Tracking Financial Performance Standards of ... - Sa-Dhan

Financial Performance StandardsChapter2FINANCIAL PERFORMANCE STANDARDSAn MFI can deduce its financial performance in terms of ratios and indicators from its operations andfinancial position. “Standards’’ is a step forward; it represents the ideal level for each indicator.Financial Performance Standards are drawn from experience of analysing the indicators that are derived fromfinancial ratios. Analysis of indicators are done in two ways (a) starting with ratios and the resultant indicatorsof a particular date say March 31, 2003 or (b) starting with ratios and indicators of different periods (March31, 2003 as compared to March 31, 2002).Application of financial performance standards can be made (a) by an MFI within itself, driven by its ownexperience and (b) Across MFIs driven by experience of the industry. This manual entirely focuses on the latter i.efinancial performance standards applicable to MFIs across the industry.The financial performance standards given in the manual therefore incorporate the experience and practiceswithin a large number of microfinance institutions and tries to add refinements wherever found necessary. Theemphasis is therefore into sharing the industry-level financial standards in the microfinance industry, irrespectiveof the microfinance model, geographical location, size or age of institutions. As the result, the financialperformance standards are applicable to all microfinance institutions. This also defines the choice of select fewfinancial standards contained in the manual.Financial performance standards for the Microfinance industry is characterised by the following four features:F Specific financial aspects of an MFI that together define financial performanceF A common set of performance indicators for measurement and comparison,F A uniform methodology for calculating the selected indicators, andF A benchmark for each indicator leading to standard2.1 SPECIFIC FINANCIAL ASPECTS THAT TOGETHER DEFINE FINANCIAL PERFORMANCEThe first step in the process of developing standards is to identify the broad financial aspects of an MFI. Thistask is made easy by the fact that there is general agreement in the financial sector about the broad aspects thatare:(1) Outreach; (2) Assets (Portfolio) Quality; (3) Productivity; (4) Efficiency; (5) Viability (Sustainability); (6)Profitability; (7) Capital Adequacy; and (8) Liquidity.Having outlined the specific financial aspects above, the next steps are to decide on the indicators within eachof the above broad aspects and work further deep into deriving the financial ratios.19