FAST Report

Project Number: 48304-001 July 2016

Equity Investment Micro-Credit Ratings International Limited Strengthening the Microfinance Ecosystem Project

This is an abbreviated version of the document approved by ADB's Board of Directors that excludes information that is subject to exceptions to disclosure set forth in ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 22 June 2016)

Currency unit – Indian rupee/s (Re/Rs)

Re1.00 = $0.014

$1.00 = Rs67.62

ABBREVIATIONS ADB – Asian Development Bank CPP – Client Protection Principles CRA – credit rating agency DMC – developing member country EDA – EDA Rural Systems Private Limited FAST – Faster Approach to Small Nonsovereign Transactions FATF – Financial Action Task Force M-CRIL – Micro-Credit Ratings International Limited MFI – microfinance institution PRC – People’s Republic of China RBI – Reserve Bank of India SEBI – Securities and Exchange Board of India

NOTES

(i) The fiscal year (FY) of Micro-Credit Ratings International Limited (M-CRIL) ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2015 ends on 31 March 2015.

(ii) In this report, "$" refers to US dollars.

Vice-President D. Gupta, Private Sector and Cofinancing Operations Director General M. Barrow, Private Sector Operations Department (PSOD) Director C. Engstrom, Financial Institutions Division, PSOD Team leader A. Taneja, Principal Investment Specialist, PSOD Team members G. Abel, Senior Transaction Support Specialist, PSOD

J. Chenoweth, Senior Counsel, Office of the General Counsel M. Corpuz, Project Analyst, PSOD V. Ramasubramanian, Safeguard Specialist, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

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PROJECT AT A GLANCE

I. INTRODUCTION 1

II. THE FINANCIAL INTERMEDIARY 1

A. Investment Identification and Description 1 B. Business Overview and Strategy 3 C. Ownership, Management, and Governance 4 D. Financial Performance 5

III. THE ADB ASSISTANCE 6

A. The Assistance 6 B. Implementation Arrangements 7 C. Value Added by ADB Assistance 7 D. Risks 7

IV. DEVELOPMENT IMPACT AND STRATEGIC ALIGNMENT 8

A. Development Impact, Outcome, and Outputs 8 B. Alignment with ADB Strategy and Operations 9

V. POLICY COMPLIANCE 9

A. Safeguards and Social Dimensions 9 B. Anticorruption Policy 10 C. Investment Limitations 10 D. Assurances 10

VI. THE PRESIDENT’S DECISION 10

APPENDIXES

1. Design and Monitoring Framework 11 2. List of Linked Documents 13

http://www.adb.org/Documents/RRPs/?id=48304-001-4

I. INTRODUCTION

1. This is an eligible transaction under the Faster Approach to Small Nonsovereign Transactions (FAST) framework.1 The transaction involves an equity investment of the Indian rupee equivalent of up to $1,500,000 to Micro-Credit Ratings International Limited for Strengthening the Microfinance Ecosystem Project.

II. THE FINANCIAL INTERMEDIARY

A. Investment Identification and Description

2. Microfinance institutions (MFIs) are a critical means of expanding financial inclusion and reducing poverty. They play an indispensable role in helping lower-income people obtain access to finance and mitigate the adversities stemming from the unreliability of their income. MFIs have become vital in delivering credit and financial services to the smallest and remotest segments of the lower-income population, i.e., those deemed least creditworthy, who do not have direct access to credit from commercial banking systems in developing member countries (DMCs). This microfinance ecosystem comprises (i) consumers or end-borrowers who rightfully expect sustained access to financial services on fair and transparent terms; (ii) MFIs with vastly varying business and operating models which deliver these services; (iii) a divergent set of MFI financiers, ranging from commercial lenders and for-profit investors to multilateral and bilateral development banks, and aid and donor agencies with some overlapping interests; and (iv) regulators, which bear the overwhelming responsibility of setting the standards and crisis prevention rules, while allowing generally unhindered entry to players in the sector.

3. While the prominence and outreach of MFIs has increased, this has also resulted in an excess lending capacity within certain countries and sub-locations, increasing competition, focus on short-term profitability and growth, and inadequate attention to internal processes relating to client evaluation, arrears and recovery practices, and risk management. These factors have, in some instances, resulted in over-indebtedness, heightened systemic risks of contagion, and strict regulatory actions in some DMCs.2

4. MFIs are also required to perform several critical functions and adhere to standards that can extend substantially beyond the requirements stipulated by local regulators to sustain their lending operations. The challenges faced by MFIs and the spill over effect of these into accessing institutional finance are well captured in the annual Microfinance Banana Skins surveys.3 These reports have consistently found unregulated operations, weak credit control, inadequate quality of management and governance, and mismanagement of market competition to be key industry risks. At the other end in this ecosystem, financiers can also face significant challenges in dealing with MFIs. The increasing variability in MFI operating models, unsophisticated accounting and disclosure practices in certain instances, and portfolio management and data quality issues can pose unanticipated credit and reputational risks. This

1 Asian Development Bank (ADB). 2015. Faster Approach to Small Nonsovereign Transactions. Manila.

2 For example, the measures introduced by the Reserve Bank of India (RBI) in August 2012 and July 2014, which

placed caps on interest rates and loan processing fees, loan amounts, tenors, and maximum allowable loans per borrower, were undertaken to limit over-indebtedness and ensure fair practices.

3 The survey is conducted by the Centre for the Study of Financial Innovation. Microfinance Banana Skins 2014 describes the risks facing the microfinance industry as seen by an international sample of practitioners, investors, regulators, and observers. This survey was conducted in January and February 2014 and is based on 306 responses from 70 countries. It updates previous surveys carried out in 2008, 2009, 2011, and 2012.

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widening gap between the financier’s understanding of MFI operations; and the latter’s sometimes limited abilities to enhance their operating and disclosure standards, creates the business opportunity for specialized unbiased third-party advisory and rating service providers like M-CRIL.

5. The investment identification process for the project attempted to bridge these separate but intertwined issues and strengthen the ecosystem of microfinance thereby increasing private sector investment in this sector.4 The investment opportunity was selected after detailed comparative assessments. Micro-Credit Ratings International Limited (M-CRIL) was selected because of its relative advantages and competitive strengths as compared with other micro-credit ratings agencies serving the Asia-Pacific region. M-CRIL is a specialized advisory, ratings, policy-research, and training company of global repute. There are 3 global specialized microfinance rating agencies and M-CRIL together with Microfinanza, actively covers Asia. It focuses on the financial, social, and developmental aspects of the microfinance ecosystem.5 Investing in M-CRIL will help strengthen the microfinance system in countries in which it is currently operational (India and Myanmar, where M-CRIL has established offices) and assist it to expand elsewhere in emerging Asia (Cambodia, Indonesia, Nepal, and the People's Republic of China [PRC] markets which are presently being covered from the existing offices). In India, ADB’s investment is critical for M-CRIL to obtain registration with the Securities and Exchange Board of India (SEBI) and accreditation from the Reserve Bank of India (RBI) as a credit rating agency (CRA).6 M-CRIL’s rating activities are currently limited to select MFIs and their specific loan portfolios, as permitted by applicable regulations. While commercial banks which lend to MFIs (or purchase securities) in India can still benefit from M-CRIL’s ratings, the ratings cannot be utilized for banks’ capital-allocation decisions, posing a severe limitation on their application and on the overall business model of M-CRIL.

6. The proposed investment builds on ADB’s ongoing and previous engagement with MFIs. Over the past 3 decades, the involvement of ADB's Private Sector Operations Department with MFIs has largely been a subset of its work on enabling micro, small, and medium-sized enterprise financing, which primarily involves extending long-term credit lines for on-lending to specified borrowers such as MFIs; a pillar in this initiative was the Microfinance Risk Participation and Guarantee Program.7 The investment in M-CRIL will strengthen institutional capacities within the sector, which will substantially supplement ongoing funding and will ultimately broaden access to finance for lower-income borrowers.

4 The critical consideration for lenders and financiers here is not limited to commercial and credit risk-related aspects, but on the fairness and transparency with which MFIs handle their borrowing clients. The incidence of MFIs exploiting the vulnerability of borrowers can be severely detrimental to their lenders or financiers from a reputational aspect.

5 In several countries, private and state-owned banks that are unable or ill-positioned to cover this underserved

category now use MFIs as agents or independent channel to deliver credit, savings, insurance, and other financial products and services.

6 Applicable SEBI regulations require that a CRA have a minimum net worth of Rs50 million, in addition to which the

CRA must have a promoter shareholder (holding at least 10% of the CRA) meeting certain eligibility criteria, one of which is a minimum net worth of Rs1 billion. In the absence of CRA accreditation, M-CRIL is unable to rate public securities, and its ratings cannot be used by banks for capital adequacy purposes. It is expected that M-CRIL will meet these and other applicable requirements once ADB’s investment enables M-CRIL to serve these markets.

7 ADB. 2010. The Microfinance Risk Participating and Guarantee Program. Manila. The $190 million program

provides guarantees and risk participations for loans made by commercial banks for MFIs in South Asia. An additional amount of $50 million was approved under this program in October 2015. As of 2016, the program has supported 19 MFIs, and approximately $370 million of loans were facilitated, supporting over 2 million borrowers, 97% of whom are women.

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B. Business Overview and Strategy

7. Given the long-dated track record, client-profile consisting of eminent commercial and developmental institutions, and its prominent coverage in Asia; M-CRIL is considered to be one of the most reputable and established independent agencies for microfinance related advisory, ratings, policy-research, and publication-focused services in the region. It offers a well-diversified range of products while simultaneously maintaining its focus on its core competencies of MFI assessments and ratings, which cover financial performance, governance and transparency, operations and portfolio quality, and social performance. As a pioneer in developing rating frameworks and related assessment services, M-CRIL has completed over 1,500 microfinance ratings, assessments, portfolio audits, evaluations, business planning review exercises, risk-diagnostic assessments, and microfinance-related sector reviews and financial advisory assignments across 32 countries. ADB also has a long-standing relationship with M-CRIL, utilizing the company’s research, training, and rating expertise in supporting ADB’s microfinance lending operations.

