MF Education Program @ Goa, India
MFI-Transformation: Why, How and The Impact
ORGANIZED BY SA-DHAN
March 24-26, 2010
Topic: Transformation & Double Bottom Line
Presenter:
Chandra Shekhar Ghosh
Senior Ashoka Fellow
Chairman & Managing Director
Bandhan
TRANSFORMATION
WHY?
Why does an MFI want to transform to an NBFC?
WHY TRANSFORMATION?
 To widen/broaden microfinance services to the
unreached poor
 To maintain Capital Adequacy Ratio
 To minimize regulatory risks
 To achieve confidence / comfort of lenders
TRANSFORMATION
WHAT?
What is the MFI going to transfer?
TRANSFORMATION OF WHAT?
Staff
System &
control
Portfolio
Bank Loans
Borrower
Fixed
assets
Surplus
TRANSFORMATION
HOW?
How is the MFI going to transfer?
HOW TO TRANSFER ?
Staff
System &
control
Portfolio
Borrower
Fixed
assets
The above can be transferred in either of the following two ways:
a)After full payment of existing loans in MFI, issue new loans to clients in NBFC
b)Loan portfolio + borrowers of all branches to be transferred in one go
TRANSFER OF
Bank Loans
There are basically three options to transfer the Bank Loans.
1. With permission from the bank (appropriate for outstanding
of huge amount)
2. Pre payment of existing loan in MFI followed by sanction of
fresh loan in NBFC (may be adopted where outstanding
amount is small)
3. Enter into back-to-back agreement
TRANSFER OF
Surplus
The MFI should carefully choose the mode of transfer of
surplus. As such, it depends on certain factors:
 Amount to be transferred
 Present legal status of MFI
TRANSFORMATION
WHAT NOT?
What should an MFI not transfer?
MIND!!!
TRANSFORMATION
STEPS
What are the various steps of transformation?
STEPS INVOLVED IN TRANSFORMATION
 Approval from the board of MFI
 Depute experienced Consultant
 Form a Committee internally to work on the transformation
 Select appropriate methodology after analysis of available options
 Seek legal opinion (in written) from reputed legal firm
 Always take a second legal opinion
 Board approval for mode of transformation
 Share the issue in details with the management, proper orientation
must be given
 Finalize the date of transformation
STEPS…CONTD
 Begin implementation – documents, printing materials , bank a/c
opening
 Preparation & execution of MoU
 Formally apply to lenders for permission
 Sign the Business Transfer Agreement (BTA)
 Prepare B/S before & after transformation
 Submit financials (after transformation) to lenders
 Enter into new agreement with the lenders
 Charge creation at ROC
 Submit reports regularly to regulatory authorities
TRANSFORMATION
CHALLENGES
What are the challenges an MFI faces during
transformation process?
CHALLENGES FACED
• Selection of mode of transformation
• Convincing board on the mode selected
• Conflict between development & commercial ideology
• Obtaining permission from lenders
• Huge cost
• Educating stakeholders
• Bank account opening at the field level
• Legal complexity
TRANSFORMATION
LEARNINGS
What have been the major learnings?
LEARNINGS
 Step-by-step documentation is a must
 Always take legal opinion before taking any major step
 Don’t forget to seek a second opinion
 Always have proper planning (set time frame) to execute the steps
 News to be shared externally only after final execution (with relevant
supporting documents)
LEARNINGS…CONTD
 The entire process should be carried on in such a manner that it doesn’t
affect the normal day-to-day activities
 Ensure that all MFI bank accounts have been closed
 Get the auditors / outsiders to check whether the execution at the field
has been done correctly
 Statutory auditor to remain the same throughout the process, preferably
even after the transformation (for 1 year at least)
 Appoint a spokesperson to talk on the transformation plan
TRANSFORMATION
IS POSSIBLE
It is a long and tedious process but can be completed with the
hard work of the team
EQUITY
WHY?
What were the reasons for getting external equity?
REASONS FOR EQUITY
•For scale up
•Build
stakeholders
confidence
•To maintain
CAR
•To maintain
leveraging
INITIAL APPREHENSIONS
What, why, when, how….?!
APPREHENSIONS
Since it was a first round of equity for Bandhan, we had
our own pre - conceived notions, worries and questions.
 Worry of private equity players
 Hold on to the organization’s mission
 Whether the organization will be able to get desired
valuation
 Great concern about push for huge return
 Building competence of the team
CHOICE OF INVESTORS
Who & why?
INSTITUTIONAL Vs PRIVATE
INSTITUTIONAL
PRIVATE
 Strategic
 Faster
 Long term
 Higher valuation
 Creates value
 Higher return
 Less interruption in day-today management
 More professional approach
 More transparent
 Very tactful
MAKING THE RIGHT CHOICE
From Day 1, the following strategy was set.
No mission drift
Like-minded
Social /
Institutional
Investor
PREPARATIONS DONE
What all?
Raising equity involves a huge process
STEP-BY-STEP PROCESS
 Preparation of Strategic Business Plan (SBP) for 3-5 years
 Analysis of equity requirement from the SBP
 Discussion of the same at the Board for necessary suggestion and final
approval
 Selection of right Arranger (if need be)
 Develop an internal team (operationally & financially sound) to work
exclusively on this
 Keep the recent financial report readily available
 Prepare a good presentation & Information Memorandum (IM) to be made
to potential investors
PROCESS…..CONTD.
 Collect market information (including investor details)
 Prepare set of documents viz. financials, trend analysis, performance
analysis, ratio analysis, MOA, projection
 Post Non-Disclosure Agreement (NDA), information sharing
 Road show - meeting potential investors
 Prepare documents for due diligence
 Organize site visit
 Start negotiation
 Obtain valuation from the investor
 Final negotiation on term sheet
PROCESS….CONTD
 Board approval
 Execution of documents – after necessary legal vetting
 Increase in authorized capital, if required
 Final infusion and allotment
CHALLENGES FACED
• Choosing the right arranger
• Choosing the right investor
• Building competent team
• Convincing stakeholders
• Negotiating on term sheet & final valuation as per
expectation
• Timing of investment
• Last minute investor!
NEGOTIATION
Major point of negotiation / disagreement always
remains the valuation.
Valuation tips
Prepare your
Depends on
valuation by
promoter, board
appointing
& the team
valuer but never
quote first
Always let the
investor speak
first
POINTS OF NEGOTATION
Management
control
Return
NEGOTIATION TIPS

