if data for the five States reporting the highest

proportion of formal rural debt are removed. Moreover, nearly 90% of

households reporting no debt, either formal or informal are headed by small &

marginal farmers suggesting institutional –rather than self-exclusion.

Intriguingly, Andhra Pradesh, the State with the highest concentration of SHGs,

MFIs & banks, reports the highest proportion of rural non-institutional debt

[nearly 73%] and the highest proportion of rural money lender debt [nearly 57%]

for all States in India, according to All India Debt & Investment Survey, 1991 &

2001.

The genesis of MicrofinanceThe term "microfinance," originated from an instance in 1976, when the

Nobel recipient for peace, Prof. Muhammad Yunus, and his students met a

woman named Sufiya Begum in a village in Bangladesh. She used to make

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bamboo stools and had to borrow the raw materials from a trader, who dictated

the price he paid for the final product.

Faced with this "micro"-level example of the vicious cycle of poverty, Yunus

gave a total of less than $27 from his own pocket as a loan to forty-two poor and

individual basket weavers. Looking at the success of his initiative which inspired

the women to lift themselves out of poverty, he began providing "microloans" to

the very poor in neighbouring villages. Later on he formed the Grameen Bank.

Since then a number of people in various countries have followed Yunus’

example and microfinance became an effective tool for poverty reduction.

Why Microfinance?Lack of capital has been identified as the single most important obstacle in

helping poor come out of poverty. But providing money as a charity or subsidy

has failed to have any appreciable impact. If the poor get money for free, they

will not have any accountability for it. They rarely use such money for any

productive purpose. To some extent it also makes the poor lazy till the money

lasts. Besides, charity cannot be sustained for all the poor or for very long.

Additionally, a one time capital injection is unlikely to bring a person out of

poverty. Poor need consistent and incremental source of credit and insurance.

The customer unfriendly procedures and lack of collateral excludes the poor

from banks. The provision of financial services is manpower intensive and banks

do not have the manpower to support a large number of very small transactions.

The only source available to such people is the local money lender. But the

moneylenders charge heavy interest rates ranging from 5% to 10% per month.

Microfinance provides the solution. It not only provides the poor with capital on

easier terms, but makes him learn to utilize it.

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There is huge demand for micro-credit estimated to lie between 75,000 to

100,000 crores. The role of micro finance institutions (MFIs) in providing

services to the poor and helping them come out of poverty in a sustainable

manner is vital and the potential impact is immense .

2. Role of Microfinance in Social Uplifting

Unrest in society has many reasons; the economic reason is the most

import one. People who are poor and unemployed are more vulnerable to

exploitation. They can invest little in the education of their children. These

illiterate children and youth are adding to the unskilled labor of the urban

centers. Unskilled labor has little opportunities in the market and there start a

struggle for survival, which minimizes the difference between good and bad, and

lawful and lawless.

The role of microfinance in poverty alleviation and economic uplifting is

being discussed since long, but there is more to it than just poverty alleviation.

Its role in social uplifting is as important as in economic uplifting. Looking at

the changing political scenario of the world and the increasing extremism and

fundamentalism in different societies, its link to the economy cannot be

overlooked. From the concept of participatory development we know that

ownership of the community cannot be ensured unless we make them

stakeholders in development through making them involved in the whole

process. In the same manner if we want a sustainable peace in the society, we

must make people stakeholders in a peaceful society.

Microfinance, a recognized tool of poverty alleviation, can play a very important

role in this situation.

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By providing skill trainings and small loans to these unskilled and unemployed,

these people can be

involved in economic activities. This will not only make them earn their bread

and butter, but it will

also make them think responsibly about the rest of the society. In simple words,

a person having

shop in a market will never set that market on fire. Similarly a person having a

vehicle plying on road

will never throw stone on vehicles on road.

Microfinance play an imperative role in:

Reduction in poverty because poverty is the root cause of social evil.

Economic empowerment of women, which leads to social and political

empowerment.

Skill enhancement, which leads to sustainability of entrepreneur and

reduces abuse of resources.

Reduces income gap.

Promoting participatory development approach, which makes it

sustainable in the long run.

Ensuring social security through Micro Saving and Micro Insurance.

Engaging people in economic activities thus making them stakeholders in

a peaceful society.

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3. Commercial Banking and Microfinance

The Government of India controls the majority of the commercial banks,

and it has been generally recognized, at least since liberalization began in 1991,

by the Government, and by the Reserve Bank, that the country's massive rural

branch network is ideally suited to bring modern' micro-financial services to the

rural poor. Earlier subsidized programmes have generally failed, the banks

desperately need new clients who will repay their loans, and the regulatory

framework which constrained profitable banking has largely been dismantled.

Nevertheless, only 4% of the commercial banks' rural branches have entered the

market, even in a very small way.

This paper attempts to explain this; the reasons include institutional, social

and economic constraints, but the paper concludes that they can be overcome,

providing that the process is well-managed and driven by strong political

conviction.

Commercial banks in India have been lending small amounts to poor

people for many years, but this has mainly been under government schemes such

as the IRDP which are both heavily subsidized and unprofitable. This is not

micro-finance' as it is nowadays defined.

The programme of linking Self Help Groups (SHGs) to banks, for savings

and loans, is a case of modern' micro-finance, even though it has generally been

dependent on cheap refinance from NABARD. This programme has been

operating for some seven years, but the rate of expansion has been slow, and the

degree of market penetration, at less than 0.05% of the population, has been

disappointing.

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There are a many reasons for this disappointing performance, relating to

the SHGs themselves, NGOs, the banks and policy makers. The constraints lie

mainly within the banks. Some skills are lacking, some staff attitudes discourage

entry to this new market and some organizational weaknesses inhibit any

innovations of this kind. There are also some legitimate concerns as to whether

this business is right' for every bank, and whether it is genuinely profitable.

SHG members themselves also have some well-founded doubts as to the real

benefits of dealing with banks, and the NGOs which in most cases prepare the

SHGs for linkage to banks can also improve their performance. Certain policy

changes, such as the discontinuation of subsidized refinance and complete

decontrol of interest rates, would also facilitate more rapid expansion.

The constraints are not such, however, as to prevent any banker who wishes to

enter or expand his involvement in this market from doing so.

The commercial banks in India have been heavily involved in micro-

finance at least since the early 1970s, and earlier. It may seem absurd, therefore,

to pose the question as to why they are not involved; they are, and have been,

very substantially and for many years. The critical word in the question which is

the title of this paper, however, is market'. The great majority of the banks'

business in what is now called micro-finance' has been under a variety of

government sponsored schemes', the largest, best known (and perhaps most

notorious) of which is the Integrated Rural Development Program, or IRDP.

It is significant that the banks' customers for these schemes are usually known

not as customers but as beneficiaries'. Whatever may, or may not, have been the

benefits which they have gained from their participation, it is generally accepted

that these schemes have not represented a market' for the banks, in the sense of

being an opportunity for profitable business. They have been heavily subsidized, through a combination of grants, cheap refinance and

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below-market final borrowing rates, but this subsidy has not benefited the banks. The modest spreads which have been allowed have probably not covered even the expected transaction costs, and the rates of recovery have been such as to destroy any hope of profitability.

It would be difficult to disaggregate the total non-performing assets of the

banks in order to find out what proportion of these were related to schemes such

as the IRDP, but it is not an exaggeration to suggest that such schemes must bear

a major part of the responsibility for the effective bankruptcy of so many banks

in this country, and in particular of the rural banks; some have been rescued by

government recapitalization funds, while others remain technically insolvent, but

government-sponsored micro-finance' must be blamed for a substantial part of

the problem.

This Indian experience with heavily subsidized finance schemes, not tied

to savings, and heavily influenced by bureaucratic and political interests, is not

unique, although it has been of longer duration, on a greater scale and at greater

institutional and financial cost than in any other country. It does not, however,

fall into what is generally known as new generation' micro-finance, which is

characterized by new forms of intermediation, market or higher than market

rates of interest, a focus on female customers, and a recovery climate where 95%

is considered rather poor, 97% is normal and 100% is not uncommon.

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Self Help Group

Lending to or through self-help groups (SHGs) is an apparent exception to

the above statement. These groups mobilize savings from their members, and

may then on-lend these funds to one-another, usually at apparently high rates of

interest which reflect the members' understanding of the high returns they can

earn on the small sums invested in their micro-enterprises, and the even higher

cost of funds from money lenders. If they do not wish to use the money, they

may deposit it in a bank. If the members' need for funds exceeds the group's

accumulated savings, they may borrow from a bank or other organization, such

as a micro-finance non-government organization, to augment their own fund.

This form of intermediation is by no means the only approach which is used in

micro-finance, and is in fact less common than the quite different Grameen Bank

Bangladesh system, where the groups facilitate the savings and borrowing

operation, but do not actually themselves lend or borrow. This requires the bank

to maintain individual savings and loan accounts for each member, and to

authorize and monitor each individual loan. The bank worker has to attend the

weekly meeting of each group, and although the group members guarantee each

loan, and offer a first line' appraisal and recovery service, the bank's transaction

costs are much higher than under the SHG system.

The Grameen Bank system is not only expensive. It also requires the bank

to organize itself around the regular meetings and other routine procedures on

which successful operation of the system depends. This requires a specialized

and dedicated management and organization system, which makes it difficult for

the bank to undertake business of any other kind.

The SHG system, however, is more flexible. The group aggregates the small

individual saving and borrowing requirements of its members, and the bank

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needs only to maintain one account for the group as a single entity. The banker

must assess the competence and integrity of the group as a micro-bank, but once

he has done this he need not concern himself with the individual loans made by

the group to its members, or the uses to which these loans are put. He can treat

the group as a single customer, whose total business and transactions are

probably similar in amount to the average for his normal customers, because

they represent the combined banking business of some twenty micro-customers'.

Any bank branch can have a small or a large number of such accounts, without

having to change its methods of operation.

Unlike many customers, demand from SHGs is not price-sensitive.

Illiterate village women are sometimes better bankers than some with more

professional qualifications. They know that rapid access to funds is more

important than their cost and they also know, even though they might not be able

to calculate the figures, that the typical micro-enterprise earns well over 500%

return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus charge themselves high rates of interest; they are happy to take advantage of the generous spread that the NABARD subsidized bank lending rate of 12% allows them, but they are also willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from new generation' institutions such as Basix Finance at 185 or 21%.

The following table gives the on-lending rates charged by 19 typical SHGs

which were studied in four different states in India during 1997.

1 Group charged.......... 18%

9 Groups charged........ 24%

5 Groups charged......... 30%

1 Group charged......... 36%

1 Group charged .......... 50%

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2 Groups charged ........ 60%

Source: Harper, Esipisu, Mohanty and Rao, 1998.

The transaction costs are thus similar to those for any other customer, the

recovery rate is good or even excellent by Indian standards, they are willing and

able to pay high rates of interest, and banks can satisfy their social mandate by

doing business with them. India does not need new financial institutions, since it

has an urban and rural branch network which is unrivalled for any country of a

similar level of development. The SHG approach appears to be the right choice

for Indian banks.

In most but not all cases, there is a third party to the transaction between a

bank and an SHG. This is the NGO, which has sometimes initiated and has

trained and developed the SHG to a level where it can do business on equal

terms with a bank. Even though the most remote communities. Except perhaps in

the mountain areas of the North, are within a day's travel at most from a bank

branch, social and communication barriers often make it necessary for the NGO

to introduce the group to the bank, and to foster the relationship for some time.

Large numbers of NGOs have responded to this new market', since it is a

powerful method of empowering their clients and making them independent of

future assistance. SHG linkage is also fashionable, so it offers an effective route

for NGOs to acquire funds from local and foreign agencies.

This form of micro-finance is thus beneficial to all parties. The members

can access the funds they need at a cost they can afford, the banks can access a

new market for profitable savings mobilization and advances, and the NGOs can

facilitate the linkage process. Surely this should have been the fastest growing

banking product of the 1990s? The record of lending through SHGs.

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Many papers have been written, and many conferences, seminars and

workshops have been held, about linking SHGs to banks. The Indian experience

in micro-finance is less well known internationally than that of Bangladesh,

Indonesia or some countries in Africa and Latin America, but the SHG linkage

concept might be considered as the uniquely Indian contribution to the field.

We should. However, look carefully at the figures, and ask whether the

achievements so far should be a source of satisfaction, or of concern. The

following figures compare the coverage that has been achieved by a small

number of NGO/MFIs in Kenya, without any commercial bank participation at

all, with the Indian achievement. They show that the level of market penetration

the NGOs have achieved in Kenya, although very small, is actually almost four

times that which has been achieved in India by all the banks and NGOs put

together.

The figures for India include the SHGs which have been financed by

NGO/MFIs which have borrowed from SIDBI or other sources, as well as those

which have borrowed direct from a bank; the figures would be even less

impressive if they only included the pure' cases, where a group has borrowed

directly from a bank.

The growth rate has accelerated, but not dramatically. The following

figures give the numbers of SHGs which borrowed from banks in each of the

four years from 1992, when NABARD first introduced its SHG linkage

programme:

These transactions were undertaken by 28 commercial banks, 60 Regional

Rural Banks and 7 co-operative banks, and many branches financed several

groups. There are, however, about 75000 commercial and rural bank branches in

India, quite apart from the even larger network of co-operative bank outlets.

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Even if each of these SHGs was the only one which had been financed, this

would mean that barely 3% of the total number of bank branches has entered this

market, even in a small way.

One leading NGO/MFI (Fernandez, 1992) estimated that some 15 million

SHGs would be needed. The figure may be over-estimated, but even if it is ten

times too large, the rate of growth has been very slow. The successful marketing

and rapid coverage achieved by totally new brands such as Kitkat, or new

concepts such as the privately owned Public Call Offices, shows that the Indian

consumer can react swiftly and massively in response to well marketed

innovations. If there is a national market of this size for this new financial

product, and after five years of intensive effort the sales have reached so small a

number, something must be wrong with the design and profitability of the

product, its prospective customers or the institutions which are trying to deliver

it.

2. What explains the poor sales of the SHG product?

It is too easy for banks to complain about the weaknesses of NGOs, for

NGOs to complain about the inertia of the banks, and for the SHG members to

resign themselves to yet another government scheme which has failed. We must

look more systematically into the reasons why the uptake has been so slow,

when the product appears prima facie to be so attractive to all parties.

