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

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Tracking Financial Performance Standards of Microfinance InstitutionsEach of these aspects are described below3.2.1.1 Operational IncomeIncome from loan Portfolio is income that an MFI derives from its lending operations (refer IS 4, Table 8 a).This would include interest and fee income. Interest income can be further divided into interest on current,past and re-structured loans outstanding.Interest Income on Current, Past-Due and Re-Structured Loans – consists of the amount collected fromclients on loans. The issues are:1. The interest rate is always stated as a percentage of the loan amount for a period (generally monthly orannually)2. It is the balance sheet accounts that are affected by the principal portion of the loan repayment, i.e., theLoan Outstanding decrease and Cash increases, until another loan is made and then the reverse is true.Apart from interest income, the MFI can also get income from fees/service charges. Fees could be of two types- stated as a percentage of the loan amount or as a flat fee, for loans provided by the organisation.Fees are however usually stated as a percentage of the loan disbursed (or loan outstanding) and they increasethe effective interest rate for the client. The impact of the fee however varies across loan terms, with fees havinga greater impact on the effective interest rate for loans with shorter rather than longer loan terms. Sometimes,an MFI charges late fees on the loans. This is the amount collected, as a penalty, from borrowers who have hadloans with payments in arrears.3.2.1.2 Investment IncomeA second income for an MFI is its investments (refer IS 5, Table 8 a). Investments are usually excess (idle) cashinvested by the MFI (into fixed deposits, savings bank accounts, marketable securities etc.) from its revolvingloan fund.Thus, the amount of interest earned by the organisation on its investments such as term deposits, securities,treasury bills, savings bank accounts etc. comprise its investment income.There are usually two forms of investments that can be made by MFIs1) Short-term investments (maturity date is less than a year)2) Long-Term Investments (maturity date is more than a year)Several aspects about investment income require clarification:1) They are getting be a legitimised source of income for MFIs2) However, only some legal forms have the scope for investing in a variety of investments3) Investment requires a special fund manager who can attend to the task of investing prudently - i.e. ensurethe right balance between safety, liquidity and returns30
Financial Statements of a Microfinance Institution3.2.1.3 Other IncomeGrant Income is the main form of other income for MFI (refer IS 22, Table 8 a). This generally includes twotypes of grants:1. Grants for provision of credit services – this includes grants (or donations) provided by donors, wholesalersand others towards salaries and other operational expenses.2. Grants for loan fund capital – this typically encompasses donations (or contributions) to an MFIs revolvingloan fund capital.Either way, grants are better brought into the income statement and through this taken into the net worth (Networth) side of the balance sheet.a. Income from Grants for Credit Services - funds donated to the organisation to cover programmeand operating expenses.b. Income from Grants for Loan Fund Capital - funds donated to the organisation to capitalise theloan fund, which are restricted to use for lending and can’t be spent on operating expenses.Miscellaneous income can also be a source of other income. For example, when loans that have been writtenoffare collected, the cash coming in (back to the organisation) is treated as miscellaneous income. This isbecause, the loan loss provision was treated as an expense in the first place and therefore, when the written-offloan is collected, it should be treated as an income.The key reasons for bifurcating the income in this manner (3 sources) is to see where an MFI is really gettingits income from - operations or investments or grants? This aspect is crucial because ultimately, an MFI thatgets most of its income from grants cannot be expected to sustainable. In terms of best practices recommendations,it can be said that operational income should constitute 60 percent, investment income 30 percent, andmiscellaneous income around 10 percent.3.2.2 ExpensesExpenses of an MFI can be categorised into two broad heads:• Financial Expenses• Operational ExpensesEXPENSES 2001 2002 2003Financial ExpensesIS 7 Interest On Debt 2,400 7,000 7,400IS 8 Interest Paid on DepositsIS 9 Total Financial Expenses 2,400 7,000 7,400IS 10 Gross Financial Margin (IS 6 – IS 9) 24,800 30,700 35,600IS 11 Provision for Loan Losses 10,000 6,000 5,000IS 12 Net Financial Margin (IS 10 – IS 11) 14,800 24,700 30,600Operating ExpensesIS 14 Salaries and Benefits 8,000 10,000 12,000IS 15 Administrative Expenses 4,600 5,000 5,200IS 16 Occupancy Expenses 4,300 5,000 5,000IS 17 Travel 4,000 5,000 5,000IS 18 Depreciation 400 600 800IS 19 Miscellaneous 500 600 600IS 20 Total Operating Expenses 21,800 26,200 28,60031
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REFERENCESBarrel, Margaret, Michael
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