MF Education Program @ Goa, India

MFI-Transformation: Why, How and The Impact

ORGANIZED BY SA-DHAN

March 24-26, 2010

Presenter: Chandra Shekhar GhoshSenior Ashoka FellowChairman & Managing DirectorBandhan

Topic: Transformation & Double Bottom Line

TRANSFORMATION

WHY?

Why does an MFI want to transform to an NBFC?

WHY TRANSFORMATION?

To widen/broaden microfinance services to the unreached poor

To maintain Capital Adequacy Ratio

To minimize regulatory risks

To achieve confidence / comfort of lenders

TRANSFORMATION

WHAT?

What is the MFI going to transfer?

TRANSFORMATION OF WHAT?

Bank Loans Surplus

TRANSFORMATION

HOW?

How is the MFI going to transfer?

HOW TO TRANSFER ?

The above can be transferred in either of the following two ways:a)After full payment of existing loans in MFI, issue new loans to clients in NBFC

b)Loan portfolio + borrowers of all branches to be transferred in one go

TRANSFER OF

There are basically three options to transfer the Bank Loans.

1. With permission from the bank (appropriate for outstanding of huge amount)

2. Pre payment of existing loan in MFI followed by sanction of fresh loan in NBFC (may be adopted where outstanding amount is small)

3. Enter into back-to-back agreement

Bank Loans

TRANSFER OF

The MFI should carefully choose the mode of transfer of surplus. As such, it depends on certain factors:

Amount to be transferred

Present legal status of MFI

Surplus

TRANSFORMATION

WHAT NOT?

What should an MFI not transfer?

MIND!!!

TRANSFORMATION

STEPS

What are the various steps of transformation?

STEPS INVOLVED IN TRANSFORMATION

Approval from the board of MFI

Depute experienced Consultant

Form a Committee internally to work on the transformation

Select appropriate methodology after analysis of available options

Seek legal opinion (in written) from reputed legal firm

Always take a second legal opinion

Board approval for mode of transformation

Share the issue in details with the management, proper orientation must be given

Finalize the date of transformation

STEPS…CONTD Begin implementation – documents, printing materials , bank a/c opening

Preparation & execution of MoU

Formally apply to lenders for permission

Sign the Business Transfer Agreement (BTA)

Prepare B/S before & after transformation

Submit financials (after transformation) to lenders

Enter into new agreement with the lenders

Charge creation at ROC

Submit reports regularly to regulatory authorities

TRANSFORMATION

CHALLENGES

What are the challenges an MFI faces during transformation process?

CHALLENGES FACED

TRANSFORMATION

LEARNINGS

What have been the major learnings?

LEARNINGS Step-by-step documentation is a must

Always take legal opinion before taking any major step

Don’t forget to seek a second opinion

Always have proper planning (set time frame) to execute the steps

News to be shared externally only after final execution (with relevant supporting documents)

LEARNINGS…CONTD

The entire process should be carried on in such a manner that it doesn’t affect the normal day-to-day activities

Ensure that all MFI bank accounts have been closed

Get the auditors / outsiders to check whether the execution at the field has been done correctly

Statutory auditor to remain the same throughout the process, preferably even after the transformation (for 1 year at least)

Appoint a spokesperson to talk on the transformation plan

TRANSFORMATION

IS POSSIBLE

It is a long and tedious process but can be completed with the hard work of the team

EQUITY

WHY?

What were the reasons for getting external equity?

REASONS FOR EQUITY

INITIAL APPREHENSIONS

What, why, when, how….?!

APPREHENSIONS

Since it was a first round of equity for Bandhan, we had our own pre - conceived notions, worries and questions.

Worry of private equity players

Hold on to the organization’s mission

Whether the organization will be able to get desired valuation

Great concern about push for huge return

Building competence of the team

CHOICE OF INVESTORS

Who & why?

INSTITUTIONAL Vs PRIVATE

INSTITUTIONAL

Strategic

Long term

Creates value

Less interruption in day-to-day management

More transparent

PRIVATE

Faster

Higher valuation

Higher return

More professional approach

Very tactful

MAKING THE RIGHT CHOICE

From Day 1, the following strategy was set.

PREPARATIONS DONE

What all?

Raising equity involves a huge process

STEP-BY-STEP PROCESS

Preparation of Strategic Business Plan (SBP) for 3-5 years

Analysis of equity requirement from the SBP

Discussion of the same at the Board for necessary suggestion and final approval

Selection of right Arranger (if need be)

Develop an internal team (operationally & financially sound) to work exclusively on this

Keep the recent financial report readily available

Prepare a good presentation & Information Memorandum (IM) to be made to potential investors

PROCESS…..CONTD.

Collect market information (including investor details)

Prepare set of documents viz. financials, trend analysis, performance analysis, ratio analysis, MOA, projection

Post Non-Disclosure Agreement (NDA), information sharing

Road show - meeting potential investors

Prepare documents for due diligence

Organize site visit

Start negotiation

Obtain valuation from the investor

Final negotiation on term sheet

PROCESS….CONTD

Board approval

Execution of documents – after necessary legal vetting

Increase in authorized capital, if required

Final infusion and allotment

CHALLENGES FACED

NEGOTIATION Major point of negotiation / disagreement

always remains the valuation.

POINTS OF NEGOTATION

NEGOTIATION TIPS

Remember that everything is negotiable

Aim your aspirations high

Never accept the first offer

Put what you have agreed on in writing

Be cooperative and friendly, Avoid abrasiveness, which often breaks down negotiations

Information is power – get as much as possible

COMMON QUESTIONSGenerally the investors will have lots of questions on the following.

EXPERIENCE

During the process, we learnt each day. Each meeting / dealing was a new experience. However, after all the struggle, post investment experience can be defined as follows.

An ideal investment in the MF space

Appropriate choice of investor

Example set for all the other players in the sector

A very good and learning experience, worth the time invested

SUGGESTIONS

FUTURE PLANS

Bandhan Ownership Pattern

THANK YOU

FOR YOUR ATTENTION For more information on Bandhan,

Log on to www.bandhanmf.com