2.1. The SHGs and their members.

If a marketing-oriented business is confronted with poor sales, it should

look first at its customers, not to blame them but to find out if there is any way

in which the product or its marketing is failing to satisfy their needs. The long

history of subsidized schemes has, paradoxically, weakened the marketing skills

of financial institutions. If a product is heavily subsidized it is natural, albeit

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erroneous, to assume that its beneficiaries will want it. The problem is perceived

as one of ensuring that only those who deserve' it get it, not to market it.

There are in fact a number of reasons why many SHGs do not come forward as

banking customers.

The SHG members have bad experiences of earlier schemes which

promised all manner of benefits but which ended in disappointment; they do not

wish to waste their time again.

The SHGs may not know that banks are willing to take their savings, and

to lend them money; the banks have not marketed the new product successfully

to them.

The SHG members may resent or be frightened of the intimidating or

arrogant behaviour of bankers or even the appearance of their offices. They feel

that such places are not for them.

The SHGs may have sufficient uses for their own savings, and the rate of

capital growth, because of the high interest rates they charge themselves, may

build the fund at a rate which is commensurate with the growth in their

investment opportunities; they do not need the banks.

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Micro Finance – A Business Concept

The world has recognized the gravity of rural indebt ness in developing

and underdeveloped countries and a consensus emerged for designing and

implementing poverty alleviation schemes in such a manner that the poor would

be encouraged to take loans for productive economic activities of their own. The

poor in these countries are encouraged to form small groups of people having

relatively equal economic status where mutual thrift and credit activities are

initiated for meeting their emerging credit needs.

Microfinance is recognized as a key strategy for addressing issues of

poverty alleviation and women’s empowerment. Access to financial services and

the subsequent transfer of financial resources to poor women enable them to

become economic agents of change. Women become economically self-reliant,

contribute directly to the well being of their families, pay a more active role in

decision making, and are able to confront systemic gender inequalities.

Microfinance has given women in India an opportunity to become agents of

change. Poor women, who are in the forefront of the micro credit movement in

the country, use small loans to jumpstart a long chain of economic activity.

It can effectively generate employment and sustain the income of the household

by giving them opportunities of work. The activity for which the loan is taken is

generally of uncomplicated nature and the repayment schedule is short, simple

and fixed by the members themselves.

Commercial Viability and Feasibility of the model

The basic objective of any Microfinance program is poverty alleviation but

it cannot ignore its economic self-sufficiency, which is a must for its survival.

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CASHPOR with the same intention do not work for profit motive and as it

impedes its basic objective. Thus we have to depend on leveraged capital to a

certain extent unless we break-even. It takes about 2.5 to 3 years to break-even

in any new district where we propose to commence our operation. We will

finance our loss in those initial years through medium to long-term subordinated

debts available at confessional rates and through working capital loans at Prime

Lending Rates available from Development Agencies and commercial banks. For

on lending purpose, we borrow both from private and public financial

institutions / banks at interest rate below PLR as microfinance forms an integral

product of their priority sector lending portfolio. Once we become a profit

making organization, we can plough back our profits into the business for further

expansion.

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4. The CASHPOR India Brand of Micro Credit

Genesis of Cashpor and its objective

CASHPOR started its operation in year 1997 by disbursing its first loan on

15th September 1997 in Mirzapur District of Uttar Pradesh. The entity was

CASHPOR Financial and Technical Services (CFTS) Ltd, working with an

objective to reduce poverty in eastern U.P. and western Bihar through the

provision of Micro finance services to the rural poor women in a timely, honest

and efficient manner. Its first six branches were set up in July 1997, to cover the

southern part, which was poorer part of the district. Its next six branches have

been opened in October 1998, to cover rest of the District.

Few of its branches having acute poverty level were finding it difficult to

become financially viable, because of little demand of loan amount, less

population density and frequent casualties in the client’s family leading to high

portfolio at risk. The lack of market infrastructure limited the avenues of

profitable enterprise for the poor. To make the branches viable it was decided to

merge three branches Hallia, Dramandganj and Lalganj into one branch

(Lalganj) and two branches Gayapura and Hargarh into another one (Bihasara

branch). After the mergers one more branch was opened to take the number to

10.

CASHPOR worked with same infrastructure until it’s breakeven. It broke

even first time in March 2003, in five and half years against its projected break

even in five years. In its journey CASHPOR evolved a sustainable model for

micro finance for the poor. However, the break even time had been relatively

high. Insufficiency of lending fund was one of the reasons of delayed breakeven.

To deal with this issue, CASHPOR in collaboration with ICICI bank pioneered

the partnership model. Under this model CASHPOR is working as an

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intermediary between clients and bank, while the transactions are recorded on

the books of the bank. This does not limit the availability of the on-lending

funds. With this new approach and learning from past, CASHPOR increased its

efficiency and reduced the breakeven time in new district to 4 years despite

reduction in the lending rate from 20% flat to 26% declining. From the year

2003 onwards CASHPOR undertook its expansion plan and started adding minimum

two districts every year and reached to 13 districts by year 2006.

Vision and Mission

Vision:

“We see the day when all poor women in rural India have access

to efficient and sustainable microfinance services, and many are

utilizing them to reduce the poverty of their households, while gaining

self respect and better social position for themselves”.

Mission:

“Our mission is to identify and motivate poor women in rural

areas and to deliver financial services to them in an honest, timely and

efficient manner so that our vision is realized and our organization

becomes a financially sustainable microfinance institution for the

poor”.

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5. Organizational Culture and Values

Kind of work CASHPOR is engaged in providing micro finance services to the poor

women in rural areas. The Managers have to manage and supervise the credit

operations of the area under them. They have to support and mentor Center

Managers (CM) who mobilize poor women, and help them access small loans.

The Managers are equally responsible for the recovery of these loans. Therefore,

the work demands close association with their subordinates and poor women.

The managers must always be vigilant that nothing goes wrong in their area. If

any thing does, it must promptly be brought to light.

Place of Work

The Managers have the dual responsibility of managing office and

field. However, the success of a supervisor depends on the frequency and duration of

time spent in the field. They will have to frequently travel to remote village locations

and visit poor habitations. Our supervisors spend most of their time in the field

locations and manage the office affairs in the remaining time.

Legal Status

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CASHPOR India is a brand of sustainable financial services

exclusively for the poor. It is the property of CASHPOR Trust (CT), a Public

Charitable Trust, registered with the Registrar of Trusts at New Delhi. CT is the

owner of CASHPOR Financial & Technical Services Limited (CFTS), which is a

holding/investment company, registered with the Registrar of Companies in

Hyderabad India. The CFTS holds two subsidiary Companies, registered with

Registrar of Companies, in Kanpur:

1. CASHPOR Micro Credit (CMC), a section 25 company

2. CASHPOR Financial Services (CFS) Ltd.

So far CMC is the only driver for microfinance in CASHPOR Group however,

CFS is non financial services company. The organizational chart for CASHPOR

group is as follows-

Operational Model:

On the basis of operational structure, CASHPOR

operating model has been divided into two categories. First is the Branch model

and second one, the unit model. On the basis of funding arrangements with the

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CASHPOR TRUST (C T)CASHPOR Financial &

Technical Services (CFTS) Ltd

Technical Services Ltd.CASHPOR Micro Credit (CMC)

CASHPOR Financial Services (CFS) Ltd

Fig. 1.1: Organizational Structure

banks these models are further divided into two, term loan and partnership

model.

Branch Model

It is a conventional model of banking where banks have

branch offices under a controlling office. CASHPOR has setup its operation

district wise. under this model, there is a district office and each district office

has 10 branch offices in its command area. Each branch has its independent

office equipped with complete infrastructure like computer, printer, generator

and furniture etc. District is headed by the District Manager (DM) who is

assisted by two Area Managers (AM); each area manager looks after 5 branches.

Branch is headed by Branch Managers (BM), who supervise 8 Center Managers

(CM) at each branch. CMs are our front line staff who deal directly with clients,

create and carry on business. CMs reports daily to branch office. The branch reports

once in a week to the district office, while the district office sends out weekly reports to

head office. Hierarchy under the operational structure under this model is as follows-

27

District Manager

Center Manager

Branch Manager

Area Manager

Unit Model:

This model was pioneered under partnership funding arrangement1 with

ICICI bank with an idea to develop low cost delivery model. Under this model entire

district has been divided into 4 units, units are headed by Unit Managers, who don’t

have separate offices. The entire team operates from district office only. Unit managers

reside in their unit area and are supposed to supervise 20 Center Managers. Center

Managers are residing in the near by market of their operating area and they operate

business from their rented rooms. Unit Managers with their Center Managers report

once in a week to the district office, to update their weekly transaction in the MIS and

to take Collection and Disbursement Sheets (CDS) and cheques for the amount to be 1

28

Branch

Office

Branch

Office

Branch

Office

Branch

Office Branch

Office

Branch

Office

Branch

Office

Branch

Office

Branch

Office

Branch

Office

District Office

disbursed in the next week. District office also report head office on weekly basis.

Supervisor’s hierarchy and operational structure under this model are as follows

29

District Manager

Center Manager

Unit Manager

Unit - 4

Unit - 3

Unit - 2

Unit - 1

District Office

District Manager

Mini Branch Model:

Unit model had been developed after introduction of cash

less system in CASHPOR. Meaning CASHPOR clients will be linked with various

RRBs/Nationlized bank in their proximity through CASHPOR accounts, through which

they will be served with financial services. The model has been introduced with a

notion to keep Center Managers free from office and let them devote their max. time in

the field, reduce overhead cost of setting up district operation, increase staff efficiency

in terms of conducting center meetings, mitigate the cash transit risk on staff and to

reduce the interest burden on clients. Initially this model worked well but with

increasing volume of business servicing banks feels overburdened and stop cooperating

and refusing CASHPOR clients to service. After bank non cooperation this model fired

back and lost the operational and financial control system. Huge cash balances were

parked in current accounts which put company financial efficiency in dearth, staff were

completely unsupervised as Unit Mangers were busy in managing the banks. To

overcome this problem CASHPOR Management decided to further split a unit in to 4

mini branches to have better control system and assuring good services to its clients. At

the same CASHPOR senior management have visited ASA, Micro Finance Institution

in Bangladesh and found by having smaller unit, supervision over field staff can be

increased that in turn will increase productivity per staff. Having these points in mind

CASHPOR got a team of consultant from ASA Bangladesh and piloted 4 ASA type

mini Branches 2 in Siwan and Gorakhpur Districts each. After having initial success on

the ground CASHPOR started transforming unit model in to Mini Branch Model in

phased manner (Pls. refer Mini Branch guideline for understanding Mini Branch

operational procedure in details). Supervisor’s hierarchy and operational structure under

this model are shown in fig1.6 & 1.7 respectivly –

30

Unit Manager

Fig. 1.6: Supervisor’s Hierarchy

Mini Branch Manager

Center Manager

6. Identification and Motivation of Poor Women in their Villages

DO

Unit Unit Unit

Mini Branch Mini Branch Mini Branch Mini Branch

Unit

CM

CM

CM

CM

31

Fig. 1.7: Operational Structure – M.B Model

The overriding objective of the Cashpor Group is reduction of poverty

through the provision of sustainable financial services to poor women. Care must

be taken in identifying at the village-level poor households, that is, our potential

clients. If this work is not done properly much of our subsequent effort (and

money) will be wasted through leakages to the non-poor. To ensure that we are

reaching the poorest households (VP), they must be distinguished from the

Moderately Poor (MP) and the Non-Poor (NP). However, this must be done in a

cost-effective manner, so as not to maintain institutional operating self-

sufficiency - the point at which all the operating costs of the Cashpor Group are

covered by its interest income, without which we will not be able to make a

significant impact on poverty. Generally the poorer a household the more

reluctant they are to borrow. They are worried about weekly repayment, and

about what may happen to them if they can't pay. Motivation work is often

necessary to open their eyes to the opportunity that is being offered to them.

Selection of Villages

Following the CASHPOR Training Manual on Cost-effective Targeting, we

begin our work in villages that have a sufficient number of poor households to

make possible the establishment of a full Center, that is one with 15-20 poor

women each. As we expect only about half of poor households will become

clients, there should be at least forty poor households in the village.

Identification & Classification of Poor Households

32

The number of poor households in a village is determined by

use of the CASHPOR House Index (CHI). Each house in a village is viewed

systematically from the roadside. Large houses made of brick or concrete and

having re-enforced

concrete or tile roofs that are unlikely to contain poor

households are excluded. Small houses made from inexpensive materials and not

having a permanent roof, that is houses that score of three or less on the CHI are

listed. The whole village is covered in this way, and the number of potentially

poor households is determined. If this number is forty or more, step two in our

process of cost-effective targeting of the poor can commence.

The CHI has been further adapted for use in eastern UP and

Bihar. As it is an area of long established settlement, houses tend to be larger

than in more recently settled areas. Double-storey houses are still excluded, but

otherwise, size of the house is not a critical indicator. Rather height and

materials of the walls and materials of the roof have become the key indicators.

(Staff Circular No: 99/04/24 below). Further in view of the recent Government

policies, various State Governments have been issuing patta land and/or one-

room houses to the poor people. Such land and houses are to be ignored,

provided their occupants fulfill the asset norms of the Company.

1. New Housing Index for Identification & Classification of the Poor

33

If any household member has any type of motor vehicle, like a

motor bike, car, jeep, van, tractor, hand tractor, etc.; or a house is built with

brick walls and a re-enforced concrete roof (excluding the Government allotted

houses), then automatically the household is not eligible for our program. No

Form No.1 is to be filled-in for such cases, unless they appeal that despite their

motor vehicle or big house they are below the poverty-line income (BPL). In

such cases, fill-in Form No.1, tell them that the Branch Manager/Unit Supervisor

will come to interview them; and continue with your work. Hand over the appeal

case to the Manager/Unit Supervisor when you return to the Branch/District

Office.

The revised Housing Index has only two indicators:

a) Height of the Walls and Materials Used: Score

i) More than 5 feet and made of brick 4

ii) More than 8 feet and made of Mud 2

iii) Less than 8 feet but more than 4 feet Mud 1

b) Materials of Roof:

i) Concrete/Pucca/Patia/New Tiles/GI Sheet 2

ii) Old Tiles/GI Sheet 1

iii) Thatch/ Straw/ Plastic/Leaves 0

c) Maximum Score 6

d) Poverty Status:

i) Non Poor 4 or more

ii) Moderately Poor (MP) 3

iii) Very Poor (VP) 2 or less

34

e) If the House Index Score is equal to or less than 3 and for the

occupants of Government allotted houses, you must conduct the

Asset Interview.

