Report of the Operating Companies

CAA-GK is a pioneer in the microfinance industry, instrumental in building the sector in India, and commenced microfinance operations in 1999. The Company offers group loans and other related financial services through the traditional microfinance Grameen group methodology to the self-employed, micro enterprises and small enterprises, which in most cases are operated by women. CAA-GK is positioning itself as an MFI that offers a multitude of financial services to cater to life cycle needs of customers with in-house products and through partnerships.

Despite the fact that the Company was already founded in 1999, its activities continue to grow rapidly whereby its net interest income and fees amounted to € 34.4 million in FY 2016, or 81% of CreditAccess’ total net interest income and fees.

Profile
CAA-GK, operating as Grameen Koota, is a pioneer in the microfinance industry and commenced microfinance operations in 1999. The Company currently operates in 74 districts in the States of Karnatake, Maharashtra, Madhya Pradesh, Chhattisgarh and Tamil Nadu. CAA-GK positions itself as a financial institute offering a multitude of financial services to cater to life cycle needs of its customers with in-house products and through partnerships. The focus is on developing other credit methodology (Individual Loans) & non-credit products to serve matured customers, although its “Group Lending” activities continue to be the vast majority of its business. Growth will be accelerated through district centric expansion to maximise its reach and penetration to remain ahead of the competition

Products

  • Group lending ranging from US$ 75 to US$ 700
  • Individual lending ranging from US$ 700 to US$ 3,000
  • Family welfare loans (medical, educational, stoves, solar lights etc) from US$ 15 to US$ 150
  • Home improvement loans (water connections, sanitation and home improvement) from US$ 75 to US$ 375
  • Other financial services, such as pensions and insurance products

Market position
Among the 22 large MFIs, CAA-GK is the 6th largest by gross loan portfolio with a market share of 4.8% and stands 3rd in overall disbursement with 5.4% market share

Main competitors
Janalakshmi, Bharat Financial Inclusion, Ujjivan, Equitas, Satin

Establishments
Present in the following states: Karnatake, Maharashtra, Tamil Nadu, Madhya Pradesh and Chhattisgarh

Branches
298

Customers

  • Group lending: economically active women earning less than US$ 5-6 per day, living mainly in rural areas (73% of its customers)
  • Individual lending: micro and small entrepreneurs with monthly incomes above US$ 500 and a more solid collateral base compared to group lending, but who typically cannot offer hard collateral or undergo the bureaucratic process requested by banks

Headlines in FY 2016

  • Reaching financial services to over 1.2 million clients
  • Expansion of operations in the state of Madhya Pradesh and Chhattisgarh
  • Implementation of new core banking system (Temenos – T24)
  • Centralisation of data entry by establishing 7 Regional Procession Centres (RPC) across states where CAA-GK operates
  • Won the “MFI of the Year” award under the large MFI category in Microfinance India 2015 Awards
  • Upgrade of Social Rating, Credit Rating and COCA Rating
  • Re-certification of Client Protection Principles by Smart Campaign, awarded S.T.A.R. (Socially Transparent and Responsible) Rating by MIXw

Financial results
Following the sharp increase in demand in FY 2015, market conditions in FY 2016 remained buoyant. Various geographical regions in which CAA-GK operates, showed a strong growth in demand.

CAA-GK reported an 81% increase in net interest income and fees to € 34.4 million, mainly lifted by the increase in the number of customers and a 24.3% higher average ticket size. Operating expenses increased by 60.9% on the back of a build-up in the number of branches, or +25% to 298, a 44% increase in the workforce, the implementation of the Core Banking Solution and the implementation of Regional Processing Centres.

Furthermore, due to proper cost containment, the overall operating expense ratio dropped to 6.2% compared to 6.7% in FY 2015, driven by a higher revenue per customer, more than 90% customer retention, including higher branch and staff productivity. As a result, profit after tax rose by 104% to € 11.2 million.

Market developments
The microfinance industry in India grew by 44% to over 32.5 million clients in FY 2016. The gross loan portfolio of the industry amounted to Rs. 53,233 crores, or around € 7.1 billion, a growth of 84% in comparison with the previous financial year. A total of 34.7 million loans have been disbursed, which was an increase of 65%.

Market share within the industry is clearly concentrated on the group of large MFIs, which account for almost 90% of the total industry gross loan portfolio, client base, loan amount disbursed and debt funding. In terms of purpose, agriculture accounts for 31% of the gross industry portfolio while the non-agriculture (such as trade/services and manufacturing) accounts for 64%. Household finance accounts of 5% of the gross loan portfolio.

Market growth in FY 2016 has been fuelled by the changes in regulations with respect to qualifying assets for MFI customers which were issued in October 2015 by the Reserve Bank of India (“RBI”). One of the new guidelines was the increase of the annual income limit of a loan borrower from Rs. 60,000 to Rs. 100,000 for rural clients and from Rs. 120,000 to Rs.160,000 for urban and semi-urban clients. These changes in regulations will also have a beneficial impact on the growth prospects for the microfinance industry in years ahead.

