Arman Lease and Finance Ltd Business Plan 2008 ‐ 2013
Arman Lease and Finance Ltd Business Plan 2008 ‐ 2013 August 2008 502‐3‐4, Sakar‐III, Opp. Old High Court Off. Ashram Road, Ahmedabad – 380014 Phones:‐ +91 79 3000 5000, 2754 1989 Fax :‐ +91 79 275 417 38 Website: www.armanlease.com Email: [email protected] 1 Executive Summary This Business Plan has been prepared in order to plan expansion and lending in Arman Lease and Finance Ltd (Arman). The document will serve as a guide for all the stakeholders in formulation of strategies, setting up policies and procedures, designing the loan products and resource mobilization and management. This will help the company in managing its operations as well as funding requirements in a planned manner. This document will also help prospective investors and lenders in making decisions. The document highlights the operational area of Arman, its products, people involved, growth strategy, highlights of operation’s policy, current and projected financial and operational statistics. The Business Plan also presents the operational and financial projections for the next five years (2008‐2013). Based on the projected financial statements, critical performance ratios have also been calculated. Arman Lease and Finance Limited was incorporated in November 1992 as a Private Limited Company. In December 1993, it converted itself into a Public Limited Company and in August 1995 it came out with a public issue of Rs2.8 crores. The company is listed in Mumbai and Jaipur stock exchange. Arman is a category “A” certification (eligible to avail deposits from public) from the RBI. The company currently is engaged into the business of offering microfinance both unsecured (personal loans), as well as, secured lending for auto rickshaws, two‐wheelers, old two and four wheelers and personal loans credit. The company is planning to enter into the market of core group based microfinance activity from the current financial year in the Ahmedabad, Gandhinagar and Mehsana districts of Gujarat. Arman realises the potential in microfinance sector is also guided by the ideology of Directors’ for working with the lower income group and hence started core microfinance products. The Company is now determined to expand its microfinance portfolio, which will be its core product and the focus area for the future. Arman is led by an experienced and qualified team with a strong top as well as middle management and has the advantage of an independent Chairman, Mr Chinubhai R Shah who has over 35 years of experience in corporate sector. He shows keen interest in the area of corporate governance and is guest professor at IIM (A). For its strong management and governance practices combined with good financial performance, it has been continuously getting a grade of Alpha (‐) to Alpha from the leading microfinance rating agency M‐CRIL. Arman has strategically chosen microfinance as its core activity and would be working in Gujarat. The current operations are based in and around Ahmedabad. The Directors as well as all the staff of the Company have extensive knowledge and understanding of the region. The region has good infrastructure, a wide and strong network of dairy cooperatives and the market size is growing rapidly. The region has large population of economically weak and socially neglected communities such as Scheduled Castes, tribal and other backward classes in its slum areas. The region offers tremendous potential for the growth of microfinance sector. The cultural and economic distinctiveness of the place offers an advantage to Arman with its expertise and knowledge of the region. This Business Plan document represents the growth that the Company envisions and its funding requirement will also be guided by the projected operational and financial figures mentioned in this document. Table of Content Content………………………………………………………………………………………Page No. Chapter 1: Microfinance Sector 2 1.1 Global Context…………………………………………………………………….. 5 1.2 Indian Context……………………………………………………………………... 5 Chapter 2: Arman Lease and Finance Ltd 2.1 Introduction……………………………………………………………………….. 7 2.2 Present Activities…………………………………………………………………... 10 2.3 Operational Highlights…………………………………………………………….. 11 2.4 Geographical Spread……………………………………………………………… 11 2.5 Organisational Structure…………………………………………………................ 12 2.6 Human Resource…………………………………………………………………. 13 2.7 Operational status as on 31 March 2008: the base year……………………………. 14 2.8 Distribution of loans – Product Wise………………….................................................. 14 2.9 Key Ratios for last two years…………………………………………….................. 14 Chapter 3: Microfinance in North Gujarat 3.1 Arman’s strategy to lend in North Gujarat………………………………………... 15 3.2 Microfinance Market North Gujarat……………………………………………...... 16 3.3 Competition Analysis……………………………………………………………… 17 Chapter 4: Arman’s Governance 4.1 Legal Form………………………………………………………………................ 18 4.2 Equity structure…………………………………………………………………... 18 4.3 Fund mobilisation………………………………………………………………… 19 4.4 Growth, expansion and competition……………………………………………… 19 4.5 Governing Board…………………….…………………………………………… 21 4.6 Arman’s plan to establish microfinance……………………………………………. 21 Chapter 5: Microfinance Methodology 5.1 Current Loan Policies …………………………………………………………… 22 5.2 Features of loan products currently offered by Arman ..…………………………. 22 22 5.3 Core Microfinance Delivery Model ………………………………………………. 5.4 Operational Unit………………………………………………….……………........ 22 5.5 Description of Core Microfinance loan products…………………………………... 23 5.6 Microfinance Procedures……………………………………………………………. 24 Chapter 6: Management Systems 6.1 Human Resource…………………………………………………………………. 27 6.2 Accounting System and MIS……………………………………………………... 27 6.3 Internal control procedures……………………………………………………….. 27 6.4 Infrastructure……………………………………………………………………... 28 Chapter 7: Business Plan Projections 28 7.1 Current Financial Position..……………………………………………………….. 7.2 Business Plan projections………………………………………………………….. 31 7.3 Financing requirements……………………………………………………............. 34 3 7.4 Notes to Projections..………………………………………………………............ Annexure 1‐ Schedules to the Financial Statements…………………………………..... Annexure 2‐ Demographic data of Ahmedabad, Gandhinagar and Mehsana……….. 35 36 43 4 Chapter 1: Microfinance context 1.1 Global context "Microfinance is the supply of loans, savings, and other basic financial services to the poor." (Consultative Group to Assist the Poor ‐ CGAP). It can also be defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low‐income individuals or households, with the goal of creating social value. Professor Mohammad Yunus of Bangladesh, noble price winner in the year 2008, is widely known as the father of microfinance. 25 years ago he founded the Grameen Bank, which is seen as the beginning of microfinance, though almost at the same time there were several other initiative being taken in microfinance. The domain of microfinance has since spread with the adaptation and evolution of Professor Yunus’ ideas to various countries and contexts. Several other innovative models in microfinance have developed. Microfinance is now being hailed as one of the most powerful instruments of poverty alleviation, worldwide. The World Bank estimates that there are now over 7,000 microfinance institutions, serving some 16 million low income families in developing countries. The total cash turnover of MFIs world‐wide is estimated at US$2.5 billion and the potential for new growth is outstanding. – (“Data Snapshots on Microfinance ‐ The Virtual Library on Microcredit”) "The great challenge before us is to address the constraints that exclude people from full participation in the financial sector... Together, we can and must build inclusive financial sectors that help people improve their lives." ‐ Kofi Annan, UN Secretary General The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal (CGAP). Formal financial institutions were not designed to help those who don't already have financial assets – they were designed to help those who do. Credit is available from informal commercial and non‐commerical money‐lenders but usually at a very high cost to borrowers. Experience shows that microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument for self‐empowerment by enabling the poor, especially women, to become economic agents of change 1.2 Indian context The microfinance sector in India has been perceived by policymakers, particularly the Reserve Bank of India (RBI), as a useful channel for expanding access to various financial services for low‐income persons and those in the informal sector. Sa‐dhan study contends that India’s microfinance sector has an outreach potential of 36.8 million borrowers including 3.5 million urban residents, which is less than 50% of the estimated potential. MFIs had close to 10 million customers and a cumulative outstanding portfolio of Rs 3,400 crores (US$769 million) as on 31 March 2007. 