Step two is a brief interview with the occupants of houses that scored less than

four on the HI. It determines the poverty status of the household from its

sources of income/no of earners and ownership of productive assets. These,

along with the score on the HI are recorded on Form No.1 Together they

determine whether the household is classified as Very Poor (VP), Moderately

Poor (MP) or Non-poor (NP). If at any time during the interview, it becomes

clear that a household is NP, the interview is politely terminated, and the Form

No.1 discarded.

Households that score two or less on CHI and have only sources of income

that are traditionally low, like agricultural, domestic or casual labor or artisan

fisheries or forest gathering, etc., and which have no more than 2 earners, and

which own no irrigated agricultural land nor large farm animals or a Dependency

Burden (no. of household members/no. of income earners) of 4 or more are classified as

VP. If the wife regularly does agricultural labor, the household is usually VP.

Households with the following characteristics are classified as Moderately Poor

(MP):

3 on the CHI, or

At least one source of income from self-employment, or

More than 3 income earners, or

Irrigated land, or one or more large farm animals, or

A Dependency Burden of less than 4

35

Moderately Poor and Very Poor households should be motivated so that the

wife can become their representative. After explaining our micro finance

program carefully, the CM should encourage her to try to form a Center with

15 to 20 members households of similar socio-economic status, no close kin

relations and whom she can trust in matters of money. She should inform him

when the Center has been formed.

Appeal cases: sometimes when you are interviewing in houses that scored less

than four points on the CHI, occupants of neighboring houses that scored four

or more, will ask to be interviewed, saying that they are also poor. In such

cases, fill-in a Form No.1 for them and tell them that their request will be

referred to the Branch Manager/Unit Supervisor who will call upon them as

soon as possible. Hand the Form No.1 for the appeal case to the Branch

Manager/Unit Supervisor.

Fill up the surety agreement and get the same duly signed by the members,

which is to be counter checked by the Branch Manager/Unit Supervisor.

GRT is to be conducted as detailed in the prescribed format.

(Exclusively for poor women: timely & honest delivery of credit in a financially-

sustainable manner)

Up to Rs. 14,000 loans for additional income generation.

Exclusively for BPL women Hassle-free procedures:

- Form a self-help Group (SHG) with 15 other BPL women that you can trust in

matters of money, and who agree to verbally cross-guarantee each other;

- Apply verbally at the SHG meeting for the loan you need;

- The loan will be disbursed within 2 weeks of approval by the SHG, at the

36

nearest Branch of the Company;

- Affordable interest paid by clients: 27% p.a. on declining weekly balance;

- Easy weekly repayment in small, equal amounts (of principal & interest) for one

year.

- Eligibility for a subsequent (larger if necessary) loan on the same terms upon

completion of regular weekly repayments.

-Rs.I000 loan upon demand, for emergency, consumption needs, after first year

of regular weekly repayment.

A good opportunity for BPL women to work for a better life for their children and themselves!

7. Operational & Financial Performance

(a) Out reach to the Poor

Overall, the Company achieved 93.14 % of its Business Plan target for

cumulative Active Loan Clients at 201,692, and 85.59% of its BP target for cumulative

Loans Outstanding, at Rs.86.12 crore. Among the Districts, Siwan performed against its

BP targets, with 221% achievement on Active Loan clients, and 224% on Loans

Outstanding. Gorakhpur performed against its BP targets, with 199% achievement on

Active Loan clients, and 175% on Loans Outstanding. Interestingly it was in Siwan and

Gorakhpur Districts that the ASA-type Branches were tested and became highly

productive.

Saran District also performed well against its BP targets, with 113% achievement

on Active Loan clients, and 108% on Loans Outstanding. Jaunpur District, as we have

seen above, set a new CASHPOR growth record for outreach in a new District,

recruiting 9,777 ALC, which was 106% achievement on its Active Loan clients BP

target, and 97% on Loans Outstanding. Ghazipur performed well against its BP targets,

37

with 101% achievement on Active Loan clients, and 98% on Loans Outstanding., as did

Mirzapur against its BP targets, with 100% achievement on Active Loan clients, and

93% on Loans Outstanding.. Bhabua-Rohtas was the seventh District (out of 13) to

achieve a 100% or more of its BP target for ALC; but it was able to reach only 85% of

its BP target for loans outstanding.

(b) Loan Portfolio QualityPortfolio at Risk (arrears> 4 weeks) was satisfactory overall at the end of the

Fiscal, at 2.6%; but it was unsatisfactory in Ballia at 5.14%, in Buxar at 4.47%, and in

Mirzapur at 4.40%. Chandauli at 2.77%, Sasaram at 2.42%, and Azamgarh at 2.17%

were worrying; but Ghazipur at 0.58% and Deoria at 0.0014% were good. The

relatively new Districts of Saran, Jaunpur, Varanasi, Gorakhpur and Siwan had

excellent portfolio quality, with zero arrears.

(c) Institutional Efficiency

District Name Targets ACR (%)

Achievement ACR(%)

Targets TCR (%)

Achievement TCR(%)

Mirzapur 9% 12% 23% 20%Buxar 14% 17% 24% 22%Varanasi 22% 26% 34% 38%Ballia 13% 15% 23% 21%Chandauli 10% 11% 16% 18%Ghazipur 11% 11% 26% 29%Bhabua-Rohtas 25% 24% 29% 39%Azamgarh-Mau 30% 27% 36% 41%Saran 32% 28% 32% 47%Jaunpur 43% 37% 54% 59%Deoria 43% 33% 47% 62%Gorakhpur 91% 36% 45% 110%Siwan 91% 27% 35% 110%

ACR = Administrative Cost Ratio = Total Administrative Cost/Average Portfolio

TCR = Total Cost Ratio = All Operating Costs including Cost of Funds and Loan Loss

Provision/Average Portfolio

38

(d) Financial Performance

Overall, CMC performed well in Operational self-sufficiency, with 86% of

its operating costs being covered by operating income, exceeding the Business Plan

target of 82%. This represented an increase of 22 percentage points in OSS over the

Fiscal. Funders and other stakeholders should take comfort from this good progress

toward financial sustainability, indicating that the basic business model is sound, and

that financial break-even is attainable as projected by the end of Fiscal 08/09.

District Name Age in Years Age Rank Target OSS( %) Ach OSS(%) OSS RankMirzapur 10 1 130% 112% 1

Ghazipur 4 2.5 89% 91% 2

Chandauli 4 2.5 112% 83% 3

Ballia 3 4.5 91% 64% 4

Buxar 3 4.5 87% 62% 5

Saran 2 8.5 48% 59% 6

Deoria 2 8.5 37% 55% 7

Bhabua-Rohtas 2.5 6.5 55% 48% 8

Jaunpur 1 11.5 43% 44% 9

Mau-Azamgarh 2.5 6.5 53% 42% 10

Siwan 1 11.5 24% 41% 11

Varanasi 1 11.5 40% 37% 12

Gorakhpur 1 11.5 24% 32% 13

CMC 81% 86%

39

Operational Self-sufficiency

The soundness of the business model and its good prospects for financial

Non- Operating Costs 137,536 111,104 111,104 111,104

Non- Operating Income 10,735,760 17,848,501 27,670,298 5,867,340

Excess (Deficit) of Total Income over Total Expenditure (9,585,646) (17,740,546) (27,823,737) (22,433,664)

Average Loans Outstanding 114,239,490 205,144,947 389,241,474 684,364,951

Average Assets 81,713,931 215,804,763 323,983,118 587,746,845

Secured Debt 161,791,845 171,153,944 280,988,943 531,405,781

Unsecured Debt (Tier II cap) 18,000,000 25,500,000 67,133,250

Total Debt 247,995,930 290,981,955 748,829,606

Tier I Capital 15,763,000 30,000,000 53,900,000 53,900,000

Total Capital 467,149,874 651,370,898 1,401,268,637

Total Risk Wgtd Assets 137,669,090 393,283,686 378,671,477 765,428,704

Capital Adequacy 11% 8% 14% 7%

Adj Return on Assets 0% -8% -5% -4%

Adj Return on Equity -78% -69% -41%

Internal Rate of Return -8% -9% -4%

Tangible Net Worth -3,648,458 20,423,879

40

sustainability can be seen also in the apparent high positive rank order correlation

between the age of the District and its degree of OSS. However, it is of concern that

Ghazipur and Chandauli Districts did not break-even as projected by the end of their 4 th

year. As mentioned earlier, the reasons are different in each District. In the case of

Ghazipur growth and portfolio quality have been excellent; but cash management was

weak, resulting in unnecessarily high total cost of funds which caused the projected

break-even to be missed. In Chandauli, growth and portfolio quality have been

disappointing, with large shortfalls compared to Business Plan targets, and hence the

planned break-even could not be achieved in a timely manner. Cash management must

be improved in Ghazipur for it to break-even during the next Fiscal. In the case of

Chandauli, we are planning to change the District Manager for one that has proven his

ability to grow our business.

Overall, as Business Plan Targets have been achieved or over-achieved

slightly, there is no need to consider any changes to the Business Plan targets for the

next Fiscal. The Company is expanding according to Plan.

Growth in CASHPOR

41

Active Loan Clients

-

50,000

100,000

150,000

200,000

250,000

2000 2001 2002 2003 2004 2005 2006 2007Year

Num

ber o

f Clie

nts

Loan Portfolio (Rs '000)

-100,000200,000300,000400,000500,000600,000700,000800,000900,000

1,000,000

Year

Loan

Por

tfolio

(Rs

'000

)

Year-wise growth in Active Loan Clients Year-wise growth in Loan Portfolio

42

Cost Ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

2000 2001 2002 2003 2004 2005 2006 2007Year

Perc

enta

ge

ACRTCR

Sustainability

0%

20%

40%

60%

80%

100%

120%

2000 2001 2002 2003 2004 2005 2006 2007Year

OSS

, FSS

OSSFSS

Year-wise Cost Ratios Year-wise Sustainability Ratios

43

Portfolio At Risk

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

Year

PAR

%

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

Year

Inte

rest

Inco

me

Interest Income

Year-wise Portfolio at Risk Year-wise growth in Interest Income

44

Target MarketMicrofinance sector in India is characterized by a huge market that has around

350 million potential clients. However, the present outreach is just around 20 millions

(largely done through SHGs). The estimated credit demand met so far is only to the

tune of 700 millions US dollars.

Our reason for existence is to reduce poverty significantly in the poorest part of

the country. In order to do so, we must reach large numbers of BPL households as soon

as possible. By implementing a standardized model CASHPOR has reached large

numbers of rural poor in one of the most backward northern areas of India where there

are very few organizations offering microfinance services. CASHPOR is further

deepening its poverty outreach by expanding operations into Bihar, one of the least

developed and most difficult states in the country. There are about 20 million BPL

households in eastern UP and Bihar. If we reach a million by 2010, still that will be

only 5%! An estimated seventy percent of CASHPOR clients are living below the

international ‘dollar a day’ poverty line. Nearly all of them had no previous access to

low-cost credit.

Eastern UP and Western Bihar, where CASHPOR is working and proposes to

deepen its impact, have large concentration of poor households.

Microfinance in India has largely focused on woman. Research shows that

women invest a larger portion of their incomes in the households and family well being,

particularly in the well being of their children. Women have proven to be more

financially responsible and more peer pressure mechanisms which leads to better

repayment performance.

Cashpor proposes to deepen its impact and increase its outreach year by year and

district by district. It has adopted the business model in which every district will have

45

80 front line staffs (center managers). Each staff will be given a target of 25 members

per month.

8. Product or Service Offering

CASHPOR has identified the financial constraints of poor women in the rural

areas of eastern UP and Bihar and, developed two basic credit products and an

insurance product which may fulfill both of their family and business needs. All these

products can be promoted to clients based on reasonable interest rate, lack of security

requirement, minimum waiting time and a promise for a bigger loan in future if they

show a good credit discipline. CASHPOR in order to minimize credit risk, has chosen

to render financial services through a peer based lending model using joint liability

groups (JLG); a loan to one group member must be guaranteed by her peers that trust

her ability to effectively use credit for income generating purposes and repay the same

to the organization in a timely manner. A group comprises of 15 to 20 members with

one of them being the group leader who is chosen unanimously by the members. The

brief description of the products is given below: -

1. Income Generating Loan (IGL) – Poor people need financial services as credit

for developing their enterprise. The Income Generating Loan (IGL), with a term of 50

weeks and weekly pro-rata repayment of principle and interest. The average loan size of

the product may vary from Rs.1, 000 up to the maximum limit of Rs.14, 000.

2. Emergency Loan (EL) – The average loan size of the product will be up to

Rs.1, 000 available on demand, for those clients only who repay back their first loan in

full on time. There will be five-week grace period, during which only interest need to be

paid followed by 20 weeks of repayment of principal. Theoretically, the clients in need

46

can get up to two emergency loans per year. This fits with the facts that there are two

lean periods each year, in terms of income and food, October/November and April/May.

For both of the above credit products CASHPOR will charge an interest of 26 percent to

be charged on declining balance, which is equivalent to 13.5 percent as flat. The

rationale of the interest rate is given below:

Interest charged to the Borrowers

Average Cost of Fund = 11%Average Administrative Cost = 10 %

Average Loan Loss Provision = 2 %

Average Margin = 3 %Total = 26%

2. Insurance - The average sum insured in the insurance plan is from Rs. 5,000 to

Rs.20, 000, available on demand. The term of the plan is one year and the

premium is collected one time during the beginning of the policy.

47

Execution StrategyCashpor will manage its operation with a systematic approach. It classifies its

area of operation from center to region. Each center will constitute of 15 to 20

members. 20 centers will form one unit. 4 units will operate in each district and three to

four districts will constitute a region.

In this way 80 center managers will be required for complete staffing of a district.

There will be one district office in each district. District manager will be the incharge of

this office. The four Unit managers and eighty center managers will report in this office.

Organizational Structure for Operation: - The microfinance Operation of the company is

executed by the officers who are classified into four categories. They are: -

Center Managers: - Center Managers are the frontline staff of the company.

