The 'A' rating indicates that the Fund of Guarantees and Business Development of Pskov Region (FGBD PR) faces a low risk of a failure to meet obligations in time, the full or partial debt restructuring risk being minimal.

The microfinance organization's rating is supported by growing capitalization, low overdue debts, acceptable solvency of the largest borrowers. Besides, we appreciate the Fund's ability to comply with most of the regulatory authority's recommendations in relation to the key microfinance performance indicators and a sufficient level of provisions for possible losses on problem and non-performing loans.

The Fund's target capital for microfinance activities has increased by RUB 10 million in the 2nd half year of 2015 to reach RUB 82.25 million as of January 1, 2016. The portfolio of active loans increased by virtually the same amount from RUB 71.7 million to RUB 82.0 million. Therefore, the Fund's lending efficiency remained very high (more than 99%). As of July 1, 2016, the lending efficiency ratio was 98.4%, also far above the minimum acceptable percentage of 70%.

As of July 1, the share of overdue loans was 6.9% decreasing by 40 bps for the 6-month period in 2016. The arrearage is considerably below the average overdue debt percentage in the small business segment of the region (29.3% as of the same date). However, a point of concern is that the arrearage is dominated by delays exceeding 90 days (potentially qualifying as loans in default) and that the Fund, among other things, writes off substantial sums of non-recoverable loans to keep an acceptable overdue debt percentage (without the write-off of losses, overdue debt would have exceeded 15%).

Our express analysis of the financial statements of the Fund's major borrowers (15 legal entities and 5 sole proprietors) has shown the doubtless solvency of at least 12 of them (at the moment the loans were granted), with only 2 borrowers being financially strained, an evidence of acceptable efficiency of the Fund's credit commission and management board as regards microlending.

We also appreciate that the Fund of Guarantees and Business Development of Pskov Region easily complies with the regulatory authority's recommendations in relation to the key microfinance performance indicators, including, along with the above-mentioned lending efficiency, operating efficiency, equity capital adequacy, the current liquidity ratio, the portfolio at risk ratio, the average margin under the microfinancing program.

The Fund's rating is also supported by sufficient provisions for possible losses on problem loans and NPLs. As of June 30, 2016, they met the levels recommended by the Bank of Russia or exceeded them with a small margin in all segments of delayed payments.

The Fund's rating is constrained by high volatility of its operational sustainability, an increase in the average microloan amount, an above-limit write-off ratio, poor monitoring of the collateral quality.

In 2015, the operational sustainability (the ratio of financial income to total expenses, the required level being 100%) of the Fund of Guarantees and Business Development of Pskov Region hit a historic low of 87.1% decreasing from 123.4% in 2014, 94.1% in 2013, 126.9% in 2012). Later, the operational sustainability returned to satisfactory levels (139.7% at the end of the first half of 2016, 105.4% for the 12-month period ending on June 30), which, however, does not absolutely guarantee a positive result in 2016 as a whole. The weaker operational sustainability resulted from substantial loan losses (the write-off of irrecoverable debts) which amounted to RUB 2.7 billion in 2015 exceeding the balance of operating incomes and expenses. As a result, the write-off ratio reached 6.9% on July 1, 2016 (1.9 p.p. above the regulatory minimum). It should however be noted that the cumulative loan loss written off by the Fund does not exceed the total operating profit from microfinance activities and therefore, does not affect the target financing level.

Despite a reduction in the number of microloans provided by the Fund (42 in the first half of 2016 against 67 the year before) the Fund maintains the portfolio of microloans at a relatively high level. The reverse of the medal is an increase in the average amount of loans (almost 2.5 times for 3.5 years to RUB 709 thousand as of July 1, 2016, more than 70% of the biggest loan provided by the microfinance organization). The growing average loan amount obviously poses higher risks associated with the loss of creditworthiness by a specific borrower.

At the moment of granting, the microloans were completely secured by pledge or a third-party surety (which involves adjustment factors ranging from 0.5 to 0.7). However, in the course of subsequent performance or non-performance by borrowers of their obligations we observe a number of collateral dilution cases. In particular, as of June 30, 2016, more than half of the overdue debt was attributable to "other loans", i.e. loans not secured by pledge, a surety or a bank guarantee. This, in our view, is an evidence of poor monitoring of the collateral quality, which puts certain pressure on the microfinance organization's rating.

Autonomous nonprofit organization Fund of Guarantees and Business Development of Pskov Region was established in 2009 at the government of Pskov region to ensure access of small and medium-sized businesses operating in the region to credit and other financial resources. The Fund of Guarantees and Business Development of Pskov Region was registered as a microfinance organization on August 12, 2011.

As of June 30, 2016, the Fund of Guarantees and Business Development of Pskov Region concluded almost 1,000 microloan contracts for a total amount of RUB 448 million. Net profit from microfinance activities amounted almost RUB 1.7 million (adjusted for loan losses).

AK&M Rating Agency assigned a microfinance institution rating to the Fund of Guarantees and Business Development of Pskov Region for the first time on December 10 2014. All rating action announcements are available on the akmrating.ru website.

The rating is valid until October 2017. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the microfinance organization's rating are revealed.

For estimation purposes, we completely rely on the reliability of information provided by the microfinance organization. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.

This press release is based on the Statement of assignment of a credit rating to the Fund of Guarantees and Business Development of Pskov Region and the Credit Rating Methodology for Microfinance Institutions rev. October 12, 2015.

The rating, along with any information and conclusions provided in this press release, only conveys our creditworthiness opinion and shall not be construed as a recommendation to purchase or sell securities, or to lend funds.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.

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