List of Abbreviations

Glossary

ABCO

ABCO is an acronym for Active Borrower per Credit Officer. It is a key operational metric in microfinance that measures the client-to- credit officer ratio, indicating the average number of active borrowers managed by each credit officer. It is also commonly referred to as the Case Load. This will also indicate the efficiency of operation, which can impact the operational expenses

Active Borrowers

The individuals whose loan accounts are current have an outstanding loan balance with the MFI, and are under repayment obligation. Individuals who have multiple loans with an MFI should be counted as a single borrower.

Assets Under Management (AUM)

Assets Under Management (AUM) refers to the total value of client loan portfolios that an institution actively manages, including both on- book and off-balance sheet (off-BS) portfolios. This includes all outstanding principal from current, delinquent, and renegotiated loans, but excludes loans that have been written off, on the own book, as well as those securitized or direct assignment assets resting on the securitization partners. AUM reflects the overall scale of financial assets the institution is responsible for, regardless of ownership.

Average Loan Size

Average Loan size represents the client-per- capita loan amount. It is calculated as the Loan portfolio divided by the number of clients of an MFI. It is a key indicator used to assess the scale and depth of credit outreach.

Average Ticket Size (ATS)

Average Ticket Size (ATS) refers to the average loan amount disbursed per loan during a specific period of time. This metric is typically calculated for a defined time period such as monthly, quarterly, or annually, depending on the reporting or analysis needs. It is calculated as the Total Loan Amount Disbursed divided by the Total Number of Loans Disbursed.

Borrowing Cost

The cost of borrowing refers to the total charge incurred for taking a debt obligation, which includes interest payments as well as any additional financial fees (such as processing fees, service charges, insurance premiums, or administrative costs). A percentage of such cost over the total amount borrowed indicates the rate of such cost.

Capital Adequacy Ratio

Capital Adequacy is a key financial indicator used to measure the solvency and risk-bearing capacity of Microfinance Institutions (MFIs). It reflects the institution’s ability to absorb potential losses and protect depositors and creditors. It is the proportion of the equity capital and free reserves or own funds held by an MFI against its total risk-weighted assets. A higher Capital Adequacy Ratio indicates stronger financial health and a greater ability to withstand credit or operational shocks. A minimum requirement of an NBFC-MFI is 15%.

Capital to Total Assets

The Capital to Total Assets ratio is a measure of an institution’s financial strength and stability. It indicates the proportion of an institution’s own capital (or net worth) relative to its total assets.

Co-lending

Co-lending is a financial arrangement in which two or more regulated entities join hands to extend a loan, by taking a fixed share by each entity. It will reflect on the books of all the partnering institutions. Typically, a bank and a non-bank financial institution (NBFC or NBFC-MFI) or HFC can join together to extend credit to a borrower and a prefixed ratio at a weighted average interest rate. The partnership combines the strengths of both entities.

Debt-Equity Ratio

The Debt-Equity Ratio is a key financial metric that indicates the proportion of total debt to total equity held by an institution at a given point in time. It reflects the degree to which an organization is financing its operations through borrowed funds versus own funds or free capital. It also indicates the leverage of capital of an entity

Debt Funding

Debt Funding refers to the portion of a financial institution’s loan portfolio that is financed through external borrowings, rather than from internal accruals or equity capital. It reflects the extent to which an institution relies on borrowed funds, such as loans from banks, financial institutions, or capital markets, to support its lending activities.

External Cost

External Cost refers to the finance cost incurred by Microfinance Institutions (MFIs) on the borrowed funds from external sources, primarily banks and financial institutions. This cost is largely determined by the prevailing lending rates of banks, and as such, it is beyond the direct control of MFIs.

Finance Cost

Finance Cost refers to the actual interest and other financial expenses incurred by a Microfinance Institution (MFI) on the average borrowed funds that remain outstanding during a given period. This metric is crucial for evaluating the cost-efficiency and funding strategy of MFIs, and plays a key role in determining their lending rates and financial sustainability.

Financial Inclusion

Financial Inclusion refers to the delivery of affordable, accessible, and appropriate financial services to disadvantaged and low-income segments of society who are traditionally excluded from the formal financial system. These services include savings, credit, insurance, remittances, pensions, banking services, etc.