They manage the Centers under their responsibility so that their share of the Business

Plan (BP) targets of the Company are achieved, particularly for Active Loan Clients,

Loans Outstanding, Interest Income and Loan Portfolio Quality. To succeed in this

work they will have to get the confidence of the BPL women and their husbands, by

giving honest, timely and efficient service to them.

48

Regional Managers

District Managers

Center Managers

Unit Managers

Unit Managers: - Unit manager is the head of a unit. He supervises the team of 20

center managers. The main responsibility of a unit manager is to increase the outreach

of the unit for the attainment of financial viability in a cost effective way. He has to

supervise the field staff working under him including their work in the field and to

ensure that the targets allotted to each field staff and unit as a whole are achieved

positively.To get the daily records updated and necessary periodical reporting made to

the higher authorities. Preparation and submission of Periodical monitoring and

financial reports/statements for the unit to appropriate authorities also comes within the

purview of his responsibility.

District Manager: - District Manager supervises over the whole district. He reports to

the Regional Manager.

Regional Manager: - Regional Manager supervises over a region which comprises of

three to four districts. He reports to the Managing Director.

The Pattern of Staffing: - To commence operation in a new district we will not

provide the full staffing at the beginning but we will form one unit in each quarter

because that will restrain the expenses within control. In this way 20 center managers

and a unit manager will be provided in each quarter and the staffing will be completed

in a year.

The overriding objective of the CASHPOR is reduction of poverty through the

provision of sustainable financial services to poor women. Care must be taken in

identifying at the village-level poor households, that is, our potential clients. If this

work is not done properly much of our subsequent effort (and money) will be wasted

49

through leakages to the non-poor. To ensure that we are reaching the poorest

households (VP), they must be distinguished from the Moderately Poor (MP) and the

Non-Poor (NP). However, this must be done in a cost-effective manner, so as not to

maintain institutional operating self-sufficiency - the point at which all the operating

costs of the Cashpor Group are covered by its interest income, without which we will

not be able to make a significant impact on poverty. Generally the poorer a household

the more reluctant they are to borrow. They are worried about weekly repayment, and

about what may happen to them if they can't pay. Motivation work is often necessary to

open their eyes to the opportunity that is being offered to them.

Following the Cost-effective Targeting, we begin our work in villages that have a

sufficient number of poor households to make possible the establishment of a full

Center that is one with 15-20 poor women each. As we expect only about half of poor

households will become clients, there should be at least forty poor households in the

village.

CASHPOR House Index

The number of poor households in a village is determined by use of the

CASHPOR House Index (CHI). Each house in a village is viewed systematically from

the roadside. Large houses made of brick or concrete and having re-enforced concrete

or tile roofs that are unlikely to contain poor households are excluded. Small houses

made from inexpensive materials and not having a permanent roof, that is houses that

score of three or less on the CHI are listed. The whole village is

Covered in this way, and the number of potentially poor households are determined. If

this number is forty or more, step two in our process of cost-effective targeting of the

poor can commence.

50

The CHI has been further adapted for use in eastern UP and Bihar. As it is an area of

long established settlement, houses tend to be larger than in more recently settled areas.

Double-storey houses are still excluded, but otherwise, size of the house is not a critical

indicator. Rather height and materials of the walls and materials of the roof have

become the key indicators. (Staff Circular No: 99/04/24 below). Further in view of the

recent Government policies, various State Governments have been issuing patta land

and/or one-room houses to the poor people. Such land and houses are to be ignored,

provided their occupants fulfill the asset norms of the Company.

Housing Index for Identification & Classification of the Poor

If any household member has any type of motor vehicle, like a motor bike, car,

jeep, van, tractor, hand tractor, etc.; or a house is built with brick walls and a re-

enforced concrete roof (excluding the Government allotted houses), then automatically

the household is not eligible for our program. No Form No.1 is to be filled-in for such

cases, unless they appeal that despite their motor vehicle or big house they are below

the poverty-line income (BPL). In such cases, fill-in Form No.1, tell them that the Unit

Supervisor will come to interview them; and continue with your work. Hand over the

appeal case to the Manager/Unit Supervisor when you return to the District Office.

The Housing Index has only two indicators:

c) Height of the Walls and Materials Used : Score

i) More than 5 feet and made of brick 4

ii) More than 8 feet and made of Mud 2

iii) Less than 8 feet but more than 4 feet Mud 1

51

d) Materials of Roof :

i) Concrete/Pucca/Patia/New Tiles/GI Sheet 2

ii) Old Tiles/GI Sheet 1

iii) Thatch/ Straw/ Plastic/Leaves 0

c) Maximum Score 6

e) Poverty Status:

i) Non Poor 4 or more

ii) Moderately Poor (MP) 3

iii) Very Poor (VP) 2 or less

e) If the House Index Score is equal to or less than 3 and for the occupants of

Government allotted houses, you must conduct the Asset Interview.

Step two is a brief interview with the occupants of houses that scored less

than four on the HI. It determines the poverty status of the household from its

sources of income/no of earners and ownership of productive assets. These,

along with the score on the HI are recorded on Form No.1. Together they

determine whether the household is classified as Very Poor (VP), Moderately

Poor (MP) or Non-poor (NP). If at any time during the interview, it becomes

clear that a household is NP, the interview is politely terminated, and the Form

No.1 discarded.

Households that score two or less on CHI and have only sources of income

that are traditionally low, like agricultural, domestic or casual labor or artisan

52

fisheries or forest gathering, etc., and which have no more than 2 earners, and

which own no irrigated agricultural land nor large farm animals or a Dependency

Burden (no. of household members/no. of income earners) of 4 or more are

classified as VP. If the wife regularly does agricultural labor, the household is

usually VP.

Households with the following characteristics are classified as Moderately Poor (MP):

3 on the CHI, or

At least one source of income from self-employment, or

More than 3 income earners, or

Irrigated land, or one or more large farm animals, or

A Dependency Burden of less than 4

Moderately Poor and Very Poor households should be motivated so that the wife can

become their representative. After explaining our micro finance program carefully, the

CM should encourage her to try to form a Center with 15 to 20 members, households of

similar socio-economic status, no close kin relations and whom she can trust in matters

of money. She should inform him when the Center has been formed.

Joint-Liability Groups

Once the BPL women in a village are identified, they are motivated to form

Joint-Liability Groups (JLG) of at least 15, from among those whom they know and

trust in matters of money. The members of the JLG cross-guarantee each others loans. It

is therefore important for them to know each other well, and to be able to choose who

they want in their JLG. In the process of selecting their sister members, the BPL women

actually indicate to our field staff, who among the BPL women in the village are

53

creditworthy. This is of course valuable information for CASHPOR India. Another

reason why it is important for the women to form their own JLG is that they may not

take collective responsibility otherwise. If the MFI staffs were to form the JLG, or

suggest some members, and subsequently some of its members refused to pay, the rest

of the JLG might blame the staff for putting those persons in the JLG, and refuse to take

collective responsibility for them.

Compulsory Group Training and Group Recognition Test

After forming their JLG, the members inform the CASHPOR field staff who then

provide continuous group training (CGT) until all of the members know the purpose

and rules of the program, can sign their names and know the effective interest rate that

will be charged and why. The Branch/Unit Manager then tests the group members

verbally to ensure that they know each other, that they know and agree with the

program rules, and visits their house to verify their poverty status and that the husband

is in agreement with their joining CASHPOR India. If the BM/UM is satisfied, the JLG

is recognized. Hence this quality control check on the targeting and training of the

clients is called the Group Recognition Test (GRT). If any of the proposed members of

the JLG fail the GRT, then the whole group has to undergo further training until they

pass.

Service Delivery Approach:

CASHPOR exclusively targets poor women. Members are organized into groups

and village-based Centers consisting of member not exceeding 20. The methodology

includes weekly meetings and “stepped” loans that can grow each time a client takes

out and successfully repays a loan (providing they demonstrate the capacity to repay the

larger loan). All individual loans are approved by the clients’ Center, who then takes

54

collective responsibility for repayment of the loans. CASHPOR reserves the right to

reduce the loan amount if it is deemed to be too high. Loan term is 25 (for emergency

loan) and 50 weeks (for income generating loan), with repayment of principal and

interest on weekly pro-rata basis.

Information and Communication Technology –

In response to the challenges of reducing cost and attaining operational

efficiency, CASHPOR has set up its central office at Varanasi for processing and

administration and technology. The company has adopted for the centralized processing

of all data recording, transaction processing, preparation of reports and storing

documents. The management of CASHPOR is aware that the highly efficient operation,

technology and process characteristic of modern retail financial institution are necessary

for capacity building and achieving economies of scale. As a operational support is

readily provided to those working in front end operations, including standardization, an

efficient and scalable processing center, and all the facilities needed for data entry,

processing transactions, maintaining customer records, checking service quality, and

control system for auditing.

Competitive Advantage

During the last ten years, the number of microfinance institution has increased

remarkably. Although the proliferation of institutions generally (1) improves the quality

of service offered, (2) drives innovation, and (3) forces institutions to examine and re-

examine current products and processes, there can be negative consequences for those

institutions facing stiff competition and market saturation in some areas. India’s villages

offer significant opportunity for microfinance. As a result, it is worth noting that there

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are millions of individuals who are not served or underserved by mainstream financial

institutions. Microfinance market is large enough for multiple players, and each

organization has a responsibility to further develop the market in order to improve the

poor’s access to financial services as quickly and effectively as possible. The northern

part of India, particularly Uttar Pradesh and Bihar still remains untouched with such

situation.

CASHPOR definitely enjoys the competitive advantage not only because we are

mainly concentrating our operation in Uttar Pradesh and Bihar which is the poorest part

of the country, and provides enough market potential, but also for our unique targeting

approach as discussed above. We try to have our access in those areas where can really

contribute to the poverty alleviation and also where other MFIs / Financial Institutions /

Banks would not ready to risk their money.

Challenges & Opportunities in the industry

The path ahead is obviously scattered with challenges. Scaling up of projects and

bringing millions of people within the fold of microfinance is no mean task. The most

convincing feature of this form of financing, that justifies its admittedly higher costs, is

the near perfect repayment rates. The expansionary zeal of microcredit practitioners

should be balanced with the quality of loans – indeed a momentous challenge.

Microfinance sector takes the challenge to develop it as a profitable investment

opportunity so as to lure investments specifically private equity as well as investments

from foreign and domestic corporates. It is evident that Indian corporates have

demonstrated the potential and also the responsibility to become sensible players in the

area of microfinance.

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Suitable Regulatory Framework and Legal Entity – The world recognizes

microfinance sector as an emerging and fast growing sector. With the fast growth of

microfinance in India, there appears a need to establish a microfinance development and

regulatory authority to ensure proper control, transparency and accountability in the

sector. Attaining a suitable legal identity for an MFI is very crucial. It enables to realize

its mission and also determines its extent of operation. Cashpor is a section 25 company

(registered under section 25 of Companies Act 1956), which makes it as a not for profit

organization. Cashpor is doing micro credit business and not accepting public deposits

as per the norms laid by RBI for a section 25 company.

Financial Management and Sustainability – Financial management is key to any

financial institution. Microfinance industry definitely forms a part of finance industry.

One of the major challenges of MFIs is obtaining funds at a lower cost so that they can

attain self-sufficiency without putting too much of a burden of a burden on the

members. MFIs borrow from banks and financial institutions for their onlending.

Obtaining funds at lower rate of interest is a difficult task.

In addition to cost of funds, many MFIs are also finding it difficult to adequately meet

the credit needs of all their members due to fund constraints.

MFIs are further constrained by the lack of equity and lack of credit guarantee to access

commercial funds from banks.

There are basically three aspects of sustainability. They are:

Sustainability of Mission and Goals,

Financial Sustainability, and

Organizational Sustainability

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Regarding the first aspect, i.e., the sustainability of mission and goals, the sector

has developmental roots but it suffers the risk of mission drift. It faces a major

dichotomy of approach and purpose. There may also be tension between social function

and financial intermediation function. Therefore it is very important for an MFI to have

clarity in approach, targeting the right group and maintaining its core values. With the

growth of microfinance, mainstreaming social agenda within MFI is becoming difficult.

There is dilemma of ensuring empowerment of the community in relation to the

financial sustainability. CASHPOR visualizes ‘the great day in the future, when all BPL

women in the eastern UP-Bihar region, would have access to efficient and sustainable

microfinance services, of which many were availing to pull themselves and their

families out of poverty’.

The second aspect of sustainability pertains to financial sustainability. Three

levels of financial sustainability can be visualized as:

Level-I Subsidy Dependence Interest and fee income does not operating costs

Level-II Operational Self

Sufficiency (OSS)

Interest and fee income at least cover operating

cost

Level-III Financial Self

Sufficiency (FSS)

Interest and fee income covers all costs including

inflation and subsidy adjustments

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The Indian microfinance sector is still in the level-I of financial sustainability. Attaining

the level-II and then level-III is very important for the sector at macro level so that the

sector itself become self sufficient and self-dependent in the move to alleviate poverty.

Cashpor is moving fast towards attaining the operational and financial sustainability.

The third and final aspect of sustainability is the organizational sustainability,

which depends upon the legal form, the governance and the human resource of an MFI.

The legal form determines the overall purpose or mission of the organization and also

the extent of its operation, i.e., whether it will be a not for profit organization, a profit

making organization or will act as a cooperative for the mutual benefit of the

organization. As discussed earlier Cashpor is a section 25 company (registered under

section 25 of Companies Act 1956), a not for profit organization. It is doing micro

credit business and not accepting public deposits as per the norms laid by RBI for a

section 25 company. The governance structure in an MFI is determined by the

ownership of the MFI, the professionalisation of the board, and the professionalised

management of the MFI. The development of the human resources depends upon ability

of MFIs to attract qualified staff, deploying them properly, and building right attitudes

and skills. Cashpor undoubtedly fulfills this condition as the company has a well-

experienced and erudite, focused and dynamic board of directors from diverse fields. It

has most of the senior staff have been with the program since its inception. Senior staffs

at headquarter and field have the postgraduate degree/diploma in rural management or

business administration and long experience in micro finance.

