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

More documents

Recommendations

Info

Tracking Financial Performance Standards of Microfinance InstitutionsRescheduling an outstanding loan involves changing the payment period and/or the size of payments.Refinancing a loan involves developing a new loan agreement before a previous one is completed. It caninclude increases in the principal amount, extension of the loan term, etc.Restructuring of loan is usually done so that a borrower is no longer in arrears. Best practices suggest thatsuch restructuring of loans is better avoided and discouraged as it results in the appearance of a “healthy”portfolio when in fact, restructured loans (and portfolio) indeed remain risky.Best practices strongly recommend this bifurcation to ensure transparency with regard to level of risk in anMFI.d) Loan Loss ReserveTo offset the risk (of loss) in loan portfolio, best practices recommend that MFI should establish a loan lossreserve. (See section 4.2.1 in chapter 4 for further detail). Hence, Loan Loss Reserve is the amount set asidethrough accounting entry to recognise probable future loan losses in an MFI’s loan portfolio so that thetrue value of the loan portfolio is fairly stated (refer BS 8, Table 8 b).e) Net Loans OutstandingThe amount of loan loss expense is recorded on the Balance Sheet as a negative asset (Loan Loss Reserve),reducing the gross outstanding loan balance. It results in a figure called as the Net Loans Outstanding. Itis the sum of all loan balances still owed to the organisation, that is, all loans disbursed and not yet repaidor written off, net of any loan loss reserve. Best practices suggest that the net loans outstanding shouldaccount for at least two-third of the total assets.Loan Outstanding 2001 2002 2003BS 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 104,000 140,000 168,000BS 8 (Loan Loss Reserve) -10,000 -10,000 -14,000BS 9 Net Loans Outstanding 94,000 130,000 154,000Rationale for creating Loan Loss Reserve – When the Reserve is created (or adjusted), a loan loss expense(referred to as the Provision for Loan Losses) is recorded on the Income Statement as an expense. The amountof loan loss provision is then recorded as the negative asset - loan loss reserve and each year the amountprovisioned under loan loss gets accumulated under loan loss reserve. This negative asset reduces the netoutstanding loan portfolio. (Process of accounting entries for provisioning, reserve and write-offs is given in detailsin section 4.2.3 in chapter 4).In case of actual loan losses, or write-offs, it gets reflected as a reduction of the Loan Loss reserve and the GrossLoans Outstanding on the Balance Sheet (and not on the Income Statement). The resultant effect is to leavethe Net Portfolio on the Balance Sheet unchanged since the reserve has already been made (see graphicalrepresentation given at the end of section 4.2.3 in chapter 4).• If the Loan loss reserve is too low relative to the value of loans to be written off, then both the Loan LossReserve and the Provision for Loan Losses (on the Income Statement) first need to be increased and thenthe loans can be written off.40
Financial Statements of a Microfinance Institution• It is to be noted here that all of the loans outstanding amounts reflect only the principal due, not theinterest (which is generally income statement item).• When interest is due but not received, there is a procedure by which this (due) interest is accrued andreflected on the balance sheet under accounts receivable (as accrued interest) as shown below.f) Other Current AssetsItems, such as accounts receivable (accrued interest, fees, etc.) and prepaid expenses (rent, insurance, salaryadvances, etc.) are clubbed under other current assets. Accrued interest (receivable) is one item that deservesattention from a best practices perspective.Consider an MFI, following accrual system of accounting also applies the accrual principle to interest income.So the interest is accounted as income irrespective of whether it has been received or not. But the interestthat is due and has not been received, if it gets into the income statement, it should be accounted for in theBalance Sheet as well. This is because when interest that is due is received, the accounting entries are:• Credit - Income• Debit - CashHowever, when interest due is not received but recorded in the income statement, the accounting entries will be:• Credit - Income• Debit - ????????? (Cash can’t be debited, as interest has not been received)As per fundamental accounting equation (Assets = Liabilities + Equity)Now, when interest due is not received but it has been recorded in the income statement, this entry gets intothe balance sheet on the equity side through net surplus (or deficit).And according to the fundamental accounting, there must be a balancing entry on the asset side. Therefore,this balancing entry in the balance sheet (when interest is due and has not been received and is also recorded inthe income statement) is called as accrued interest.Thus, when interest is due and not received and also when it is recorded in the income statement as income, theentries are:• Credit - Income• Debit - Accrued Interest (asset under accounts receivable)And when this income is realized, the corresponding entries are:• Credit - Accrued Interest• Debit - CashAnd when Accrued Interest is Written-off along with principal outstanding, the corresponding entries are:• Credit - Accrued Interest (reduces asset)• Debit - Capital Reserve or Corpus (reduces equity)If written-off accrued interest is collected, then, the corresponding accounting entries are:• Credit - Miscellaneous Income• Debit - Cash41
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 90 and 91:
Tracking Financial Performance Stan
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

Create successful ePaper yourself

Delete template?

Save as template?