8. M-CRIL has a three-pronged strategy that will be facilitated by ADB’s investment. This entails (i) the merger with its parent, EDA Rural Systems Private Limited (EDA); (ii) strengthening the company’s staff, resources, and internal processes to expand outreach and market share in India once it obtains CRA accreditation; and (iii) utilizing its current experience, skills, competence, and client relationships to widen its geographic coverage by establishing more permanent operations in the identified key markets of Cambodia, Indonesia, Myanmar, Nepal, and the PRC. It is expected that M-CRIL will complete its overseas expansion between fiscal year (FY) 2017 and FY2020, and will prioritize Myanmar, Indonesia, and the PRC8 in the first phase.

9. After the investment and subsequent to CRA accreditation, it is estimated that M-CRIL will regain market share in its domestic MFI ratings business—from its current level of 7% to about 20%.9 Growth is forecast to be more pronounced in 2017–2018, after which it would normalize to more moderate levels of 12%-15% per annum. Similarly, revenue growth in the key non-rating segments, chiefly the Client Protection Principles (CPP)10 and the social impact ratings or assessment, which constitute 50% of the total revenue base, is expected to accelerate after the investment.11 The proportion of its domestic and overseas revenues is expected to become equal (now 80% of revenues come from overseas operations).

8 M-CRIL has some experience in these markets, with a joint venture initiated in the PRC, which later had to be

dissolved because of an internal decision of its partner. M-CRIL is now in discussion with the Fangzhun Credit Analysis Company of Shanghai for a new partnership. The timing for executing the expansion plans also depends on obtaining necessary regulatory approvals.

9 This is a conservative estimate. Prior to the changes in the RBI’s accreditation policies for CRAs (announced in

2013), M-CRIL held a nearly 60% share of the MFI credit ratings business in India, which migrated to other CRAs after this regulatory change. M-CRIL is expected to re-attract its previous clients, which are still dealing with the company for its non-rating services (such as implementing the Client Protection Principles (CPP) and assessing social impacts), and are very familiar with M-CRIL’s ratings approach, expertise and reputation, and understand the value that M-CRIL’s work adds to their operations.

10 The CPP are defined in the Smart Campaign for Microfinance, which supports full transparency in pricing, terms, and conditions of all financial products offered by MFIs to their lower-income client base. Smart Microfinance is working with clients to prevent over-indebtedness or purchase of products they do not need or understand. CPP also involves employing respectful collection practices and adopting high ethical standards in the treatment of clients.

11 This business segment is forecast to grow at a faster pace in 2017–2018, responding to new staff hiring and opening of permanent offices in other DMC markets. This will increase M-CRIL’s capacity and broad-base its

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10. EDA is engaged in the nonfinancial ratings-related businesses of microfinance and rural development, such as social performance ratings, assessment of financial inclusiveness, social impact studies, and adoption of and training in CPP. With the merger of EDA and M-CRIL, the business, product, and client portfolio of the combined entity will benefit from both revenue and geographic diversification, lower operating costs, and reduced organizational redundancies, while still retaining overall focus and specialization.

C. Ownership, Management, and Governance

11. Ownership. M-CRIL was established in 1999 in response to the need for performance assessments of small microfinance service providers. M-CRIL was developed through EDA, which was established in 1983 and holds about 91% of M-CRIL; the balance is owned by M-CRIL employees. M-CRIL and EDA are about to merge under a process expected to be completed by July 2016. M-CRIL will be the surviving entity carrying on the combined businesses of M-CRIL and EDA. The founders of M-CRIL, Sanjay Sinha and Frances Sinha, are the predominant owners of EDA, together holding almost 100% (with a small minority share held by a key employee). M-CRIL has one wholly owned subsidiary incorporated in Myanmar, established to carry on its operations there.12 Due diligence was conducted in accordance with the Integrity Due Diligence Guidelines for Nonsovereign Operations, and no significant or potentially significant integrity issues were identified.13

12. Completion of the merger between M-CRIL and EDA will be a condition precedent to ADB’s investment and will result in the creation of a full-service entity covering both the financial and the social aspects of microfinance. The merged entity will have a wider revenue, product, and client base with unaudited combined revenues of about Rs90 million and a combined net worth of about Rs85 million as of FY2016. The founders have also initiated measures to transfer ownership of part of the company to key staff pursuant to an employee stock option plan. By FY2020, after the merger and after full deployment of ADB’s investment, ownership of M-CRIL is expected to be shared by the founders (60%), ADB (25%), and employees (15%). 13. Management and governance structure. M-CRIL is professionally managed, with a strong team of experienced and well-qualified staff in various positions across its business development, analytical and financial analysis functions, operations, and research and publications. M-CRIL understands the need to further strengthen the management team, streamline its internal processes, and bring greater specialization and decentralization to its operations as a critical part of its post-investment activities.

14. Despite its historically closely held ownership, M-CRIL follows high standards of transparency and governance and has established a board with strong backgrounds and experiences in finance sector regulation, MFI industry operations, rural and commercial banking, and academia, to oversee its operations. Five of the seven board members are

presence for such assignments. As these services are also often bundled with financial ratings, these will likely increase in tandem.

12 Sanjay Sinha directly owns 0.004% (1 share) of M-CRIL Myanmar Limited.

13 In March 2016, the United States Treasury issued an advisory that Myanmar had made progress in substantially addressing the FATF action plan at a technical level. Consequently, FATF removed Myanmar from the FATF Public Statement and now includes the jurisdiction in its Improving Global Anti Money Laundering (AML) and Countering Financing of Terrorism (CFT) Compliance ongoing process. Myanmar is not a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and has thus not been rated. Due diligence in relation to M-CRIL's relatively minor Myanmar operations has been undertaken and no material integrity risks were identified.

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independent; the chairman (Malcolm Harper) is a globally renowned expert in microfinance and social development. The board meets at least four times a year to oversee the company’s operations; assesses and helps direct key businesses, reviews the human resource strategy and policies, and decisions related to investment or expansion; and provides independent oversight of the analytical rigor and consistency of M-CRIL’s products and services.

15. M-CRIL follows a well-established protocol in the conduct of its social and financial ratings and assessments. The rating process starts with desk analysis of information and a subsequent field visit to the head office and operational branches, and the borrowers of the MFI. Unlike mainstream rating agencies, intensive field visits and interaction with clients are at the core of the M-CRIL approach. The M-CRIL ratings team prepares a detailed assessment report, cross-checks the data with the specific MFI (without discussing or disclosing the rating), and subsequently ensures an adequate quality review by its senior management. As M-CRIL has performed reviews, assessments, and diagnostics on MFIs in the same geographic region, it is well placed for a comparative analysis and performance benchmarking. The final report, along with additional factual details and data provided by the rated institution, is submitted to the rating committee, composed entirely of independent microfinance experts. D. Financial Performance

16. M-CRIL’s financial performance is characterized by stable revenue growth, which benefits substantially from the wide range of services and a diverse client profile. As discussed, the effect of the rapid tapering in its ratings-related business was offset by rising contributions from CPP assessments, client certifications, and social performance ratings of MFIs (Table 1). The technical assistance and advisory work, which is usually linked to larger-scale projects with longer completion cycles, also mitigated this impact. Notwithstanding this variability, M-CRIL’s revenues grew by an average of 15% in 2008–2015, with a tapering effect in the latter years.

Table 1: Revenue Share by Segment

17. M-CRIL has maintained relatively steady operating and earnings before interest, taxes, depreciation, and amortization margins since FY2010, after bringing in the requisite adjustments. M-CRIL’s cost base primarily consists of salaries for staff and fixed operating expenses (about 80% of costs), making the number and client-profile of completed assignments a key driver of operating profitability. The overseas assignments tend to have better payment terms and make a dominant contribution to profits, although they typically block staff resources for longer periods. The domestic assignments, specifically ratings, are on more price-competitive terms, but tend to be shorter engagements and allow for higher staff rotation. Given that the share of these two markets will remain roughly equal, the earnings before interest, taxes, depreciation, and amortization margin is expected to improve to 18%–20% (from a current average of about 15%), with a build-up in domestic ratings. M-CRIL’s move to its own premises in the second quarter of 2015 removed the drag of rental payments. M-CRIL has consistently ploughed back all earnings, declaring no dividends, which reflects the founders’ approach to building the organization.

Revenue Share by Segment 2010-11 2011-12 2012-13 2013-14 2014-15

Credit Rating 41.9% 60.6% 22.2% 12.6% 10.4%

Research/Assessment/Social Performance 20.0% 17.1% 18.9% 39.1% 43.4%

Technical Assistance, Advisory 8.5% 5.9% 33.7% 28.6% 21.0%

Others 5.9% 0.2% 3.1% 0.4% 2.4%

Training 7.1% 0.0% 1.3% 12.1% 4.0%

Livelihoods Programs 16.6% 16.2% 21.0% 7.2% 18.9%

Consolidated revenue 100.0% 100.0% 100.0% 100.0% 100.0%

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18. Given its relatively simple business model and conservative accounting treatment, M-CRIL’s balance sheet position reflects (i) substantial liquidity (current ratio in excess of 5x); (ii) consistent debt-free position; (iii) deployment of profits into liquid investments (cash and bank balances average 20% of assets); (iv) M-CRIL’s office premises (book value of about Rs30 million, current market value higher); and (v) a reasonably managed working capital cycle. The deposits and investments are a source of interest or dividend income to the company.

19. M-CRIL’s historical focus has been on delivering outstanding work quality and positioning itself as a practice leader in microfinance activities in the region, rather than pursuing market share and higher volumes of assignments. M-CRIL’s founders and staff actively pursue several publication and representation activities, which showcase the firm’s technical competence and build its brand equity even if these may not be directly revenue-accretive. Despite its focus on setting eminent standards through its work, M-CRIL’s 5-year average return on assets is at 9%, and return on equity is at 13%. Given the sustained profitability and reinvestment of all earnings, the book value of M-CRIL’s shares increased by 1.7x over a 5-year period. In the context of the company’s business, a liability-free status and clear capital structure are good indicators of the shareholder value created by the company.

III. THE ADB ASSISTANCE

A. The Assistance

20. The ADB assistance consists of an equity investment of the Indian rupee equivalent of up to $1.5 million in the form of new shares to be issued by M-CRIL after its merger with EDA. This is expected to constitute 25% of the share capital of the company.14 ADB will have the right to nominate a board member, and minority protection rights consistent with those usually obtained by ADB for such investments.

