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

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