5 The efficiency and profitability indicators of Indian MFIs are highly favourable compared to Asian benchmarks. Several leading MFIs have begun to operate on a national scale. Since 2007, there have been at least four PE investments in Indian MFIs totalling $43 million. Such investments are expected to accelerate. There are two main reasons why PE firms are interested in the microfinance sector. First, there is a perception that this sector is capable of providing extraordinary returns. Compartamos, a Mexican bank specialising in microfinance, made a successful IPO of 30% of its shares with a valuation at 12 times its book value. Second, studies indicate that returns from the sector are not sensitive to swings in global economic cycles. This makes such investments desirable for risk diversification. In India, microfinance gained momentum in early and mid 1990’s with emergence of Basix, SHARE and SNF as major players in microfinance. Between 2000 and 2003, a number of new players (primarily Spandana and SKS) with innovative business models emerged on the microfinance radar of India. Their spectacular returns and scaleable business model attracted the attention of commercial banks like ICICI Bank, HDFC Bank and ABN AMRO Bank. Most of these banks set up dedicated microfinance lending cells and started looking microfinance as a business opportunity rather than part of their priority sector obligation. Microfinance gained further momentum after 2003 – sector growing for more than 100% on year to year basis. Some of older MFIs, who were conservative in their growth plans earlier altered their plans drastically and started planning aggressive expansion. The growth momentum is expected to continue, given the plans of the commercial banks, equity funds and the MFIs. Apart from the main stream Microfinance Institutions, the traditional finance companies working under Non‐Banking Finance Company license area also increasingly adopting core microfinance products. The increasing competition in urban sectors and also the realization that low income group people are also bankable, in fact more bankable in many cases, has led to NBFCs adopting microfinance. Also there is ample business opportunity in low income group sector. Total outstanding portfolio of all Indian MFIs taken together along with the expected growth has been presented in Table 1. The total outstanding of the MFIs is expected to be to the tune of Rs10,000 crores by March 2009. Table 1: Growth in Microfinance Outstanding1 Year ending Outstanding (Rs Crores) Year ending Outstanding (Rs Crores) Mar‐06 2,300 Mar‐08 7,000 Mar‐07 3,400 Mar‐09 10,000 Despite this spectacular growth, the supply of microfinance is still miniscule as compared to the demand which is now estimated to be to the tune of over Rs100,000 crores in India. To make the matters worse whatever, supply is available is highly skewed in favour of South and to some extent Eastern part of India. Microfinance service providers in other parts of country especially centre and western states including Gujarat are very limited. 1 From Sa-dhan’s study. Numbers for March 2007 onwards are estimates. 6 Chapter 2: Arman Lease and Finance Ltd 2.1 Introduction ARMAN LEASE & FINANCE LIMITED was originally incorporated on 26th November, 1992 as Private Limited Company under the name and style of ARMAN LEASE & FINANCE PRIVATE LIMITED and was converted into Public Limited Company vide fresh Certificate of incorporation dated 22nd December, 1993. The main objects of the company as enunciated in the Memorandum Of Association of the Company consist of providing a wide spectrum of financial services both Fund based and Non Fund Based activities such as Lease / Hire Purchase Finance, Bill Discounting, Investment in Primary and Secondary market, Merchant Banking, Portfolio Management, Loan Syndication etc. In line of the expansion plans that the company perceived, it was decided to come out with public issue and the company has issued 28,00,000 Equity shares of Rs. 10 each on 21st August, 1995 aggregating to Rs 280 lacs and has received overwhelming response from the public and it was oversubscribed by 7 times in the category of small investor and more than 22 times in case of applicants with application of more than 1000 shares. The company retained an additional amount of Rs 2.66 lacs as per the SEBI Guidelines and hence made an allotment of shares of Rs 282.66 lacs. During the said period the company’s Promoters has also increased their contribution to capital in the company up to Rs 125 lacs. Hence the total paid up capital of the company after the public issue increased to Rs. 407.66 lacs, which has been continued till date. Name Arman Lease and Finance LImited Date of Incorporation 26‐11‐1992 as Pvt. Ltd. Company 22‐12‐1993 as Public Limited company wide fresh certificate of Incorporation Legal form Public Limited Non‐Banking Finance Company Category ‘A’ (Deposit taking) Reserve Bank of India Registration No.01.00066 Chairman Sh Chinubhai R. Shah Managing Director Sh Jayendra Patel 502‐3‐4, Sakar‐III, Opp. Old High Court Registered Address (Head Office) Off. Ashram Road, Ahmedabad – 380014 Phones:‐ +91 79 3000 5000, 2754 1989 The Company has 8 (Eight) member Board of Directors, a mix of executive and independent Directors. The list of Board along with their qualification and experience is given below. Board of Directors 7 S. No. Name Designation 1 Sh. Chinubhai R. Shah Chairman Qualification Experience M. A. LL.M. (Gold Medalist) DLP, DTP, Life Fellow AIMA Experience: More than 30 years of Senior Managerial and Board level experience in the corporate sector finally ending with M.D. position at the Ahmedabad Electricity Co. Ltd. Served as Professor of Law & Management at Gujarat University and Indian Institute of Management, Ahmedabad, for more than 25 years Guest Lecturer at ASCI, Hyderabad, MDI, New Delhi, AIMA, New Delhi as well as to many other institutions for than two decades, in the subjects of corporate laws, joint ventures, foreign collaborations and capital market. Mr. C. R. Shah is on the Board of many reputed Companies of India like Nirma Ltd., Adani Export Ltd., Meghmani Organics Ltd., Gujarat NRE Coke Ltd., H.K. Finechem Ltd., Tinplate Company of India Ltd. (Tata Company), Cadila Pharma Ltd. etc. His affiliations include: • Member, Board of Governors of Indian Institute of Management, Ahmedabad [1992‐97] • President, Gujarat Chamber of Commerce & Industry, Ahmedabad [2004‐05] • President, All India Management Association, New Delhi [1991‐92] • President, The Institute of Company Secretaries of India, New Delhi [1977‐79] • President, The Gujarat Investors’ & Shareholders’ Association [1988‐97 and from October 1999 onwards] • Member, Primary Market Advisory Committee, SEBI, Bombay [1992‐2003] • Member, Western Regional Committee, IDBI, Bombay [1997‐99] • Member of Direct Taxes Advisory Committee, Ministry of Finance, New Delhi [1992‐93] His Other interest include • Has written a number of Articles on Law, General Management and Economic Subjects Contributes a regular column titled “Law and Society” in Gujarat Samachar, No. 1 language daily in Gujarat. • Travelled throughout world, lead Indian delegations to International Conferences in Hong Kong and London. • Mr. C. R. Shah is affiliated with organizations like Apollo Hospital International Ltd., India Renal Foundation, Saline Area Vitulization Enterprise Ltd., Gulmahor Green‐Golf & Country Club Ltd., Gujarat Investor & Shareholder’s Association Managing 2 Sh. Jayendra B. Patel B. Sc. B.S Director Experience: 8 More than 20 years of Senior Managerial and board level experience in the corporate sector. Mr. Patel was in U.S.A. for a decade where he completed his education. After completing his education he joined business firm in USA namely KAPPS PHARMACEUTICALS INC. as Company Executive. During his stay in USA he successfully turned around two sick units into profitable position. Later he returned to India to concentrate and expand in the field of finance, he devoted fulltime attention to ARMAN LEASE AND FINANCE LIMITED. Mr. Patel is a founder member of the Gujarat Finance companies Association and presently secretary of the Association. Mr. Jayendra Patel was Member of the Finance and Banking Committee of Gujarat Chamber of Commerce & Industry (GCCI), Ahmedabad. More than 20 years of Senior Managerial and board level Whole Time B.Com 3 Sh. Amit R. Manakiwala experience in the corporate Director sector 4 Sh. Kaushikbhai D.Shah Director B. COM. LL.B., F.C.A. Experience • More than 30 years as Practicing Chartered Accountant. Expert in the Field of Accounts, Taxation, Corporate Laws and Audit • Chairman of Ahmedabad branch I.C.A.I. for 86‐87 & 87‐88 and elected member of W.I.R.C. for 88 to 91 • Visiting faculty in H.L. College of Commerce • Vice Chairman of the Western India Regional Council of the I.C.A.I. for the year 1989‐90. • President – All Gujarat Federation of Tax Consultants for year 99‐2000 • Member of the Executive Committee of Gujarat Chamber of Commerce & Industries for the year 99‐ 2000. • Chairman of Taxation Committee of Gujarat Chamber of Commerce and Industries for the year 99‐2000 to 2004‐05 • Treasurer Cum Joint Secretary of Gujarat Chamber of Commerce and Industries for year 2005‐06 • Addressed Seminars and conference on Topics of Accounts and Audit & Taxation • Written Articles in Journal of Chartered Accountants Association, Ahmedabad. • Trustee of the Sadanand Trust, Ahmedabad and India Foundation & India Service Centre, U.S.A. The Sadanand Trust is actively engaged in social activities all over India and undertakes various activities of flood, famine, draught relief etc. • Written Book – “Controversies in Direct Tax Laws” – Published by Taxman of Delhi 5 Sh. Aakash J. Patel Director 6 Sh. Nilesh Trivedi Director 7 Sh. Aalok J. Patel Director 8 Smt. Ritaben J. Patel Director Arman’s Statement of Vision, Mission and Objective 9 Vision statement of Arman “To be a reliable, transparent and self‐sustained micro‐finance institution” Mission statement of Arman “To provide financial services to low income families of the state of Gujarat to assist them in improving their income generating capacities” Objective To provide funds for setting up small enterprises to sixty thousand low income families of Ahmedabad and other districts of Gujarat by the end of financial year 2012‐13. 