Joint Liability Groups

Groups of 4 to 8 borrowers come together to borrow from a financial institution under a joint liability concept, as per which there is an inter se agreement between the members whereby each borrower is liable to repay the loan of each member of the group.

Margin

Margin refers to the difference between the total yield on the loan portfolio and the finance cost incurred to fund that portfolio. It represents the net earnings a Microfinance Institution (MFI) makes from its lending activities before operating expenses and provisions.

Managed Loan Portfolio

Managed Loan Portfolio refers to the loan assets originally originated by Microfinance Institutions (MFIs) but subsequently sold or assigned to a third party, such as a bank, to improve liquidity. Despite the sale, MFIs continue to manage these loans, including activities like collection of repayments and servicing the accounts on behalf of the purchasing institution. This arrangement helps MFIs free up capital while maintaining their relationship with borrowers and ensuring ongoing portfolio management.

Non-Performing Assets (NPA)

A Non-Performing Asset (NPA) is a debt obligation where the borrower has failed to honour repayment commitments, either interest, principal, or both, to the designated lender for a specified period, typically 90 days or more. As a result, the NPA ceases to generate income for the lender in the form of interest or principal repayments. NPAs represent credit risk and affect the financial health and asset quality of lending institutions.

On-book Portfolio (Net Loan Portfolio)

On-book Portfolio (Net Loan Portfolio) refers to the total outstanding principal of all active client loans recorded on the institution’s balance sheet. This includes current, delinquent, and renegotiated loans, but excludes loans that have been written off. Interest receivable is not included, except for Microfinance Institutions (MFIs) that report under Ind-AS, where such interest is recognized as part of the outstanding amount.

Operating Self Sufficiency (OSS)

Operating Self Sufficiency (OSS) measures the extent to which a Microfinance Institution’s (MFI’s) income from operations and investments is sufficient to cover its operating expenses, like operating costs, loan loss provisions, and finance costs (cost of borrowed funds) incurred for conducting the operations. An OSS ratio of 100% or above indicates that the MFI is generating enough income to sustain its operations without requiring subsidies or external support, reflecting financial viability and sustainability.

Outstanding Borrowings

Outstanding Borrowings refer to the total amount of funds that an entity has borrowed and has not yet repaid as of a specific reporting date. This includes all short-term and long- term debt obligations, such as loans, credit lines, bonds, and other forms of financing, net of any repayments made.

Portfolio Quality

Portfolio Quality refers to the level of credit risk present in a loan portfolio, indicating the likelihood of default by borrowers. A high- quality portfolio contains a lower amount of risk, characterized by timely repayments and minimal defaults. Maintaining good portfolio quality is crucial for the financial health and sustainability of lending institutions.

Portfolio at Risk (PAR)

Portfolio at Risk (PAR) indicates the proportion of outstanding amounts of all loan accounts having past due/arrears to the total outstanding loan. In general, PAR 30 refers to the percentage of the loan portfolio that remains unpaid 30 days or more beyond the due date, which would be used as a measure to assess the portfolio quality. Loans with dues overdue by 90 days or more (PAR 90) are generally classified as Non-Performing Assets (NPAs).

Qualifying Assets

Qualifying Assets are loan portfolios created by MFIs adhering to certain conditions as prescribed by RBI, to make the MFIs eligible to be called as MFIs and to raise loans from banks under the Priority Sector Advances Scheme (as per recent RBI norms). For an MFI, 60% of the total ass ets need to be under this category

Return on Assets (RoA)

Return on Assets (RoA) is the universally accepted profitability measure, which, in essence, is the percentage net income earned out of total average assets deployed by MFIs during a given period, typically one financial year. It is a widely used profitability metric that measures how efficiently an institution utilizes its total assets to generate net income.

Return on Equity (RoE)

Return on Equity (RoE) is a key profitability indicator that measures the net income earned by a Microfinance Institution (MFI) relative to its average equity during a given period, typically one financial year. RoE reflects how efficiently an MFI is using its own capital (equity) to generate profits.

Self Help Groups (SHGs)

SHGs refer to groups of 10-20 persons coming together to form an informal community-based institution to meet their common financial and social needs. Most of the SHGs are formed by women from a homogeneous background. SHGs collect regular savings from members and use them for internal lending, before accessing higher amounts from banks.