Operational Risk Management – The microfinance sector faces several types of risks,

which can be categorized as:

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i. Operational risks relating to credit, fraud and security. MFI handle large no. of

clients and transactions. Safety of cash and staff becomes important.

ii. Institutional risk relating to social mission vs. commercial mission and

dependency.

iii. Financial Management risks which arise with regard to asset and liability

management, inefficiency and system integrity.

iv. External risks which are related to regulatory constraints, competition,

demographic constraints, nature of physical environment and macroeconomic

policies.

Professionalism – Professionalism is an essential condition for the success and

sustainability of microfinance sector. MFIs need committed professionals who can stay

longer. There is a dichotomy between core values of development and professional

values. For professionalising a development sector we can move ahead with a concept

of Empathetic Professionalism. It implies - “Addressing Empowerment through

Professionalism”. Here, the whole thrust of professionalisng should be to primarily

empower the members.

Capacity Building – The thrust of capacity building work has been on developing a

common perspective and knowledge of microfinance practices amongst practitioners.

This becomes imperative in terms of the enormous diversity existing in the sector in

methodologies, mechanisms, appropriate roles etc. A need has been felt for an

increasing no. of organizations which work for poverty reduction by supporting MFIs

through quality assessment, research and advocacy in microfinance. An experienced

and skilled cadre of professionals is required who can render effective technical and

managerial solutions to the key microfinance issues, thereby strengthening the

microfinance movement and leading it towards long-term sustainability.

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Management Information System – MIS is major challenge area for the MFIs.

Identifying and putting in place a systematic MIS itself has been a major challenge.

MIS is required to maintain database and records properly.

Cash and Liquidity Management – Cash is a very peculiar stock in trade. There

are security related issues in handling cash like transit safety, fidelity and destination

safety. For MFIs, the collections are in small denominations while disbursals are not.

Proper handling of cash is very necessary as cash management is an important aspect

for MFI’s functioning. An MFI needs good information system that is cutting edge and

ensures transparency. The information system should allow MFIs to route cash

properly. Coordination with banks is equally important in this regard. MFIs need to

handle accounts and transactions with banks suitably. MFIs are facing the challenge to

manage the liquidity of their funds efficiently. The main source of funds for most of the

MFIs is the external source, which they have to borrow from external funding agencies.

These are the leveraged funds, which bear a cost in the form of interest. Thus most of

these funds should be disbursed and least of it should be kept idle, as it becomes a non-

performing asset for the industry.

Challenges due to prevailing socio economic environment – Apart from the

internal managerial problems, MFIs also are confronted with many operational

challenges that arise due to prevailing socio economic factors. Since these problems are

related to local socio-economic conditions, there are variations in the nature of

problems faced by MFIs. Lack of awareness about micro credit among the local

community is one of the problems MFIs face in some regions. At the entry time the

target groups look at the MFI with suspicion and are hesitant to deal with the MFIs for

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fear of being cheated. MFIs have to put in extra efforts to convince people about their

credibility.

Widespread prevalence of moneylenders is another challenge MFIs. These

moneylenders often make attempts to break the groups, as microfinance intervention is

a threat to their business.

Since MFIs target disadvantaged sections it becomes difficult to reach out to the

poorest living in remote areas. Lack of transportation and communication facilities

further hamper smooth monitoring and follow up.

Low level of education and illiteracy among target group becomes a problem.

Member from these groups find it difficult to manage their group. This becomes a

bottleneck in achieving expected growth of groups. Poor are also reluctant to deal with

MFIs and bank because of many pre-conceived notions. In areas with caste

differentiation, it becomes difficult to bring together different communities under same

group. Existing gender relations also come in the way of smooth functioning of the

group.

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9. Group Formation & Process

What is Group? A human group is usually defined as a collection consisting of a number of people who

share certain aspects, interact with one another, accept rights and obligations as

members of the group and share a common identity.

For CASHPOR, 10 -20 (depending upon operating model2) self selected like minded

poor women of same economic status, living in the same village for minimum three

years, of same age group, almost of same educational level, having no more than two

kin/relatives, who can trust each other in financial transaction, coming together to

access the financial services constitute a group.

Why is Group important?

1. The group gives courage and inspiration

The group inspires the poor women to come forward for accessing the financial services

to start income generating activity. Alone a poor woman would not dare to take credit

and start any enterprise. But, if they are in the group of some experienced women, they

gather the courage to start the enterprise with small loans and gradually move towards

sizeable enterprise.

2. The group helps in instilling credit discipline

The norms imposed on the group help in instilling credit discipline. This discipline

helps the poor client’s in making perfect and on time repayment, which keeps their

credit line open for higher loan size.

2

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3. The group acts as a substitute for collateral

Microfinance, though for a social cause, is a business and has to be conducted with a

business approach. Normally in a business one would not lend to anybody without

security. But the poor do not have collateral. The group provides a social security a

substitute for collateral.

Points to remember while forming a group –

1. All the group members should be poor women

Generally people raise the question why the clients should be women? The answer

is, men do not realize poverty in the sense as women do because most of the time, they

are out of the family. While, women live with their hungry all the time. They are the

first to feel the lack of necessities in their households. Therefore, by and large women

are more sincere than men in using any opportunity for the betterment of their family.

Since they run the household, they are also more adept at managing and saving small

sums of money. This in turn translates into their credit worthiness.

2. Members should be self selected and like minded

All the group members should be selected by the members themselves, because they

know each other very well (better than you). They are the best to judge who can be

trusted and would share the responsibility. This also shifts the responsibility on them in

case of aberrant behaviour by a member later. Self selection gives them the confidence

to take responsibility and enforce credit discipline at the center.

3. Equal economic status

Homogeneity in economic status avoids the inferiority or superiority complex in the

members that lead to strong group binding and equal participation of the each member

in group decision. Otherwise well off members dominate the group decision making.

There is another possibility that group will always have clash in decision making. It is

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also difficult for members of lower economic status to enforce collective responsibility,

discipline and group norms on the members economically better members.

4. All the group members should be resident of the same village, for minimum

three years

Members from the same village who have lived together for some time will have

better understanding of each other therefore they can trust each other. They can exert

peer pressure on such members in case of any crisis, which will maintain credit

discipline at the center. Also it is easier and less time consuming for members of the

same village to assemble for the center meetings. If the woman has lived for less than 3

years, there is no surety for her permanence.

5. The group member should be of same age group

Elder members do not like to be supervised by the member of younger age group.

They also impose their opinions on the younger members due to their more respectable

status in the society. Younger group members may feel shy in expressing their opinion

in presence of older women. On the contrary if there are only one or two old women,

they may be left out. This divides the center into two groups, reducing the peer

pressure, which in turn breaks the credit discipline. The other reason is member of

different age group will not have same level of thinking that will always be a hurdle for

the group to reach on consensus.

6. The entire group should be of almost same educational level

Like other parameters of homogeneity, same educational level keeps the members

on equal footing. Otherwise, there will be feelings of superiority or inferiority which

will weaken the group.

7. Kin relations within the group should not be more than two

Allowing kin relation within the group will reduce the group pressure on group

members and weaken discipline. Group members favour their kin relatives, even if they

are wrong. Therefore, if they will be significant numbers, they will always try to hijack

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the group. Therefore CASHPOR has allowed only two pairs of kin relatives within a

group, provided separation of the households has happened at least three years ago.

8. Group members must have trust on each other

When poor women are joining the credit program, they keep themselves in extra

financial burden; it is quite possible that they may face some financial crisis during the

year. It is important for each of the members to have trust on each of them in financial

transaction therefore they can help their peers financially in time of crisis.

Continuous Group Training (CGT)

After being organized in a group, group members have to be trained on the

objective of the credit program, rules- regulation, systems and procedures. There is a

provision for providing 7 days Continuous Group Training (CGT) to newly formed

group.

Points to remember while conducting the training

CGT requires attention and interest of each member of the group. Therefore, the

training should not stretch more than an hour in a day.

The training must be continuous for 7 days (not a single day gap)

Training program should start in presence of all the members. Not a single

absenteeism should be allowed during the training, because it is a platform for

creating discipline among the group members.

All the members should be present by the decided time.

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Verbal Contract

Every Center meeting begins with a verbal contract between Centre Manager (Co.

representative) and clients. The contract from the clients is nothing but the 5 steps that

need to be strictly followed by the clients in the weekly meetings. It plays a great role in

assuring 100% repayments from the center, therefore it is important for the center

managers to explain explicitly the importance of the 5 steps.

Client’s Contract

“We pray to god that

1. we will come to the center on time

2. will utilize the loan for the purpose we have taken

3. will pay installments timely

4. will utilize the surplus for wellbeing of the family

5. and will take collective responsibility”

Centre Manager’s Contract

“If you will follow your commitments, I promise to keep providing you the credit

services timely, honestly and in an efficient manner.”

Day wise schedule of the training is as follows-

Day - 1

a. Signature on attendance registers (Members who do not know how to sign will be

trained to put their signature)

b. CM’s introduction

c. Introduction with the company and the objective of the credit program

d. Prerequisites of becoming member

Poor residing for more than 3 years

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Houses close together

No close relatives

Trust among members

e. Introduction with verbal contract between clients and staff

f. Explaining the verbal contract in detail and start the learning process

g. End of the first day with verbal contract

Day - 2

a. Opening of the day with verbal contract by both the parties; clients and staff

b. Check the learning status

c. Signing of the attendance register by the members, check the signature of the

learner and guide them accordingly

d. Revision of the first day

e. Detail information of source of income, possession of assets and history of the

family members

f. Introduction to loan products

g. Introduction to interest rate

h. Close the day with verbal contract by both the parties

Day - 3

a. Beginning of the session with verbal contract by both the parties - clients and

staff

b. Check the learning status

c. Signing of the attendance register

d. Revision of the second day’s learning

e. Loan amount and its instalment

f. Explain a group’s objective and role

g. Rules for group operation and role of center leader and secretary

h. Election of group leader and secretary

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i. End the day with verbal contract by both the parties

Day - 4

a. Start off the day with verbal contract by both the parties- clients and staff

b. Signing of the of the attendance register

c. Revision of the third day

d. What is a financially sustainable credit program

e. Loan amounts and its installments

f. Collective responsibility

g. Loan proposal process

h. Selection of first 60% clients

i. End the day with verbal contract

Day-5

a. Starting of the day with verbal contract by both the parties- clients and staff.

b. Signing the attendance register

c. Revision of fourth day

d. What is a Center? Operating center and role of center leader and secretary

e. Weekly center meeting and its importance

f. Loan disbursement process

g. Loan ceiling in different years

h. What will happen if verbal contract is breached by the clients

i. Close the day with verbal contract by both the parties

Day-6

a. Starting of the day with verbal contract

b. Signing the attendance register

c. Revision of fifth day

d. Loan utilization check and its importance

e. Loan repayment process

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f. Record keeping at the center and knowing loan balance of each members

g. End of the day with verbal contract by both the parties

Day-7

a. Start the day with verbal contract

b. Signing of the attendance register

c. Revision of the sixth day

d. Branch Manager conducts GRT and gives his/her recommendation/decision to

pass the group, if found satisfactory. Else the group fails and the training is extended

for few more days.

e. End the day with verbal contract by both the parties

GRT (Group Recognition Test)

It is a process by which a supervisor checks the group formed by the Center

Manger. The process is recorded on a prescribed format, the GRT Form (Annex - ??).

The supervisor ascertains the poverty status of the clients and their acquaintance with

products and services offered by the company, loan disbursement process and other

terms and conditions.

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DM sanctions amounts up to Rs.

14,000.

CM fills the loan proposal for 60%

members

Loan proposal submitted in

Branch/Unit for sanction

Disbursement at the Branch and at Centre

Meeting by CM, in Units through bearer

cheques

Weekly repayment of the disbursed loans in

nearby banks by clients

Proposal of next 40% members, if min. attendance is 90%

YES

In Branch

In Unit

2 weeks for 1st

disbursement

CM watches discipline for

the first week

1 week for subsequent

disbursement

10. Lending Process at CASHPOR

CM collects the bank receipts and matches with demand in the

CDS

In the Centre Meeting

Sanction by AM

Amount up to Rs.

10,000Amount more

than Rs. 10,000Amount up

to Rs. 12,000

Sanction by BM

Sanction by UM

Amount up to Rs.

10,000

CM visits the first Centre meeting after

GRT with loan proposal form

,Loan proposal

postponed for the next meeting

Is the attendance at least

90%?

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Credit discipline is nothing but following the 5 steps of the

verbal contract strictly. Experience says that if Center Manger is able to

implement the verbal contract then he will never face the repayment crisis at

his/her center.

Since the poor survive with very thin margins. Credit increases

their financial burden and disturbs their normal routine. Many a poor have not

been able to pay up for their debts and had to lose some of their asset or forced to

do labour for a very long time. Credit discipline helps the clients to become

habituated to a routine which includes making small savings. Following a strict

routine forces them to manage small sums of money to repay their instalments.

This discipline alone helps the poor family to absorb the increasing loan amount

and raise themselves out of poverty.

How to create and maintain credit discipline?

Creating discipline is just like creating a good habit. Creating

good habit requires attitudinal changes and disturbs the routine of the poor

women. Therefore, it is a time taking process. Have patience, but do not yield.

Stick to your demand for complete discipline. The lesson of discipline starts with

client selection. Following are some tips on creating and maintaining credit

discipline:

a) Do not allow non poor members in the group. Experience is

that the poorer the women the higher her repayment rate, contrary to conventional

wisdom. This is because the poorest women usually have no other opportunity to

acquire capital, and will do almost anything to keep our credit line open.

b) Rigorous client training that emphasizes the importance of

the verbal contract.

From the very first day of the CGT, the Center Manger needs to ensure

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timely and full attendance

proper sitting arrangement

keeping commitments

c) Opening and closing meetings with the client and staff pledges.

d) Unanimous approval of loan applications by the Center

e) Thorough loan utilization check by the Group leader and CM

The best way to enforce discipline is by leading through example. The CM must

honour all his/her commitments. Maintaining discipline is as important, as

creating it. A single negligence may break the discipline, so consistently insist on

maintaining discipline.

10. The Lending Process

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Loan Proposal1. Loan proposal is always filled in weekly Center meetings. 2. At the time of loan proposal minimum 90% attendance is

compulsory.3. Center Manager starts the Center meeting with the pledge,

after requisite attendance4. The CM enquires about the loan instalments if any loan is

outstanding. 5. For the first proposal, only 60% members are eligible. These

members are selected during the CGT on the 4th day. 6. The proposals of the first 60% are filled in the first meeting

after the GRT. The proposal of the rest of the members is taken in the fourth meeting.