2.2 Present Activities Arman is one of the 13 Category `A’ Non Banking Finance Company (NBFC) in the state of Gujarat which is registered with Reserve Bank of India. As per this classification the Company is eligible to accept public deposit and is regularly scrutinized by RBI. The Company has not accepted public deposit but has maintained category `A’ as it provides self check and credit worthiness to it’s image. Arman has operated in three major segments, Vehicle loans like two / three / four wheeler financing with the hypothecation of new and used vehicles, Personal Loans and Business loans to various corporates for short term working capital requirement. However the company has moved away from business segment because of the inherent risk involved and has continued to operate in a safer more obedient and more profitable two / three wheeler segment and in personal loan, micro finance segment. Arman has gained rich experience in two and three wheeler segment with all it’s clientele based in Ahmedabad. The company has a database of 11,000 clients with proven credit worthiness which is advantageous for a personal loan or a repeat vehicle loan. The Company was originally rated by ICRA, the noted rating agency and it was assigned credit rating of `7’ which was indicative of safe borrowing from the Bank. The Company has been rated three times over the last 4 years by a leading microfinance rating agency M‐CRIL and it has come out with flying colours. The draft rationale is available for a review which can be available on a request. The last rating received by the company in April, 2008 is Alfa, which is an investment grade. 10 2.3 Operational highlights For the Year Portfolio Outstanding (Rs lakhs) Number of Borrowers Total Staff Total branches External borrowings (Rs lakhs) Paid‐up capital (Rs lakhs) Average Outstanding loan size (Rs) Repayment Rate PAR (>60 days) 31‐March‐05 March‐06 March‐07 March‐08 618.1 718.5 1355.4 1669.4 3,196 3,328 3,770 4,232 29 35 46 58 1 1 1 1 118.1 616.2 806.8 1,148.9 407.7 407.7 407.7 407.7 19,340 21,589 35,953 37,736 97.2% 98.9% 97.7% 97.1% 5.7% 4.6% 5.0% 5.0% 2.4 Geographic spread At present, Arman has Planned Microfinance concentrated operations in the Geography municipal limits of Ahmedabad and Gandhi Nagar twin cities. The organization, however, plans to expand its presence in smaller towns towards districts of North Gujarat that is, Mehsana and Sabarkantha. Arman is in process of introducing its new core microfinance product and setting up a core microfinance team for its operations. It has already recruited a senior Operation’s Manager with more than 6 years of managing group based microfinance operations in southern India. 11 2.5 Organisational structure Arman at the Head Office has Managing Director supported by whole time Director; Head (collections), Head (Legal affairs and Company Secretary), Head (Marketing and Business Development) and Head (Accounts). Arman’s Head Office Structure Board of Directors Mr. Jayendra Patel (Vice Chairman & Managing Director) Mr. A. R. Manakiwala (Whole time Director) Mr Prashant Modi Mr. B.J.Vaghela (C.S.) Mr. R.B. Agarwal (C.A.) Mr. Atul Patel Head (Collections) (Company Secretary & Legal affairs) (Manager Marketing & (Chief Accountant) Business Development) Deepak Rathod Shailesh Patel Manoj Shah Hiren Shah Dilip Patel Himanshu Mistri (Secretarial Work) (Legal & Judicial Matters) (Accounts Assistants) Dharmendra Parmar (Data Entry Operator) Tele Callers Team leader Seizing Agencies Collection Executives Sales Executive Tele Callers Field Investigation Event management 12 2.6 Human resource Arman has a well‐qualified and trained team of staff at all levels. The list below shows the qualification of senior management of Arman: S. No. 1 Name Designation Qualification Experience Sh. Jayendra B. Patel Managing Director B. Sc. B.S 3 Sh. Amit R. Manakiwala Mr. B. J. Vaghela 4 Mr. R. B. Agrawal 5 Mr. Atul M. Patel Whole Time Director Company Secretary Head (Marketing and Business Development) Chief Accountant More than 20 years of Senior Managerial and board level experience in the corporate sector. Mr. Patel was in U.S.A. for a decade where he completed his education. After completing his education he joined business firm in USA namely KAPPS PHARMACEUTICALS INC. as Company Executive. During his stay in USA he successfully turned around two sick units into profitable position. Later he returned to India to concentrate and expand in the field of finance, he devoted fulltime attention to ARMAN LEASE AND FINANCE LIMITED. Mr. Jayendra Patel was Member of the Finance and Banking Committee of Gujarat Chamber of Commerce & Industry (GCCI), Ahmedabad. Mr.Patel is founder member of The Gujarat Finance companies Association and presently he is a secretary of the Association. More than 20 years of Senior Managerial and board level experience in the corporate sector More than 20 years of experience as Company Secretary More than 10 years of corporate experience 2 B.Com B.com, AICWA, FCS B.Com, CA B.Com More than 15 years of experience in Accounts and Auditing. For its planned new core microfinance programme, Arman has planned to have a separate operation’s team. For the back office jobs including accounting and fund raising the same team would function. Arman has recently recruited a senior microfinance professional with more than 6 years of experience in group based microfinance lending in southern India. The organization has also hired the services of two microfinance consultants experienced in both microfinance operations and well as strategy formulation. 13 2.7 Operational status as on 31 March 2008: the base year As on 31 March 2008, Arman had a portfolio of Rs19.6 crores, which was distributed across Personal loan, two wheeler and three wheeler loans 2.8 Distribution of loans – Product Wise Gross Receivables including Interest Receivable (Rs lakhs) 563.3 1041.0 157.0 55.5 141.8 Sr. No. SEGMENT No of Loans 1 Asset Base Micro Loan (Two wheeler) 2,054 2 Asset Base Micro Loan (Three Wheeler) 1,485 3 Unsecured Micro Loans (Personal loan) 586 4 Four Wheeler 102 5 Others (Working Capital finance) 5 TOTAL 4,232 1,958.6* * This figure includes interest receivable also. The figure is derived from portfolio tracking system of Arman and is only for the purpose of presenting the distribution among segments 2.9 Key ratios for last Four years Key Ratios 31‐March‐05 March‐06 March‐07 March‐08 Capital Adequacy Risk Weighted Capital Adequacy ratio 75.1% 58.8% 39.6% 35.5% 97.2% 98.9% 97.7% 97.1% Repayment Rate 5.7% 4.6% 5.0% 5.0% PAR (>60 days) Profitability 13.3% 13.3% 11.1% 7.9% Operating Expense Ratio (OER) 27.6% 28.8% 30.1% 25.9% Loan Portfolio Yield 21.2% 12.4% 10.4% 11.2% Return on Equity 14.3% 6.3% 4.1% 4.1% Return on Assets 14 Chapter 3: Need and market potential of microfinance in North Gujarat 3.1 Arman’s planned operational area Arman Lease and Finance limited is currently operating in the municipal limits of Ahmedabad and Gandhi Nagar. Since the company plans to launch its core group based microfinance programme in the current financial year 2008‐09, it has identified three districts towards north of Ahmedabad for expansion. These are Mehsana, Sabarkantha and Ahmedabad (including Gandhi Nagar). The target beneficiaries of the organization would be people mainly women inhabiting in semi urban and rural with a special focus on those belonging to economically poor and socially neglected communities such as Scheduled Castes, Scheduled Tribes, Other Backward Classes and religious minorities. The organization has surveyed North Gujarat areas with emphasis on Ahmedabad and Mehasana districts and found a dire need for working for the masses these towns and the surrounding areas. SABARKANTHA D The decision of working in North Gujarat is due to several important factors. Arman’s Directors and staff are well aware of local conditions, culture, needs and constraints. Arman has good idea of geography, market potential, social dynamics and various other local issues and constraints. Arman would like to capitalize on this knowledge by continuing working in these areas. Secondly and more importantly, though Gujarat is witnessing increasing volume of economic activities, low income families still find it difficult to raise finance from banks. Local moneylenders wreak havoc in the area through usurious interest rates. Microfinance Institutions are still limited in this area. Arman sees this as an opportunity and would like to use this opportunity to provide timely financial services to the needy. The general economic condition and potential market size has been elaborated further. 