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NRSP transformation story
Rashid Bajwa
NRSP Holding
Pakistan
About Pakistan:
• Population – 180 M estimated; 15% MF clients (estimated); current 3 M
• GDP per capita – 3,100 $ (2013 est) – Country comparison to the world 177*
• Gross national saving: – 12.7% of GDP (2013 est.) – Country comparison to the world 120
• GDP - composition, by sector of origin Vs Labor force participation – Agriculture 25.3% Vs 45.1% – Industry 21.6% Vs 20.7% – Services 53.1% Vs 34.2%
*https://www.cia.gov/library/publications/the-world-factbook/geos/pk.html
About NRSP Holding • NRSP (NGO MFI); NRSP Bank; NRSP IRM (Not profit)
• Largest MFI+ in Pakistan – 23% market share amongst active borrowers
• Specialized product – MF as farm credit for small and landless farmers
– Average credit size $ 200 - $ 400
– Tenure 6 months bullet repayment
• Transformation as part of the GoP MF policy – Disinvestment in Govt. owned MF Bank (Khushaalibank)
– Transformation of NRSP into a MF Bank
Kech (Turbat)
FATA
Dera Ismail Khan
Ghizer
Gilgit
Astore
Diamer
Skardu
Dera Ghazi Khan
Rahim Yar Khan
Tando Allah Yar
LEGEND
NRSP Field Unit
NRSP Hub Office
NRSP Holding Footprint in Pakistan
NRSP District Office
NRSP Programme District
NRSP Bank Districts
Carving out the Bank: 2010
Southern
Punjab
Sindh
Why transformation
2.27 3.31 4.97 11.42
22.87
61.33
42.25
55.28
29.43
-20
-10
0
10
20
30
40
50
60
70
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(Budgeted)
Amount disbursed (NRSP)
USD
in m
illio
n
Transformation in the Pakistan context
• From NGO MFI to… – Non Bank Finance Institution
• Non deposit taking • For profit • Equity
– MF Bank
• For us, getting independent of commercial financiers was the key – But is deposit easy – What is the cost of deposit Vs borrowing cost? – What is and should be the deposit mix
• Sticky deposit with IRR of %Vs corporate TDRs of IRR 12+%
Who are the investors
• Why are they investing
– Share holders agreement
– PUT option
– Supermajority voting powers for greater control
– Share holders Vs Board powers
– Board seats
• What about the “sweat equity”
• Client acquisition cost
Fit and proper criteria by Central Bank of the Board of Directors and Management
Fit and proper criteria by Central Bank of the Board of Directors and Management
Who brings what on the table
• Share holders selection was based on
– Alignment to the Bank’s mission – Value they bring to the table
• IFC – Global brand in Micro Finance – Global knowledge about MF – Best practices in Corporate Governance – TA/advisory for institutional assessment and business plan – Debt
• KFW – TA of 1 M Euros – Very strong on details – 7 M Euro as subordinated debt (in process)
• ACCUMEN – Strong on social mission
Who are the Directors?
• Wrong selection will make crocked walls – Selection has to be merit based – Are they driven towards double bottom line
• Independent directors – Ex Bankers Vs ex development professionals
• Are they serious; is there a meaningful participation • Do they have time • Are they pushing CVs all the time
– NRSP Bank has two independent directors • One heads the Internal Audit committee • One heads the HR and remuneration committee
What is the business model of the new entity
• Loan product continues to be the same – Although the size has increased by three times
– What is your five; seven and ten year business plan
• Cost of doing business increases almost two folds – Regulatory and prudential requirements
– Tax status changes from a non profit to a “for profit”
Tax treatment of the transaction
• The NGO MF was Tax exempt
– All pre incorporation expenses borne for the transformation were therefore tax exempt
• However, since these expenses can be amortized, this becomes irrelevant except for – Cost of capital
– Cash flow as amortization is 20% per annum
Tax treatment of the MF Bank • Pakistan Income Tax
Ordinance 2001 Sec. 25 “allows deduction for any pre-commencement expenditure. o To be amortized on a straight-
line basis at the rate of 20%. o Maximum amortization limit is
total amount of the expenditure.