7. The selected Clients propose their loan demand with the purpose to the Center in the weekly Center meeting with prior consent of her husband.

8. Center assesses the genuineness of her demand by analyzing her absorption and repayment capacity.

9. The Center/group members and Center leader may reduce the loan amount. On consensus the Center leader will recommend the loan amount

10. Center leader finally proposes the amount to the Center Manager.

11. Center Manager fills up the loan proposal form and gets the signature of the Center leader and clients whose proposal has been taken.

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12. The CM should enquire the husband’s approval for the loan.

13. Based on his own judgment, the Center Manager will recommend the loan amount. The CM can reduce the loan amount, if he/she feels that the proposed loan amount is more than the client’s capacity. But the CM cannot increase the loan amount under any circumstance.

14. The Center Manager recommends the loan amount to Branch Manager for approval.

Loan Sanction

1. The recommendation is placed before the BM for approval. The BM takes the decision of sanction amount.

2. The UM/AM sanctions the amounts.3. Only the DM is empowered to sanction loans above the

criteria. 4. The Supervisors should not blindly sanction the amount but

verify randomly at least 10% of the proposals in their routine Centers Visit.

5. They should not only verify the client who has made the proposal, but must do a loan appraisal as well.

6. The appraisal should try to determine the following:a. Real demand to see that there is no over financingb. The economics of the project- investment, returns,

cash flow etc.c. Other sources of funding the project, if the loan is not

sufficient

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d. Capacity of the client to undertake the project

Loan Disbursement

1. All disbursements are to be scheduled post lunch so that the CMs and members can complete their meetings.

2. Minimum 90% attendance is compulsory in the meeting after which loan will be disbursed. If the attendance falls short, the disbursement should be deferred.

3. As always, the meeting should start with the pledge which is followed by ensuring the due collections.

4. The Center Manager should carry Collection and Disbursement Sheet (CDS) in duplicate copies for every meeting. The approved amount appears as To Be Disbursed (TBD) on the CDS.

5. The CM should ensure the utilization of previous loan and no outstanding arrears. CM should then ask the members to come to the branch office with the Center leader.

6. At the branch the CM completes the Demand Promissory (DP) note and gets it signed by the client before loan disbursement.

7. The BM enquires the members about their loan amounts and end use. He should seek clarifications to see whether the first time borrowers have understood the program. Before giving the amount BM must clarify all the terms and conditions and stress on the following:

i. This loan is being given by CASHPOR and it is not the decision of any one individual.

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ii. The amount has been given on verification for their purpose and they must not hand it over to anybody else.

iii.Since they are taking the loan from the branch of the CASHPOR, they must return it there and no other person or place.

iv.The repayment has to be in 46 weekly instalments over 50 weeks period with two weeks extension in emergencies.

v. The weekly instalments of the members and the Group/Center

8. The Loan amount in cash is given to the client by the Branch Manager in presence of the concerned Center Manager. The disbursed amounts are entered on the CDS and sent for entry into the MIS during daily/weekly reporting.

Loan Repayment

1. Each loan is for a term of 50 weeks with 4 weeks holiday.2. The MIS breaks up the loan repayment into equal weekly

instalments. 3. The weekly instalment of every member is reflected in the

CDS. The CM informs each borrower of the amount of the instalment.

4. In every meeting, the CM reminds the Center Leader of the total instalment that is due from the Center for the next week. The CM hands the Center leader the advance receipt

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with the due amount and Centre details written on it. One of the CDS is left with the Center, while one is carried by the CM for record.

5. It is the responsibility of the Center to deposit the instalment at the Branch before the next meeting.

6. The Center Leader collects the due instalment of each member. By rotation every member is responcible to visit the branch in different weeks with the aggregated amount for depositing it.

7. The Cashier/BM collects the cash from the members along with advance receipt with the Centre id and village name. The transaction is recorded in the cash register and the receipt is stamped and returned to the members.

8. In the next meeting the CM has to collect the receipts with paid stamp and paste it at the back side of the CDS for record. He must write the amount of collection for each client in the CDS.

9. The Center copy of the CDS has to be left at the Center, while the CM must take the updated office copy and deposit it at the Branch in case of unit model it will send to DO for entry in the MIS during weekly reporting.

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Reporting and MIS

1. The MIS is maintained at the branch and district level depending upon the operational model. In case of unit turn mini branch model the MBMs report all the data to be entered into the MIS, weekly. The MBM enters the data into the MIS with help of MIS officer and prints the CDS for next week Center Meetings.

2. However in branch model Center Manager enter the data into the MIS on daily basis at branch office and produce the report.

3. The Center Managers must report to the Branch every day. If a CM fails to report explanation should be sought for his absence. Action may be taken as per the rules mentioned in the Operations Manual.

4. The CM must carry the office copy of the CDS with details of repayment to the Branch office.

5. The Cashier/BM collects the CDS and Form no.1 and GRT forms from the all the CMs and maintains them in the Branch office.

6. The Mini Branch Manager reports to the District on a specified day every week. During his/her visit, the MBM

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carries all the CDS with recovery and disbursement details and the GRT forms of the new groups and replacements.

7. In Branch model daily reporting and MIS entries takes place at branch office. BM is responsible to send his branch weekly transaction database to the district office on specified day of the week.

8. The BM also carries a reporting register, in which he mentions all the reports submitted and received at the District Office. This Register is signed by the AO.

9. A similar reporting register is maintained at the district where the BM signs on reporting.

11. Strict Credit Discipline

What is credit discipline?

Credit discipline is nothing but following the 5 steps of the verbal contract strictly. Experience says that if Center Manger is able to implement the verbal contract then he will never face the repayment crisis at his/her center.

Why credit discipline is necessary?

Since the poor survive with very thin margins. Credit increases their financial burden and disturbs their normal routine. Many a

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poor have not been able to pay up for their debts and had to lose some of their asset or forced to do labour for a very long time. Credit discipline helps the clients to become habituated to a routine which includes making small savings. Following a strict routine forces them to manage small sums of money to repay their instalments. This discipline alone helps the poor family to absorb the increasing loan amount and raise themselves out of poverty.

How to create and maintain credit discipline?

Creating discipline is just like creating a good habit. Creating good habit requires attitudinal changes and disturbs the routine of the poor women. Therefore, it is a time taking process. Have patience, but do not yield. Stick to your demand for complete discipline. The lesson of discipline starts with client selection. Following are some tips on creating and maintaining credit discipline:a) Do not allow non poor members in the group. Experience is that the poorer the women the higher her repayment rate, contrary to conventional wisdom. This is because the poorest women usually have no other opportunity to acquire capital, and will do almost anything to keep our credit line open. b) Rigorous client training that emphasizes the importance of the verbal contract. From the very first day of the CGT, the Center Manger needs to ensure timely and full attendance

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proper sitting arrangement keeping commitmentsc) Opening and closing meetings with the client and staff pledges.d) Unanimous approval of loan applications by the Centere) Thorough loan utilization check by the Group leader and CMThe best way to enforce discipline is by leading through example. The CM must honour all his/her commitments. Maintaining discipline is as important, as creating it. A single negligence may break the discipline, so insist on consistently maintaining discipline.

12. Delinquency management

What is Delinquency?

A situation when the borrower fails to repay the full instalment on the due date, i.e., the loan falls in arrears. Delinquent loans are loans on which any payments are past due. This is the ringing of alarm bell for the CASHPOR team. The CM has to take immediate

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steps to recover the arrears. A Manager must strive to attain 0% delinquency in his area of supervision. The Organization has zero tolerance for delinquencies and this is reflected in its policies. The performance and incentive of all the staff is affected by arrears.

Causes of delinquency

The aphorism “Prevention is better than cure” holds good for Microfinance as well. The major causes of delinquency are lapses during the group formation or training stage or lack of discipline by the CM. Thus if the Manager strictly follows all the procedures and keeps a close monitoring, most of the problems can be avoided. Following are some of the causes of delinquency Adverse selection- including a non deserving member in the

group Over financing- Amount lent to member was higher than she

could manage The loan was not utilized for the purpose it was taken Members not homogeneous- due to which peer pressure

cannot be imposed Inadequate training Irregularity by the CM Unavoidable conditions like death or severe illness

Why should we check delinquency?

The success of a micro-credit program depends on the credit discipline of the clients. The poor clients have no other means to

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prove their credit worthiness for larger loans. On time repayment is absolutely necessary for sustaining the microfinance programme and enhancing fund management skills of the clients. There are various reasons because of which the MFI cannot afford delinquency (arrears)3: destroys credit discipline among clients delays revenues and decreases operating spreads slows down rotation of the portfolio increases collection costs (visits, analysis, and recovery campaign costs) threat of losing credibility and long-term institutional viability

How to measure delinquency

The measures of portfolio quality are a measure of delinquency:

Repayment rate=Total repayment received – (Arrear payment + Prepayments) Total Amount due for the period Portfolio At Risk (PAR) = Amount of loan outstanding with arrears more than 4 weeks

Total loans outstanding (Portfolio Outstanding)

The repayment rate provides a measure of performance and portfolio quality. All CMs should strive for a 100 % repayment rate. However, repayment does not give the estimation of the 3

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actual risk. PAR is the best indicator for assessing the risk of potential losses.

Measures to deal with delinquency

No Tolerance of Arrears Policy (NTAP)

Our organization strictly follows the NTAP. If it is implemented fully and consistently right from the time of the first arrears, it will prevent their spread and, before long, result in their elimination, due to the group pressure generated on the defaulters. The CM must immediately report the first arrears in a Center. There should be no further disbursements in Centers with

arrears. The CM must visit the Centers with arrears in a team of other

neighbouring CMs for recovery If the efforts of the CM are not successful, the BM must make

visits to the erring Center with the CM. The responsibility later shifts to higher officers.

Clients usually oppose the NTAP strongly, and make all kinds of threats. But the Center Managers must be instructed to keep patience. They must remind the Center members of their promises to pay in full every week and to assist sister Center members who are having difficulty in paying. The CM must remind the clients that they have only their word, through the Surety Agreement/Verbal Contract, that they will take collective

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responsibility for all the loans to Center members. If they break their promise, how can Cashpor do any more business with them? The clients will definitely not like this, but if the CM stays firm they will understand and accept it. The CM must report any arrears to their Branch Manager/Unit Supervisor as soon as possible by telephone.

Rehabilitation of Centers with Arrears

1. Identification of Wilful Defaulters The first step in Center rehabilitation is the identification of defaulters who have the ability to pay but have decided not to. These wilful defaulters can be identified with the help of the clients still in good standing. Make a list of defaulters with arrears of 5 weeks or more, and go through it client by client asking the members in good standing to identify the wilful defaulters. They know and will reveal the information for the sake of resumption of loan disbursement.2. Letter of Expulsion for Wilful Defaulters In most circumstances, wilful defaulters with arrears of 12 or more weeks of age should be expelled from the micro-finance program. However, District In charge may wish to give one last chance to them by means of a letter requesting them to resume attending the Center Meeting and paying their instalment in full by a specified date. In experience, such letters have had little effect in terms of improving repayment, but in some cases they

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have made the subsequent expulsion of the client more socially acceptable. Ultimately a letter of expulsion will have to be sent to most of the wilful defaulters with arrears of more than 4 weeks. It should make clear that they are no longer entitled to attend the Center meetings or to participate in the financial services offered by the MFI, but their debt to The MFI continues and interest on it continues to accrue. It would be best for them to settle it by paying what they can at any subsequent meeting of their Center. Otherwise, the MFI will have no choice but to try to collect the debt at their house, with all the attendant embarrassment.3. Write-off of Debt of Expelled Members Clients are expelled only when the age of their arrears is such that the chances of their collection are near zero. Such debt should be put up to the Board for being written-off at its next meeting. Loans written-off should be reported separately in the Loan Portfolio Quality Report.4. Motivation for Wilful Defaulters with Arrears of less than 12 Weeks Wilful defaulters with arrears of less than 12 weeks may decide to clear them if they are motivated well. If their arrears cross 5 weeks, they should be asked to resume attendance at Center Meetings, if they have stopped attending, and then they should be motivated first not to allow their arrears to cross 12 weeks and to clear them gradually. In such case they should be eligible for a subsequent loan smaller than the previous loan by the total

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amount of instalments that they missed, prior to settling the loan.5. Restructuring for non-Wilful DefaultersNon-wilful defaulters can be identified with the help of the Center members still in good standing. They will be clients whose earning capacity has been reduced suddenly by means of an accident, serious illness or loss of an important productive asset (e.g., death of a milk cow or buffalo that was purchased with the loan and for which there is no insurance). Or they could be clients with children that are seriously ill. They should be motivated first to resume attendance at Center meetings, and then a plan should be developed with them for their rehabilitation. It could include refinance (disbursement of supplementary funds) or lengthening the loan term or both. Such restructuring can be done only with the approval of the CEO, for which sufficient evidence must be provided, and must be reported in the Loan Portfolio Quality Report, to the next meeting of the board and on the next audited Balance Sheet. Prior to any restructuring, the Center must cover the arrears of any non-wilful defaulters.

13. Monitoring and Supervision

Strict Supervision: Key to SuccessCashpor is organized to facilitate attainment of its Vision

and Mission. Essentially it involves District-level operations

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under the supervision of a District In-Charge who reports to the Regional Manager. Supervision of subordinate staff is a central process in the running of an effective and efficient micro finance institution. It is perilous to assume that work is being carried out by the subordinate staff, as directed. Each supervisor has the responsibility of continuous check to ensure that the work is being carried out properly, i.e., procedures and internal controls as outlined in the Operations Manual are being complied with. If a supervisor does not check the work of his/her subordinate staff thoroughly and frequently, they will assume he does not really care how they do their work. This results in reduced motivation and incentive for good work and exposes the area to the hazards of frauds.

Generally, good supervision involves issuing clear instructions (written if possible) to subordinate staff, making a record of them (say in your diary), carrying out both planned and surprise visits/checks to ensure that they have been carried out as directed. If not, asking why and changing the original instructions if necessary.

Brief, summary, written reports of surprise visits should be made on the prescribed form to the supervisor of the manager who carried them out. A copy should go into the personal file of the officer-in-charge of the unit that received the surprise visit. Surprise visits should not be taken

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personally. They are a normal and essential part of the supervisory work in a micro finance.