15 3.2 Microfinance market in North Gujarat The population of the Gujarat State was 5.1 crores as per the 2001 census data with more than 3 crores of rural population. The density of population is 258 persons per km. The four districts of North Gujarat had a population of 1.1 crores with 34 talukas and 2,775 villages. District Area(in sq. km.) Population Taluka Village 196,024 48,387,270 222 18,569 8,707 58,16,519 10 551 649 13,34,455 4 216 Mehsana 9,027 18,37,892 7 622 Sabarkantha 7,390 20,83,416 13 1,386 25,773 1,10,72,282 34 2,775 GUJARAT Ahmedabad Gandhi Nagar Total Literacy(in %) Talukas/Towns Planned/Potential for microfinance operations 60.91 73.1 Ahmadabad, Bhadiad, Bhoyani, Dehgam, Dholera, Dholka, Jetalpur, Lothal, Nal Sarovar, Surkhej, Vautha 87.1 Adalaj, Dabhoda, Gandhinagar 65.1 Becharaji, Delmal, Kadi, Kalol, Mahesana, Mahudi, Modera, Patan, Shankheshwar, Sidhpur, Taranga, Unjha, Vadnagar 59.0 Himatnagar, Idar, Khed Brahma, Modasa, Shamlaji, Talod As can be observed from the above table, the four selected districts have comparatively dense population suitable for microfinance. Apart from the information as presented above, Arman has collected details of slums of these districts. These slums present good potential for extending the group based microfinance product of Arman. Detailed demographic information on Ahmedabad, Gandhinagar and Mehsana is provided in Annexure 2 of this document. Arman plans to launch its microfinance programme initially in these three districts while it will start operations in Sabarkantha in 2009‐10. Gujarat including North Gujarat is the main producer of tobacco, cotton, and groundnuts in India. Other major food crops produced are rice, wheat, jowar, bajra, maize, tur, and gram. North Gujarat has an agricultural economy; the total crop area amounts to more than one‐half of the total land area. Animal husbandry and dairying have played a vital role in the rural economy of North Gujarat. Dairy farming, primarily concerned with milk production, functions on a cooperative basis with lacs of members. Gujarat is the largest producer of milk in India. Amul milk co‐operative federation products are well known all over India and is Asia's biggest dairy. 16 Among livestock raised are buffalo and other cattle, sheep, and goats. As per the results of livestock census 1997, there were 209.70 lakh livestock in Gujarat State. As per the estimates of the survey of major livestock products, during the year 2002‐03 the Gujarat produced 6.09 million tonnes of milk, 385 million eggs and 2.71 million kg of wool. Gujarat also contributes inputs to industries like textiles, oil and soap. All these offer immense opportunity for the rural masses of Gujarat. Over the last five decades in Gujarat, with the changes in the agrarian economy and the adoption of a market economy, the proportion of poor, particularly those below poverty line has steadily declined. However, even though not officially classified as poor by the State, the vast majority of the population live only just above the poverty line. They do not own the means of production or possess marketable skills. They work mainly as casual labourers in the informal sector of both the rural and the urban economy and have no social power or security. The above mentioned quantitave and qualitative facts suggest a good microfinance market scenario. Even a conservative estimate suggest potential borrower base of atleast 10 lakhs with a potential loan appetite of 2,000 crores in the four selected districts. 3.3 Competition Analysis Arman operates in highly competitive area as far as its existing segment of market is concerned. Currently every private as well as public sector banks have started providing two‐three wheeler loans with different schemes. Additionally it faces competition from other MFIs. However, strong linkages with auto dealers and brokers help the company generate new business. For its new planned core microfinance, competition at present is very limited though there is an indication of SKS Microfin Ltd entering the state. Currently only small NGOs are engaged in the state which are following the SHG model. The scale achieved by these organsiations is limited and still the major proportion of the microfinance maket is catered by informal entities such as the traders and moneylenders. The advantage with Arman over its competitors would be its knowledge of region, strong back office systems, strong capital adequacy for growth and skilled human resource. Anyways the company follows conservative financing model with emphasis on client selection and loan appraisal and is planning to achieve a modest target of around 60,000 borrower base by 2013. 17 Chapter 4: Governance This section discusses strategy of the organisation on various issues related to Governance. 4.1 Legal Form Arman Lease and Finance Limited is a Public Limited Non‐Banking Finance Company. It is a Public Limited Non‐ Banking Finance Company. Its is a Category A company implying that it is eligible to avail public deposits and is well regulated by the Reserve bank of India. Arman has a suitable legal form to conduct finance business and it does not foresee any legal risk continuing in this legal form. The Company is well‐regulated by Reserve Bank of India and meets all regulatory requirements. Therefore, Company will not be making any change in its legal form. 4.2 Equity Structure In line of the expansion plans that the company perceived, it was decided to come out with public issue and the company has issued 28,00,000 Equity shares of Rs. 10 each on 21st August, 1995 aggregating to Rs 280 lacs and has received overwhelming response from the public and it was oversubscribed by 7 times in the category of small investor and more than 22 times in case of applicants with application of more than 1000 shares. The company retained an additional amount of Rs 2.66 lacs as per the SEBI Guidelines and hence made an allotment of shares of Rs 282.66 lacs. During the said period the company’s Promoters has also increased their contribution to capital in the company up to Rs 125 lacs. Hence the total paid up capital of the company after the public issue increased to Rs. 407.66 lacs, which has been continued till date. Table 3: Arman’s Net worth as on 31 March 2008 Particulars Authorised Share Capital Paid‐up Capital Reserves and surplus Retained profits General reserve Total reserves and surplus Total net worth Rs 50,000,000 40,766,000 19,383,381 6,260,566 25,643,937 66,409,937 18 The ownership structure of the company is shown in the following table. Table 4: Ownership structure: Shareholding (as on 30 June 2008) S. no. Shareholder Category % of shareholding 1 Promoters ‐ Indian 2 Bodies Corporate 3 Indian Public (including relatives of promoters) 4 NRIs/OCBs Total 30.62 6.37 51.77 10.88 100.00 As the company is comfortably placed as far as the equity is concerned, there is not much significant change likely in the structure. However, Arman is now poised to expand rapidly, if in the future, the company requires capital it will be open to equity investments from external sources. So far company has maintained a ‘close’ strategy and the shareholders are mainly Directors or relatives of Directors, but now if need be the Company may explore external equity sources. However, with Rs6.6 crores of Net worth the company is very comfortably placed at present and need for equity investment from any external source does not seem likely at least for the next one year. 4.3 Fund Mobilisation Arman’s lender base was limited to ICICI Bank and Indusland Bank till the year 2006. However, it diversified its funder base in the year 2006‐2007 and was able to mobilise funds from HDFC Bank, Axis Bank and SIDBI which gave a major push to the company’s portfolio. The total outstanding borrowings from banks and financial institutions as on 31 March 2008 were Rs1,061.5lakhs Arman is in discussions with numerous banks to establish lines of credit. These banks include Axis bank, ICICI bank and SBI. Funds from external sources will be utilized primarily for the microfinance loans, which will now be the focus area. The Company will also try keep borrowing sources diversified and will prefer not to have excessive dependence on a single source of fund. 4.4 Growth, expansion and competition The growth of the company since