21. ADB’s investment will (i) bolster M-CRIL’s balance sheet to enable it to pursue its expansion in the DMCs outlined above; (ii) assist with institutional strengthening to enhance its domestic operations; and (iii) facilitate M-CRIL’s transition to an accredited CRA. ADB’s investment plan will follow a phased approach matched to achieving CRA accreditation, implementing the employee stock option plan, and ensuring compliance with ADB’s investment limits.

14 ADB’s investment will not exceed 25% of M-CRIL’s issued share capital nor result in ADB being the single largest shareholder of M-CRIL.

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B. Implementation Arrangements

22. ADB’s Private Sector Operations Department will monitor the project. M-CRIL will provide ADB with financial reports at predetermined regular intervals. These will include (i) quarterly reporting of key financial parameters, (ii) audited financial statements on an annual basis, and (iii) annual reporting on selected development indicators agreed by ADB and M-CRIL. Monitoring reports will be prepared and submitted to ADB regularly and at least annually.15 The first report will be submitted no later than 12 months after the first disbursement. As a condition precedent to ADB’s investment, M-CRIL will be required to provide a business plan that outlines the next steps toward (i) regulatory approvals for accreditation in India; (ii) regional expansion in the pre-specified markets by opening regional or in-country offices; and (iii) strengthening the organizational resources and skills base by hiring staff, providing training, and upgrading its information technology.

C. Value Added by ADB Assistance

23. ADB is expected to provide the following value additions: (i) Support financial inclusion. ADB’s funding will help M-CRIL further expand in

India and across Asia, creating opportunities to service a much wider client base of MFIs that lend to lower-income borrowers.

(ii) Strengthen microfinance industry and catalyze private sector funding for microfinance institutions. Providing uniform and transparent credit ratings against industry benchmarks and across multiple countries is expected to provide comfort to private sector financiers, thereby directing incremental capital to this industry.

(iii) Create value as a strategic shareholder. The proceeds of ADB’s investment will help support M-CRIL’s capital requirements until FY2019. As a strategic partner, ADB will provide value through a nominee director to the board and potentially attract future funding. Importantly, ADB’s investment will enable M-CRIL to qualify as an accredited CRA in India.

(iv) Support women borrowers. ADB’s assistance will help improve access to finance for women, who are the predominant borrowers from MFIs. The project has been classified as effective gender mainstreaming and will further boost support to women.

D. Risks

24. Key risks of the proposed project are: (i) Capacity risks. The founders’ and management’s ability to scale up M-CRIL’s

operations and execute them under the proposed business plan is a key risk. However, M-CRIL’s track record in these markets, its ability to attract and retain staff, the employee stock option plan, and the institutional links with ADB will help minimize this risk.

(ii) Regulatory risks. The microfinance sector remains exposed to regulatory changes, particularly as various regulators seek to strengthen their supervisory oversight of MFIs. Historically, however, the alignment between the regulators’ priorities and M-CRIL’s role in strengthening the microfinance ecosystem has been high.

15 ADB. 2013. Nonsovereign Operations. Operations Manual. OM D10/BP. Manila.

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(iii) Sector concentration risk. M-CRIL has acquired noteworthy competencies, reputation, and a position of expertise in the microfinance ecosystem, but it remains focused on this segment. Historically, however, M-CRIL has shown its ability to grow its relevance in line with the evolving priorities of stakeholders in the MFI sector.

(iv) Key person and transition risks. Given the long history of the founders’ involvement and the strong brand association, a key person risk exists. However, this risk should decline over time as the founders are transitioning M-CRIL to an even more professionally managed and employee-owned company. The founders are also implementing decentralization initiatives. The founders have committed to retaining the majority ownership of M-CRIL while ADB remains a shareholder.

(v) Reputational risk. ADB’s investment will allow M-CRIL to graduate to an eligible CRA status in India. Various funders or other stakeholders supporting financial inclusion initiatives may associate ADB’s name with the company and its products. Should the company be unsuccessful in its business plan, there may be an implied expectation of additional support from ADB, given its visibility as a large institution. The most important safeguard against reputational risk is the long-run track record of M-CRIL’s and EDA’s operations.

(vi) Exit risk. The entry valuation assumes an adequately conservative growth projection, which lowers the risk of ADB overpaying on its investment. However, investing in a small organization in a specialized field limits the exit options. ADB has sought to minimize this risk by negotiating a broad range of exit rights, including buyback arrangements for its stake.

IV. DEVELOPMENT IMPACT AND STRATEGIC ALIGNMENT A. Development Impact, Outcome, and Outputs

25. Project output and outcome. The core outputs of ADB’s investment of growth capital into M-CRIL are the (i) establishment of M-CRIL as a regional, professionally managed entity, offering a diverse suite of MFI assessment, advisory, and social and financial rating services; and (ii) establishment of M-CRIL as an accredited CRA in India.

26. The core outcome will be sustained poverty reduction in the region through MFI lending that is pro-poor, protects client interests, and is undertaken in a socially responsible manner. A wider application of services by M-CRIL and associated improvements made by the MFIs will lead to sustained access to funding from financiers, resulting in an expansion of the coverage areas and client base of these entities. The proposed investment sets a good example of the Finance++ approach, a step in fostering transfer of knowledge and skills within the Asian region. M-CRIL will also have an opportunity to extensively capitalize on ADB’s internal knowledge base and long-established support and involvement in developing rating agencies in Asia.16

16 This investment will utilize the expertise developed through the Office of Regional Integration and its work with the Association of Asian Credit Rating Agencies, along with ADB’s balance-sheet-based investing capacity, to foster regional expansion of locally developed institutions like M-CRIL.

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B. Alignment with ADB Strategy and Operations

27. Finance sector development is listed as one of five core specializations for operational focus under Strategy 2020, and re-emphasized in the midterm review of April 2014.17 This, along with the related midterm review objectives—consumer protection, financial literacy, development of regulatory and supervisory frameworks, as well as investment in risk management policies, for covering the unserved and underserved populations—fits very strongly with the core objectives of the proposed equity investment in M-CRIL.

28. According to the country partnership strategy for India, 2013–2017, ADB’s nonsovereign operations will continue to support the infrastructure and finance sectors by undertaking selective projects for physical and social infrastructure and financial infrastructure.18 The proposed transaction will support the development of microfinance in India, one of the financial infrastructures identified in the country partnership strategy, and a high priority for the government with growing emphasis on including private sector financing. Within this domain, the government and regulators have strongly emphasized better standards of transparency, governance, risk management and reporting for MFIs, which is the key thematic focus of the proposed investment.19 This investment also supports various other country partnership strategies related to the project.20

29. In 2000, recognizing that the financial landscape had changed, ADB formulated and approved the Microfinance Development Strategy, which identifies inadequate financial infrastructure, more specifically regulatory and supervisory systems, as a constraint to further growth of MFIs. The Microfinance Development Strategy also names investing and “developing financial infrastructure” as a key component of ADB’s sector strategy. Investing in M-CRIL aligns very well with these recommendations, by delivering a very high multiplier impact from the investment. This positive attribute was also very well established in the previous three investments by ADB—in CRISIL India, Rating Agency Malaysia, and Thailand Rating Services Limited, which became pillar institutions in their local markets and yielded very positive developmental results for ADB. Since the microfinance client base consists predominantly of women and the investment’s objective is sustained and fair access to credit and financial services for MFI borrowers, M-CRIL also links well with the priorities identified in ADB’s Gender Equality and Women's Empowerment Operational Plan, 2013–2020.21

V. POLICY COMPLIANCE

A. Safeguards and Social Dimensions

30. The proposed investment is classified as category C for environment, involuntary resettlement, and indigenous peoples under ADB’s Safeguard Policy Statement (2009). M-CRIL’s operations—primarily risk advisory, assessment, financial and social rating services for

17 ADB. 2014. Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific. Manila.

18 ADB. 2013. Country Partnership Strategy: India, 2013–2017. Manila.

19 This will also be the objective of M-CRIL in the new markets in the region where the company will set its foothold.

20 ADB. 2014. Country Partnership Strategy: Cambodia, 2014-2018. Manila; ADB. 2013. Country Partnership Strategy: Nepal, 2013-2017. Manila; ADB. 2016. Transforming Partnership: People’s Republic of China and Asian Development Bank, 2016-2020. Manila.

21 ADB. 2013. Gender Equality and Women's Empowerment Operational Plan, 2013–2020: Moving the Agenda Forward in Asia and the Pacific. Manila.

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MFIs—are expected to have negligible impacts on the environment and are not expected to trigger involuntary resettlement or result in impacts on indigenous peoples. The company will apply ADB's prohibited investment activities list, abide by applicable national laws and regulations, comply with the Safeguard Policy Statement, and establish and maintain an appropriate environmental and social management system satisfactory to ADB before disbursement of ADB’s investment. M-CRIL will comply with national labor laws and, pursuant to ADB’s Social Protection Strategy (2001), take measures to comply with the internationally recognized core labor standards.22 M-CRIL will report regularly to ADB on its compliance with such laws and the measures taken. Information disclosure and consultation with affected people will be conducted in accordance with ADB’s requirements. 31. The investment in M-CRIL is expected to result in greater access to finance for low-income borrowers, comprising 90% women in mostly rural and semiurban areas, and has been categorized as effective gender mainstreaming. M-CRIL has prepared and is committed to implementing a gender action plan outlining the activities and targets to achieve greater financial access for low-income borrowers, predominantly women. B. Anticorruption Policy 32. M-CRIL was advised of ADB’s policy of implementing best international practice relating to combating corruption, money laundering, and the financing of terrorism. ADB will ensure that the investment documentation includes appropriate provisions prohibiting corruption, money laundering, and the financing of terrorism, and remedies for ADB in the event of noncompliance. C. Investment Limitations 33. The proposed equity investment is within the medium-term, country, industry, group, and single-project exposure limits for nonsovereign investments. D. Assurances 34. Consistent with the Agreement Establishing the Asian Development Bank (the Charter),23 ADB will proceed with the assistance upon establishing that the Government of India has no objection to the assistance to M-CRIL. M-CRIL will enter into suitable finance documentation, in form and substance satisfactory to ADB.

VI. THE PRESIDENT’S DECISION 35. The President, acting under the authority delegated by the Board, has approved the equity investment of the Indian rupee equivalent of up to $1,500,000 from ADB’s ordinary capital resources to Micro-Credit Ratings International Limited for Strengthening the Microfinance Ecosystem Project, and hereby reports this action to the Board. 14 July 2016

22 ADB. 2003. Social Protection Strategy. Manila (adopted in 2001).

23 ADB. 1966. Agreement Establishing the Asian Development Bank. Manila.

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Impacts the Project is Aligned with:

Increased access for MFIs to long-term funding.

