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Chaitanya India Fin Credit Private

Limited
Private Placement Memorandum
www.chaintanyaindia.in

Chaitanya - Improving Lives


Our Mission
• Improve lives of low income families through financial
services simultaneously ensuring sustainable shareholder
returns
– Business Scope is limited to financial services
– Customer Scope is focused on low income households
– Mission to deliver Long term sustainable shareholder returns is in total
alignment with the mission to improve lives of our customers
– Business Practices, interest rates, customer choices, product
structures etc. have to meet the joint test of being value accretive to
shareholders and customers
• We will not service customers we cannot profitably serve
• We will provide services to customers only if we are convinced that the services
improves their lives socio economically

Both aspects of our mission are vitally important and self reinforcing.

Chaitanya - Improving Lives


Chaitanya – The past
• Started in 2004 as a non profit by Ramesh Paineedi
– District of Chitradurga, Davangere, Bellary in Central Karnataka
– Work for rural enterprise development and rural education
• Rural Micro Finance was added in 2007 with the support and
close coordination of Anand Rao and S3IDF
• NBFC set up in2009 to expand scope and ensure sustenance
• Operations Started in October 2009
– Profitable since Sep 2010
– 9000 customer, 100MN of disbursals and 69 MN portfolio
– One region well stabilized with 5 branches
– Two new regions started in June 2010 with one Branch each
– Expect to zero all accumulated losses by Mar 2011

Evolution from a rural , micro finance NGO to NBFC has contributed to mission clarity

Chaitanya - Improving Lives


The Founders
• U Anand Rao – Managing Director, In charge of operations
– Management Degree from IIT – Mumbai and MA Syracuse University
– Prior experience at Pepsico India, Bosch India, World Resources Institute,
Washington DC
– Five Years in S3IDF an international non profit with experience of working
with SHG and JLG models to provide finance for basic infrastructure needs
in the rural areas of central Karnataka

• Samit Shankar Shetty – Director, finance, Internal audit, risk


– Management Degree from IIM Ahmadabad
– Worked for 9 years with OLAM international in Cote’d’voire and Brazil
gaining exposure to commodity trading, finance, risk management etc.
– Played leadership role in Brazil for 4 years with experience in
organizational building, human resources, IT and risk management

Bringing together the best practices from the corporate world and from
community and rural development experiences

Chaitanya - Improving Lives


Independent Directors of the Board
• Mr. K.S. Ravi, partner in an audit firm. Experience as an auditor for banks,
NGOs, MFIs. Expertise in Legal, corporate governance and audit issues
• Mr A Narasimha, retired as Chief Vigilance Officer of Andhra Bank. 37 years
of banking with experience in agricultural advances, retail and small
business lending
• Mr R Nandakumar, group CEO Emmvee Group of companies, Retired as Vice
President of ING Vysya after 40 years of experience in agricultural, rural,
SME banking. Closely associated with the bank’s working with Micro
Finance Institutes when he was head of the credit department.
• All board members share the vision to create a transparent, valuable and
customer conscious company.
• The board members firmly believe that there is a role for a commercially
viable financial intermediary to provide financial services for low income
households

A committed team with diverse experience

Chaitanya - Improving Lives


Senior Management Profile
• Mr. Vasudeva S.B, Financial Controller
– A Chartered accountant with 25 years experience in financial management,
treasury accounting
• Mr. Jeyasheelan L, Unit Manager, Jagalur
– 16 years experience in the NGO, Sampark in project management. Extensive
experience in SHG formation and SHG bank linkages
• Mr. Shreepad Mohan Vaze, Unit Manager, Bailhongala
– 10 years experience in rural education and 6 years in community mobilization.
Worked with Deshpande Foundation and Azim Premjee Foundation
• Mr. Uppu Markandeyulu, Unit Manager, Koppal
– 5 years experience with Spandana Spoorthy Micro Finance