start of its finance activities has been reasonable. In March 2008 the gross portfolio (including interest receivable) of the company reached Rs19.59 crores. Arman has decided to expand its portfolio mainly in Microfinance loans and to some extent secured micro loans with vehicle collateral while restricting Personal and Consumer loans which have high default rates. Arman has already experimented with Microfinance loans and has witnessed potential for high growth. Arman through internal surveys and results of its microfinance loans so far has realized that there is a huge need for credit in lower income group segment. These clients do not have access to any formal financial institutions. Such clients rely on Moneylenders who charge unimaginably high interest rates. Poor and low‐income clients, not having any alternative, have to resort to taking loans from such moneylenders. Arman has found that catering to such clients has distinct advantages 19 such as exposure to one client is small, clients are involved in daily business activities having short business cycle and hence money is quickly recoverable. Since, the collections are more frequent (weekly) repayment rates are significantly better. Geographically, Arman has identified three districts towards north of Ahmedabad for expansion. These are Mehsana, Sabarkantha and Ahmedabad (including Gandhi Nagar). Arman will focus on semi‐urban and town like centers in these areas where most of the economic activities take place. With Microfinance loans it would like to support cattle breeders, small entrepreneurs, daily vendors, petty shop‐keepers and traders who have running businesses and generate fast cashflows. Arman in near future will restrict itself from going significantly into remote villages, as it does not have the required experience in that. The organisation plans to cover the following centres in the state under microfinance in the next three years. Table 5: Planned Geographic Coverage S. no. 1 Districts Ahmedabad 2 Gandhi Nagar 3 Mehsana 4 Sabarkantha Centres Ahmadabad, Bhadiad, Bhoyani, Dehgam, Dholera, Dholka, Jetalpur, Lothal, Nal Sarovar, Surkhej, Vautha Adalaj, Dabhoda, Gandhinagar Becharaji, Delmal, Kadi, Kalol, Mahesana, Mahudi, Modera, Patan, Shankheshwar, Sidhpur, Taranga, Unjha, Vadnagar Himatnagar, Idar, Khed Brahma, Modasa, Shamlaji, Talod Details of growth and planned expansion in numeric terms are elaborated in Financial Section (Chapter 7). Arman plans to grow only in Gujarat as it has experience of these areas. It is well aware of livelihood and socio‐ economic condition of the state. Further, the microfinance potential in these areas is very good. Much has already been elaborated on this in Chapter 3. As far as competition is concerned, Arman does face competition at present and will be facing it in future as well. However, until now competition from microfinance institutions is not an area of major concern. The competition will increase once SKS establishes its operations. While moneylenders are charging an excessively high interest rates, they do not pose much threat once Arman introduces its loan products. As far as NGO‐MFIs are concerned they are generally small in size and does not have infrastructure and equity comparable to Arman. 4.5 Governing Board Arman has an eight‐member Board. All the Board members are well qualified and experienced professionals. Four of the Board members including the Chairman, are independent directors. The Chairman, Shri Chinubhai Shah, has 37 years of experience in corporate sector. He held the position of President of Gujarat Chamber of Commerce and was a guest faculty for courses in law and management to various universities and institutes of repute includingGujarat University and IIM, Ahmedabad. He shows keen interest in the area of corporate governance and is presently the president of Gujarat Investors’ and Shareholders’ Association. He plays his role in the Investors’ Grievance Committee and Audit Committee of Arman too. 20 4.6 Arman’s plan to establish microfinance As Arman is still new to microfinance, it would be making changes in its microfinance methodology, delivery model, product and systems such as Accounting, MIS and controls. The objective is to have systems and mechanisms, which can enable fast growth, are simple and are yet sound from control perspective. To this effect, the Company has already hired the services of professional microfinance consultants, to review its present systems, model, product and provide comprehensive guidance on transforming the company into an effective microfinance service provider. The organization has also recruited an experienced microfinance practitioner with more than 6 years of microfinance experience in southern India with a reputed organization. 21 Chapter 5: Microfinance Methodology 5.1 Current Loan Policies Currently the loan applications are collected by the sales executives who are placed at the vehicle dealers’ showrooms and other sales points. This requires an arrangement with the vehicle dealers. In case of personal loans, applications are collected by the company at its office in the Ahmedabad city. It also receives applications from Direct Marketing Agents (DMAs) along with the relevant documents (proof of identity and residence, income tax returns and bank statements). A co‐applicant, who serves the purpose of guarantor, is compulsorily asked for. After collecting the application a field investigation and a telephonic enquiry of the applicant and the joint applicant (guarantor) is conducted. Loans are disbursed through cheques and PDCs are collected for repayments 5.2 Features of loan products currently offered by Arman Typical features Two‐wheeler loan Purpose New two wheeler purchase Collateral/ Guarantee Hypothecation of vehicle and PDCs 12‐36 months Rs15000‐Rs40000 Avg‐Rs29,000 Loan term Loan size Three‐ Wheeler loan New three wheeler purchase Hypothecation of vehicle and PDCs 12‐36 months Rs50,000‐ Rs1,00,000 Avg‐Rs82,000 Used vehicle loan Personal loan Used two wheeler Working capital, and four wheeler family events etc purchase Hypothecation of Guarantor and vehicle and PDCs PDCs 12‐36 months 12‐36 months Rs15,000‐Rs50,000 Rs15,000‐Rs40,000 Avg‐Rs25,000 Avg‐Rs28,000 5.3 Core Microfinance Delivery Model Arman currently follows Individual methodology for its loans. It plans to follow Group Methodology, for the new core microfinance product. The group size will be between 8‐12 members. The group members will have to share the responsibility of repayment. The organization will put in place a separate trained team for this programme with an experienced team leader. 5.4 Operational Unit Arman will set up branches for disbursement, collection and monitoring of microfinance loans. Decision making, accounting and MIS will be decentralized for achieving faster expansion. Branch Manager will be responsible for achieving growth as well as portfolio quality targets. 5.5 Description of Core Microfinance loan products 22 Description of Loan Products The company will have a single group loan product with following features and policies 1st Cycle loan for income generating activities Loan size Rs5,000 to Rs15,000 Loan duration 12 months Loan Purpose Income generating activities like livestock especially for milch animals, petty shop, hawker business etc Loan Repayment Installment is paid monthly at the office Borrowers’ profile Lending to be made to group of 8 to 12 members, preferably women Guarantee/collateral No Collateral, Joint liability of group for repayment of each individual’s loan Rate of interest 24% per annum, calculated on declining loan balance Documentation Charges Rs100 per loan agreement Security Deposit 10% of the loan amount, to be adjusted with the loan outstanding towards the end of the loan 2nd and subsequent loans for income generating activities Loan size Rs5,000 to Rs50,000 Loan duration 12 months to 24 months Loan Purpose Income generating activities like livestock especially for milch animals, petty shop, hawker business, working capital or establishment of trading business, purchase of equipments etc Loan Repayment Instalment is paid monthly at the office Borrowers’ profile First loan is repaid without any delays. Lending can be made to individuals or to the group of 8 to 12 members, at the option of the borrower Guarantee/collateral No Collateral, One Guarantor required in case of loan to individual Rate of interest 24% per annum, calculated on declining loan balance Documentation Charges Rs100 per loan agreement Security Deposit 10% of the loan amount, to be adjusted with the loan outstanding towards the end of the loan Loans of or more than Rs20,000 will be lent to borrowers’ with existing enterprises/activities. Loan appraisal process based on cash flow analysis of the borrowers’ will be carried out by trained appraisal staff. Loan will be approved by the credit committee. Seasonal loan/Top‐up loan/Social Purpose loan • This loan is for borrowers’ in second or subsequent cycles • The loan can be given as a top‐up loan also, that is, even when a second or subsequent cycle loan for income generating purpose is outstanding. • Purpose of this loan is to meet seasonal business requirements or social requirements such as a marriage or medical emergency. 