The RBI also awarded licenses to ten (financial) institutions for setting up small finance banks (“SFB”). Eight of these licenses were awarded to MFI companies and one to a major non-banking financial company (“NBFC”). The targeted customer segment of these banks are economically disadvantaged people or comparable to those of the microfinance industry. However, the microfinance industry should benefit from the issuance of the SFB licenses since these ten banks will be subject to all prudential norms and regulations of the RBI as applicable to existing commercial banks. This implies that in the next few years these SFBs will be much more internally focused on adjusting the organisation in such a way as to comply with the regulations of the RBI. Hence, this will offer the other microfinance companies in India the opportunity to increase their market share.

Developments within CAA-GK
The Company clearly benefited from the favourable market circumstances in FY 2016. CAA-GK opened 60 branches and acquired a significant number of new customers (+351k). Overall performance during the financial year was quite robust resulting in improvement in all operational and financial parameters while maintaining a very low ratio of 0.1% for the portfolio at risk (30 days).

Part of the portfolio growth was driven by the lower interest rates in the market which CAA-GK passed on to its customers. Interest rates for the group loans were reduced from 25% to 23%, while home improvement and family welfare loans were lowered substantially from 24% to 20%. The Company expects that these lower rates will also have a positive impact on the anticipated growth for FY 2017.

In FY 2016 CAA-GK implemented the Temenos T24 core banking system, a migration from its Mifos system which was used previously. The transition to Temenos T24 enables the organisation to have better control of the Company, while at the same time it supports future needs. Furthermore, the implementation of seven regional processing centres optimised the data entry process. The centralisation of these activities resulted in a steep increase of staff productivity, while field staff can now concentrate more on customer handling, customer joining and loan disbursements at branch offices. Already a large improvement in data quality has been noticed after the implementation of the regional processing centres.

CAA-BAV is actively engaged in the microfinance sector in Indonesia and was founded in December 2011. CAA-BAV offers working capital, through a modified version of the traditional microfinance Grameen group methodology, exclusively to women who do not have or have only partial access to the formal financial sector. In addition, CAA-BAV provides access to business loans for small enterprises.

Since its inception in December 2011, CAA-BAV has witnessed a strong growth of its activities and generated net interest income and fees of € 5.7 million in FY 2016, or 13% of CreditAccess’ total net interest income and fees.

Profile
CAA-BAV, operating as Bina Artha, has been actively engaged in the microfinance sector in Indonesia since December 2011. CAA-BAV offers working capital through a modified version of the traditional microfinance Grameen group methodology exclusively to women who do not have or only have partial access to the formal financial sector. In addition, CAA-BAV provides access to business loans for small enterprises. CAA-BAV’s strategy at inception was initially to offer only group loans to lowincome women and, after having acquired a good understanding of the local social and economic environment, gradually scale-up the market with a wider range of financial products to a broader segment of the economically active low-income population

Products

  • Group lending ranging from US$ 200 to US$ 500
  • Individual lending ranging from US$ 500 to US$ 3,000
  • Sanitation loans for the construction of proper toiletss

Market position
4th player in terms of clients, 3rd player in terms of number of branches

Main competitors
BTPN Sharya and MBK Ventura

Establishments
Four provinces in Java (West, Central, East, Yogyakarta)

Branches
168

Customers

  • Group lending: economically active women earning less than US$ 6 per day
  • Individual lending: micro entrepreneurs and small entrepreneurs with monthly incomes above US$ 500 and a more solid collateral base compared to group lending, but who typically cannot offer hard collateral or undergo the bureaucratic process requested by banks

Headlines in FY 2016

  • CAA-BAV was the first microfinance institution in Indonesia to be accredited by Jamkrindo, the largest governmental credit insurance provider, and to be granted access to Bank Indonesia Credit Bureau
  • The Company became the 3rd microfinance institution in Indonesia in terms of number of branches and the 4th player in terms of clients and portfolio outstanding
  • Additional IDR 100 billion borrowings was received from various foreign lenders
  • CAA-BAV launched a new sanitation product in 2016, aimed at financing clients who want to build a proper toilet
  • The Company introduced an automated monitoring system through mobile devices for its quality assurance staff in the field

Financial results
The ever expanding branch network, with 51 additional branches in 2016 on Java, allowed CAA-BAV to reach a portfolio of € 16.8 million at the end of FY 2016, a growth of close to 60% compared with the previous year. At the same time, Bina Usaha, the Company’s financial lending vertical, achieved a portfolio of around € 1.3 million at the end of FY 2016, a growth of 520% and thereby confirming the potential of rapidly becoming a leading product for CAA- BAV.

The growth in portfolio resulted in a significant increase in net interest income and fees, which reached € 5.7 million over FY 2016, and triggered a 60% growth in financial margins despite financial expenses increasing 75% over the same period. However, the significant expansion in the last twelve months in terms of opening new branches, new infrastructures and attracting new employees, strongly impacted the administrative and personnel costs of the Company, which resulted in a negative bottom line performance.

