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

More documents

Recommendations

Info

Tracking Financial Performance Standards of Microfinance Institutions3.3 BALANCE SHEET – KEY DEFINITIONS AND INTERPRETATIONSThe balance sheet is a stock statement, which is a snapshot of the MFI at a moment in time. The statementreflects what the MFI owns and what is owed to it (assets), what it owes others (liabilities), and the differencebetween the two (equity or net assets).The Balance Sheet provides an instant picture of an organisation financial position in terms if where all fundshave been obtained from (sources of funds) and where all the funds have been used for (application of funds).The balance sheet uses the fundamental accounting equationSOURCES OF FUNDS = APPLICATION OF FUNDSandASSETS = OWN FUND + EXTERNAL LIABILITIESThe Balance Sheet items would now be elaborated to look into possible components under each head.3.3.1 Sources of Fund - Liabilities and Net Worth3.3.1.1 LiabilitiesLiabilities represent what is owed by the organisation to others either in the form of a cash commitment or asan obligation by the organisation to provide goods and services in the future.Current Liabilities1. Short-term Borrowing (commercial) – the outstanding amount, that the organisation owes to banksor other lenders for which it is paying a market rate of interest, and are due to be repaid within oneyear (refer BS 18, Table 8 b).2. Short-term Borrowing (concessional) – the outstanding amount that the organisation owes to banksor other lenders for which it is paying the lender a rate of interest below the market rate, and are dueto be repaid within one year (refer BS 19, Table 8 b).3. Client Deposits (Group Savings Deposits, Trust Fund, etc.) - both voluntary and forced client savingsthat are deposited with the organisation that it must return (refer BS 20, Table 8 b).LIABILITIES 2001 2002 2003Current LiabilitiesBS 18 Short-Term Borrowing (Commercial) 12,000 24,000 36,000BS 19 Short-Term Borrowing (Concessional Rate) 0 0 0BS 20 Client Savings 0 0 0BS 21 Total Current Liabilities 12,000 24,000 36,000Although a liability for the organisation, deposits are different from funds borrowed from a financialinstitution because there is normally no due date or amortisation schedule - fixed and recurring deposits,while they have a maturity date, are not structured by MFIs in the same manner as in banks. Therefore,while technically, they have to be returned on the date of maturity, they are often (required to be) extendedfor another term on a sequential basis. This, in effect is a double-edged sword that has an advantage as wellas disadvantage.36
Financial Statements of a Microfinance InstitutionLong-Term Liabilities1. Long-term Debts (commercial rate) - The outstanding amount that the organisation owes to banksor other lenders for which it is paying a market rate of interest. Long-term debt is that portionwhich is due to be repaid in more than one year’s time (refer BS 22, Table 8 b).2. Long-term Debt (concessional rate) - the outstanding amount that the organisation owes to banksor other lenders for which it is paying the lender a rate of interest below the market rate (refer BS 23,Table 8 b).3. Other Liabilities include: Restricted Deferred Revenue, which are funds received, but restricted foruse in future years, are classified as a liability on the balance sheet, because they would have to bereturned to the funding organisations if the specified programmes were not carried out. The fundsare not recorded as revenue until the service or product is delivered. When the organisation receivesrestricted or deferred funds, it incurs an obligation (liability) to provide the services described in thegrant agreement. As the organisation provides the services (i.e., technical assistance or training tomicro entrepreneurs) it incurs expenses. Deferred revenue is then reflected as grant revenue andused to cover those expenses.Deferred expenditure - Likewise, outstanding expenses like salaries payable, providence fund payable,insurance payable are treated as liabilities, as the organisation will have to pay for such expenses in thefuture (refer BS 24, Table 8 b).LIABILITIES 2001 2002 2003Long Term LiabilitiesBS 22 Long Term Debt (Commercial) 15,000 30,000 24,000BS 23 Long Term Debt (Concessional) 37,600 60,000 70,000BS 24 Restricted or Deferred Revenue & Expenses 0 0 0BS 25 Total Long Term Liabilities 52,600 90,000 94,000Several key issues need to be articulated here and these are outlined below:1) Not all MFIs can acquire savings from clientele, as there is a legal restriction on savings deposits by theRBI. Another aspect here is that most MFIs treat savings not as a liability but rather as equity. This is notcorrect as savings deposits are strictly returnable to clients and hence, they ought to be treated as liability.2) MFIs must distinguish between long-term debt as commercial and subsidised, for this enable an analyst tounderstand its financial position, from a sustainability perspective. Interest rates less than the prime-lendingrate can be considered as subsidised and those equal to or greater than this rate (set by the RBI) can beregarded as commercial debt. In India, this cut-off rate often fluctuates but for the purpose of Microfinancethis can be taken as 12 percent annualised rate.3) Disclosure of the outstanding expenses is also very crucial because it tells an analyst about the futurecommitments of the MFI and makes the balance sheet more transparent4) In summary, all of the above are required as part of increasing the transparency and accountability of MFIsand they must acquire the culture to provide balance sheets in such fashion, which are based on international(global) best practices.37
Page 2 and 3: TECHNICAL TOOL SERIES 1TRACKING FIN
Page 4 and 5: INTRODUCTION TOMICROFINANCE STANDAR
Page 6 and 7: 5. PERFORMANCE STANDARDS - CONCEPT,
Page 8 and 9: ACKNOWLEDGMENTSThe need of the oper
Page 10 and 11: Tracking Financial Performance Stan
Page 86 and 87:
Tracking Financial Performance Stan
Page 88 and 89:
Page 90 and 91:
Page 92 and 93:
Page 94 and 95:
Page 96 and 97:
Page 98 and 99:
Page 100 and 101:
Page 102 and 103:
Page 104 and 105:
Page 106 and 107:
Page 108 and 109:
Page 110 and 111:
Page 112 and 113:
Page 114 and 115:
Page 116 and 117:
Page 118 and 119:
Page 120 and 121:
Page 122 and 123:
Page 124 and 125:
Page 126 and 127:
Page 128 and 129:
Page 130 and 131:
Page 132 and 133:
Page 134 and 135:
Page 136 and 137:
TermStatement of Profit and LossStr
Page 138 and 139:
REFERENCESBarrel, Margaret, Michael
show all

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

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?