Middle Management comes in with managerial experience and deep understanding of


the rural setting

Chaitanya - Improving Lives


The Business of Micro banking
• Distinction between traditional banking and low income
banking
– Low transaction size
– Poor quality collateral
– No legal recourse and political patronage
– Limited customer understanding of formal banking
– In the rural segment customers are geographically dispersed
• More than a 100 million households
• Current Credit off take is estimated at INR2,500Bn mainly
from informal sources
• Formal Sector outstanding to the segment is INR 890Bn
Low Income Banking is distinct and organizations are at an early stage of evolution

Chaitanya - Improving Lives


Channel wise portfolio of micro loans
Channel Total Estimated Total Growth The data on commercial banks
account number of outstand Rate and SHG’s show enormous
s (Mn) unique ing last overlap as commercial Banks
household (Billion) year
deliver mainly through the
(Million)
subsidized SHG channel
SHG’s 59.6 40 272.66 20%
MFI – direct 26.7 18 183.44 56%
Commercial 39.2 30 429.36 No MFI’s have been shown most
banks Plus Data consistent growth rate in the
RRBs last 5 years
Primary Coop 28.7 28.7 280 No
Societies data Primary Cooperative Societies
Total Formal 154.0 50 -60 890 and RRB’s have not proved to
Sector Credit
be viable scalable business
Total 100 2,500
Potential
models

Data Till 31st March indicates that MFI’s are fastest growing segment and currently
have less than 25% of micro loans
Commercial Banks are reducing their exposure to SHG’s while the growth of SHG
loans is around 20%
Joint Liability Group Lending by Micro Finance Institutions is poised for faster growth
Chaitanya - Improving Lives
State Wise Reach of Micro Loans
Some States of Popula Percent Estimated Share of Total Share of Coverage
India tion in age Micro Credit National MFI+SHG National to
Million Below potential in Potential Outstanding Portfolio Potential
Poverty Bn in Billion
Uttar pradesh 166 31% 386 17.8% 25.2 5.5% 6.53%
Bihar 83 43% 268 12.4% 9.9 2.2% 3.69%
Maharashtra 97 25% 182 8.4% 20.2 4.4% 11.12%
MP 60 37% 167 7.7% 11.9 2.6% 7.13%
WB 80 27% 162 7.5% 34.3 7.5% 21.19%
TN 62 21% 130 6.0% 62.9 13.8% 48.28%
Orissa 36 47% 127 5.9% 26.8 5.9% 21.05%
AP 76 16% 122 5.6% 157.7 34.7% 129.68%
Karnataka 52 20% 104 4.8% 34.5 7.6% 33.16%
Rajasthan 56 15% 84 3.9% 6.9 1.5% 8.25%
Gujurat 50 14% 70 3.2% 4.3 1.0% 6.18%
Rest of Country 182 20% 364 16.8% 60.0 13.2% 16.48%
2,165 455

Five States show coverage to potential greater than 20% while most of the states
show enormous growth potential

Chaitanya - Improving Lives


Key Aspects of the Business Segment
• Financial Services for low income population is
underpenetrated by the formal financial sector for credit,
savings and other products.
• The JLG based lending done by MFI’s has achieved the fastest
growth in the last 4-5 years
• MFIs are still a small portion of the current market.
• As on date formal lending is mainly through SHG bank linkage
from commercial banks, loans from RRBs and credit societies.
• Vast areas of India remain almost untouched and have
potential for enormous growth

The right organisation has immense potential in India and in a lot of other
developing countries of the world.

