Average Portfolio per Credit Officer - Sa-Dhan

Sa-Dhan Microfinance Manager Series: Technical Note # 8
What is Average Portfolio per Credit Officer How to use it in Microfinance *
S
a–
D
han
What is Average Portfolio per Credit officer
Average Portfolio per Credit Officer is a currency number (#) ratio. In simple
terms, it highlights the “loan portfolio outstanding (or volume of business)
generated by a credit officer.” This Ratio is useful primarily for the internal
management of productivity and must be used cautiously (if at all), when comparing
productivity to other Microfinance Institutions (MFIs).
What is the formula for Average Portfolio per Credit Officer
Average Value of Loans Outstanding
Average Number of Credit officer
What does it measure
The amount of loan portfolio per loan officer is a key indicator of financial viability,
since a higher portfolio per officer will generate more revenue when staff costs are
held down. Some MFIs are indeed beginning to consider credit officers as profit
centers and evaluate them as such.
This Ratio has an interesting interrelationship with the credit officer caseload: in
that, as loan size drops, a credit officer must manage larger caseloads (i.e., more
clients) in order to maintain the same amount of loan portfolio.
If an institution fails to maintain a high loan portfolio per credit officer, that
institution would be forced to charge higher interest rates in order to generate
the same amount of revenue.
If a credit officer is with an MFI over a long period of time, the number of active
borrowers and portfolio outstanding should increase to an optimal level. At this
point, growth in the number of active borrowers that the credit officer manages
should be minimized.
The SEEP network document on ratio analysis provides an example of the
interrelationship of caseload, portfolio, and income. This is given below:

S
a
–
D
h
a
"Consider an institution that provides end-of-term payment loans averaging $100. If
their methodology permits a typical loan officer to work with 100 clients at a given time,
the loan officer is managing a portfolio of $10,000 (100*$100). At an effective yield of
30%, this loan officer would be generating $3000 of income annually. If the institution's
clients mature over time and are capable of receiving increasingly larger loans, the
average loan size will gradually increase. If the officer continues to work with 100 clients
with an average loan size now of $150, her portfolio has grown to $15,000, and she is
now generating $4,500 of income."
What minimum records are required for calculating the Ratio
Loan ledger with disbursement schedule and repayment data on each individual
loan backed-up by a comprehensive credit policy outlining various terms and
conditions;
Aggregation of the loan ledger data with regard to delinquent and current
loans, either a simple ageing table or a comprehensive portfolio report;
Key financial statements like the Balance Sheet and Income Statement,
appropriately constructed; and
Staffing details including portfolio and other data disaggregated by the credit
officers.
What can be said with regard to trends
An increasing Loan Portfolio per Credit Officer is positive.
This derives from the sustainability imperative whereby, the greater the loans
outstanding, the more the income for the MFI. However, this Ratio is highly
susceptible to the loan size aspect and hence, it would be important to keep this
strategic aspect in mind while comparing MFIs.
n

S
a
–
D
h
a
n
Step 1
Step 2
Step 3
Step 4
How to calculate Average Portfolio per Credit officer
Have clear and upfront definitions of the term 'credit officer'.
Calculate the average outstanding loan portfolio during period (for instance,
a year). Data from the portfolio report and/or aggregated loan ledger or other
formats could be used for this. Alternatively, data from Balance Sheets (quarterly)
could also be used.
Calculate the average number of credit officers during the period (for instance, a year).
Divide the average outstanding loan portfolio by the average number of credit officers to
obtain the Ratio value.
How to Average
As noted earlier, period averages are much more meaningful when they are
computed on a monthly or at least a quarterly basis.
When using such sub-period averages, the numerator is the opening balance plus the
sum of the balance at the end of each sub-period, while the denominator is the
number of sub-periods plus one.
As an example, a quarterly average would be calculated as:
avg 0 1 2 3 4
P = (P + P +P +P +P )
(4+1)
Using the above formula, the average outstanding loan portfolio and average number of
credit officers can be calculated. Using a month or a quarter as a period is preferred and
also suggested here.

What strategic issues affect (distort) the Ratio
Defining a credit officer is very crucial - a credit officer is a full-time employee whom the MFI
acknowledges as such, and it is normally understood that the person works at least for 8 hours a
day and minimum of 5 days a week. Given the various methodological and other problems
associated with productivity Ratios, using average amounts (both in the numerator and
denominator) is preferable.
Where delinquency exists in a large measure, this ratio will not give an accurate picture of viability
at the individual level. The aspect whether to exclude past due loans outstanding and of what age,
is also a very crucial aspect here.
The size of the average portfolio outstanding per credit officer will vary depending on the loan
sizes, the maturity of the MFI's clients, and the optimal number of active borrowers per credit
officer. A key aspect for this and other productivity ratios is that while credit officers could
indeed be efficient, there could be a whole lot of other staff contributing to inefficiency. Hence, all
measures that use credit officers in the denominator should be interpreted with caution.
Generally, from a sustainability perspective, average portfolio per credit officer should equal or
exceed the amount required to generate revenue, (at least) equal to all expenses (direct and indirect)
attributable.
*This technical note has been compiled specially for Sa-Dhan by Ramesh S. Arunachalam, using Best Practices material available with Sa-Dhan and stakeholders like
CGAP, SEEP and others. First published in August 2006. © Sa-Dhan. Website : www.sa-dhan.org