Reporting Structure

All District In-Charge report to the Regional Managers The Regional Managers has responsibility and authority for all District-level operations and the following:

a. Attainment of company business plan in his region.b. Assuring adherence with laid down policy and

procedure.c. Keeping organisation reputation in good shape. d. Final recommending authority for termination of

personnel in his jurisdiction.e. Final recommending authority for appointment of

Center Manager in his jurisdiction.f. Final recommending authority for disciplinary Action

for staff under his supervision that could result in termination or transfer.

District In-charge (DIC) has responsibility and authority for all the personnel, assets and activities in their Districts, except for:

a. As regards transfer of personnel working under him, he had to act as per provisions of Transfer policy

b. Expenditure in Excess of the approved budgets

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The District In-Charge supervises the Area/Branch Supervisors. He should receive weekly reports from them on their planned and actual supervisory activities, including copies of their Surprise Center and Branch Visit Reports that require his attention. In cases of serious violation of operating procedures as described in the Operations Manual, the District In-Charges should schedule as soon as possible a surprise visit to the concerned Center/Branch to ensure that corrective action has been taken.

Area Managers/Unit Managers (AM/UM) are responsible for supervising the Branch Managers/Center Managers placed under their authority by the District In-Charge. The Area/Unit Managers should make both planned and surprise visits to Branches and their village-based Center meetings, where most of the business of the financial service program is carried out. Each Area/Unit Manager should make a surprise visit as per their quota given in operation manual. Before the surprise visit to the Branch, the AM/UM should make surprise visits to at least two of its Center meetings, under different CMs. AMs/UMs give their Surprise Visit Reports to the BM for follow-up action. Copies of Reports showing serious violations of operating procedures, such as following must be given to the District In-charge, by the end of the week:- The Center meeting not taking place on the scheduled time

and day, - Attendance below 80%

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- Any suspected cases of phantom loans or under-disbursement- Loan utilization of less than 90%- PAR > 5%

Surprise Center Visit (SCV) The AM /UM/BM/Officer carrying out SCV should arrive at the Center Meeting place ten minutes before the scheduled time for the meeting. Whether or not the CM arrives on time should be recorded, as is whether he/she is wearing a crash helmet. Attendance of Center members should be observed and recorded; and the Center Attendance Register should be checked to determine if it is being kept properly and to calculate the average weekly attendance over the past month. If it is less than 80%, the AM/UM/BM should bring it to the attention of the Center members. 1. The following points during conduct of the Center Meeting

should be observed and recorded: Are the members seated correctly? Does the Center Chief

run the meeting? Is the Group Chairperson queried about any absentees, and

sent to fetch any that are unexplained? Are the official receipts handed out, and do the GCP check

for the CM's signature, and for any alterations not signed by him?

Are the receipts kept neatly in a folder, according to date? 2. The officer performing the SV should receive the Deposit Slip

from the Center Chief, so as to spot quickly any irregularities.

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Is the deposit complete? If not, the Supervisor must find out why? Does each CDS circulate independently on its own clipboard for signature, to save client time? How long does the meeting take? The Supervisor’s observations should be entered on the Surprise Center Visit Report.

3. After the Meeting, the visiting official should check loan disbursement and utilization at the houses of the clients who have received loans since the last Surprise Visit (based on the CDS report).

4. The Surprise Center Visit Report should be completed by the visiting officer during the Center Meeting and discussed with the CM and the Center Chief, and immediately after the meeting all should sign in the designated spaces.

Disbursement from records

Observation/Finding

Supervisor: Signature:

When the Officer visits the Branch after the SCV, a photocopy of the report should be made by the BM for his follow-up action.

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Another copy should be submitted to the Supervisor of the visiting Officer, in case of serious violations of operating procedures and rules (see above).

The Supervisor should schedule a surprise visit to the Center, and carry the SCV Report with him during the visit.

Frequent Visits are necessary for Mentoring BMsBranch Managers are in a difficult position. They are part of the management of Cashpor but they are posted in the field alone. They interact daily with their subordinate staff, and may come to take their point of view rather than that of the management, unless visited frequently and motivated by their Area/Unit /District Managers.The Branch Manager must ensure the following:

1. To take day-to-day responsibility for all the work to establish/successful functioning of branch where ever posted.

2. To implement the CASHPOR model branch plans by following the procedures/systems being in vogue at various existing/proposed Districts.

3. To increase the outreach of the branch for the attainment of financial viability in a cost effective way.

4. To supervise the field staff working under him/her including their work in the field. He must make extensive field visits. His success depends on this.

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5. To ensure that the targets allotted to each field staff and branch as a whole are achieved positively and also to ensure that net increase as per target is achieved positively.

6. To get the daily records updated and necessary periodical reporting made to the higher authorities.

7. To conduct all GRTs with rigour and sincerity. GRTs may be postponed but quality should not be compromised.

Surprise Branch Visit (SBV)

Checking Cash Upon arrival at the branch to be visited, the officer carrying

out the SBV should ask for the key register, cashbox, cash book, vault register and bank registers.

He should check to see that the keys are with the designated persons, and obtain them.

The cashbox contents are to be checked against the cashbook and the vault register, and any discrepancies recorded, with the explanation(s) of the staff responsible. If the closing balance was not nil and preceding day was not a Wednesday, then the BM should be asked for an explanation, and instructed to follow the nil balance rule in future.

The officer must have received the details of any payments of funds, by cash, cheque or transfer, from the District Office to the Branch since the last visit, and verify their proper receipt through the cashbook or bankbook.

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Estimating Idle fundsThe officer conducting the SBV must check to see that there are no “idle funds” in the Branch bank account(s). “Idle funds” are any that the Branch will not need in the next week. The amount needed over the next week can be estimated by verifying the branch due disbursement report. Prospective salary and incentive payments to Branch staff must be considered. After assessing the estimated total fund requirements of the Branch for the next week, any excess funds in the bank(s) should be transferred inter-bank to the District Office account of the respective Bank.Verification of Loan disbursements & Checking for Pending Loans: The officer doing the SBV should ask for the Due Disbursement Report for the Branch for the previous week to be printed out and should check the appropriate CDS to ensure that disbursement actually took place. If not, the case should be reported in the SBV Report, including the reason(s) and what happened to the funds. Any pending loan applications, i.e., those that were approved by the Center more than a week ago and have not yet been approved/ disbursed should be identified and each case reported in the SBV Report. Verification of Salaries & Incentives Paid: The officer doing the SBV must check the incentives and salaries paid to the staff for the previous month against original documents, including the Branch Staff Attendance Register, the Monthly Staff Productivity

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Report and monthly staff movement register (for reimbursement of local conveyance purposes.)Verification of Monitoring Data: The officer making the SBV should carry with him a copy of the latest Branch Monthly Data Report from the DO. Items on Active Loan clients, Total Loans Outstanding, Portfolio at Risk and Interest Income Received should be verified against the appropriate original documents. Any discrepancies should be brought to the attention of the Branch Manager and should be recorded in the SBV Report. Compliance with Staff & Office Rules: the officer doing the SBV should have familiarized himself with the Office Rules. Any violations observed during the visit should be brought to the attention of the staff concerned by means of a verbal warning & recorded in the SBV Report.Feedback to BM from Surprise Center Visit: A Surprise Branch Visit should always follow a Surprise Center Visit, and the Officer who carried out the SCV should brief the BM on it and a photocopy of the SCV Report be handed over to him for follow-up action.Surprise Branch Visit Report: Completed SBV forms should be filled out in duplicate, discussed with the Branch staff collectively before the supervisor leaves and a copy left with the Manager. The original should reach the respective DIC within a week.

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GRT and Poverty Status

The GRT must be conducted by an authorized officer not below the rank of a Branch Manager/ Incharge. All questions must be put to prospective clients. The Client Pledge must be recited individually by each prospective client, and the Group must not pass until its members can do so.

Poverty Status Verification is to be done by the IAD during their regular internal audit visits. Initially 20% GRTs are to be checked for each Branch Supervisor. Client's houses are to be visited and the CHI score on Form No.1 is to be verified. Rest of the items on Form No.1 are to be checked to verify the poverty status of the household. If more than one non-poor household is discovered in a Center, then all other Centers of that Supervisor must be checked and follow-up action taken through the District Incharge. All cases of leakage must be reported to the RM with copy to Managing Director and Chairman.

Revenue Model and Financial Plan

Interest income is the main source of revenue for CASHPOR. The two loan

products that we offer (discussed earlier) are Income Generating Loan and

Emergency Loan. For both the loan products we charge an interest of 26 percent,

on declining basis.

The Proposed expenses are discussed below:

Staffing and their remuneration:

The remuneration of the staff has been classified as: -

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Basic Salary,

Provident Fund

Medical Allowance

Mobile Allowance

Earned Leave for 30 days in a year.

Incentives based on performance, the company also requires support staff in

addition to the staff for operation. Each district needs some support staff to carry

on the operation. They are paid their remuneration in same fashion as for the

operation staff. The different support staffs with their basic salary are as follows:

Administrative Expenses:

The list of Administrative expenses to be incurred in one of the district office is as

follows:

Traveling & Conveyance This expense is proposed to be incurred for field

visits by center managers, Unit managers and the

District manager.

Rent The rent of the district office is assumed to be

Rs.8000 per month.

Utilities Utilities include the expenses for water and electricity

bill. The utilities expense is assumed to be Rs.1, 000

per month.

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Generator Expenses The fuel for generator will be Rs.3000 per month.

Postage Telegram &

Telephone

This expense is also assumed to be Rs.1, 000.

Printing and Stationery This expense constitutes the major part of

administrative expense. It is proportional to the no. of

clients. We assume it to be in the range of Rs.4500

and Rs.5000.

Repair and Maintenance This expense will be Rs. 1,000 per month.

Entertainment Entertainment expense includes the entertainment

expense for office and visitors. We assume Rs.500

per month for this expense.

Depreciation Different assets are depreciated in different rates.

Miscellaneous Expenses This expense includes newspaper, Photograph and

film, daily wages, guest room expense etc.

Bank Charges This expense is proportional to the amount of

disbursement and repayment.

Financial Expense: - The Company will borrow funds for onlending and working

capital. It is assumed that Banks/Financial Institutions will charge different rate of

interest for both of them. As microfinance comes under the priority sector lending

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of banking portfolio, we can assume that we can obtain funds for onlending below

the PLR (Prime Lending Rate). We assume that the term loan for onlending will

bear an interest rate of 11% and the working capital loan will bear an interest of

12.5%.

As it is well acknowledged that financial viability is necessary for the survival of

any microfinance program, we cannot ignore it. In the Business Plan we have

tested our financial efficiency and financial viability through the calculation of

varied ratios. Operational Self-Sufficiency and Financial Self-Sufficiency are the

two ratios which measure our viability and the ability to sustain.

We have tried to develop the model plan i.e., the plan for one district (Annexure

1) and adopted it for the district wise expansion to reach the consolidated plan.

The five year projection of all the new districts which has been proposed to be

opened is shown in Annexure 2.

Financial Analysis

The financial viability of the plan can be checked by testing it under

different parameters. We adopt a thorough ratio analysis for this purpose. There

are different types of ratios calculated to measure the different dimensions of the

operational and financial performance. These ratios are discussed here under:

Portfolio Quality:

Portfolio at risk: The portfolio quality of the company can be measured by

ascertaining the proportion of portfolio outstanding that remains under the risk of

default. We call it portfolio at risk (PAR) or value at risk (VAR). The PAR adds to

the non performing asset of the company and should remain as minimum as

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possible. We have assumed that the PAR, in any case, will not exceed the ceiling

of 5% of portfolio. We create a provision of 5% against the PAR.

Loan Write-Off Ratio: This is the ratio of loan write off amount and

portfolio outstanding. We should write off a certain percentage of provision every

year.

Loan Loss Reserve Ratio: Loan Loss reserve is the amount left writing off out

of the provision. This is the difference amount of provision created and written

off. The loan loss reserve ratio compares the loan loss reserve with the portfolio

outstanding.

Profitability Ratios: This is a very crucial ratio. It measures the self sufficiency

of the MFI to meet its expenses both operational and financial.

Operational Sustainability (OSS): OSS measures the ability of an MFI to meet

its operational expenses which includes both, the administrative expenses as well

as the cost of borrowed funds. To calculate OSS, we compare the operational

income with operational expenses. It is assumed that the interest income from our

products is the only source of income. An MFI can be fully sustainable if its

operational income (interest income) is sufficient to meet all of its operational

(administrative and financial) expenses. But, as an MFI we do not work with

profit motive, we struggle to attain it. According to the business plan, we are

under sustainability with 68% OSS in the first year. We become fully sustainable

in the second year of operation and the OSS ratio is on increasing trend following

the principle of economy of scale.

OSS is calculated as follows:

Financial Income (Interest income)

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Total expenses (Administrative & Financial)

Financial Sustainability (FSS): Financial sustainability measures the financial

soundness of the company under prevalent market conditions. To calculate the

ratio, in addition to the total cost, the cost of capital is also considered.

To find the cost of capital, inflation rate to average equity (@ of 5%) and market

rate of borrowed funds (@ 15%) is added to the total cost.

FSS is calculated as follows:

Financial Income (Interest income)Total expenses (Administrative & Financial) + cost of capital

Efficiency and Productivity Ratios: The efficiency ratio measures the ability of

the MFI to perform with increasing rate of return and cost effective manner.

Yield on Portfolio: This ratio measures the return on average portfolio

outstanding. It is calculated by comparing the interest income to the average

portfolio outstanding.

Administrative Cost Ratio: This ratio compares the total administrative expenses

(field & head office) with the average portfolio outstanding. In the plan, the ratio

shows the declining trend due to the principle of economy of scale.

Operating Cost Ratio: This ratio compares the total expenses (administrative &

financial) with the average portfolio outstanding. In the plan, this ratio also shows

the declining trend due to the principle of economy of scale.

Borrowers per Credit Officer: This ratio measures the efficiency of the field

staff in terms of number of loan clients. In the plan, the ratio shows the increasing

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trend as the number of loan clients accumulates every year and thus the credit

officers has to enhance their efficiency.

Loan Portfolio per Credit Officer: This ratio measures the efficiency of the field

staff in terms of portfolio outstanding. In the plan, this ratio also shows the

increasing trend as the portfolio accumulates every.

