Financial Inclusion and Institution Building Initiatives

Support provided under PSIG: Old Initiatives During the first phase of PSIG, the micro finance sector was reviving from the Andhra crises, accordingly, support was extended basically to cater to the on-lending needs of the small and the mid- sized MFIs. Also some support was extended to bigger and mid-sized MFIs for expanding into newer geographies. Gradually, as the macro environment of the micro finance sector stabilized, there was need of more specific products and interventions to strengthen and hand-hold the sector. Accordingly, to cater to the specific needs of the MFIs, second phase of Liquidity Fund and Capacity Building Grant was launched alongwith other sector specific schemes which looked at rendering support to the business correspondent network managers, support for co-lateral requirements to small/mid-sized MFIs by way of guarantee/FD for supporting BC operations etc. Learning from the experiences and stakeholder feedbacks, a bouquet of schemes and funds (including both loans and grants) were launched and operationalised during the second phase of the project to address the existing gaps & evolving needs of the partners. Liquidity Fund

• Debt Fund for On-lending : On-lending support to smaller MFIs: After the AP crisis, the smaller MFIs were facing a liquidity crunch since the MF sector was experiencing a downtrend in funds flow. The interventions envisages on-lending support to smaller MFIs.
• Debt Fund for Capacity Building: Expansion support to Tier I & II MFIs:Designed for Tier I & II eligible MFIs which have the scale, potential and capacity to expand in under-served geographies in which they would have expanded much later. The key mandate of the fund is to create additional capacities in PSIG states, though expansion of branch network in the underserved/un-served PSIG states, diversfying the loan product basket in the area of health, energy, water/sanitation, eduction, enterprise ( higher ticket size individual loans ) etc, promoting other financial services like Micro Pensions, Savings ( through BC model), Insurance etc and strenghening the technology / MIS and implementation of Mobile technonolgy for efficient delivery of credit services.
• Fund: First loss default guarantee upto 20% for lending to MFIs by SIDBI and others banks for onlending in PSIG states: To support lending to eligible MFIs for targetted on-lending in PSIG States. This would result in enhanced outreach and increased penetration in PSIG States.
• Cash Collatarelised Guaarntee Fund (CCGF) : For extending support under Banking Correspondent (BC) model towards First Loss Default Guarantee (FLDG) as Cash Collateralized Guarantee (CCG) for NBFC Tier II (less > 50000 and < 2, 50,000 borrowers) and Tier III (less than 50,000 borrowers) and all Non NBFC MFIs/SHPIs with a focus on smaller and medium socially oriented MFIs/SHPIs with the objective of achieving long term sustainability of operations in unserved and underserved pockets of PSIG states.

Capacity Building Grant (CB) support: for Tier I, II & III MFIs: Grant support after a detailed capacity building need assessment (CBNA) exercise in the following broad areas :

• Enhancing credibility of micro finance institutions by supporting confidence building measures such as Loan portfolio audit, Social performance assessment, Code of Conduct Assessment, Systems/ process audit etc.
• Improving operational efficiencies – by supporting technology led solutions and staff capacity building through trainings, hiring professionals etc.
• Improving responsible and transparent finance practices with focus on clients and staff
• Deepening outreach of financial services in unserved areas
• Supporting innovative credit products and expansion of other financial services like micro insurance, micropensions etc.

Note: The support would be available for MFIs operating in PSIG states. Eligibility criteria (indicative) for support under Liquidity Fund & CB Grant:

• Borrowing Power/power to accept grant
• Power to offer Security
• Power to carry on Micro credit Activities
• Eligible Activities - For financing micro enterprises and non-farm activities.
• Should be in existence for atleast 5 years and or it has a demonstrated track record of running a successful micro credit programme at least for the last 3-years. Any new MFI desirous of initiating a micro credit programme may also be considered for assistance if it has been promoted/ managed by experienced professionals with experience of at least 3 years in banking or social/financial intermediation etc.
• The mf programme is generally oriented towards poverty reduction and majority of its clients are poor, more so women.
• Membership - Has a minimum outreach of 5,000 loan accounts or 3,000 borrowers [through individual lending/SHGs/partner NGOs or MFIs] or demonstrate the capability to reach this scale within a period of 12 months. Variation in this regard may be considered depending upon the merit of such cases. The above criterion may however not be insisted upon in r/o MFI-NBFC.
• Secular clients/activities.
• Maintains satisfactory and transparent accounting, MIS and Internal Audit or willing to adopt such practices with assistance from SIDBI.
• The accounts audited by an external auditor on Annual basis or agree to do so immediately after the loan is sanctioned. as and when required.
• Relatively Low Risk Portfolio/or definite plan to improve its recovery performance
• Should move on a clear and credible path to operational and financial self-sufficiency
• It has plans to broad base it’s resource base further
• Should possesses competent and adequate staff for proper appraisal and intensive supervision
• Benchmark Norms:
• PAR>90 days : Desirable norm – 5%
• OSS : Desirable norm – 100%
• Minimum investment grade by the SIDBI empanelled rating agencies : MfR5 of CRISIL
• Compliance of regulatory guidelines, tenets of responsible financing & extant Fair Practices Code.
• Capacity Building Support, being in the nature of grant, it is desirable that MFI comply with the eligibility norms as well as Regulatory guidelines, Tenets of Responsible Lending Practices, Fair Practices Code etc.