23 Loan size Loan duration Loan Repayment Borrowers’ profile Guarantee/collateral Rate of interest Documentation Charges Security Deposit Rs5,000 to Rs20,000 Upto 12 months Instalment is paid monthly at the office First loan is repaid without any delays. Lending can be made to individuals or to the group of 8 to 12 members, at the option of the borrower No Collateral, One Guarantor required 24% per annum, calculated on declining loan balance Rs100 per loan agreement 10% of the loan amount, to be adjusted with the loan outstanding towards the end of the loan Portfolio of seasonal/top‐up loan product not be more than 20% of total outstanding loan portfolio at any time. Pre‐Payment Policy 1. No pre‐payments are allowed except in case the borrower makes full payment to close an existing loan. 2. No pre‐payments are allowed before half the loan term is completed 3. No pre‐payment penalty is charged from the clients 5.6 Microfinance Procedures Borrowers will be selected from lower income group (earning less than $2 per day) In the rural and urban slum areas borrowers should be only women. There may be male clients in the urban areas and particularly among target groups with micro‐entrepreneurs and small trading activities. However, male clients would not be more than 5% of total number clients. Detailed procedure as follows: Client Identification: Field Officers (FO) based in respective branch offices will be responsible for locating potential clients in market areas. The clients should already be involved in an income generating activity. Group formation: Homogenous clients would be identified in an area with similar loan requirements. FOs would organize them into groups of 8‐12 members and would ask them to form groups. Each group should have a Group leader elected by the Group members. FOs would inform the group about Arman’s loan policies, processes and group’s collective responsibilities. Loan Application: Once the group has been formed loan application from each client along with address proof would be mobilized. If formation of group is not possible or particular client has higher loan demand then client is considered for Individual loan. The Loan Application in the Arman’s format has to be submitted by the clients to the Branch manager at the office. After receiving the applications manager would conduct Field Investigation (GRT, as called in the Grameen model). 24 Disbursement: Disbursements would be made at the Branch Office. Head Office would send the funds as per the disbursement plans of the branches and the Branch Manager would make the disbursements though cheque or cash as is decided for the individual branch. The clients have to bring the processing fee and documentation charges with her. These are not deducted from the loan amount. Collection: Repayments are weekly and are either made at the office or deposited by the groups in the bank account of the company. While making the collection the client is given the receipt and the collected amount has to be deposited with the Accountant in the branch office. Overdues follow up system: In case FO encounters an overdue FO has to enquire about reason of overdue from the group and the action/discussion taken place within the group on default. FO enquires as to why other members of Group have not paid on her behalf. If the Group is unable to pay, Branch manager is informed who should visit the clients immediately and take commitment on when the amount would be repaid. The product provides limited flexibility to the client to decide the loan size and loan term. Based on loan term and loan size weekly installment is set, however, repayments have to be made weekly. The loans decisions are taken completely based on appraisal done by the Field Officer and the Branch Manager. Field Investigation of individual borrowers looks into primarily the cash flows and asset base of the borrower. Loan Insurance 1. Life Insurance with a limit of loan amount is compulsory for each and every borrower as the loan is sanctioned 2. Nominee of insured borrower would be Arman 3. In case a borrower dies, amount remaining after recovering the loan outstanding would be delivered to the legal heir of borrower. Loan Write‐off and provisioning policy 1. The right of loan write‐off rests only with the Board. Board after being satisfied that the possibility of recovering the loans is remote or is costly and time consuming vis‐à‐vis its benefits; it may decide to write‐off the loans. 2. Provision for overdue loans on portfolio at risk should be made on the basis of ageing of the overdues Loan classification Provision as a % of Loan Outstanding Portfolio with no overdues 1% Overdues ageing 0‐30 days 20% Overdues ageing 31‐60 days 40% Overdues ageing 61‐90 days 60% Overdues ageing 91‐180 days 80% Overdues ageing >180 days 100% 25 Chapter 6: Management Systems 6.1. Human resource quality & management Arman has well‐qualified and competent managerial staff. The staff members, both at the office and at sales point have a good understanding of the operational procedures. Roles and responsibilities of staff are clearly established. Arman has been careful not to outsource its critical function of appraisal. Appraisal team consists of both Whole time Director and the Manager (Marketing and Business Development), who is a Chartered Accountant. Realising the fact that recovery of new overdues is critical, it has developed an in‐house team of ten collection staff who have the responsibility of recovering the overdues 6.2. Accounting System and MIS MIS at Arman is strong. It is computerised and Arman has utilised the services of a local professional software development agency for MIS maintenance. The whole time director has played a key role in the design of the software, which has features to cater to the specific needs of the company. Source codes are also owned by the company and are well documented by the developer. Software has Visual Basic as the front end and SQL based back‐end. The software has integrated MIS and accounting. The present software has sufficient security systems. MIS is able to generate reports for the analysis by top management. Important documents including the contract documents, RC books, and PDCs are stored in the Head Office’s fireproof lockers. Accounting systems are strong and requirements of Companies Act, Income Tax Act and all RBI guidelines on reporting for NBFCs are followed. It follows the policy to write‐off all the debts overdue for more than six months and provides adequate proof to the income tax authorities to get acceptance of the write‐off. For loan cases in which partial payments are still coming, it provides provision on portfolio as per the RBI guidelines. Company being a class ‘A’ NBFC has to make regular reporting to the RBI and is also audited periodically by the RBI staff. It also needs to submit various reports to the stock exchanges as per the listing agreement with them. In addition to this, it is audited every quarter by the External Auditor, as well as, the Internal Auditor of the company. External Auditor, on the requirement of Arman’s Board, audits all the vouchers of the company. 6.3. Internal control systems and financial planning To maintain the cash credit limits with the banks, portfolio growth and cash position monitored on daily basis by whole time director. Bank reconciliation is done twice a month. Growth plans have been set up till 2013. A private chartered accountancy firm does the work for internal auditor for Arman, which submits a quarterly report to Board. The report deals with an analysis of the major financial figures and covers policy issues to a limited extent. Internal auditor also comments on the policy decisions taken by the management. One such issue raised by the Internal Auditor in a recent report was with regards to the increase in the interest costs and disproportionate rise in bad debts written off. 26 6.4. Infrastructure Arman has a well‐furnished Head Office in Ahmedabad. Its office is equipped with computer hardware and software, fax machines, telephones, furniture and fixture. Anticipating that increased number of microfinance clients, Arman plans to set‐up branch offices. 27 Chapter 7: Business Plan Projections 7.1 Current financial performance ARMAN has had a decent financial performance and is making profits. The OSS of the organisation in March 2007 was 140.9% and the operating expenses are also reasonable at 10.3%. The company has followed a conservative expansion model with much emphasis on maintaining a good portfolio quality. It has maintained a high repayment rate of 97.1% and a reasonable Portfolio at Risk (>60 days) of 5.1%. The company has very healthy capital adequacy of over 35.5% and Arman has now decided to leverage and achieve high growth with introduction of microfinance product. In the last financial 2007‐08, the Company had experimented with microfinance loans. From this financial year onwards it will introduce group based microfinance lending model. 