CASHPOR has commenced its operations in 1997. From its very inception, it has

concentrated its operation in the states of Uttar Pradesh and Bihar. The

performance of the company for the past two years i.e., as on 31st March 2005 and

31st March 2006 is shown below:

Years No. of

Districts

No. of Loan

Clients

Portfolio

Outstanding

Operational

Self

Sufficiency

2005 6 68,229 27 Cr 65%

2006 10 123,359 50 Cr 62%

The District wise performance for the previous year is shown below:

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Name of

Districts

Performance against targets

for active loan clients

Performance against targets

for portfolio outstanding

Financial

Year 2005

Financial

Year 2006

Financial

Year 2005

Financial

Year 2006

Mirzapur 101 % 102 % 88 % 98 %

Ghazipur 91 % 111 % 112 % 105 %

Chandauli 75 % 95 % 85 % 87 %

Ballia 104 % 106 % 127 % 116 %

Buxar 67 % 122 % 84 % 119 %

Bhabua - 66 % - 85 %

Mau 65 % 54 %

Deoria 114 % 94 %

Saran 140 % 135 %

Jaunpur 56 % 42 %

Overall 91 % 100 % 93 % 98 %

Funding Requirements

As per the consolidated Business Plan (Annexure 2), we require the funds for

three purposes, namely –

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a) For on lending

b) For Working Capital, to finance the loss in the first year

c) Equity Investment – To cover the negative equity in the first two years, we

need an investment in the form of quasi equity / medium to long term

subordinated debt.

There are number of bankers which can provide us funds for on lending and

working capital.

For getting the funds sanctioned from the funding agencies, we submit a loan

proposal showing our projections of portfolio outstanding and the no. of

members / loan clients. After going through their due diligence, the funding

agencies sanction us the funds.

Human Resource Development

The Company is aware of the critical importance of our staff, our human

resources, to the success of our mission. It is through our field staff, in particular,

that we interact with the poor. If our Center Managers (CM) are trained and

motivated to do their work efficiently and effectively, then we shall succeed.

Otherwise failure will be out lot. It is as simple as that.

Training of CM is mostly in the field where they learn by observing the

experienced CM in their work, asking questions and trying to do it themselves.

The Head Office for each training module supplies a list of important questions

and trainees have to try their best to prepare themselves to answer them. How they

do this at the branch-level, however, is mostly up-to-them.

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Motivation of CM to work efficiently and to attain their share of the

Business Plan targets of the Company can be achieved only by offering them an

attractive package of benefits/incentives. No doubt job satisfaction comes partly

from seeing the results of their labor, that is seeing poor households come out of

poverty as a result of the micro finance services provided; but there is no

substitute for an attractive and competitive package of material benefits. Key

components of this package are salary, productivity-related incentive payments

and promotion/career prospects.

CFTS Ltd/CMC/CG has two core HRD policies that underlie the package

of specific benefits: 1) an open promotions policy in which paper qualifications

determine only the entry point into the organization. Thereafter actual work

performance is the main determinant of promotion. 2) Priority to filling positions

by promotion from within the organization. Only when there is no suitably

qualified candidate within, and nobody who can be trained in time, do we look

outside the organization.

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14. Accounting Process

Objective of Accounting

The objective of accounting can be stated as follows:

1) to maintain systematic records2) To ascertain net profit or net loss of the business3) To ascertain the financial position of the business4) Provide information for taking actions to improve business5) To provide accounting information to interested parties

Parties Interested in Accounting InformationOwners: Owners contribute capital and assume the risk of business

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Managers: Accounting information is of immense use to managers. It helps to plan, control and evaluate all business activities.

Lenders: Institution like bank and other financial organization who provide money for business.

Creditors: Those who supply goods and services on credit are called creditors.

Prospective Investors: A person who wants to become a partner in a firm or a person who wants to become a share holder of a company.

Tax Authorities: Tax authorities of the Government are interested in the Financial Statements as to assess the tax liability of the enterprise.

Employees: The employees of the enterprise are also interested in knowing the state of affairs of the organization in which they are working

Accounting Activities

Transactions and Accounting Principles in MFIs

Transactions

It can be seen that in any type of organization whether commercial, financial or social, many types of events, business, exchanges and give and take process takes place. These processes are termed as Transaction.

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Basic accounting principles for MFIs

Double Entry SystemEvery business transaction has two parts; (1) the receiving aspect, and (2) the giving aspect. For example, when you purchase goods for cash, goods come in and cash goes out. Thus, a transaction affects two items (also called accounts) at the same time. When you record the transactions in the books of account of a business, it would be better if you record the effects relating to both the items. In the above example the items affected are goods and cash, stock of good increases and cash decreases. So we would record the increase in the stock of goods and also record the decrease in cash. This involves two entries, one in

Commercial and financial Transactions1. Disbursement

of loan to the center

2. Collection of Installment from the Center

3. Salary payment to staff

Non Financial Transactions

1. Weekly Center Meetings

2. Staff Meeting

Types of Transactions

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goods account and other in Cash Account. This method of recording business is called ‘Double Entry System’. It recognizes and records both the aspect of every transaction.

Conservatism and PrudenceConservatism means recording financial transactions such that assets, revenues, and gains are not overstated and liabilities, expenses and losses are not understated. It is intended to result in the fair presentation of financial results.

MaterialityEach material item should be presented separately in the financial statements. Material items are those that may influence the economic decision of a user.

RealizationRealization requires that revenue be recognized in the accounting period it is earned, rather than when it is collected in cash. It defines the point at which revenue is recognized.

MatchingOrganizations incur expenses to earn revenues. Expenses should be reported on theIncome-Expenditure Statement during the same period as the revenues they generate.3.0 Types of Accounts

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Types of Accounts

Personal Account Real Account Nominal Account

Natural account Artificial Account Representative Account

Vouching and Primary Books of Accounts

In a Micro finance institution accounting procedure starts with the recognition of the nature of transaction. The first step is to identify the dual aspect of the transaction and then to prepare a proper voucher for the corresponding transaction. After preparing the vouchers entries are made in primary books of accounts in a manual system. However, if the accounts are computerized, on passing an entry the corresponding book of account is automatically updated.

Vouchers

The whole process of accounting starts with the recording of the day to day transaction of the organization and this process of recording and classifying starts with the preparation of a voucher. As we know that each transaction has two identities and

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it is the voucher on which these two different identities are identified and recorded as Debit and Credit.

Types of VoucherDepending on the necessity of accounting procedures every organization use many types of vouchers but in most of the micro finance organizations mostly two types of vouchers are used. They are

1) Cash voucher 2) Transfer VoucherCash Voucher: In this type of voucher only those type of transactions which are only cash in nature are recorded

Financial Statements

The MFIs usually start with the trial balance and finally prepare Balance Sheet and Income-Expenditure Statements.

Trial Balance

After posting the journal entries into the ledger and balancing all accounts, we prepare a statement called Trial Balance. This statement shows the balance of all the accounts, which appear in the ledger. The debit balances are shown in one column and the credit balances in the other. It is usually just before preparing the final accounts. The purpose is to check the arithmetical accuracy of the books of account.

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We know that under the double entry system for every debit there is an equal and corresponding credit. So, the total of debit given to different accounts must be equal to the total of credits given to different accounts. Similarly, the total of debit balances in different accounts must be equal to the total of credit balances in different accounts. Now, if the Trial Balances Tallies i.e., the total of its debit balances column is equal to the total of its credit balances column, it would mean that both the aspects of each transaction have been correctly entered in the ledger. If, however, the two totals do not tally it implies that some errors have been committed while posting the transactions into the ledger.

The fourth and the final stage of accounting is preparation of Income and expenditure statement and Balance sheet with the help of Trial balance.

If the organization has adapted computerised method of accounting then in this case all the transactions taking place daily in the organization are identified as debit or credit entries and a manual voucher is prepared with proper supporting. After the manual voucher has been prepared and verified by the proper person it is screen fed. As soon as the voucher is entered in the system it automatically updates it in the various books of account i.e., journal, day book, cash book and bank book etc. Not only it updates all the books and ledgers it also prepares trial balance, Income and expenditure statement and finally the balance Sheet.

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Balance Sheet

A balance sheet is a summary of the financial position of the MFI at a specific point in time. It presents the cumulative economic resources of an organization and the claims against those resources.

Assets

Represent what is owned by the organization or owed to it by others

Are items in which an organization has invested its funds for the purpose of generating revenue

Liabilities

Represent what is owed by the organization to othersEquity

Represents the capital or net worth of the organization Includes capital contributions of members, investors or donors, retained earnings, and the current year surplus

Sample Balance SheetAccounting Period

Assets1. Cash and due from banks2. Reserves in central bank3. Short-term investments in money market instruments4. Loan portfolio5. (Loan loss reserve)6. Other short-term assets

Assets = Liabilities + Equity

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7. Long-term investments8. Net fixed assets

9. Total assets

Liabilities10. Savings/Deposit accounts if any11. Loans from commercial banks (ICICI, HDFC, SBI)12. Loans from SIDBI13. Loans from FWWB14. Other short-term liabilities15. Other long-term liabilities

16. Total liabilities

Equity19. Paid-in equity from shareholders plus members20. Donated equity—prior years, cumulative21. Donated equity—current year22. Prior years retained earnings/losses23. Current year retained earnings/loss24. Other capital accounts25. Total equity

26. TOTAL LIABILITIES AND EQUITY

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Income-Expenditure Statement4

An income-expenditure statement reports the organization’s financial performance over a specified period of time. It summarizes all revenue earned and expenses incurred during a specified accounting period. An institution prepares an Income-Expenditure Statement so that it can determine its net profit or loss (the difference between revenue and expenses).

An Income-Expenditure Statement Relates to a balance sheet through the transfer of cash

donations and net profit (loss) as well as depreciation, and in the relationship between the loan loss provision and the reserve

Starts at zero for each period (in contrast to the Balance Sheet which is cumulative since the beginning of the organization’s operation)

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Revenue

Refers to money earned by an organization for goods sold and services rendered during an accounting period, including• Interest earned on loans to clients• Fees earned on loans to clients• Interest earned on deposits with bank,

Expenses

Represent costs incurred for goods and services used in the process of earning revenue. Direct expenses for MFIs include• Financial costs• Administrative expenses• Loan loss provisions

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Sample Income-Expenditure StatementAccounting Period

Operating Income1. Interest and fee income from loans2. Income from other finance-related services3. Income from investments4. Total operating incomeOperating Expenses5. Interest and fee expense6. Loan loss provision expense7. Administrative expense – personnel8. Other administrative expenses9. Total operating expenses10. NET OPERATING PROFIT (LOSS)Non-operational Income and Expenses11. Cash donations12. Other non-operational income13. Total non-operational expenses

14. TOTAL CONSOLIDATED PROFIT/LOSS

Progress/Portfolio Reports

A portfolio report provides information about the operations of an MFI. It provides timely and accurate data about the quantum, the outreach and the quality of the portfolio. It may also include other key performance indicators (e.g.,).Information usually includes Number of Staff Number of Center Managers Number of CentersNumber of active loan clients Value of loans outstanding end of period

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Total value and number of loans disbursed during the period Value of outstanding loan balances in arrears, value of

payments in arrears Portfolio aging analysis Value of Portfolio at RiskA report which contains all the above is called a portfolio report. Reports where the achievement is compared against the planned are called progress reports

15. Individual Loan - a new concept

Looking at the increasing demand of clients in the field, Company raised

the maximum amount of loan up to 50,000/- for the mature clients only and

decided to give the name of Bada loan to this product / loans under the scheme.

The main conditions for getting this loan are that clients should have the past

clean track record with minimum 3 loan cycles but without any arrears or defaults

in repayments of any Installment / Interest in the past.

Under these loans the repayment period fixed by the Company is 46 to 52

weeks with six weeks grace period & weekly repayment with interest @ of 27%

p.a. as applicable in the loans under the main scheme of the Company i.e. Income

Generating Loan (IGL). The other requirements under this loan are, the clients

should have a clean past history, age below 50 years and she should provide a

letter of her recommendation from other members of her existing group for

providing her the bada loan as per the scheme of the Company.

For processing and monitoring of these loans the Company has made a policy to

appoint the Bada Loan Officers. These Bada Loan Officers verify the cash flow,

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business proposal and also the experience of the clients for running the proposed

business. While processing the proposal, they also see the likely effect of the bada

loan on their cash flow to ensure the timely repayments of loans.

In the cases of bada loan Company has also made policy to obtain one

guarantee after evaluating the willingness & credibility of the guarantor. In

addition to this additional guarantee of son/ husband is also obtained.

For the regular monitoring of these loans, bada loan officer remains in

constant touch with borrowers. They visit the borrowers’ work place within 15

days from the date of release of loan to ensure the proper end use of funds / loans.

Area / Senior Manager also visits him within the period of one month from the

date of disbursement of loan to see the proper utilization of loan amount.

16. Microfinance in India

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Evolution of Microfinance in India• Microfinance has been in practice for ages (though informally).• Legal framework for establishing the co-operative movement set up in

1904.• Reserve Bank of India Act, 1934 provided for the establishment of the

Agricultural Credit Department.• Nationalization of banks in 1969• Regional Rural Banks created in 1975.• NABARD established as an apex agency for rural finance in 1982.• Passing of Mutually Aided Co-op. Act in AP in 1995.

The Profile of Microfinance in India

The scenario

• Estimated that 350 million people live Below Poverty Line

• This translates to approximately 75 million households.

• Annual credit demand by the poor in the country is estimated to be about

Rs. 60,000 crores.

• Cumulative disbursements under all microfinance programmes is only

about Rs. 5000 crores.(Mar. 04)

• Total outstanding of all microfinance initiatives in India estimated to be Rs.

1600 crores. (March 04)

• Only about 5 % of rural poor have access to microfinance

Motivation behind Starting with Microfinance –

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It had been observed through various researches that most of the poor had been

born into poor, rural families, and for one reason or another had missed out on the

opportunities that had enabled most rural dwellers to come out of poverty. Yet

they had ideas of what they could do to pull themselves out of poverty – if only

they could get access to the required capital. This became the motivation for us to

try our hands at banking with the rural poor and to form a network that became

known as CASHPOR, Credit and Savings for the Hardcore Poor.

Thanks!Bragesh BahadurReg. 510934083

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