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

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Tracking Financial Performance Standards of Microfinance Institutions3.3.1.2 Net WorthNet Worth is equal to the assets less the organisation’s liabilities. Net Worth is sometimes referred to as Equity,Fund Balance, or Net Assets. Unlike liabilities, the net worth of an organisation does not have to be repaid. Ittherefore represents the value of the organisation. Net worth might include capital contributions of investorsor donors, retained earnings, and current year surplus.1. Equity/Corpus/Capital – Equity represents what the investor has contributed. Corpus denotes the“capital’’ of the MFI. While MFIs registered as company would show capital in its proper name,corpus is the synonymous nomenclature used for MFIs registered as society or trust. For purpose ofaccounting and measurement of financial performance, corpus is equated with permanent capital.Sources of Capital include grants restricted and designated to be taken as capital, investor contributions,the proceeds of fund raising activities, and/or membership fees (refer BS 27, Table 8 b).2. Net Retained Surplus/Deficit prior years - the amount of income (or loss) accumulated since theformation of the organisation. It may also be referred to as undistributed profits or earned surplus(refer BS 28, Table 8 b).3. Net Surplus/Deficit current year - the amount of income (or loss) generated in the current year (referBS 29, Table 8 b).NET WORTH 2001 2002 2003BS 27 Equity/Corpus/Loan Fund Capital 66,000 66,000 80,200BS 28 Retained Net Surplus/Deficit prior years 0 0 400BS 29 Net Surplus/Deficit current year 0 400 2,000BS 30 Total Net Worth 66,000 66,400 82,600Ideally reserve also is part of Net Worth, but for fairer representation of the balance sheet, it is taken as anegative asset. In MFI, generally two types of Reserves are created: (i) Specific reserves -created for some specialpurpose (loan loss reserve is most common reserve for an MFI), whereas, (ii) General reserve - created for anynature of future use.Any impact of delinquency/other losses will directly affect the net worth of an MFI. Therefore, if de-capitalisationis occurring one must look at the causes and attempt to control or mitigate or eradicate these.3.3.2 Application of Fund - AssetsIn the previous section we discuss about representation of “sources of fund” in the balance sheet, in this sectionwe will discuss about “application of funds”, the other part of balance sheet, i.e. ‘Assets’.Assets represent what is owned by the organisation or owed to it. They are those items in which an organisationhas invested its funds for the purpose of generating future receipts of resources. They may be either current(short term) or long term by nature of their life and utility within the organisation. Assets are divided into twocategories, namely (1) Current, and (2) Long-Term.3.3.2.1 Current AssetsCurrent assets include cash and deposits (marketable securities), accounts receivable, and inventories i.e. assets,which in the normal course of business will be turned into cash within a year. As per best practices norms,between 75% - 77% of the total assets in current assets is considered as optimal.38
Financial Statements of a Microfinance InstitutionThe components of Current Assets are dealt below:a) Cash in Hand and Bank Current AccountsAll balances available with the MFI instantly/on demand such as cash in safe or with bank in currentaccount or any non- interest bearing deposit are classified under this head. (refer BS 1, Table 8 b).b) Interest bearing depositsFunds on deposit with any financial institution, with a term of less than one year, which are earninginterest income for the MFI (refer BS 2, Table 8 b).c) Loans outstandingThis is the most important income-generating asset for an MFI. It is also called as ‘loan portfolio’. This isbecause, in common parlance of Microfinance, the main source of revenue comes from ‘lending’ to clients.Greater the micro-loans provided by the MFI, the higher its income (all other things being equal) and thegreater the loans provided, the higher the loans outstanding.As in case of sources of funds, loans given by the MFI need careful examination. In the sense that someloans may have repayment portion exceeding next one year and hence need to be treated separately as longterm. All other loan-portions falling due for collection in next one year are “current’’.For convenience of understanding, if all loans are short term in nature, there are three sub-categorieswithin this broad category of loans outstanding – Namely, Regular loans outstanding, Past due loansoutstanding and Re-structured loans outstanding. Let’s take a look into the details of each of these subcategories.• Regular Loans Outstanding - the total amount of loans outstanding at a point in time that are regular,i.e., with no late payments or defaults (refer BS 4, Table 8 b).• Past-Due Loans Outstanding - the total amount of loans outstanding which have amount past due.In other words, it represents outstanding balance of all overdue loans (refer BS 5, Table 8 b).There is another aspect that requires clarification with regard to past due loans. In strict accountingparlance, any loan, which has even a single (installment) payment over due for (just) a day, should beclassified as a past due loanHowever, MFIs may have their own norms with regard to this aspect and consequently, this could varyon a case-by-case basis. But, best practices recommend that, if a payment on a loan due on a certaindate is not paid by that date, then that loan should be classified as a past due loan.• Restructured Loans outstanding - Outstanding loans in which original terms are re-negotiated (referBS 6, Table 8 b). There are two cases here: loans can be either refinanced or rescheduled.Current Assets 2001 2002 2003Cash and DepositBS 1 Cash and bank current accounts 10,000 5,000 10,000BS 2 Interest-bearing deposits 4,000 14,000 16,000BS 3 Total Cash and Deposit 14,000 19,000 26,000Loan OutstandingBS 4 Regular 64,000 100,000 132,000BS 5 Past Due 40,000 39,000 34,000BS 6 Restructured 0 1,000 2,000BS 7 Gross Loans Outstanding 104,000 140,000 168,00039
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REFERENCESBarrel, Margaret, Michael
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