Improved access to finance for low-income borrowers in markets covered by MCRIL.

(SDG 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all)

Results Chain Performance Indicators with Targets

and Baselines

Data Sources and

Reporting Risks

Outcome

Loan portfolio of MCRIL’s clients using newly introduced services expanded

a. Introduce MCRIL’s rating, advisory, and impact assessment services in four additional markets by 2025 (2016 baseline: 0)

a–c. ADB’s annual monitoring report

Lack of regulatory support in target markets

Lack of client demand for services

b. Number of MFIs in new markets using MCRIL’s rating, advisory, or impact assessment services increases to 25. (2016 baseline: 0)

c. Loan portfolio of MCRIL’s MFI clients increases by a factor of 3 by 2023 (2016 baseline: 0)

Outputs

1. MCRIL accredited as credit rating agency in India

a. MCRIL obtains approvals from the Securities Exchange Board of India and the Reserve Bank of India

a–b. ADB’s annual monitoring report

Regulatory risks and possibilities of procedural delays

MCRIL unable to hire and deploy appropriate staff in target markets

2. MCRIL expanded to at least four new markets and provides greater access to finance for low-income borrowers (predominantly women in rural and semi-urban areas), facilitated by MFIs assessed, advised, and rated by MCRIL.

b. MCRIL establishes branch or representative or joint venture offices in four DMC markets.

c. 1.5 million lower- or marginal-income borrowers (of whom at least 90% are women) benefit from broader access to finance from MFIs, by 2022.

d. 200,000 first-time borrowers (of whom at least 90% are women) benefit from broader access to finance from MFIs, by 2022.

e. By 2022, training and capacity building of 650 women staff who deal with end-borrowers or clients (more than 90% of whom are women) on aspects like loan assessment, transparent disclosure, fair

c–g. MCRIL tracker

12 Appendix 1

Results Chain Performance Indicators with Targets

and Baselines

Data Sources and

Reporting Risks

practice, avoiding over-indebtedness and adopting fair and acceptable collection practices.

f. 25 MFIs or development organizations covered by MCRIL research, which includes gender issues, by 2022.

g. 10 events or other mechanisms organized, by which MCRIL disseminates gender issues, by 2022.

Key Activities with Milestones

Output 1

(i) ADB infuses the first tranche of its investment, up to 15% of the shareholding of the company (August 2016)

(ii) MCRIL complies with all first-tranche conditions precedent, principally the court approvals for the merger with EDA (August 2016)

(iii) MCRIL completes the filing for accreditation with the regulatory agency, SEBI (October 2016)

Output 2

(i) ADB infuses its second tranche of investment in the company (August 2017)

Inputs

ADB: equity investment of up to the Indian rupee equivalent of $1.5 million

Assumptions for Partner Financing

Not applicable.

ADB = Asian Development Bank, EDA = EDA Rural Systems Pvt Limited, DMC = developing member country, MCRIL = Micro-Credit Rating International Limited, MFI = microfinance institution, SDG = Sustainable Development Goal, SEBI = Securities and Exchange Board of India. Source: Asian Development Bank.

Appendix 2 13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=48304-001-4

1. Sector Overview 2. Ownership, Management, and Governance 3. Details of Implementation Arrangements 4. Contribution to the ADB Results Framework 5. Financial Analysis 6. Country Economic Indicators 7. Summary Poverty Reduction and Social Strategy 8. Safeguards and Social Dimensions Summary 9. Gender Action Plan Supplementary Documents 10. MCRIL and EDA Evolution

SECTOR OVERVIEW

1. Microfinance institutions (MFIs) are a critical means of expanding financial inclusion in developing member countries (DMCs) of the Asian Development Bank (ADB) because micro-credit is their key product. MFIs play an indispensable role in helping the poor obtain access to finance and mitigating the adversities stemming from the unreliability of their income. MFIs have become essential in delivering credit and financial services to the smallest and remotest segments of lower-income populations, i.e., those deemed least creditworthy, who do not have direct access to credit from the commercial banking systems in DMCs.1 2. MFIs rely on wholesale sources of debt or subordinated funding—principally through commercial banks, DFIs, foundations, trusts, and private equity or capital asset managers—to fund their onlending operations. Most DMCs and their banking sector regulators do not allow MFIs to access retail deposits, which arguably is the correct approach since MFIs’ capitalization levels, access to liquidity, and overall risk management and governance standards are still evolving, making them financially susceptible and less creditworthy for directly accessing public savings.2 Further, while regulatory oversight of MFIs is steadily improving, it is often as a sharp response to MFI credit-risk and governance crises,3 usually constraining liquidity and access to funding for even the better-managed and better-governed MFIs. Figure 1 shows the capital-structure profile of a regionally diverse sample of MFIs, which underscores the point about dependence on institutional debt, and the diminishing contribution of public or client savings. The immediate future is likely to reflect further reliance on external debt since access to equity and contributions of earnings have been constricted, and MFI earnings have generally come under pressure from greater competition and more credit losses. This trend highlights the role and contribution of the kind of risk assessment work undertaken by Micro-Credit Ratings International Limited (MCRIL) for the debt providers.

1 In several countries, where private and state-owned banks are ill-positioned to cover the vast market, they now use

MFIs as a strategic choice—as agents or an independent channel to deliver credit, savings, insurance, and other financial products and services to the underserved client category. This model of “correspondent banking” is using the more nimble and widely present MFIs to widen coverage and source clients (borrowers and depositors) for the larger commercial banks.

2 A recent example of this transition is the case of Bandhan Financial Services Private Limited in India, which was

granted an approval to start commercial banking operations and access to public deposits, although it will need to maintain stringent capital, liquidity, and governance standards. Bandhan has a 15-year track record and relatively strong governance and reporting standards; such qualities are not seen often in MFIs.

3 The MFI crisis in Andhra Pradesh, India, which impacted access to funding for all institutions across India, was

often cited as an outcome of changes in the external operating environment. Similar MFI crises of individual institutions, and their sector-wide impact, were seen in the PRC, Indonesia, and the Philippines.

Figure 1: Capital-Structure Profile

Source: International Financial Inclusion Financing Data, 2015, Consultative Group to Assist the Poor (CGAP).

3. Universally, both across emerging and well-established DMC markets, concerns persist regarding disclosure, governance, and accounting standards and risk management in the development of MFIs.4 While the very few larger and developed institutions have progressed to better standards, the gap in the requirements of the risk takers (i.e., the commercial lenders) and the borrowing MFIs remains vast. This information gap is most significant for portfolio quality assessment, which is often not adequately and transparently evident from published accounts, and has generally been weakening, which only adds to the lenders’ concern. Figure 2 profiles the key countries or markets that are likely to be vulnerable to loan portfolio quality concerns,5 as reflected in high growth (y-axis) and penetration (x-axis) rates. For a majority of the DMCs, it is forecast that loan portfolios will weaken from current levels while penetration rates increase, which directly signifies the importance and value addition of specialized MFI risk-assessment services.

4 Several independent assessments have consistently highlighted these concerns as the foremost DMC microfinance

risk factor—among others, (i) the Microfinance Banana Skins reports of 2012, 2013, and 2015, which are global surveys of microfinance risks as seen by an international sample of practitioners, investors, regulators, and observers; (ii) MicroRate 2013, a survey of microfinance investment vehicles; (iii) ResponsAbility – Microfinance Market Outlook 2014; (iv) The Impact Investor’s Handbook – Lessons from the World of Microfinance (2011, 2014); and (v) Microfinance in South Asia – Towards Financial Inclusion for the Poor (World Bank).

5 A PAR30 (which implies the value of all loans outstanding that have one or more installments of principal past due

for more than 30 days) is a standard indicator of portfolio quality, and levels above 5%–7% (of total portfolio) are generally considered risky.

64.5

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2009 2010 2011 2012 2013 2014

Debt Equity Grant Guarantees Structured Finance

Figure 2: Countries with Substantial Deterioration in the Quality of Microfinance Institution Portfolios

4. This anticipation further distorts risk assessment, increases risk aversion and transaction costs for lenders, and negatively impacts the MFIs’ access to a sustained flow of long-term funding to their onlending operations. The ability of a specialized agency such as MCRIL to offer these risk advisory, assessment, and measurement services; reduce the transaction costs; and provide a wider reference base for lenders is the key economic rationale for MCRIL's business and a core rationale for this investment. 5. Regulations. The regulations governing microfinance activities have generally focused on reporting requirements and on setting minimum standards, which typically would allow a vast array of MFIs to continue their operations. Among the South Asian countries, Bangladesh, India, Nepal, and Sri Lanka regulate MFIs by law. India, as the largest country in South Asia, has the most diversified microfinance service providers—banks, nonbanking financial companies (NBFCs), societies, trusts, and cooperatives. The Microfinance Institutions (Development and Regulation) Bill, 2012 was tabled in Parliament in May 2012 and was examined by the Standing Committee on Finance, but is still to be enacted. However, considering the importance of the sector and the lessons from the Andhra Pradesh crisis, the Reserve Bank of India created a separate category of NBFCs, NBFC-MFIs, for extending loans to the microfinance sector. Since NBFC-MFIs contribute more than 80% of the outreach and microfinance portfolio, are directly supervised by the Reserve Bank, and operate under its directives, it can be said that the Indian microfinance sector is well regulated.

