The 'B++' rating indicates that the Association Microlending Company 'Business Support Center of Kursk region' (previous name: Association 'Business Support Center – MFI of Kursk region', hereinafter referred to as the Association) qualifies as a microfinance institution with a satisfactory degree of creditworthiness. The risk of a delay in meeting obligations is moderately low.

The positive rating drivers include an increase in the amount of credit support provided to small and medium-sized businesses in the region, growing lending efficiency, relatively high security for the microloans, high operational sustainability, efficiency improvements, top-level risk management in relation to microlending resulting in lower loan portfolio-specific risks and overall profitability.

In 2014, the Association received a record high amount of RUB 102.5 million for microfinance activities, including RUB 82 million from the federal budget, RUB 20.5 million from the regional budget. Next year, no funds were allocated from the budget for the development of microfinance activities, but in 2016, the Association received another RUB 6.2 million for supporting small and medium-sized businesses in the region from the regional budget.

As a result, the Association's capitalization had exceeded RUB 150 million by January 1, 2017.

Simultaneously, the Association continued to expand the scope of support provided to small and medium-sized businesses in the region in 2015 and 2016.

In 2015, the Association provided 126 loans to small and medium-sized businesses (against a mere 66 loans in 2014), with 133 more microloans provided in 2016. The total amount of the microloans increased from RUB 49.8 million in 2014 to RUB 107.3 million in 2015 and RUB 177.3 million in 2016.

As a result, the number of active loans provided by the Association to small and medium-sized businesses reached 150 at the end of 2016 against 129 active loans declared at the end of 2015). The total amount of active loans provided by the Association to small and medium-sized businesses in the region went up from RUB 30.6 million to RUB 64.9 million in 2015 and further increased more than twice to over RUB 133 million in 2016.

Therefore, the Association has increased the total amount of active microloans and the number of effective contracts. Both parameters reached their 5-year highs at the end of Q4 2016.

In 2015, the Association's lending efficiency improved from 21.3% to 45.2%, following by a considerable increase to 88.7% in 2016, so that its lending efficiency exceeded the minimum acceptable regulatory requirement. As of December 31, 2016, the Association's lending efficiency reached a historic high.

The growing support to small businesses in the region is the determining factor for the microfinance institution's rating.

The Association maintains a relatively high level of security for the microloans exceeding the amount of existing microloans almost 4.5 times. This substantially mitigates the risk of irrecoverable loss of money should clients default on their obligations.

The Association considerably increased its operating efficiency in the period under review: from 9.8% at the end of 2015, the operating efficiency ratio improved to 4.9% in 2016 (the maximum acceptable level being 30%). The positive operating efficiency trend contributes to the microfinance organization's rating.

Despite a decrease in 2016, the Association's operational sustainability remains fairly high (178.3% at the end of 2016). The high operational sustainability of the microfinance organization supports its rating.

In 2016, the microloan portfolio-at-risk ratio of the Association Microlending Company 'Business Support Center of Kursk region' decreased from 4.85% to 3.68%, an evidence of advanced risk management in relation to microlending operations.

The write-off ratio on microloans to small and medium-sized businesses also stays at acceptable levels (a mere 0.79% at the end of the fourth quarter of 2016).

It should also be noted that the Association's available financial resources temporarily not used as intended are deposited on accounts with highly reliable banks (Sberbank of Russia, VTB Bank, JSC Rosselkhozbank), which substantially lowers risks of losing these funds.

The high quality of risk management in relation to investment of financial resources allocated for microfinance activities is a positive argument for the rating of the microfinance organization.

In the period under review, the Association's overall financial result was positive. In particular, its net profit amounted to RUB 15.6 million in 2015, RUB 7.9 million for the 9-month period in 2016. Earnings from microfinance activity totaled RUB 9.8 million and RUB 3.3 million, respectively. The overall profitability contributes to the microfinance organization's rating.

The Association's rating is constrained by deterioration in the overdue debt structure, an increase in delays exceeding one year, as well as shrinking financial income from microfinance activities.

In 2016, the total amount of loans with delays exceeding one year grew almost 6.5 times reaching RUB 2.8 million. As a result, in early 2017, the proportion of such loans in total overdue debt increased to almost 53%, their share in the total loan portfolio reached 2.1%. The growth of loans with long delays and a worse structure of overdue debt constrain the financial institution's rating. 

Another point of concern is a weaker financial income from microlending operations. In 2016 the total annual financial income of the Association from microfinance activities decreased by 30.5% (from RUB 14 million to RUB 9.8 million).

Noncommercial partnership "Regional Business Support Center" was established in 2006 for the purpose of creating a favorable environment for the operation and development of small and medium-sized businesses in Kursk region. On November 23, 2015, it was renamed as Association 'Business Support Center – MFI of Kursk region' pursuant to amendments to federal law no. 99 dated May 5, 2014 and federal law 151 dated July 2, 2010. Later, as federal law 407 dated December 29, 2015 took effect, it was renamed as Association Microlending Company 'Business Support Center of Kursk region' in December 2016.

Full name: Association Microlending Company 'Business Support Center of Kursk region'

Short name: Association MLC 'BSC of Kursk region'.

The Association has been providing loans and microloans to SME entities since November 15, 2010. It was included in the state register of microfinance organizations on December 15, 2011. For the whole period of microfinance activities, the Association has concluded 414 microlending contracts for a total amount of more than RUB 384 million.

AK&M Rating Agency assigned a credit rating to the Association Microlending Company 'Business Support Center of Kursk region' for the first time on March 14, 2013. The last rating action in relation to the Association was taken on March 21, 2016. All rating action announcements are available on the akmrating.ru website.

This press release is based on the Statement of assignment of a microfinance institution rating to the Association Microlending Company 'Business Support Center of Kursk region'.

The rating is valid until the end of February 2018. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the microfinance organization's creditworthiness 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.

The rating, along with any information and conclusions provided in this press release, only conveys our reliability 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

Phone no.: (495) 916-70-30, fax no.: (499) 132-69-18.