Negative list for CB Grant:

• The CB Grant support should not be provided for purposes such as Civil works, purchase of vehicles, international travel, Business Class air travel etc., which are in the nature of creation of fixed assets/luxuries.
• Similarly, no assistance is generally envisaged under the Scheme for promotion of JLGs/SHGs.

New Initiatives 1) Liquidity Fund II

• Component I : Debt Fund for Capacity Building- Support to MFIs for expansion and technology based initiatives: The second phase of this fund has brought all categories of MFIs irrespective of its tier and type under its preview. the key rationale for formulating the Debt Fund II for expansion under the PSIG Programme was that MFIs which have the scale, potential and are in compliance with the RBI guidelines as well as the other guidelines as laid down by the Bank from time to time, should be supported for expansion in identified geographies in which they would have otherwise expanded much later so that, the key programme mandates like expansion of outreach and increased access to finance in the underserved/un-served PSIG states could be fulfilled. The support under Debt Fund not only aims at increasing the outreach, but also the level of penetration and greater access to credit to the women beneficiaries. The fund would also support the technology based initiatives of MFIs from time to time so as to address the problem of last mile reducing the their overall cost of operations and improving the viability.
• Debt Fund for On-lending - On-lending support to Tier II & III MFIs: Raising funds for smaller MFIs is always a challenge. The on-lending funds have given the desired liquidity to the MFIs for carrying out their MF operations in these underserved PSIG states. The support under this head is towards on-lending support to Tier II & Tier III MFIs. With a view to incentivise MFIs under this scheme, those having greater adherence to COCA a two tier rate structure is proposed with a reduced rate of interest.

Eligibility criteria for MFIs:

• Should be registered as Society, Trust, Company/Section-25 Company, NBFC-MFIs, Co-operative Society and MACS.
• Registered as any other legal entity may be considered only after BO obtains Legal Department’s clearance on its suitability.
• Should have been lending under MF for at least 36 months or should have promoters/senior management having at least 10 years of experience in micro credit/banking/NBFC lending operations.
• Has a minimum outreach of 5,000 loan accounts or 3,000 borrowers.
• Has a minimum term loan requirement of Rs 0.50 crore.
• Targets the poor, especially women and is secular.
• has audited financial statements (in case of NGO with microfinance as a programme, the NGO should have separate audited financial statements for the MF programme) and Has systems, processes and procedures in place required of a financial intermediary like internal accounting, internal audit, risk management, cash management, timely MIS, etc.
• Shall be in compliance with RBI and other statutory guidelines.
• Others:
  • MFI may follow any generally practiced MF models like Grameen model, SHG model, JLG model, cooperatives, etc., and any other appropriate model permissible under the law.
  • In case of two tier MFIs, a minimal portfolio size of Rs.10 crore to be considered as a threshold mark.
  • First loan to an MFI shall not be more than 25% of its outstanding loan portfolio.
  • For NBFCs or any other MFI set up for/by taking over the existing MF operations of another entity, track record of the earlier entity can be considered for eligibility of 36 months tenure and exposure subject to continuity of promoters/senior management of the earlier entity.
  • SIDBI’s loan to be on lent by MFIs for use by borrowers in:
  • Setting up/running non-farm income generating activities and micro enterprises under MSMED Act and
  • for construction of new / renovation/ expansion of dwelling units / dwelling unit-cum-work sheds, etc.
  • Loan to an MFI will be on annual/need basis with minimum loan of Rs0.50 crore to an MFI.
  • NBFC-MFI to submit a certificate from a C.A regarding compliance with RBI norms for NBFC-MFIs and all other MFIs to submit a C.A certificate regarding compliance with RBI’s norms on eligibility of bank loans to MFIs under priority sector.
  • Availability of a valid external rating.
  • Additionally all MFIs has to follow tenets of Responsible Lending Practices and agree to the common set of loan covenants as per Lenders’ Forum.
  • In case, the MFI has been assisted earlier under Debt Fund for capacity building/expansion/ on-lending under PSIG Debt Fund, the deployment should have been satisfactory.