Chaitanya - Improving Lives


Current Business Scenario
• Grameen Bank Pioneered JLG model
– Replace the skill of risk assessment at transaction with a scalable
process of group training
– Exceptionally high repayment rates over 20 years
– Despite the High frequency and low installment amount, it reduces
transaction costs and forewarning system is built in.
• Supportive Government Interventions
– Government support and coordination for SHG – Bank linkage through
Nabard
– Supportive steps and facilitative regulatory changes provided to aid
creation of business correspondents to facilitate financial inclusion
– Classification of MFI lending as priority sector lending.
Support of the government has been central to the growth of the sector over the
last five years

Chaitanya - Improving Lives


Current Business Scenario .. contd
• Emergence of For Profit Micro Finance Institutions
– Social Relevance, high growth and profitability has attracted funders of
all types
– Uni Dimensional growth focused on JLG based credit growth
– SKS’s public issue has raised the pitch of the debate on the business
model of MFIs
• Recent Pressure from regulators
– AP government makes the case that MFIs lead the poor to debt traps
and joint liability discipline leads them to suicide
– New Regulation in Andhra Pradesh has led to introspection amongst
the MFIs and the necessity to move beyond JLG based lending model
New Models need to evolve as the industry finds its role as an effective financial
intermediary

Chaitanya - Improving Lives


Critical Success Factors in Micro Banking
• Operational Efficiency related factors
– Cost per customer and cost per transaction
– Process orientation and process efficiency, systems and controls
– Ability and cost of raising financial resources
• Operational Effectiveness related factors
– Speed and quality of service delivery at transaction point.
– Quality of risk assessment and risk mitigation steps at transaction point.
– Credit assessment and documentation Skills at branch office level.
– Ability to handle customized product offerings and diverse product types.
• Organisational Leadership and Management related factors
– Strategic and tactical agility in handling a changing business situation,
adopting the right products etc.
– Responsiveness to local social, economic and political factors.
– Organisational agility in terms of reach and choosing right operational areas
– Ability to build and improve managerial skills and financial skills at the
transacting levels of the organisation

An evolving and nascent industry has to build sound management and leadership to
sustain its growth

Chaitanya - Improving Lives


Major Players in Micro Banking
Mapping of Competencies of Micro Financiers
Management & Leadership Abilities
Inferior MONEY LENDERS etc
INFORMAL
12 Superior
Private Banks
Average
E Spandana
10 Spandana
f
Manappuram Finance
f
8 SKS Muthoot Finance
i
c
6 SKDRDP Basix
i
Ujjivan
e
4
n
Private Banks
c
2 Public Sector Banks
y INFORMAL MONEY LENDERS
etc
0
0 2 4 6 8 10 12

Effectiveness

Some MFIs are slowly building towards the required combination of effectiveness
and efficiency, however organizational abilities are still average

Chaitanya - Improving Lives


Chaitanya – SWOT Analysis
Strengths Weakness

Strong Management Team and Geographical concentration in only


experienced Board one state
Commitment of Key People
High dependency on Banks and
Low Overhead Operations Apex Financial Institutions

Young and Fresh Team Less than 2 years as a NBFC


Modest Scale of Operations and no
Local Hiring of field staff
economies of scale as yet
Cost effective IT system Product offerings are limited to JLG
lending. No product options to
Deep Rural Operations
customers as yet

Most Weaknesses would be eliminated as we institutionalize new skills and grow


business size and scope

Chaitanya - Improving Lives


Chaitanya – SWOT Analysis
Opportunities Threats

Large market for Credit currently Political, Regulatory and Systemic


serviced by high cost informal sector Risks
Other financial services beyond credit
Weather or Health Related
could open up to private companies
Catastrophes
Competition from the organized sector
is very limited Multiple lending and poor lending
practices in the industry have led to
Scope for geographical expansion
large industry wide defaults

The opportunity size is very sizeable however till a base business volume is
reached there are significant risks

Till the industry matures the larger threat is industry wide defaults, regulatory
risks and systemic risks

