Submitted to:

Mrs. Ankita
Table of Contents

INTRODUCTION....................................................................................................................2

GIRAFE Rating Model...........................................................................................................2

PEARLS Rating Model...........................................................................................................4

CAMEL Rating Model...........................................................................................................6

MicroRate Rating Model......................................................................................................7

The Philippine Coalition for Microfinance Standards..........................................................9

CRISIL Rating Model...........................................................................................................10

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ACKNOWLEDGEMENT

 I would like to express my special thanks of gratitude to my teacher Mrs. Ankita as well

who gave me the golden opportunity to do this wonderful project on the topic “Credit

lending Models in MFI’s”, which also helped me in doing a lot of Research and I came to

know about so many new things I am really thankful to them.

Secondly I would also like to thank my parents and friends who helped me a lot in

finalizing this project within the limited time frame.

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INTRODUCTION
Credit rating is the evaluation or assessment of MFI’s ability to pay back financial
obligations or the chances of not defaulting on the financial obligations. It is used to
determine an MFI’s credit risk.

There are various models of credit rating used across the world. Some of the important
rating models are:

GIRAFE rating Model

PEARLS Rating Model
CAMEL Rating Model
MICRO RATE Rating Model
Philippines Coalition for Microfinance Standards
CGAP Rating Model
CRISIL Rating Model

GIRAFE Rating Model

 This model was developed by a “Planet Finance”, one of the financial
organisations involved in rating of Microfinance institutions.
 The components of GIRAFE rating are used to measure the operational and
financial sustainability.
 The areas under GIRAFE rating are:

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 1. Governance and decision making: It is the process by which legal owners of
micro-finance institutions guide the institution to achieve its mission and
protect its assets. The rating factors in this are planning, management
team, decision making and management of human resources. The key
issues in this are anticipation of risks, balancing the operational realities
and strategic vision ensuring the skills necessary to achieve the objectives
and the organization’s responsiveness.
2. Information and equipment: It involves the process with which the
microfinance institution defines its information needs, collects and
processes the data, analyze and present the data, and disseminate and
store the data. The factors of rating are the management information
systems, information on activities,, and financial and accounting
information.
3. Risks identification and control: The evaluation factors are internal audit.
The risk identification and control includes-

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 A. To identify and prioritize the risk,
B. To develop the strategies to measure those risks i.e., selection of
one or more indicators and setting limits,
C. To define integrated control chain
D. To define actions for which limits are reached.
4. Activities (products and services): It is necessary to access the activities of
the MFI. The accessing factors of activities are marketing and ompetion,
portfolio management, portfolio at risk, write off ratio and credit risk
coverage.
5. Funding and liquidity: It includes the rating of the MFI’s funding structure
(origin of its equity, current structure and cost of its liabilities) and
appropriateness of the capital structure for the activities financed. The
assessment factors are financing strategy and liquidity management.
6. Efficiency and profitability: It measures the MFI”s financial sustainability
that determines operational sustainability through staff productivity,
operational expenses ratio, financial self sufficiency and return on assets.

PEARLS Rating Model

 This model was developed by World Council of Credit Unions (WOCCU).
 The objective of this model is to set financial ratios to monitor the financial
stability of the credit unions.
 The model helps the donors and regulators to monitor, plan, standardize, rank
and facilitate supervisory control in credit unions.
 The components of PEARLS Rating Model are as follows:

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 A. Protection: Adequacy of the provisions for loan losses is compared against
the amount of delinquent loans.
B. Effective financial structure: It measures credit union assets, liabilities and
capital, and an “ideal’ structure is recommended.
C. Asset quality: It is used to identify the impact of non-earning assets by
analyzing delinquency ratios, percentages of non-earning assets and the
financing of non-earning assets.
D. Rate of return and assets: This includes the calculation of investment
yields, and evaluation of financial costs and operational expenses.
E. Liquidity: It analyzes liquidity from three perspectives- total net liquidity
reserves, obligatory liquidity reserves and idle liquid funds.
F. Signs of growth: This is measured in seven key areas like total assets, loans,
savings deposits, external crdit, shares, institutional capital and
membership.

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CAMEL Rating Model
 This model was developed by “ACCION”, a financial consulting and rating
organisation.
 Under this model, the MFI is required to gather the information for a CAMEL
assessment on-
1. Financial statements
2. Budgets and cash flow projections
3. Portfolio aging schedules
4. Funding sources
5. Information about the board of directors
6. Operations/staffing
7. Macroeconomic information
 This is a quantitative analytical model in which MFIs are required to present
audited financial statements from the past 3 years and interim statements from
the most recent 12 month period.
 The indicators of CAMEL Rating Model are given below-

1. Capital Adequacy:
 Leverage
 Ability to raise equity
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  Adequacy of reserves
2. Asset Quality:
 Portfolio quality
 Portfolio classification system
 Fixed assets-Productivity of long term assets & Infrastructure
3. Management:
 Governance
 Human resources
 Processes, controls and audit
 Information technology system
 Strategic planning and budgeting
4. Earnings:
 Adjusted return on equity
 Operational efficiency
 Adjusted return on assets
 Interest rate policy
5. Liquidity management:
 Liability structure
 Availability of funds to meet credit demands
 Cash flow projections
 Productivity of other current assets

MicroRate Rating Model

The objectives of MicroRate rating model are used to assess the credit risks which can
be used by potential investors or creditors or donors. It uses full initial evaluation,
annual analysis and preliminary credit assessments.

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The Philippine Coalition for Microfinance Standards
This model uses eight performance indicators for social and financial rating of
microfinance standards. These are:

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CRISIL Rating Model
Credit rating Information Services India Limited (CRISIL) is one of the biggest credit risk
rating agency in India. It was set up in 1987 as a rating agency.

CRISIL rating model is called as MICROS rating; it is one of the most popular rating
models used in India. The rating components under CRISIL rating model are:

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CONCLUSION
Therefore, it can be concluded that credit rating plays a significant role in th evaluation
of a Micro Finance Institution’s credit worthiness and the ability to pay back financial
obligations. It involves both quantitative as well as qualitative methods to access the
operational and financial worthiness of the MFI.

Hence, the main models of Credit rating of an MFI are namely:

GIRAFE rating Model

PEARLS Rating Model
CAMEL Rating Model
MICRO RATE Rating Model
Philippines Coalition for Microfinance Standards
CGAP Rating Model
CRISIL Rating Model

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REFERENCES
• Understanding Microfinance by Debadutta K. Panda

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