The 'B++' rating indicates that the State Business Support Fund of Kaluga region qualifies as a microfinance institution with a satisfactory degree of solvency (reliability).

The microfinance institution's rating is supported by high equity capital adequacy of the Fund, high lending efficiency and operational sustainability, acceptable operational efficiency, an increase in the portfolio of active loans, a reduction in the debt burden.

Since the start of 2016, the amount of active loans increased from RUB 148.8 million to RUB 158.9 million, i.e. by almost 7%. Given an overall contraction in lending to SME businesses in the region (-19.1% for the same period), we regard this improvement as a positive rating driver.

We also appreciate the Fund's growing lending efficiency (from 118.6% to 126.6%), an increase in operational sustainability (from 113.4% to 134.0%) and low operating expenses of the MFI (1.6% of the average portfolio of active loans).

For the 9-month period in 2016, the Fund's credit debt burden decreased from RUB 50 million to RUB 32 million reaching a mere 9% of its cash and equivalents or about 30% of its reserve capital as of September 30, 2016, which also contributes to the rating.

The key rating constraint for the MFI is an increase in overdue debt on the loans provided by the microfinance institution to small and medium-sized businesses in the region. For the 9-month period in 2016, the borrowers' overdue debt increased by more than RUB 7 million (+26%) to 22.3% of the total portfolio of active loans, which is above the average market levels (as of October 1, 2016, the overdue debt on loans to SME was 15.0% in the Russian Federation, 13.2% in Kaluga region).

Of special concern is an obvious negative trend in the overdue debt structure towards longer delays. In particular, the amount of loans with payment delays exceeding one year increased by 20% to RUB 26 million at the end of Q3 2016 (16.4% of the portfolio of active loans or more than half of the total amount of overdue loans). Loans with payment delays exceeding 180 days grew by 23%. As of the last reporting date, the portfolio-at-risk (PAR) ratio was rather high (30%), with similar problems at the start of the year (the regulatory authority's requirement is no more than 12%).

The relatively poor quality of the Fund's assets also puts certain pressure on the microfinance institution's rating. As of September 30, 2016, debts qualifying as almost irrecoverable receivables (loans with payment delays exceeding 1 year, deposits with the bankrupt and delicensed Investbank, recourse claims related to the discharged payment obligations under surety contracts) accounted for almost 20% of the Fund's assets. On the same date, the fair value of financial assets of the State Business Support Fund of Kaluga region only slightly exceeded the Fund's target capital.

The State Business Support Fund of Kaluga region, later supplemented with the 'microfinance institution' qualifier was established in 1995 at the Government of Kaluga region. The Fund has been providing loans and microloans to SME businesses since April 29, 2009. The State Business Support Fund of Kaluga region (MFI) was included in the State Register of Microfinance Institutions on May 29, 2012.

AK&M Rating Agency assigned a credit rating to the State Business Support Fund of Kaluga region (microfinance institution) for the first time on February 11, 2014. The last rating action in relation to the Fund was taken on February 18, 2016. All rating action announcements are available on the akmrating.ru website.

For estimation purposes, we completely rely on the reliability of information provided by the Fund. 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 microfinance institution rating to the State Business Support Fund of Kaluga region (microfinance institution) and the Credit Rating Methodology for Microfinance Institutions (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.

AK&M Rating Agency

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www.akmrating.ru

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