28 The financial statements of the company for the last two years are presented below. ARMAN LEASE AND FINANCE LIMITED BALANCE SHEET AS ON : P A R T I C U L A R S Schedule No. SOURCES OF FUNDS 1. Shareholders' Funds : (a) Share Capital (b) Reserves and Surplus 1 2 40,766,000 25,643,937 2. 3 4 106,150,436 8,737,688 66,409,937 114,888,124 920,974 86,677,736 879,339 182,219,035 147,265,788 APPLICATION OF FUNDS 1. Fixed Assets Gross Block Less : Depreciation 5 11,442,432 2,894,944 2. 3. Investments Current Assets, Loans & Advances (a) Current Assets (b) Loans & Advances 6 7 8 23,498,951 159,695,653 8,547,488 975 7,512,995 84,975 9,987,878 136,405,890 4. Less : Current Liabilities & Provisions (a) Current Liabilities (b) Provisions 9 10 183,194,604 1,751,617 7,772,416 9,524,033 173,670,571 6,725,951 139,667,818 182,219,034 147,265,788 Notes to Accounts As per our report of even date attached. For, J. T. SHAH & COMPANY CHARTERED ACCOUNTANTS 15 For & On behalf of Board of Directors Loan Funds : (a) Secured Loans (b) Unsecured Loans 3. Deferred Tax Liability (Net) Total….. Net Current Assets 31/03/2008 Rs. 31/03/2007 Rs. 40,766,000 18,942,713 59,708,713 80,684,872 5,992,864 10,366,680 2,853,685 146,393,769 1,138,871 5,587,080 29 ARMAN LEASE AND FINANCE LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED P A R T I C U L A R S INCOME 1. Income from Operations 2. Other Income EXPENDITURE 1. Administrative & Other Expenses 2. Interest 3. Depreciation 4. Write‐offs PROFIT BEFORE TAXATION Less : Provision for Taxation ‐‐ Current Tax ‐‐ Fringe Benefit Tax ‐‐ Deferred Tax Assets/ (Liability) PROFIT AFTER TAXATION Prior Period Items Excess / (Short) Provision of Earlier Years Add : Balance B/F from last year PROFIT AVAILABLE FOR APPROPRIATION Interim Dividend Tax on Interim Dividend Tranfer to General Reserve Tranfer to Special Reserve BALANCE CARRIED TO BALANCE SHEET Notes to Accounts As per our report of even date attached. For, J. T. SHAH & COMPANY CHARTERED ACCOUNTANTS Schedule No. Rupees 31/03/2008 Rs. 11 38,712,302 12 173,729 31/03/2007 Rs. 31,279,653 241,970 31,521,623 38,886,031 13 11,110,317 14,103,677 14 12,348,498 8,440,750 5 579,193 497,425 13 3,555,164 27,593,172 Nil Nil 15 11,292,859 8,479,771 (4,100,000) (82,500) (41,635) 7,068,724 Nil (367,500) 6,701,224 14,182,157 20,883,381 (3,050,000) (65,000) 49,834 5,414,605 Nil (375,722) 5,038,883 10,153,273 15,192,157 Nil Nil Nil 1,010,000 14,182,157 Nil Nil 1,500,000 19,383,381 23,041,852 For & On behalf of Board of Directors 30 7.2 Business plan projections This section projects the financial statements based on the growth plans of the company. Based on the projected financial statements various ratios have also been projected. Assumptions 31‐Mar‐08 For the year ending: (Actual) Mar‐09 Mar‐10 Apr‐11 Mar‐12 Mar‐13 Asset Base Micro Loan (Two wheeler) 2,054 2,773 3,605 3,965 4,362 4,798 Asset Base Micro Loan (Three Wheeler) 1,485 1,708 1,964 2,062 2,165 2,273 Unsecured Micro Loans (Personal loan) 586 615 646 678 712 748 Four Wheeler and other 107 112 118 124 130 137 Core Microfinance (New Product) 4,000 14,000 26,600 39,900 53,865 Total 4,232 9,208 20,333 33,430 47,269 61,821 Average loan size (disbursed) – Two Wheeler 29,000 30,000 31,500 33,075 34,729 36,465 Average loan size – Three Wheeler 82,000 86,100 90,405 94,925 99,672 104,655 Average loan size –Personal Loan 28,000 29,400 30,870 32,414 34,034 35,736 Average loan size – Other 25,000 26,250 27,563 28,941 30,388 31,907 Average loan size (core microfinance‐new) ‐ 12,000 13,200 14,520 15,246 16,008 Yield– Two Wheeler 25.0% 24.5% 24.5% 24.0% 23.5% 23.0% Yield – Three Wheeler 26.0% 25.5% 25.0% 24.5% 24.0% 24.0% Yield–Personal Loan 36.0% 36.0% 37.0% 36.0% 35.0% 34.0% Yield – Other 20.0% 20.0% 20.0% 20.0% 19.5% 19.0% Yield (core microfinance‐new) ‐ 30.0% 30.0% 30.0% 29.0% 28.0% Weighted Average Yield 25.9% 26.2% 26.4% 26.5% 26.1% 25.8% Cost of external funds 12.2% 13.5% 13.0% 12.7% 12.2% 12.0% Repayment rate from groups 97.1% 96.5% 96.0% 96.5% 96.5% 96.5% Loan loss reserve and write‐offs Ratio 2.23% 2.6% 2.6% 2.8% 3.0% 3.2% 31 Projected Income Statements (Rs Lacs) For the year ending: 31‐Mar‐08 31‐Mar‐09 31‐Mar‐10 (Actual) Income Interest income 382 536 793 Other income 7 10 15 Total Income 389 546 808 Cost Financial 123 216 329 Loan loss provision and write‐off 36 24 27 Salary 41 62 86 Travel 3 5 8 Other operating Expenses 67 94 141 Depreciation 6 8 11 Total Cost 276 409 602 Surplus/Deficit 113 137 206 Provision for tax 42 56 81 Net Surplus/Deficit 71 80 124 31‐Mar‐11 Projections 1,066 20 1,086 436 35 108 10 177 13 778 308 120 188 31‐Mar‐12 31‐Mar‐13 1,316 25 1,341 1,580 30 1,610 523 40 132 12 216 16 939 619 47 161 14 263 20 1,124 402 486 155 187 247 299 32 Projected Balance Sheets (Rs Lacs) As on: 31 March 2008 2009 2010 Actual Assets Cash and Bank balance 163 241 313 Other Current Assets 72 113 160 Loan Outstanding Asset Base Micro Loan (Two wheeler) 459 643 932 Asset Base Micro Loan (Three Wheeler) 849 1,061 1,326 Unsecured Micro Loans (Personal loan) 128 160 176 Four Wheeler and Other 161 201 221 Group based Microfinance loans ‐ 422 866 Total Loans outstanding 1,597 2,487 3,522 Loan loss reserve ‐5 ‐29 ‐56 Net loans outstanding 1,592 2,458 3,466 Net fixed assets 85 117 137 Total Assets 1,913 2,929 4,076 Liabilities and Net Worth External Borrowings 1,149 2,045 3,020 Other Current Liabilities 100 140 187 Equity 408 408 408 Retained surplus/deficit 186 256 337 Current surplus/deficit 71 80 124 Net worth 664 744 869 Total Liabilities and Net Worth 1,913 2,929 4,076 2011 Projections 335 205 1,072 1,459 185 232 1,567 4,515 ‐91 4,424 166 5,129 3,840 232 408 461 188 1,057 5,129 2012 2013 444 252 459 303 1,233 1,605 203 244 2,272 5,557 ‐131 5,426 202 6,324 1,356 1,685 213 256 3,171 6,682 ‐178 6,504 248 7,514 4,740 279 408 649 247 1,304 5,580 330 408 896 299 1,604 6,324 7,514 33 7.3 Financing Requirements The projected cash flow statement gives the estimate of funding requirements for Arman Lease and Finance Limited. Projected Cash flow Statements (Rs Lacs) For the year ending: Mar‐09 Mar‐10 Apr‐11 Mar‐12 Mar‐13 Inflows Opening cash 163 241 313 335 444 External Borrowings 1,700 2,400 2,800 3,700 4,000 Repayments from Borrowers 2,102 3,956 6,394 8,996 11,938 Equity ‐ ‐ ‐ ‐ ‐ Interest income 536 793 1,066 1,316 1,580 Other income 10 15 20 25 30 Total Inflow 4,511 7,405 10,594 14,372 17,992 Outflows Disbursement 2,993 4,991 7,387 10,038 13,063 Repayments to Lenders 804 1,424 1,980 2,800 3,160 Operating expenses (excl. Depr.) 161 236 295 359 438 Interest paid on borrowings 216 329 436 523 619 Tax 56 81 120 155 187 Dividends ‐ ‐ ‐ ‐ ‐ Fixed assets purchase 40 30 42 53 66 Total Outflow 4,270 7,092 10,259 13,928 17,532 Net cash balance 241 313 335 444 459 34 Projected ratios For the year ending: Operational self sufficiency Return on average assets Operating Expense Ratio Financial Cost Ratio Average outstanding/borrower (Rs) Portfolio growth rate Return on Equity Risk weighted capital adequacy ratio Mar‐08 Actual Mar‐09 Mar‐10 140.9% 4.1% 7.9% 8.3% 37,735 25.1% 11.2% 35.5% 133.4% 3.3% 8.3% 10.6% 27,010 55.7% 11.4% 32.1% 134.1% 3.5% 8.2% 11.0% 17,322 41.6% 15.4% 23.5% Apr‐11 Mar‐12 Mar‐13 Projections 139.6% 142.8% 143.2% 4.1% 4.3% 4.3% 7.7% 7.5% 7.5% 10.8% 10.4% 10.1% 13,505 11,756 10,809 28.2% 23.1% 20.2% 19.5% 21.0% 20.6% 22.4% 22.6% 23.1% Notes to projections 1. Repayment rate: has been assumed considering the current performance of Arman. Repayment rate on the new microfinance product is expected to be around 97% taking into account the performance of NGOs operating in the region. 2. Share of microfinance loans: has been gradually increased. 3. Other income: is mainly fee and penalty income from borrowers. 4. Loan Loss Reserve: and write‐offs are based on repayment rates. 5. Tax: has been assumed at 35% of the PBT Plus Loan Loss Provision 6. Average loan size: of all the products has been gradually increased keeping in account the increasing absorption capacity of the borrowers. Overall average outstanding of the company is expected to go down steeply with an increase in the share of microfinance loans. 7. Repayment from borrowers is assuming one year loan term for new microfinance loan product and for rest of the product the ratio of collections to total disbursements of past year is applied. 8. Financial cost ratio which is total financial cost as a proportion to total loan portfolio is poised to increase with an increase in rate of interest charged by the lenders as well as due to increase in debt‐equity ratio. 9. Operating expense ratio is expected to go up despite an increase in scale of operations. This is mainly due to decrease in average ticket size of loans due to expansion in microfinance loan segment. 10. Company does not plan to raise equity at this point since the projection suggest a comfortable capital adequacy position. 