2) Scheme for support to Business Correspondent Network Managers (BCNM) /Corporate BCs The scheme aims at providing financial, technical and operational support for bridging the gaps and overcoming the challenges faced by Corporate BCs/BCNMs and in turn the BCAs. The scheme will focus on putting in investments through grant in the promising Corporate BCs after in depth assessment of their institutional structure focusing on improving institutional efficiency, management, scalability and efficient product delivery. The areas of support are generally broad and based on the assessment of the BCNMs requirement and could range from technical & operational requirement, product development requirement & innovative pilots, promoting financial literacy, infrastructure support, CSP efficiency etc. Eligibility Criteria :

• Corporate BC Companies with minimum three years of satisfactory working track record as BC of at least one Bank.
• Managing minimum of 100 BCAs
• Corporate BC Company/BCO should maintain a satisfactory and transparent accounting, MIS and internal audit system or is willing to adopt such practices with SIDBI PSIG assistance.
• Corporate BC Company / BCO should have its accounts audited by an external auditor on annual basis.
• Minimum Net worth of Rs. 10 lakh.
• Corporate BC Company / BCO should possess competent and adequate staff for implementation and intensive supervision.
• Should not be a defaulter of any Bank/Financial Institution
• Satisfactory conduct with the existing BC Banker. Group concerns not listed in RBI / CIBIL / Internal database of the Bank

3) Risk Assurance Fund (RAF): RAF was set-up with the core focus of assisting the small and medium sized MFIs to accelerate lending from public sector banks and other types of financial institutions. MFIs post Andhra crises were faced with a major reputational risk in terms of receiving repayments from their borrowers. The fund was set-up to give impetus to bank lending to MFIs by way of extending comfort letters/FD through NCGTC. The scheme has been operationalised through NCGTC. RAF aims to provide risk cover to banks upto 20%, on overall portfolio basis, of their lending to MFIs for their operations in PSIG States. The risk cover i/r/o bank lending to an individual MFI would be extended up to 75% of the outstanding amount on the date of account becoming NPA, within the overall limit of 20% on portfolio basis. The scheme is presently operational through National Credit Guarantee Trustee Company Ltd (NCGTC), a subsidiary of SIDBI. Eligibility Criteria : 1. Eligibility Criteria for Banks

• All scheduled private/ public sector banks having substantial microfinance portfolio of greater than Rs. 100 Crore are eligible.
• NBFCs rated AA or equivalent rating by any accredited rating agency (relaxable upto A- or equivalent rating by any accredited rating agency, by the sanctioning authority) and above are also eligible. However, the total assistance to NBFCs under RAF shall be restricted to Rs.10 crore of the total Risk Fund.

2. Eligibility Criteria for MFIs

• The MFI to be covered under RAF should be an existing partner under PSIG programme.
• The bank should not take any security from the MFI for the financial assistance extended by it to MFI, other than the required FLDG and hypothecation of Book debts.

4) Financial Inclusion & Women Empowerment Challenge Fund (FIWECF):