SHG Bank Linkage Programme (SBLP)

SHGs are linked to mainstream banks for keeping their surplus savings and also to obtain loans. The loan is often given as a multiplier of the total internal savings accrued in a group. It is considered to be an effective strategy to ensure financial inclusion for the unbanked poor people.

Surplus

Surplus refers to the excess of income over expenses. It is calculated as the difference between the yield (i.e., income earned from the loan portfolio) and the total cost (including finance cost, operating expenses, and provisions). It can also be referred to as net margin.

Yield on Portfolio

Yield represents total income from microcredit operation - interest income, processing fee/ service charge – earned out of the average loan portfolio outstanding for a specific period. It does not include investment income. It is a good proxy/surrogate for loan interest rates. It serves as a useful proxy for the effective loan interest rate charged to clients and is often used to assess the pricing structure and earning capacity of the loan portfolio.

Climate Smart Agriculture: Readiness to Resilience

6A.1 Climate Change Challenge

Home to more than 1.4 billion people, about one-fifth of the global population, India is facing one of the worst man-made global crises in the form of climate change. The impacts of climate change are numerous and varied, often disproportionately affecting the poor, women, and children. In the context of Indian agriculture climate change has a disproportionate impact on the small holder farmers. India’s farmer population are facing a multifaceted challenge of ensuring food and nutritional security and is particularly vulnerable due to decreased yields and increasing agricultural losses, attributable to climate change events. Addressing these challenges necessitates a move towards sustainable agriculture. The impact of climate change on the smallholder farming community spans across entire agricultural value chain ranging from crop yield losses to post-harvest damages and leading to rising production cost. These challenges have cut farm incomes by 15-18%1 and pose systemic risks.

MLIs credit portfolio may also experience increased stress due to declining income of their borrowers as a result of climate change. It may pose challenges such as increased credit risk, liquidity, and capital constraints, thereby limiting financial flows at the micro level throughout the agricultural value chain.

6A.2 Need for Climate-Smart Agriculture (CSA) Technologies

It is estimated that India’s food demand is likely to increase to around 400 million tonnes by 2050 (Indian Agricultural Research Institute: Vision 2050). A government of India report have suggested that climate change will reduce the yields of rainfed rice by 20% and irrigated rice by 3.5% by 2050, with a decline in wheat yield of 19.3%² . Extreme weather events such as temperature increase, shifting rainfall patterns etc. are impacting water availability, soil health, and pest populations, which are expected to exacerbate food shortages and nutrient deficiencies thereby compromising the country’s food and nutritional security. In addition, agriculture is the second-highest emitting sector in India, producing 18% of the country’s gross GHG emissions³ .

In order to tackle the challenges posed by climate-related risks and promote sustainable agriculture and allied livelihoods, Climate- Smart Agriculture (CSA) provides solutions to enhance productivity, strengthen resilience, and decrease emissions. Techniques within CSA include precision farming, which maximizes resource efficiency, and crop diversification, which lowers the risk of crop failure. These approaches enable farmers to cut down on expenses related to fertilizers, pesticides, water, and also help them cope better with climate change-related challenges. As responsible lending institutions MLIs need to make it part of its policies to support CSA in their lending.

6A.3 Intersection of Climate Change, Agriculture and Microfinance

There is a significant connection between microfinance, agriculture and climate change. With climate change impacting the household, microbusiness, and systemic levels, its direct impact can be felt on their livelihood and income-generating capability. The data from MLIs indicates that over 65% of microloans are used for agriculture and allied activities. The ever-increasing climate change-related stress that impacts the repayment capabilities of the borrowers of the microloans, results in affecting the asset quality of the MLIs. Therefore, addressing climate adaptation is critical to ensuring the resilience and vibrancy of the microfinance industry. This close association of climate change-related stress affecting the income stability and indebtedness of the small and marginal farmers directly impacts their ability to repay loans which increases the portfolio risk for MLIs. The exhibit showing this connection between climate change, agriculture and microfinance is shown below.

Despite the tremendous benefits of the climate-smart agriculture technologies and the Government of India’s push for sustainable finance in agriculture, adoption of climate- smart agriculture technologies among smallholders is hindered by poor credit access, high costs, and risk perceptions. The uptake of CSA practice has been slow due to various financial and ecosystem barriers such as high investment requirements, higher bio-input cost, lack of de-risking mechanisms, lack of awareness, training and capacity building, etc.