Market developments
The Indonesian microfinance sector, albeit still showing significant growth potential, is gradually becoming more competitive with existing players growing at a significant pace while new players are entering the market. In fact, Permodalan National Madani (“PNM”), a governmental financial institution, launched a new vertical at the end of 2015, named Mekaar, which offers credit through the group methodology to CAA-BAV’s client segment. PNM has very aggressive targets and their customer interest rates are subsidised by the government, and hence it is likely that they will become a major competitor in the medium term.

A positive development for the microfinance sector is the set-up of the new industry association by a group of committed MFIs including CAA-BAV at the end of 2016. The first priorities of the association are drafting a code of conduct and sharing data by members to a credit bureau with the aim of mitigating the risk of multiple lending. Access to a credit bureau by microfinance institutions will be easier in the future as the government recently liberalised the credit bureau industry, with private credit bureaus now allowed to operate if licenced by Otoritas Jasa Keuangan (“OJK”), which supervises public companies and non-bank financial institutions. Four credit bureaus have received the licence and should start their operations by the end of 2016.

Developments within CAA-BAV
After significantly investing in its branch network, human resources and technology in the past years, CAA-BAV is now a well-recognised player in the market and is in a position to leverage the current network to further develop its portfolio and, importantly, improve profitability. The introduction of the new individual lending product, which has been successfully piloted and launched, is enhancing market opportunities and will likely impact client retention positively, as group lending clients who perform well and grow their business, are eligible to receive individual loans.

In FY 2017 the Company is planning to expand its network further, establishing more than 80 new branches and entering one new island. At the same time, CAA-BAV will strengthen technology with the introduction of a tablet based loan origination system, a new HR system and a GPS system to better plan market expansion and make collection activities of field staff more effective.

CAA-OP was incorporated in February 2014 with the aim to provide simple, convenient and accessible credit products to the unbanked and underserved households in the Philippines, focusing on working capital credit for existing businesses.

Although CAA-OP has only existed for two years, the Company has already experienced a fast growth and already accounts for 6% of CreditAccess’ total net interest income and fees in FY 2016, or some € 2.6 million.

Profile
CAA-OP, operating as OnePuhunan, was incorporated in February 2014 with the aim of providing simple, convenient and accessible credit products to the unbanked and underserved households in the Philippines, focusing on working capital credit for existing businesses. After a successful pilot phase to test the product offering and the internal processes, CAA-OP started an expansion phase aiming to reach a profitable and efficient scale in 2017

Products
Single loan product, ranging from US$ 150 to US$ 300, with a six month tenor and instalments collected at centre meetings. The product is structured with the goal of making it extremely easy to understand from the clients’ perspective and the processes streamlined in order to minimise disbursement time

Market position
Currently one of the top 10 players in the microfinance sector in the Philippines

Main competitors
CARD NGO and ASA Philippines, which are the biggest players in the country. Additionally, there are a few organisations currently serving more than 100,000 clients that represent the most structured MFIs

Establishments
CAA-OP is currently operating in seven regions covering Central Luzon, Calabarzon, Bicol and Mindanao. Current branch network enables CAA-OP to serve around 40% of the country’s households

Branches
110

Customers
CAA-OP is currently serving self-employed women active in multiple activities including trading, handicrafts, eateries, agriculture

Headlines in FY 2016

  • In February 2016, CAA-OP completed the first expansion phase reaching a total of 110 operational branches
  • The expansion achieved will enable the organisation to reach a break even result in the course of next year
  • During the year, CAA-OP successfully finalised and implemented an android based app to collect loan applications and upload them automatically into the core banking system. The new system allows the Company to reduce the cost of data encoders and to increase the control of branch officers monitoring all phases of the clients’ acquisition process
  • CAA-OP has already performed market analysis and concluded a study phase in order to be able to start the pilot phase for an individual lending product in the coming year

Financial results
The financial results of the Company are in line with expectations as CAA-OP implemented the expansion of the branch network according to schedule. As a result of the investment in the branch infrastructure, the Company is now in a position to diversify the geographic exposure and to service a broad potential client base.

Net interest income and fees have been growing substantially over the year, driven by the increase in gross loan portfolio, and are expected to continue this trend in the coming year by leveraging its existing branch network. Operating costs have been increasing proportionally to the number of operating branches which resulted in a negative result for the financial year FY 2016. However, as operating expenses are expected to stabilise in the coming financial year, since the expansion phase is suspended, financial results should improve significantly in FY 2017.

Market developments
The microfinance market in the Philippines has been growing steadily over the past year while there were no substantial regulatory changes. The governmental project to establish a comprehensive credit bureau is underway and it is possible that significant progress in that direction will take place before the end of 2016. It is clear, however, that full implementation is not expected before 2017.

Developments within CAA-OP
CAA-OP has been growing at a significant pace over the past year and is now in a position to leverage on the economies of scale offered by the current branch network. The considerable growth in the number of clients and areas of operations have allowed the organisation to adapt and optimise internal processes and the strategic approach to the market. These efforts will continue in the coming years whereby the focus will be on the continuous improvement of the current business model in tandem with the testing and roll out phase of the individual lending product, which represents an important milestone both in terms of risk mitigations and broadening of the market potential for CAA-OP.