OWNERSHIP, MANAGEMENT, AND GOVERNANCE A. The Company, Sponsors, and Management 1. Company ownership and history. Micro-Credit Ratings International Limited (MCRIL) is engaged in the financial and social ratings of microfinance institutions (MFIs). It was one of four agencies globally that first specialized in microfinance ratings. MCRIL was established in 1998, in response to the need for performance assessments of small microfinance service providers. It provides standard comparisons of the financial, management, and mission-oriented performances of MFIs to facilitate the decision-making process of investors and lenders. The foundation for MCRIL’s activities was laid by its parent company, EDA Rural Systems Private Limited (EDA), which was set up in 1983 and has undertaken livelihood assessments, and monitoring and evaluation of microfinance programs for over 25 years across Asia. MCRIL was among the first agencies to be accredited by the IDB–CGAP Rating Fund1 and The Rating Initiative of ADA, Luxembourg.2 2. As a pioneer in developing rating frameworks and related assessment services, MCRIL has completed over 1,500 microfinance ratings, assessments, portfolio audits, evaluations, business planning review exercises, risk-diagnostic assessments, and microfinance-related sector reviews and financial advisory assignments across 32 countries, and has undertaken around 420 school assessments. Since MCRIL has completed assignments and assessed MFIs in various regional markets over the past 8–10 years (specifically in DMCs such as Cambodia, Indonesia, and Nepal, and more recently in markets such as the People’s Republic of China (PRC) and Myanmar), it is now well placed to implement its strategic plan to establish a permanent presence and local operating base in PRC. MCRIL’s major clients include : Asian Development Bank; Department for International Development of the United Kingdom; Food and Agriculture Organisation of the United Nations; Ford Foundation; International Finance Corporation; Mekong Private Sector Development Facility; National Bank for Agriculture and Rural Development in India; Pakistan Microfinance Network; Rural Microfinance Development Centre , Nepal; Swiss Agency for Development and Cooperation; United Nations Capital Development Fund; World Bank, among others.

Key Services

MCRIL EDA

Microfinance institutional ratings Value chain assessments Loan portfolio audits Ratings of producer organizations Client protection assessments (SMART Campaign)

Evaluations of microfinance program support

Social ratings, Truelift assessment Social performance management

1 The Inter-American Development Bank (IADB) and the Consultative Group to Assist the Poorest (CGAP) have

launched a joint initiative—the Microfinance Rating and Assessment Fund (the Rating Fund)—aimed at improving the quality, reliability, and availability of information on the risk and performance of MFIs. The Rating Fund provides partial financing of rating and assessment services for MFIs. It finances both financial and social impact ratings or assessments of MFIs.

2 The Rating Initiative was launched by the Luxembourg microfinance agency ADA (Appui au Développement Autonome), in collaboration with the Government of Luxembourg, Microfinance Initiative Liechtenstein (MIL), Swiss Development Cooperation (SDC), Oxfam Novib, Österreichische Entwicklungsbank (OeEB), the Principality of Monaco, responsAbility, BlueOrchard, and the Social Performance Task Force (SPTF). The project operates as a public–private partnership and part-finances ratings of MFIs, and allows MFI lenders and investors access to specific rating-related details.

Strategic business planning support NGO assessments Training of MFI managers, regulators, Low-cost school assessments policymakers, donor staff Financial inclusion studies Documentation of programs Research and evaluation of microfinance and financial inclusion programs

3. Sponsors and founders. EDA owns about 91% of MCRIL, the balance is owned by MCRIL employees. MCRIL and EDA are merging under a process expected to be completed by July 2016. MCRIL will be the surviving entity carrying on the combined businesses of MCRIL and EDA. The founders of MCRIL, Sanjay Sinha and Francis Sinha, are the predominant owners of EDA, together holding almost 100% (with a small minority held by a key employee). MCRIL has one wholly owned subsidiary incorporated in Myanmar, established to carry on its operations there. EDA is an operating–holding entity and has been engaged in nonfinancial rating activities for the microfinance industry, such as social performance ratings, assessment of inclusiveness, social impact studies, adoption of the Client Protection Principles of the Smart Campaign, and training. 4. The ownership structure of MCRIL is expected to evolve, resulting in a greater proportion of employee shares and a reduction in the founders’ ownership, which will help further align the stakeholder interests in this very skills- and people-intensive business, and will strengthen the long-term commitment of key staff to the organization. This approach has also worked very effectively for most global and domestic Asia-based credit rating agencies (CRAs). 5. Management. MCRIL is professionally managed, with a strong team of experienced and well-qualified staff in the areas of business development, rating services, financial analysis, business and organizational process analysis, operations, and research and publications. A summary profile of MCRIL’s senior management is given below. MCRIL understands the need to comprehensively strengthen the management team, streamline its internal processes further, and bring in greater specialization and decentralization to its operations as a critical part of their post-ADB investment activities. ADB draws comfort from the management’s and the founders’ receptivity to these needs, and the willingness to structure this formally in the proposed business and investment plan. 6. Swetan Sagar, chief operating officer. Swetan Sagar graduated as a master of business administration (MBA) from the Indian Institute of Forest Management, Bhopal. He has more than 15 years of professional experience across nine countries in South Asia and Southeast Asia. He leads the research initiatives at MCRIL and EDA. His key areas of expertise include designing large-scale research projects; conducting monitoring and evaluation of programs; promoting micro, small, and medium-sized enterprises (MSMEs); and developing BDS markets. He also has significant experience in capacity and risk assessment of MFIs. 7. Gunjan Grover, senior vice president. Gunjan Grover holds an MBA in rural management from the Institute of Rural Management, Anand (IRMA), India (gold medallist); a company secretary degree (ACS) from the Institute of Company Secretaries of India, New Delhi; and is a CFA charter holder. He has more than 10 years of experience and has worked in 14 countries across Southeast Asia, South Asia, Commonwealth of Indipendent States, and Africa in credit ratings, capacity and risk assessments, systems’ evaluation, and loan portfolio assessments of MFIs. 8. Board profile. Despite its shareholding profile and accumulation of ownership by the founders, MCRIL follows high standards of transparency and governance, and has established

a board of directors with strong backgrounds and experiences in finance sector regulation, MFI operations, rural and commercial banking, and academia, to oversee its operations. Five of the seven board members are independent; the chairman is a globally renowned expert in microfinance and social development. These are strong indicators of the governance and transparency standards that form the backbone of MCRIL’s operations. MCRIL’s expertise and authority give it a competitive edge over other its peers. 9. The board oversees the company’s operations; helps assess and direct its key business; guides decisions on human resources, investments, and expansion; and provides an overarching and independent oversight of the analytical rigor and consistency of MCRIL’s products and services. 10. Both founders are members of the board, with equal voting rights to the independent members, but do not have a formal veto, control or blocking right on any matter,3 which ensures collective decision-making and alignment of interests between the founders, the management, and the board. The members of the board are profiled below: 11. Malcolm Harper, chairman. A professor emeritus of the Cranfield School of Management in the United Kingdom, Harper is an internationally renowned expert in the field of development theory, microenterprise promotion and microfinance, financial inclusion, and livelihoods of low-income families. His research and consultancy work has been supported by a wide range of national, international, and nongovernment development agencies. His experience and knowledge in these fields stretches across Asia and Africa. 12. Yogesh Chand Nanda. An alumnus of Delhi School of Economics, he began his career with the State Bank of India and the Reserve Bank of India (RBI). He later joined India’s National Bank for Agriculture and Rural Development (NABARD) and eventually was appointed managing director and chairman of NABARD. He is also a former chairman of Agriculture Finance Corporation. After his retirement, he was appointed a full-time member of the National Commission of Farmers by the Government of India. During integrity due diligence in preparation of the proposed project, Nanda was identified as politically exposed person in MCRIL’s structure. However, Nada is a career bureaucrat and has been selected to these positions by independent selection panels that do not have political affiliations. Further, his involvement with MCRIL came only after his retirement from all these institutions and as one of the five independent board members; he has no power to influence the operations or key decisions of the company. Brij Mohan. Brij Mohan started his career in the Indian Statistical Service and the Department of Company Affairs of the Government of India before joining the Industrial Development Bank of India in 1986. In 1990, he opted to join the Small Industries Development Bank of India (SIDBI) upon its formation. As a senior member of SIDBI’s management he played a pivotal role in SIDBI’s extensive engagement with the microfinance sector in India. Executive Director, Indian Institute of Banking and Finance

3 In the event of a dispute or unresolved matter at board level, the shareholders (i.e., the founders) can exercise

their rights and proceed with their preferred decisions, but this, as stated by the founders, has never occurred in the company’s history. The ADB investment documentation will revise the board and shareholder consent arrangements to ensure that ADB has the benefit of minority protection provisions consistent with those usually obtained for similar investments.

13. HK Pradhan. Pradhan is professor of finance and economics at XLRI Jamshedpur, where he also serves as the member of the Board of Governors and chairs the Doctoral Programme. He is at present a member of the Reserve Bank of India’s Technical Advisory Committee on Money, Foreign Exchange, and Government Securities Markets; an independent director of the SBI Mutual Fund; and a member of the Index & Option Committee of the National Commodity and Derivative Exchange, Mumbai. He has worked as the Pacific regional advisor for the Commonwealth Secretariat, London, while serving concurrently as the resident debt advisor with the Ministry of Finance, Government of Fiji Islands, during 2005–2007. 14. Frances Sinha, managing director, EDA. A graduate of Oxford University and the London School of Economics, Frances Sinha has led EDA for the past 30 years (she is a cofounder and board member of EDA). She contributed to the development of MCRIL as an associate company of EDA and led the teams for impact assessment, social performance management, and market research with a focus on cost-effectiveness, gender issues, poverty analysis, and practical reporting throughout India and in various countries of Asia and Africa. For MCRIL, she pioneered the development of a social rating methodology to complement credit ratings. 15. Sanjay Sinha, managing director, MCRIL. An alumnus of Oxford University, Sanjay Sinha earned his master of philosophy degree in economics from Jesus College. He has over 35 years of experience in the areas of microfinance, financial inclusion, and rural livelihoods. He pioneered the financial rating tool, making MCRIL one of the first organizations worldwide to initiate the rating of MFIs. He has provided consultancy and advisory services to numerous agencies such as the Asian Development Bank, BRAC Bank, DFID, CGAP, Ford Foundation, World Bank, among others. He is an internationally acclaimed authority on inclusive finance; in recognition of his contribution he served as a Member of the UN Advisors Group on Inclusive Financial Sectors during the Advisor Group’s tenure, 2006–2008. B. Business Overview and Strategy 16. MCRIL is arguably the most reputed and established regional agency specialized in advisory and rating services. It offers a well-diversified range of products and services to its clients while simultaneously maintaining its focus on its core competencies—MFI risk assessments, governance and transparency, operations and portfolio quality analyses, social performance assessments and ratings, sector and policy reviews centered on financial inclusion, and MFI-related regulations and policy reforms. After the integration of EDA into MCRIL, the business, product, and client portfolio of the combined entity will benefit from both revenue and geographic diversification while still retaining overall focus and specialization. 17. Operations. MCRIL follows a well-established protocol in the conduct of its ratings and assessments. The rating process starts with a desk analysis of information and subsequent field visits to the head office, operational branches, and the borrowers of the MFI. Unlike mainstream rating agencies, intensive field visits and interaction with clients are at the core of the MCRIL approach. Its rating team prepares a detailed assessment report, cross-checks the data with the specific MFI (without discussing or disclosing the rating), and subsequently ensures adequate quality review by its senior management. As MCRIL has performed reviews, assessments, and diagnostics of MFIs within the same geographic region, it is well placed for a comparative analysis and benchmarking performance. 18. The final report, along with additional factual details and data provided by the rated institution, is placed before the rating committee for a decision. Uniquely among all specialized