6A.4 Opportunities for CSA Financing for MLIs

Globally, there are multiple examples of leveraging microfinance as a tool to promote climate adaptation through green energy products, concessional finance, financing climate-resilient technologies, training and capacity building. MLIs can enable farmers to adopt climate-resilient tools and technologies through financing CSA technologies tailored to their needs. The upfront costs of these technologies are much higher than what smallholder farmers can afford. By providing tailored financing solutions, MLIs can significantly promote adoption of these practices. Some of the prevalent CSA technologies that MLIs can promote for financing CSA adoption are presented in next page.

6A.5 Sa-Dhan’s Climate Resilient Agriculture Initiative

Sa-Dhan’s approach to promoting climate resilience is grounded in an evidence-based approach and focused on scaling proven solutions that have undergone rigorous field trials. To mitigate climate risks and enhance livelihoods, Microlending Institutions in India are empowering small and marginal farmers through financial support and awareness generation. Sa-Dhan in collaboration with GIZ India and Sustain Plus Energy Foundation is undertaking one such initiative “Expanding the reach of climate resilient technologies for agriculture through improved financial access” in India. The Impact of the project highlighting the critical role MLIs can play in climate adaptation is depicted below.

Key outcomes at the farmers’ level are: 1) Increased productivity; 2) Improved resilience to climate change-induced patterns such as erratic rainfall, pest attacks, etc, 3) Adoption of climate-resilient agricultural practices and 4) Cost Savings and increase in income. These outcomes not only contribute to climate adaptation but also directly support the economic empowerment goals of transforming smallholder farmers into Lakhpati (prosperous) farmers.

6A.6 Benefits for MLIs by Financing CSA Technologies

By financing CSA solutions, MLIs can not only contribute to a greener future by supporting sustainable agriculture practices but also result in a more resilient and better- performing agricultural portfolio. MLIs can help farmers become more resilient to climate change, leading to improved yields, reduced input costs, and greater access to markets. This, in turn, strengthens the financial health of both farmers and the MLIs that serve them. Some specific benefits for MLIs include,

Increased Profitability: Adopting CSA practice can lead to higher and more stable yields for farmers, reducing the risk of crop failure due to climate shocks. This will not only lead to increased income for MLIs borrowers - smallholder farmers and SMEs but also improve repayment rates for MLIs

Improved Portfolio Quality: By diversifying crops and adopting water-efficient techniques, farmers can better withstand droughts, floods, and other climate-related challenges. This reduces the risk of loan defaults for the MLIs as borrowers will be better immune to lower income due to crop loss.

Increased Client Outreach and Portfolio: Financing CSA allows MLIs to expand their client base by extending credit to agricultural borrowers and thus increasing their portfolio stability by diversifying exposure to traditional loans. This can lead to increasing client outreach and portfolio.

Carbon Credit Benefits: Financing CSA technologies allows MLIs a significant economic incentive by transacting verified and certified carbon reductions in carbon credit market. Regulated carbon credit programs typically involve substantial investments in technology and infrastructure leading to carbon footprint reductions and depending on the Voluntary Carbon Market (VCM) model the carbon credit sales income can be accrued to the MLIs.

Attract ESG-Focussed Investors: MLIs that issue ESG or sustainability-linked instruments and integrate ESG principles into their operation’s present attractive investment opportunities for ESG-focused investors. These institutions often exhibit strong governance practices, prioritize environmental sustainability, and target marginalized communities. Microfinance itself provides access to financial services to low-income individuals and small businesses. Hence, MLIs assimilating ESG framework as a part of business goals would be better placed to secure these funding sources.

Opportunities to Avail Grants and Corporate Social Responsibility (CSR) from Donors: MLIs that finance CSA technologies have significant opportunities to access grants and CSR funding from donors and socially responsible corporations.

6A.7 Learnings and Emerging Opportunities

The convergence of climate finance and microfinance presents a transformative opportunity to empower India’s rural communities while contributing to climate adaptation and mitigation. MLIs’ grassroots presence, financial inclusion focus, and trusted relationships with rural communities make them ideal intermediaries for delivering climate-resilient solutions at scale. Sa-Dhan’s learning from the current collaboration falls into two broad categories: 1) What MLIs can offer additionally, and 2) Opportunities for strengthening the Supply Side.

6A.7.1 What MLIs can offer additionally?

6A.7.2 Opportunities for strengthening the Supply Side