NRSP Bank absorbed its pre-commencement expenditures amounting to PKR 39 million in its first year of business i.e. 2011
• Second Schedule Sec 66, XVIII exempts total income of MF Banks for a period of five years starting from first day of July 2007 o Provided the Banks
shall not issue dividends to their share holders
NRSP Bank is contesting this “sunset clause”. If accepted, there will be a boost in the retained earnings
What about the Portfolio Take over Vs Fresh Portfolio
NRSP Loan portfolio in Bahawalpur….region that was transformed
2.27 3.31 4.97 11.42
22.87
61.33
42.25
55.28
29.43 0.00
46.59
67.35
112.61
-20
0
20
40
60
80
100
120
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(Budgeted)
Amount disbursed (NRSP) Amount disbursed (NRSP Bank)
USD
in m
illio
n
HR
• Training
– Set up a separate training unit well before the commencement
– Outsourced entire training to Central Bank’s training unit
• Biggest nightmare
– How to combine ex NGO staff with new specialized recruitment….
Technology
• What is the core Banking solution – Is it a “condition precedent” as was the case of IFC
– Dilemma is buying a Jet with no pilot or a motorcycle
• Does the cost paid includes – Customization
– Alternate Delivery Channels
– Branchless Banking
– Islamic Module
Performance
2011 2012 2013 2014
(projected)
Profit before tax (PKR millions) 37 143 338 355
Profit after tax (PKR millions) 36 164 244 262
Profit before tax (PKR millions); 355
Profit after tax (PKR millions); 262
0
50
100
150
200
250
300
350
400
2011 2012 2013 2014 (Projected)
Performance
Equity; 2,178
0
500
1,000
1,500
2,000
2,500
2011 2012 2013 2014 (Projected)
2011 2012 2013 2014
(projected)
Equity
Share capital 840 1,000 1,000 1,500
Reserves and profits 62 269 450 678
Equity 902 1,269 1,450 2,178
Performance
2011 2012 2013 2014
(projected)
Portfolio (PKR millions) 2,588 3,747 5,712 7,645
Outreach (numbers of borrowers) ‘000
127 177.8 205.3 260.5
Deposits (PKR millions) 633 1,763 3,619 4,000
Portfolio (PKR millions); 7,645
Deposits (PKR millions); 4,000
Outreach (numbers of borrowers); 260,527
0
50,000
100,000
150,000
200,000
250,000
300,000
0
2,000
4,000
6,000
8,000
10,000
12,000
2011 2012 2013 2014 (Projected)
NRSP Bank as of today
• The Bank has remained profitable since very first year of operation, year 2011.
–All pre-incorporation expenditures were absorbed through profit and loss since very first year.
• In year 2012, we managed to get tax benefit by properly managing grants in relevant years.
• In 2014, shareholders inducted new equity through rights issue of 50% so that the bank may serve maximum outreach possible, meeting CAR requirements of the Central Bank.
• One of the main objective to transform into a regularized bank was to get benefit from deposit mobilization.
– The outreach over the years remained very positive, both in terms of loan portfolio as well as deposit mobilization.
Story of the NGO
• NRSP NGO continued with its MF operations outside the operational area of the Bank
• NGO learned from the Banking regulations • Adopted same prudential guidelines
• Same write off policy
• Internal Audit
• ALCO
What happened to the NGO MFI
58,547
67,090
60,187
70,395
88,397
122,267
196,858
299,460
575,740
410,525
440,902
401,697
347,364
409,978
492,388
99,860
110,849
175,893
220,862
-
100,000
200,000
300,000
400,000
500,000
600,000
Jun-00Jun-01Jun-02Jun-03Jun-04Jun-05Jun-06Jun-07Jun-08Jun-09Jun-10Jun-11Jun-12Jun-13Jun-14
No
. o
f A
cti
ve
Bo
rro
we
rs
What would I do differently if I have to redo
• Take advantage of the Pre incorporation expenditure to be adjusted – Invest heavily in technology
• CBS compliant with ADC and BB
• Bank today has 55 branches – Ideally, it should be no brick and mortar branch
• Should CEO be from the NGO MFI or a Banker??
• Bank will reverse asset liability ratio by 2018 – Should have been within three years
Thank you
Questions?