advisory and rating service companies, MCRIL’s rating committee consists entirely of microfinance experts who are independent of MCRIL’s management and its founders. It is made up of senior bankers, commercial lenders, regulators, and chartered accountants, each with independent sources of income and none significantly dependent on earnings from MCRIL. The founders participate in but are not voting members of the committee. Each report is referred to a subcommittee consisting of two members of the rating committee; recusal is applied whenever a member of the rating committee has any existing business relationship with the MFI to be rated. It is only after discussion with the rating team (and, if necessary, after seeking further clarification from the MFI) that the committee decides the final rating for the MFI. These practices are born out of the significance attached by MCRIL to analytical rigor, objectivity, independence of judgment, transparency, and avoidance of conflicts of interest. MCRIL also has adequate procedures to handle conflict-of-interest situations with those MFIs that are its clients for risk advisory, risk-assessment, and process-review engagements. These make up a significant proportion of its client base, but MCRIL observes a cooling period of 3 years before such entities are considered as clients for ratings. This arrangement also works well from a business perspective because most MFI prefer an initial diagnostic input, followed by a plan to improve their governance and disclosure and operating procedures, which enhances their prospects for a better risk assessment or rating. 19. Future strategy. MCRIL intends to follow a medium-term three-pronged strategy to capitalize on emerging opportunities and realize the proposed investment objectives. This will involve (i) consolidating the activities of EDA and MCRIL into a single entity, as a precondition of (ii) strengthening the organization’s staff, resources, and internal processes to expand outreach and market share in India once MCRIL is accredited as a CRA by RBI; and (iii) utilizing its current experience, skills, competence, and client relations to widen its geographic coverage by establishing more permanent operations in the identified key markets. MCRIL has already shown its commitment to the regional expansion strategy by setting up a subsidiary in Myanmar and looking at a possible joint venture in the PRC. 20. The overall strategic plan—which was discussed extensively with ADB and aligned with common objectives—benefits from a phased investment approach and an ability to track progress, outcomes, and capital requirements against a plan and to time ADB’s proposed equity infusion accordingly. The approach also helps diversify risks since MCRIL is well placed to capitalize on the market opportunities after being accredited by the RBI, when the incremental cash flows and earnings from its India operations can help partly bear the initial investments and the start-up expenses of the overseas operations, as well as deliver interim financial returns to shareholders. MCRIL will also deploy its existing cash flows and cash reserves to part-fund the proposed strategy.

21. The existing MFI borrowing base in India (globally the largest microfinance market) offers MCRIL an opportunity to scale up its business, which will yield more predictable cash flows for supporting the early market expansion into key countries such as Cambodia, the PRC, Indonesia, and Nepal, where microfinance penetration is expected to increase with greater access to long-term funding. India leads the Asian market in terms of active MFI borrowers with 49 million; Bangladesh, 19 million; Viet Nam, 8 million; Philippines, 5 million; Pakistan, 3.7 million; China, 2.7 million; Cambodia, 2.3 million; Indonesia, 1.3 million; Nepal, 1.2 million; and Sri Lanka, 0.6 million.4

4 Source: Microfinance Information Exchange Market (MIX Market), gathered on 4 April 2016

DETAILS OF IMPLEMENTATION ARRANGEMENTS

1. Given the strong track record of Micro-Credit Ratings International Limited (MCRIL) with regard to its operations, rigor in internal procedures, good governance and disclosure practices, and the oversight by an independent board, the project team is of the opinion that the operating arrangements for this investment, in its post-approval (holding period) stage, will not require substantial amendments and changes to MCRIL’s current practices. The business plan for the proposed investment captures the next steps in (i) seeking regulatory approvals for accreditation in India, (ii) pursuing regional expansion in the pre-specified markets by opening regional or in-country offices, and (c) strengthening the organizational resources and skills base by hiring new staff, providing training, and upgrading the information technology. 2. The milestones to be tracked in the post-approval stage involve

(i) compliance with all terms and the specific conditions precedent; (ii) the progress of approvals from the Securities and Exchange Board of India (SEBI)

and the Reserve Bank of India (RBI) for MCRIL’s accreditation as a credit rating agency (CRA).

(iii) the company’s regional expansion activities, capital spending, and staff hiring plan.

3. Because some of the milestones require a longer execution period and are sensitive to changing business conditions and market opportunities, the availability period for ADB’s equity investment was kept at 3 years from the date of first disbursement. Some milestones relating to the hiring of new staff, staff training, realignment of the organizational structure, and establishment of overseas offices cannot be pegged to rigid timelines. An extended availability period will give MCRIL an opportunity to pace its activities and progress around specific opportunities, and will also allow the Asian Development Bank (ADB) to review progress and to time the disbursement of the second tranche accordingly. Merger. The merger of MCRIL with its parent company, EDA Rural Systems Private Limited (EDA), is a condition precedent to ADB’s investment. Given the merits of this restructuring, the sponsors had already planned the merger, and the inclusion of ADB as an institutional investor accelerated its execution. 4. The merger is at an advance stage and awaiting the issuance of the final approval documents by the courts in India. Since MCRIL and EDA have functioned collectively as one organization, often servicing a common set of clients and frequently rotating or interchanging their staff, the operational issues in managing this merger are minimal. The expected benefits relate to greater client focus and synergies in the new markets; streamlining of some costs of support functions (e.g., audit, finance, information technology); reduction in statutory obligations (audits, separate board meetings); and overall efficiency gains for the merged entity (MCRIL).

5. Accreditation. ADB will invest its first tranche of investment in the merged entity to allow MCRIL to be considered eligible for CRA accreditation by RBI and SEBI. ADB will qualify as an eligible promoter-investor for these purposes, and additionally MCRIL will meet minimum net worth requirements (applicable SEBI regulations require that a CRA have a minimum net worth of Rs50 million, and have a promoter-shareholder holding at least 10% of it). It is expected that it will take at least 8–10 months between ADB’s first-tranche investment and the

completion of the SEBI and RBI approval process, i.e., the accreditation of MCRIL.1 The investment of the second tranche is expected to be made after the accreditation process, within the limits of 25% of the merged company’s total equity, or a $1.5 million investment limit. The investment outlays in the interim would be partly deployed toward funding the India-focused operations.

6. Overseas expansion and staff hiring. MCRIL will be utilizing a substantial part of ADB’s proceeds for its overseas expansion, largely to fund initial set-up expenses, payments for office premises and physical infrastructure, and for hiring on-site staff. These expenses will be outlined in MCRIL’s annual budget plans and part-funded by ADB’s equity infusion. 7. Operating arrangements relating to staffing will include hiring for the new positions; widening the analytical staff pool and increasing specialization in new markets and products; and centralizing certain administrative and support functions around new staff roles (such as company secretary and chief financial officer). It is anticipated that ADB’s equity investment will further elevate MCRIL’s stature as an employer, and will help attract a wider and better talent pool.2 This will also be reinforced by the employee share option plan arrangements, which ADB has structured into the terms of investment.

1 The process laid out by SEBI is transparent and the guidelines and requirements are well defined. MCRIL, which

has been in the business of microfinance institution (MFI) ratings for several years, has already adapted and practiced the internal processes and control arrangements that are recommended for CRAs.

2 MCRIL still is seen in high regard amongst fresh graduates from specialized premiere schools like the Institute of

Rural Management at Anand, where MCRIL is a preferred employer; largely drawn in by the profile and reputation of the Sponsors.

CONTRIBUTION TO THE ADB RESULTS FRAMEWORK

No. Results Framework Indicators (Level 2)

Targets Methods or Comments

1 Microfinance loan accounts opened or end borrowers reached

Total number of microfinance borrowers increased by 1.5 million by 2022 Total number of female microfinance borrowers increased by 1.35 million by 2022

90 percent of total microfinance borrowers are women

Source: Asian Development Ban

FINANCIAL ANALYSIS 1. Background. The Asian Development Bank (ADB) proposes to invest the lesser of the Indian rupee equivalent of $1.5 million or 25% of the net worth in the merged entity of Micro-Credit Ratings International Limited (MCRIL) and EDA Rural Systems Private Limited (EDA); MCRIL will be the post-merger entity. The proposed pre-money valuation of the investment is based on the reported book value of the merged entity, to be calculated with the latest available audited results, prior to the investment. The following factors are considered in ADB’s proposed valuation:

(i) The book-value approach is considered more appropriate for this investment, given (a) MCRIL’s simple business model and cash-flow pattern; (b) its consistently conservative accounting policies; (c) the absence of any third-party or external liabilities; (d) its asset base consisting almost entirely of the company’s own office premises (fixed assets), and cash and good-quality receivables as current assets; and (e) assets funded entirely through the sponsors contribution (initial capitalization) and accrued profits or retained earnings of the company over the past 20 years. In summation, given the absence of any financing complexity and the company’s conservative accounting, the reported book value is a very good indicator of the fair value of MCRIL.

(ii) ADB’s valuation proposal factors in (a) the strong reputation of the Sponsors and the highly regarded stature of MCRIL globally—as a specialized advisory, rating, training, and research-focused entity—built over 20 years of operations; (b) MCRIL’s track record in India, and its focus and alignment with ADB’s DMC markets; (c) minimal start-up risk for ADB, since MCRIL has staff resources and proven management competence to expand its client and product coverage to these markets; (d) a well-established trend of operating profitability (since inception) and reinvestment of all its earnings in its core business; (e) willingness to work with ADB, demonstrated by the sponsors agreement to some onerous conditions specified by ADB; and (f) the expected rate of return from the investment, even after assuming moderate growth and a tempered impact of ADB’s investment, and the reasonably visible prospects of both annual dividends and capital gains from an exit.