Chaitanya - Improving Lives


Chaitanya’s Operational Strategy
• Entry Strategy: Establishing a viable Joint Liability Group (JLG) lending
model in one Region
– Build Skills in the recruitment, training and streamline processes and systems
– Establish relationship with bankers are lenders
• Stage 2 Strategy: Create differentiation through new products and
services in first region building superior operational effectiveness in one
region.
– Build viable JLG lending model in all the regions
– Institutionalize the methodology of risk assessment across all layers and systemize
the processes at the transaction level in one region
• Stage 3 Strategy: Geographical expansion of the differentiated approach
across regions
– Build the soft skills to translate leadership and management expertise across
geographies
Organizations with best in class efficiency and superior effectiveness in risk
management and product diversity will build sustainable advantages, geographical
expansion will be attempted post building a sustainable advantage at service delivery

Chaitanya - Improving Lives


Fund Raising Plans

• Current Equity held by promoters


– 52.74 Mn, 5,274,000 Shares at Book Value of Rs 10/Share
• Proposed to Raise fresh equity of a minimum of Rs 50Mn
– Post Equity Raising Book Value would be Rs 14/Share
– 2,000,000 new shares at Rs 25 / Share
– Promoters would subscribe at same price
• Future Equity Issuing exercises would be targeted towards
institutional investors in the financial year 2012-13
• Debt Issue also planned in 2011
This round of equity raising is done by Private Placement with Individual investors.
The next round of equity raising would be from private equity investors.
On a conservative estimate we expect to give 24% IRR to our investors.

Chaitanya - Improving Lives


Reasons to Invest in Chaitanya
• Business Related
– Expected appreciation of invested capital as returns accrue
– Fast growing medium sized NBFCs command a substantial Price to Book
premium in India
– The Micro financial services is a large market, fast growing and evolving
• Company related
– Commitment, capability and integrity of promoters and board
– Strong corporate governance practices
– Apparent Gap in Strategic and Leadership nous in the industry
– Shareholders can participate in high coupon debt also
• Customer related
– Far Reaching Societal benefits among the low income households
– Number of opportunities to multiply returns on labor that go unutilized in a
poor household due to lack of capital
– Entrepreneurship and respect for creditors amongst low income families
A journey that should be financially and professionally satisfying for its promoters,
investors and Improve Lives of our Customers
Chaitanya - Improving Lives
Risk Factors
• Environmental Factors
– Political and regulatory Interventions encouraging willful defaults
– Natural or Health Catastrophes in operating area
– Banking or Financial Sector Crisis
– Bank’s becoming antagonistic to NBFCs
• Operational Factors
– Process or Internal Control failures
– Fraud & fidelity issues.
• Industry Factors
– Loose lending practices and Multiple Lending could over indebt
customers and lead to mass defaults
– Imminent establishment of a credit bureau and self regulation should
ameliorate this factor
The investment is an early stage investment in a privately held company and can
be illiquid for a considerable amount of time
Chaitanya - Improving Lives
Regulatory and Tax Considerations
• Post Tax Returns considered to estimate IRR and NPV
– Long term Capital gain is taxed at a maximum rate of 10% of Sale Price
– Divided is taxed at 15% in the company’s books
• Minimum investment of 500,000 USD if foreign shareholding
is less than 50% and 5Mn USD if greater than 50%
• Increased Regulation as the company becomes a systemically
important or deposit taking NBFC
• Evolution of the Business Correspondent model could be an
opportunity though currently NBFCs are barred
• Malegaon Committee recommendations should bring
regulatory stability
• NBFCs could have a long term opportunity of turning into
Banks
Despite the Negative fallout in Andhra Pradesh the regulatory and political
framework realize the value Micro finance brings to the financial inclusion agenda

Chaitanya - Improving Lives


Closing Comments
The Investment entails a risk of capital loss or could turn illiquid

The promoters have made substantial investment of their financial and


professional wealth in the belief that the risk will not materialize

We expect the returns to investors to be higher than comparable investments


and have portrayed a conservative picture of growth and valuations

The Social Value of the business is an important aspect of the mission of the
company and we believe that the social objectives of the business is in
alignment with the financial objective of maximizing value in the long term
for investors

Welcome to Chaitanya
Chaitanya - Improving Lives

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