35 Key Definitions Active borrowers Number of borrowers, which have loans outstanding as on the date of reporting. Loan portfolio Outstanding loans of the organization, which is appearing in the books. PAR60 Outstanding balance of loans with overdues more than 60 days Total portfolio outstanding Operational Self‐Sufficiency (OSS) Total operating incomes Total operating expenses (excluding taxes) Operating Expense Ratio (OER) Total Operating expenses during the year Average portfolio outstanding for the year Capital Adequacy Ratio (CAR) Total qualifying capital (allowed for the NBFCs) Risk weighted Assets Return on Portfolio (RoP) Profit before taxes Average portfolio outstanding for the year Return on Equity (RoE) Profit after taxes Average net‐worth during the year Yield on portfolio (YoP) Interest and fees income on portfolio Average portfolio outstanding for the year Return on Assets (RoA) Profit after taxes Average assets during the year 36 Annexure 1 Schedules to the Financial Statements ARMAN LEASE AND FINANCE LIMITED SCHEDULES "1 TO 15" FORMING THE PART OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 31st MARCH, 2008 As at P A R T I C U L A R S 31/03/2008 Rs. SCHEDULE ‐1 SHARE CAPITAL : Authorised Capital : 5,000,000 (Prev. Year 5,000,000) Equity Shares of 50,000,000 Rs. 10/‐ each Issued, Subscribed & Paid up Capital : 4,076,600 (Prev. Year 4,076,600) Equity Shares of Rs. 10/‐ each fully paid up 40,766,000 Total….. 40,766,000 SCHEDULE ‐ 2 RESERVES AND SURPLUS : General Reserve : Balance as per last Balance Sheet 625,556 Add: Transferred from Profit & Loss A/c. Nil 625,556 Special Reserve Balance as per last Balance Sheet 4,135,000 Add: Transferred from Profit & Loss A/c. 1,500,000 5,635,000 Profit and Loss Account 19,383,381 Total….. 25,643,937 SCHEDULE ‐ 3 SECURED LOANS : Term Loans from Banks 78,722,220 (secured against book debts and personal guarantee of one of the Director ) Term Loans from Financial Institutions 7,328,000 37 As at 31/03/2007 Rs. 50,000,000 40,766,000 40,766,000 625,556 Nil 625,556 3,125,000 1,010,000 4,135,000 14,182,157 18,942,713 62,315,569 10,000,000 (Secured by Hypothication of hypothicated assets and also by personal guarantee of Directors ) Working Capital Loans form Banks (Secured by way of Mortgage of Office Premises, Book debt and also by personal guarantee of Directors ) Vehicle Loan from Banks (Secured by way of Mortgage of specified assets under Finance ) Total….. SCHEDULE ‐ 4 UNSECURED LOANS : From Directors & their Relatives Inter Corporate Deposit Total….. SCHEDULE ‐ 6 INVESTMENTS : Long Term Investments (Non Trade) : Quoted Shares 300 (Prev. Year 300) Shares of HDC Ltd. of Rs. 10/‐ each fully paid up Nil (Prev Year 2,400) Shares of Sayaji Iron & Steel Ltd of Rs. 10/‐ each fully paid up Debentures 150 (Prev. Year 150) NCD of HDC Ltd. of Rs. 50/‐ each fully paid up Less : Provision for Diminution in value of Investments Total….. SCHEDULE ‐ 7 CURRENT ASSETS : (Considered Good unless otherwise stated) STOCK IN TRADE : (As Certified by Directors) 150 Shares (Prev. Year 150) of Core Emblich Ltd. of Rs. 10/‐ each fully paid up 400 Shares (Prev. Year 200) of Rolta India Ltd. of Rs. 10/‐ each fully paid up 1000 Shares (Prev. Year 1,000) of Rolatainer Ltd. of Rs. 10/‐ each fully paid up 80 Shares (Prev. Year 800) of Silverline Ltd. of Rs. 10/‐ each fully paid up 32 Shares (Prev. Year Nil) of Silverline Animation 19,253,345 846,871 106,150,436 8,737,688 Nil 8,737,688 8,737,688 17,400 Nil 5,400 22,800 21,825 975 1,200 104,540 16,930 2,232 38 8,369,303 Nil 80,684,872 5,992,864 Nil 5,992,864 17,400 84,000 5,400 106,800 21,825 84,975 530 43,880 14,040 12,440 Ltd. of Rs. 10/‐ each fully paid up 660 Shares (Prev. Year 660) of Pentamedia Graphics Ltd. of Rs. 1/‐ each fully paid up 1,000 Shares (Prev. Year 2,500) of Sanara Computer Ltd. of Rs. 10/‐ each fully paid up 800 Shares (Prev. Year 800) of Shreerama Multi Ltd. of Rs. 5/‐ each fully paid up 100 Shares (Prev. Year 100) of Trygen Technology Ltd. of Rs. 10/‐ each fully paid up 1 Shares (Prev. Year 1) of Reliance Capital Ltd. of Rs. 10/‐ each fully paid up 127 Shares (Prev. Year 27) of Reliance Ind. Ltd. of Rs. 10/‐ each fully paid up 70 (Prev. Year Nil) of BGR Energy Ltd. of Rs. 10/‐ each fully paid up 27 Shares (Prev. Year 27) of Reliance Comm. Ltd. of Rs. 5/‐ each fully paid up 2 Shares (Prev. Year Nil) of Reliance Energy Ltd. of Rs. 10/‐ each fully paid up 9000 Shares (Prev. Year Nil) of Power Grid Corporation of Rs. 10/‐ each fully paid up 27 Shares (Prev. Year 27) of Reliance Natural Resources Ltd of Rs. 5/‐ each fully paid up NiL Shares (Prev. Year 500) of I..P.C.L. of Rs. 10/‐ each fully paid up 5 Shares (Prev. Year 5) of Chola Mandalam Fin. Ltd. of Rs. 10/‐ each fully paid up 5 Shares (Prev. Year 5) of Ashok Leyland Fin. Ltd. of Rs. 1/‐ each fully paid up 5 Shares (Prev. Year 5) of First Leasing of Rs. 10/‐ each fully paid up 5 Shares (Prev. Year 5) of HDFC Bank Ltd. of Rs. 10/‐ each fully paid up 5 Shares (Prev. Year 5) of ICICI Bank Ltd. of Rs. 10/‐ each fully paid up 5 Shares (Prev. Year 5) of Indusind Bank Ltd. of Rs. 10/‐ each fully paid up 5 Shares (Prev. Year 5) of Kotak Mahindra Bank Ltd. of Rs. 10/‐ each fully paid up SUNDRY DEBTORS : Unsecured, Considered good unless otherwise stated Outstanding for a period exceeding six months : Good Secured Unsecured 320 449 13,080 4,800 1,765 226 120,767 23,933 6,741 1,272 884,700 122 Nil 749 178 211 3,594 2,498 159 1,222 755,855 2,674,012 3,429,867 ` 1,191,687 39 Nil 3,241 32,700 4,840 2,560 537 9,058 Nil 6,741 1,007 Nil 122 111,709 547 178 201 3,594 2,498 159 1,222 251,803 438,304 1,135,201 1,573,505 Doubtful Nil Nil 3,429,867 Others : Good ‐‐ Secured 1,967,448 ‐‐ Unsecured 652,140 2,619,588 Doubtful Nil Nil 2,619,588 6,049,455 CASH AND BANK BALANCES : Cash on Hand 362,753 Balance with Scheduled Banks ‐ In Current A/c. 14,984 (Maximum Debit Balance at any time during the year Rs./‐ 2380935) (Prev. Year Rs.7515308) Balance with Non‐scheduled Banks ‐ In Current A/c. 2,482,234 (Maximum Debit Balance at any time during the year Rs./‐ 47,181,343 ) (Prev. Year Rs.45,147,966/) ‐ Fixed Deposit A/c. 13,397,838 (Maximum Debit Balance at any time during /‐ the year Rs.13397838/‐) (Prev. Year Rs.49,40,299/‐) 16,257,809 Total….. 23,498,951 SCHEDULE ‐ 8 LOANS AND ADVANCES : Considered good unless otherwise stated a. Secured Loan Secured by Hypothication of Assets 131,576,339 (Refere Note No. 14 of the "Schedule 15") b. Unsecured Loans to Companies, Firms & Individuals 19,905,180 (Refere Note No. 13 of the "Schedule 15") Advances recoverable in cash or kind or for value to be received 3,054,361 Deposits 27,500 Advances to Staff 65,000 Advance Income‐tax & TDS 5,067,273 40 Nil 1,573,505 1,253,627 1,361,262 2,614,889 Nil 2,614,889 4,188,394 55,857 90,179 461,346 4,940,299 5,547,681 9,987,878 114,513,378 16,839,983 969,146 30,500 32,900 4,019,983 Total….. SCHEDULE ‐ 9 CURRENT LIABILITIES : Sundry Creditors Security Deposites (Repayable within One Year Rs. Nil (Prev. Year Rs. 23,743/‐) Others Unclaimed Dividend Total….. SCHEDULE ‐ 10 PROVISIONS Provision for Taxation Provision for Fringe Benefit Tax Provision for NPA Total….. SCHEDULE ‐ 11 INCOME FROM OPERATIONS : Interest Income (TDS Rs. 546,289/‐) (Prev. Year TDS Rs.157,646/‐ ) Income from Loan Share Trading Income Income from Mutual Fund Total….. SCHEDULE ‐ 12 OTHER INCOME : Dividend Total….. SCHEDULE ‐ 13 ADMINISTRATIVE AND OTHER EXPENSES : Payment made to Employees (Including Director's Salary Rs.6,98,843/‐ ) (Prev. Year Rs. 6,91,552/‐) ‐ Salary and Bonus ‐ Staff Welfare Expenses Rent, Rates and Taxes Electricity Expenses Security & Recovery Expenses Insurance Repairs to (a) Building (b) Plant & Machinery (c) Others 159,695,653 1,572,588 Nil 103,959 75,070 1,751,617 7,150,000 147,500 474,916 7,772,416 3,889,661 228,974 561,563 Nil Nil 136,405,890 893,740 23,743 18,398 202,990 1,138,871 5,120,000 137,000 330,080 5,587,080 38,158,250 180,752 373,301 Nil 38,712,302 173,729 173,729 4,118,635 90,140 117,527 325,285 38,275 31,061,232 162,808 55,516 97 31,279,653 241,970 241,970 3,211,921 106,982 3,318,903 125,235 107,958 169,141 47,455 132,376 Nil 73,447 41 Printing, Stationery & Advertisement Postage & Telephone Expenses Travelling, Conveyance & Vehicle Maintenance (Including Director's Travelling Rs. 55,660/‐) (Prev. Year Rs. 92,775/‐) 561,563 689,298 417,840 205,823 532,901 397,385 258,649 262,508 1,674,726 2,397,185 534,864 119,736 141,000 125,015 NIL 2,628,480 146,427 522,821 632,614 13,500 14,103,677 6,332,478 2,108,272 8,440,750 1,296,522 628,223 387,493 105,336 149,000 26,197 7,200 3,555,164 144,836 1,243,211 505,087 NIL 14,665,481 Banks 10,524,487 Others 1,824,011 12,348,498 Legal & Professional Expenses Sales Incentive Exp. Marketing Expenses Remuneration to Auditors Director's Sitting Fees Loss on Sale of Fixed Assets Loss on Sale of Investment Bad Debts & Irrecoverables W/off (Net) (Refer Note‐15 of Schedule 15) Provision for N.P.A. (Net) (Refer Note‐16 of Schedule 15) Sundry Balance Written Off General Expenses Donation Total….. SCHEDULE ‐ 14 INTEREST PAID Total….. 42 Annexure 2 Demographic details of Ahmedabad, Gandhinagar and Mehsana 43 44 45 46
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