(iii) The investment plan structured by ADB is substantially de-risked, since the equity infusion will be in at least two tranches, with high visibility of the improving business and earnings prospects of the investee. The valuation factors in the exit arrangements structured by ADB, which allow for a clear path to divestment within a reasonable holding period, if other options like a third-party trade sale do not materialize.

(iv) The proposed valuation is in the lower range of the fair value estimated in the independent valuation exercise.

(v) This exercise should also be viewed in the context of materiality, e.g., in view of the investment size ($1.5 million equivalent) as well as the business-plan and funding requirements of the company. Any excessive reengineering of assumptions, valuation approaches, and multiples will not translate into any meaningful reduction in ADB’s exposure. On the other hand, it may leave MCRIL in the suboptimal situation of a partially funded business plan.

2. With ADB having a 25% stake, estimated to be acquired by fiscal year (FY) 2018, the sponsors’ holdings will be reduced to 60%. The employees’ stock options, a critical element of ADB’s investment terms, will increase to nearly 15% within 2 years of ADB’s entry as an investor. The table below gives the indicative details and the change in the holding structure.

Shareholding Stakes in Micro-Credit Ratings International Limited

Shareholders FY2015A FY2016E FY2017E FY2018E

Sanjay Sinha 47.37% 45.97% 37.45% 29.95%

Frances Sinha 47.25% 45.85% 37.45% 29.95%

Employee Stock Option Plan 5.26% 8.06% 10.00% 15.00%

Othera 0.13% 0.13% 0.11% 0.10%

Asian Development Bank 15.00% 25.00%

Total 100.00% 100.00% 100.00% 100.00% a “Other” refers to one individual, Upendra Misra, a long-term staff member and one of the initial team members of EDA.

3. Independent valuation of the company. Grant Thornton India was commissioned by the project team to conduct an independent valuation of the merged MCRIL–EDA entity, based on various approaches—five methodologies, three variants of discounted cash-flow analysis, a comparable market multiple, and comparable transaction multiple. 4. Forecast returns. ADB’s investment horizon in MCRIL is expected to be in the range of 5 to 7 years, assuming that the first tranche is disbursed before the end of March 2017. An exit through a trade sale after 5 years is expected to yield an adequate risk-adjusted return.

COUNTRY ECONOMIC INDICATORS (Updated as of 28 April 2016)

1 Data from 2011 are based on new GDP series base year 2011-12) except overall GDP and sectoral growth rates in

2011, which are based on old GDP series (2004-05). 2 Based on Advanced Estimates.

3 The liquidity data provided here pertains to M3.

4 Consolidated including federal as well as states.

5 Budget Estimates.

6 April 2015 to December 2015.

7 As of December 2015.

Sources: Economic Survey 2015–2016, Ministry of Finance, Government of India. Ministry of Finance, Government of India. Ministry of Statistics and Programme Implementation, Government of India. . Reserve Bank of India. Reserve Bank of India Bulletin (various years), Database on the Indian Economy, Reserve Bank of India http://dbie.rbi.org.in (accessed 28 April 2016)

Item Fiscal year

2010 20111 2012 2013 2014 2015

A. Income and Growth

1. GDP per capita ($, current) 1,441.4 1,494.9 1,481.2 1,489.4 1,613.2 1614.4

2. GDP Growth (%, in constant 2011-2012 prices) 9.3 6.2 5.6 6.6 7.2 7.62

a. Agriculture 7.9 3.6 1.5 4.2 (0.2) 1.148

b. Industry 9.2 3.5 3.6 5.0 5.9 7.348

c. Services 9.8 8.2 8.1 7.8 10.3 9.248

B. Saving and Investment (% of GDP)

1. Gross Domestic Investment 36.5 39.0 38.6 34.7 34.2 —

2. Gross Domestic Saving 33.7 34.7 33.8 33.0 33.0 — C. Money and Inflation (annual % change)

1. Consumer Price Index 10.5 8.4 10.3 9.4 5.9 4.9

2. Total Liquidity (M2)3 16.0 13.5 13.6 13.6 11.9 10.8

D. Government Finance (% of GDP4

1. Revenue and Grants 20.7 19.9 20.2 20.0 21.5 21.85

2. Expenditure and Onlending 27.6 27.7 27.1 26.6 28.5 28.451

3. Overall Fiscal Surplus (Deficit) (6.9) (7.8) (6.9) (6.7) (7.0) (6.5)51

E. Balance of Payments

1. Merchandise Trade Balance (% of GDP) (7.0) (10.3) (10.7) (7.2) (6.7) (5.7)

2. Current Account Balance (% of GDP) (2.3) (4.3) (4.8) (1.7) (1.3) (1.4)6

3. Merchandise Export ($) Growth (annual % change)

40.7 21.9 (1.8) 4.9 (1.5) (15.8)

4. Merchandise Import ($) Growth (annual % change)

28.5 32.4 0.2 (8.4) (0.3) (15.3)

F. External Payments Indicators

1. Gross Official Reserves (including gold, in weeks of current year’s imports of goods)

42.9 31.3 31.0 35.2 39.7 48.8

2. External Debt Service (% of exports of goods and services)

4.3 6.0 5.9 5.9 7.5 —

3. Total External Debt (% of GDP) 18.2 19.6 22.3 24.2 23.8 24.17

( ) = negative, — = data not available, GDP = gross domestic product.

G. Memorandum Items

1. GDP (current prices, Rs billion) 77,953 87,360 99,513 112,728 124,882 135,67249

2. Exchange Rate (Rs/$, average) 45.6 47.9 54.4 60.5 61.1 65.5

3. Population (million) 1,186 1,220 1,235 1,251 1,267 1,283

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY Country: Regional Project Title: Micro-Credit Rating International Limited:

Strengthening the Microfinance Ecosystem Project

Lending/Financing Modality:

Equity investment Department: Division:

Private Sector Operations Department Financial Institutions Division

I. POVERTY AND SOCIAL ANALYSIS AND STRATEGY

Targeting classification: general intervention

A. Links to the National Poverty Reduction and Inclusive Growth Strategy, and Country Partnership Strategy

Supporting finance sector development is a key focus of development assistance for the Asian Development Bank (ADB), in line with the tenets detailed in ADB’s Private Sector Development Strategy and in its enhanced poverty reduction strategy.

a ADB’s Private Sector Development Strategy refers specifically to ADB’s role in

strengthening the finance sectors in its developing member countries (DMCs). The investment also aligns with the country partnership strategies for India, where Micro-Credit Ratings International Limited (MCRIL) will potentially expand its operations, and for other regional DMCs (Cambodia, People's Republic of China, Indonesia, Myanmar, and Nepal) that are targeted in MCRIL’s phased expansion approach. Improving access to finance, especially for low-income borrowers in rural and semiurban areas, facilitated through microfinance institutions (MFIs), is an integral part of the national poverty reduction and growth strategies in the regional DMCs where MCRIL plans to expand its operations.

B. Results from the Poverty and Social Analysis during Project Preparation or Due Diligence

1. Key poverty and social issues. The microfinance sector targets borrowers at the bottom of the pyramid

who often rely on informal channels (friends, family, and informal moneylenders) for credit. Access to finance, and assistance in mitigating the adversities from the unreliability of their incomes, is a key issue for lower-income households. As private and state-owned banks are unable or ill-positioned to deliver credit and financial services to the smallest and remotest segments of low-income populations (those deemed least creditworthy), direct access to credit is a major challenge. MFIs generally lack established procedures for consumer protection, transparency, and fairness, which has resulted in some of them exploiting the vulnerability of borrowers. The financing constraints are more severe in less-developed countries, where financial markets are not well developed, regulatory and legal frameworks are weak, informational asymmetries are persistent, and risk management systems are not as robust. A developed finance sector helps mobilize and allocate resources, and manage risks, contributing to private sector development.

2. Beneficiaries. ADB’s investment in MCRIL will strengthen the institutional capacities of the microfinance sector and will improve access to microfinance in ADB DMCs. It will allow MCRIL to widen its market coverage for risk advisory, assessment, and rating services to MFIs, create opportunities for MFIs to service a much wider client base, and provide commercial and institutional lenders with a more transparent and consistent basis for MFI evaluation.

3. Impact channels. A wider application of services by MCRIL and associated improvements made by the

MFIs will lead to sustained access to funding from financiers, resulting in an expansion of the coverage areas and client base of these entities.

4. Other social and poverty issues. – None.

5. Design features. The investment will impact MFI activities nationally and regionally through (i) better

access to MFI advisory, assessment, and rating services in ADB DMCs, which will help MFIs access long-term funds from institutional and commercial lenders; (ii) greater ability for responsible MFIs to expand their coverage and loan portfolio; and (iii) greater access to finance for low-income borrowers.

C. Poverty Impact Analysis for Policy-Based Lending

Not applicable.

II. PARTICIPATION AND EMPOWERING THE POOR

1. Summarize the participatory approaches and the proposed project activities that strengthen inclusiveness and empowerment of the poor and vulnerable in project implementation. – While MCRIL’s operations do not directly target the poor and vulnerable, MCRIL will assess the MFIs for their social practices with their borrowers, including fairness, inclusiveness, and client protection. Any gaps with the standard social practices will have to be bridged by the MFIs, and will be monitored. 2. If civil society has a specific role in the project, summarize the actions taken to ensure their participation. – Not applicable. 3. Explain how the project ensures adequate participation of civil society organizations in project implementation. – Not applicable. 4. What forms of civil society organization participation are envisaged during project implementation? – Not applicable. 5. Will a project level participation plan be prepared to strengthen participation of civil society as interest holders for affected persons, particularly the poor and vulnerable? Yes. No.