• The objective of the FIWECF is to offer targeted funding to new ideas, approaches and innovations for furthering the goal of financial inclusion in 4 PSIG states and impact the microfinance sector. The objective of the FIWECF is to offer targeted funding to new ideas, approaches and innovations for furthering the goal of financial inclusion in 4 PSIG states and impact the microfinance sector. FIWECF shall be extended by way of grant support. The interventions under FIWECF could be at institutional level or for limited geographies but its impact is expected to be at the sectoral level such as demonstrating best practices, taking innovations to scale, suggesting policy changes, model guidelines and rolling out new products etc. The initiative should be such so as to create real, measurable outcomes, which promotes equity, efficiency and sustainability and provide opportunities which will benefit and enhance the access to financial services.
• The objective of the fund is:
• To provide evidence backed research to influence policy for financial inclusion
• To provide clients of financial institutions opportunity to enhance their capability for effective usage of financial services and improving their well being.
• To Provide innovative approaches to ensure that financial institutions:
  • Improve targeting of poor (<$1.5) and excluded ( SC/ST/women headed) households
  • Achieve Deeper penetration of financial services in PSIG States (underserved blocks/districts)
  • Promote and practice responsible finance practices
  • Provide financial literacy in a cost effective technology
  • Effectively harness technology to provide cost effective services
  • Provide Diverse financial products and services
  • Eligibility Criteria : Civil Society Organisations, NGOs, Section 25 (8) Companies, Trusts, Cooperatives, Societies Private Limited Companies, nonprofit entities, Banks, FIs, NBFCs ,BCNMs, Research Organisations, International agencies, Think Tanks, Universities, other academic institutions and individuals are eligible to apply. The institutions can also form a consortium or collaboration with single or multiple partners to bring in collective and complementary strengths. 5) Capacity Building Grant (CB) support II: for Tier I, II & III MFIs:
  • To address to the dynamic needs of the partner MFIs in the project as well as to be in sync with the changing enviornment the CB Grant support areas have also been re-alinged and based on 5 basic pillars. Grant support after a detailed capacity building need assessment (CBNA) exercise is proposed in the in the following broad areas :
  • Responsible Finance: Regulatory Compliance, Client Centric Practices, transparency and sustainable growth : Initiatives aimed at strengthening responsible lending practices by the MFIs including client centric practices & proper targeting of clients, strengthening of corporate governance, setting up grievance redressal systems etc.
  • Improving operational efficiencies – by supporting human resource management, technology led solutions, Specialized and innovative consultancy and mentoring services and Support for setting up of micro enterprise lending.
  • Promoting innovations in delivery of services
  • Deepen outreach of microfinance services in underserved and unserved areas and to help institutions improve poverty targeting.
  • Supporting New Models and Other Financial Inclusion initiatives like APY, MUDRA, PMJDY etc. Also support to Small Finance Banks (SFBs) has been considered.
  • Should be registered as Society, Trust, Company/Section-8 Company, NBFC-MFIs, Co-operative Society and MACS.
  • Registered as any other legal entity may be considered only after BO obtains Legal Department’s clearance on its suitability.
  • Should have been lending under MF for at least 36 months or should have promoters/senior management having at least 10 years of experience in micro credit/banking/NBFC lending operations.
  • Has a minimum outreach of 5,000 loan accounts or 3,000 borrowers.
  • Targets the poor, especially women and is secular.
  • has audited financial statements (in case of NGO with microfinance as a programme, the NGO should have separate audited financial statements for the MF programme) and
  • Has systems, processes and procedures in place required of a financial intermediary like internal accounting, internal audit, risk management, cash management, timely MIS, etc.
  • MFI should have a relatively low risk portfolio (PAR < 5%) or has a definite plan to further improve its recovery performance
  • OSS>100%, however, relaxable upto certain extent based on the merits of the case.
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  • Shall be in compliance with RBI and other statutory guidelines.
  • MFI may follow any generally practiced MF models like Grameen model, SHG model, JLG model, cooperatives, etc., and any other appropriate model permissible under the law.
  • For NBFCs or any other MFI set up for/by taking over the existing MF operations of another entity, track record of the earlier entity can be considered for eligibility of 36 months tenure and exposure subject to continuity of promoters/senior management of the earlier entity.
  • NBFC-MFI to submit a certificate from a C.A regarding compliance with RBI norms for NBFC-MFIs and all other MFIs to submit a C.A certificate regarding compliance with RBI’s norms on eligibility of bank loans to MFIs under priority sector.
  • Availability of a valid external rating, MfR5 by CRISIL/ Beta + of MCRIL or equivalent rating as approved by Micro Lending Development Department. However, this may be relaxed by the sanctioning authority in case of small MFIs with a view to provide strong support to enable their sustainability and make them achieve investable grade rating through CB support.
  • Additionally all MFIs have to follow tenets of Responsible Lending Practices and agree to the common set of loan covenants as per Lenders’ Forum.
  • Willingness to report on appropriate platform such as MIX India and /or Gold Service of MIX India platform or as specified by PSIG from time to time.
  • Capacity Building Support, being in the nature of grant, it is desirable that MFI comply with the eligibility norms as well as Regulatory guidelines, Tenets of Responsible Lending Practices, Fair Practices Code etc.
  • The CB Grant support should not be provided for purposes such as Civil works, purchase of vehicles, international travel, Business Class air travel etc., which are in the nature of creation of fixed assets/luxuries.
  • Similarly, no assistance is generally envisaged under the Scheme for promotion of JLGs/SHGs.