Remember that everything is negotiable

Aim your aspirations high

Never accept the first offer

Put what you have agreed on in writing

Be cooperative and friendly, Avoid abrasiveness, which often
breaks down negotiations

Information is power – get as much as possible
COMMON QUESTIONS
Generally the investors will have lots of questions on the following.
Promoter
Capacity of
the team to
implement
SBP
Technology
Funding
situation is
always
analyzed
EXPERIENCE
During the process, we learnt each day. Each meeting /
dealing was a new experience. However, after all the
struggle, post investment experience can be defined as
follows.
An ideal investment in the MF space
Appropriate choice of investor
Example set for all the other players in the sector
A very good and learning experience, worth the time
invested
SUGGESTIONS
It is advisable to complete the transformation
process, if any before raising equity
Set the time frame (though 12-18 months is minimal
requirement for 1st cycle)
Do not hurry with anything – it is better to be slow
& sure than fast & sorry
FUTURE PLANS
Bandhan is driven by the vision to reach 8
million clients by March 2014.
It has recently closed its 1st round of equity
after successful infusion of Rs. 500 million
from SIDBI.
2nd round of equity is yet to be decided
upon
Bandhan Ownership Pattern
Employees, 30%
Community,
58%
External ,
12%
THANK YOU
FOR YOUR ATTENTION
For more information on Bandhan,
Log on to www.bandhanmf.com