III. GENDER AND DEVELOPMENT

Gender mainstreaming category: effective gender mainstreaming

A. Key issues. Opportunities for business expansion, employment growth, and innovation of micro, small, and medium-sized enterprises (MSMEs) are severely limited because of substantial unmet financing needs in most DMCs, including those where MCRIL proposes to expand: Azerbaijan, Cambodia, People’s Republic of China, Indonesia, Myanmar, and Nepal. Across these developing countries, women entrepreneurs have less access to finance than male entrepreneurs.

b This not only impedes women’s ability to grow their businesses, it can also restrict the types of

businesses they can start and thus their future potential. The International Finance Corporation (IFC) estimates that as many as 70% of women-owned small enterprises in the formal sector in developing countries are not served or underserved by financial institutions—a financing gap of $260 to $320 billion.

c

B. Key actions. Gender action plan Other actions or measures No action or measure MCRIL commits to implement the following activities to promote gender-inclusive access to finance to low-income borrowers, as part of its expansion into new markets: (i) provide broader access to institutional credit for 60 MFIs that aim to improve gender inclusion, based on ratings by MCRIL; (ii) support 75 MFIs in expanding their coverage and loan portfolio to improve access for women-owned MSMEs in rural and semiurban areas; (iii) provide better access to finance from MFIs, and benefit 1.5 million lower- or marginal-income borrowers, which includes 200,000 first-time borrowers, of whom at least 90% will be women; (iv) support institutional strengthening and capacity building of 50 MFIs on nonfinancial aspects, targeting fairness and protection of interests of end-borrowers (90% of whom are women), apart from training of 650 women staff in dealing with end-borrowers, mostly women MSMEs; and (v) carry out research and evaluation studies that contribute to sector awareness of gender issues and barriers to women’s access to finance. The gender action plan (Appendix 7) details the proposed activities.

IV. ADDRESSING SOCIAL SAFEGUARD ISSUES

A. Involuntary Resettlement

Safeguard Category: A B C FI

1. Key impacts. MCRIL is a microfinance rating agency for financial and social ratings of MFIs, and will not engage in any direct investments in, or lending to, MFIs or individual borrowers. MCRIL’s operations, which consist primarily of risk advisory, assessment, financial and social rating services for MFIs, are not expected to trigger involuntary resettlement impacts as defined in ADB’s Safeguard Policy Statement (2009). 2. Strategy to address the impacts. – Not applicable 3. Plan or other actions.

None

B. Indigenous Peoples Safeguard Category: A B C FI

1. Key impacts. Is broad community support triggered? Yes No – MCRIL’s operations consist primarily of risk advisory, assessment, financial and social rating services for MFIs, and are not expected to result in impacts on indigenous peoples. 2. Strategy to address the impacts. – Not applicable. 3. Plan or other actions.

None V. ADDRESSING OTHER SOCIAL RISKS

A. Risks in the Labor Market

1. Relevance of the project for the country’s or region’s or sector’s labor market: high (H), medium (M), and low or not significant (L). (L) unemployment (L) underemployment (L) retrenchment (L) core labor standards 2. Labor market impact. – Not applicable.

B. Affordability

The project will have no direct impacts related to affordability. The financial and social rating services by MCRIL are expected to allow the MFIs it covers sustained access to credit and financial services for the poor and low-income borrowers as well as MSMEs at better terms. C. Communicable Diseases and Other Social Risks

1. Indicate the respective risks, if any, and rate the impact as high (H), medium (M), low (L), or not applicable (NA): Communicable diseases Human trafficking Others (please specify) ______________ Not applicable (NA)

2. Describe the related risks of the project on people in project area. – None VI. MONITORING AND EVALUATION

1. Targets and indicators. The following key indicators will be monitored during the investment period: (i) expansion of MCRIL’s advisory, assessment, and rating services into new markets; (ii) increased and improved access to institutional credit for MFIs, so as to expand their coverage and loan portfolio; (iii) broader access to finance for low-income borrowers; and (iv) institutional strengthening and capacity building of MFIs. 2. Required human resources. The MCRIL team will carry out the monitoring of the targets during the period of investment. 3. Information in the project administration manual – not applicable. 4. Monitoring tools. MCRIL will be required to submit annual monitoring reports of its operations and also on the implementation of the gender action plan. Source: ADB. 2000. Private Sector Development Strategy. Manila. a ADB. 2004. Enhancing the Fight against Poverty in Asia and the Pacific. Manila.

b IFC and McKinsey Women SME mapping exercise, 2011. Quoted in IFC. 2011. Strengthening Access to Finance for Women-Owned SMEs in Developing Countries. Washington. p.6

c Access to Credit among Micro, Small, and Medium Enterprises. http://www.ifc.org/wps/wcm/connect/1f2c968041689903950bb79e78015671/AccessCreditMSME-Brochure-Final.pdf?MOD=AJPERES. (22 June 2016)

SAFEGUARDS AND SOCIAL DIMENSIONS SUMMARY A. Safeguards

1. The equity investment of the Asian Development Bank (ADB) in Micro-Credit Ratings International Limited (MCRIL) will allow the company to widen its market coverage for risk advisory, assessment, and rating services to microfinance institutions (MFIs), create opportunities for MFIs to service a much wider client base, and provide commercial and institutional lenders with a more transparent and consistent basis for evaluating MFIs. This in turn will improve overall access to finance in ADB developing member countries. The activities associated with MCRIL’s operations are expected to have negligible environmental impacts, and are unlikely to trigger impacts related to involuntary resettlement and indigenous peoples. The investment is categorized as C for environment, involuntary resettlement, and indigenous peoples under ADB’s Safeguard Policy Statement (2009). B. Other Social Dimensions 2. MCRIL will comply with national labor laws and, pursuant to ADB’s Social Protection Strategy (2001), take measures to comply with the internationally recognized core labor standards.1 MCRIL will report regularly to ADB on its compliance with such laws and the measures taken. The investment in MCRIL is expected to result in greater access to finance for low-income borrowers, 90% of which are typically women, in mostly rural and semiurban areas, and has been categorized as effective gender mainstreaming. The gender action plan proposes the implementation of the following actions to give women in rural and semiurban areas greater access to credit: (i) expand access to MCRIL’s advisory, assessment, and rating services in new markets; (ii) Increase and improve access to institutional credit for MFIs, so they can expand their coverage and loan portfolio; (iii) provide broader access to finance for low-income borrowers; (iv) strengthen the institutional capacities of MFIs, consistent with industry best practices; and (v) document and disseminate good practices from MCRIL operations.

1 ADB. 2003.Social Protection Strategy. Manila (adopted in 2001).

GENDER ACTION PLAN

Outputs (from DMF) Activities Targets (2022) and Indicators 2015 baseline

Data sources and / or

reporting mechanis

ms

Results

MCRIL expanded to at least four new markets and provides greater access to finance to low income borrowers (predominantly women in rural and semi urban areas), facilitated by MFIs assessed, advised and rated by MCRIL.

1. Expand access to advisory, assessment and rating services activities by MCRIL in new markets

• 75 MFIs with gender inclusive access provided advisory, assessment and rating services by MCRIL in new markets.

25 MCRIL tracker

2. Increased and improved access to institutional credit for MFIs, to expand their coverage and loan portfolio

• 60 MFIs of whom at least 80% have improved gender inclusion and access benefitted from institutional credit (in terms of larger lines of credit, better terms), including commercial banks and international funding agencies, based on ratings by MCRIL

20 MFIs rated – tracked

by MCRIL

• 75 MFIs expand their coverage and loan portfolio to improve access to borrowers’ in rural and semi-urban areas, in addition to borrowers from low income groups.

25 - as above-

3. Higher access to finance in new markets for low income borrowers

• 1.5 million lower/marginal income borrowers benefit from higher access to finance from MFIs, of whom at least 90% are women

• 200,000 first-time borrowers benefit from higher access to finance from MFIs, of whom at least 90% are women

NA as MCRIL’s

operations in the new

markets are at an early stage

- as above -

4. Institutional strengthening and capacity building of MFIs, consistent with industry best practices in new markets

• Institutional strengthening of 50 MFIs/other development organisations, with support of MCRIL, on non-financial aspects relating to (i) governance, , (ii) client protection principles, (iii) social, gender and financial inclusion, (iv) communication tools, and (v) adoption of fair practices (such as SMART

campaign1) – all of these translating into fairness

and protection of interests of the end-borrowers (of whom at least 90% are women);

24 MCRIL tracker

• Training and capacity building of 650 women staff; who deal with end-borrowers/clients (more than 90% of which are women) - on aspects like loan assessment, transparent disclosure, fair practice,

NA as MCRIL’s

operations in the new

MCRIL tracker

1 The Smart Campaign is a global effort to unite microfinance leaders around a common goal: to keep clients as the driving force of the industry.

Outputs (from DMF) Activities Targets (2022) and Indicators 2015 baseline

Data sources and / or

reporting mechanis

ms

Results

avoiding over-indebtedness and adopting fair and acceptable collection practices.

markets are at an early stage

• HR policies of 40 MFIs/development organisations, aligned around (i) fair and responsible treatment of clients and (ii) compliance with recognized core labor standards and acceptable HR practices, including to prioritize and enhance women’s employment in MFI/development workforce

NA MCRIL tracker

5. Research and evaluation studies contributing to sector awareness of gender issues and barriers to women’s access to finance, or employment in financial services in new markets

• 25 MFIs/development organizations covered by MCRIL research that includes gender issues

• 10 events/other mechanisms organized, by which MCRIL disseminates gender issues.

NA MCRIL tracker

6. Document and disseminate good practices from MCRIL operations in new markets

• Document 6-10 testimonials on how MCRIL’s operations have contributed to greater access to finance for low income borrowers (comprising 90% women) and how the project has improved their lives, and wide dissemination.

NA MCRIL tracker

MCRIL AND EDA EVOLUTION

1 March

1983

Economic Development Associates (EDA) established as a partnership firm

July

1985

First international assignment (Bangladesh)

23 December

1997

EDA Rural Systems Private Limited registered – takes over all EDA business

Feb-Aug

1998

Tool development/ MFI rating by EDA, First commercial rating

February

1999

First rating contract with SIDBI, EDA appointed by CGAP as its regional microfinance training partner for South Asia, launches training of MFI managers

1998-99

Annual turnover crosses Rs10 million

8 June

1999

Micro-Credit Ratings & Guarantees India Limited (MCRIL) registered as a public limited company

13 May

2002

MCRIL name changed to Micro-Credit Ratings International Limited

December

2005

First social rating undertaken, BWDA, Tamil Nadu Loan portfolio audit (LPA) launched

2010-11

NGO assessments introduced MCRIL contracts a major World Bank project for assessing 508 community loan funds (UPKs) in Indonesia Code of Conduct Assessments (CoCA) launched

2012-13

Profit before tax crosses Rs15 million MCRIL becomes Clients Protection Principles (CPP) certifier Risk Management Programme for MFIs started

2013-14 Annual turnover, Rs104 million, profit before tax, Rs17 million