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

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Tracking Financial Performance Standards of Microfinance Institutions20. While the method to arrive at aging was done using data with the Flat rate of interest method, the samegeneric principles apply to loans terms using ‘Reducing Balance Method’ and/or ‘EMI Method’. Theschedules for these are given in Tables 10 and 11.21. As long as borrowers pay according to their schedule, interest payments will mirror what needs to be paidas per schedule. But the moment borrowers deviate from the schedule, interest payments will also changebased on the principal outstanding.22. For example, Rs15 is the interest due per month and has to be paid on the last day of the month forRs1000 loan, payable in 10 equal months with interest at 15% declining balance annualised. The principaland interest payments as per schedule are as follows:No. of Principal Due Interest Due as Principal Principal OutstandingInstallment as per Schedule per Schedule Paid at end of installment1 100 15.00 100 9002 100 13.50 100 8003 100 12.00 100 7004 100 10.50 100 6005 100 9.00 100 5006 100 7.50 100 4007 100 6.00 100 3008 100 4.50 100 2009 100 3.00 100 10010 100 1.50 100 0Now assume that the client does not pay the 1 st installment on time and infact pays it one installment late.Then interest to be charged changes and is as follows:This installment interest is 15 andnot 13.50 because PrincipalOutstanding is still 1000 before theborrower makes the paymentNo. ofPaid PrincipalPrincipal Due Interest Due PrincipalInstallmentOutstandingat end of InstallmentInterest Paid1 100 15 0 1000 02 100 15 100 90015 (Interest Overdue) +15 (this installment Interest)3 100 13.50 100 800 13.504 100 12.00 100 700 12.005 100 10.50 100 600 10.506 100 9.00 100 500 9.007 100 7.50 100 400 7.508 100 6.00 100 300 6.009 100 4.50 100 200 4.5010 100 3.00 100 100 3.0011 100 1.50 100 0 1.50So, MFIs must re-work their calculations at the time of repayment to account for such aspects.54
Constructing Loan Repayment Schedule Aging Schedule and Loan Portfolio Report for an MFI23. Also, MFIs must have clear-cut norms on dealing with interest issues after the loan term. For example,when the flat rate of interest is used, an equal interest amount gets charged per installment from theborrower based on the original loan conditions. Now, after the loan term is over and principal amounts arestill unpaid by the borrower, charging the same interest may be erroneous. How to deal with such aspectsalso needs to be clarified upfront. Further, penalties and penal interest (if any) and their rates thereof mustbe specified and used consistently.24. Interest Rate should always be expressed as an ‘Annualised Percentage Rate’ and the following formula willhelp in doing so:To annualise a number, the formula is: AA = [A x (12/M)]WhereAA = Annualised amountA = Amount for the periodM = Number of months in the period25. Interest Calculation Aspects – whether until date of payment or month End is followed should be clarified.Often times, when last date of month is the due date, MFIs still take the full month’s interest even ifthe borrower repays 7 days before the scheduled date. Some others calculate interest until the date ofpayment only. Among the latter, while some adjust for the interest on principal outstanding for the 7 daysbalance, others just forget about it. The key aspect is that all of these have an impact on aging, portfolioanalysis, ratios and sustainability and hence, information on what is done as part of the loan protocol isvery necessary.26. Also, the method of Interest Calculation – whether EMI or Regular Diminishing or Flat – should not bechanged during the course of a loan.55
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TECHNICAL TOOL SERIES 1TRACKING FIN
Page 4 and 5: INTRODUCTION TOMICROFINANCE STANDAR
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TermStatement of Profit and LossStr
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REFERENCESBarrel, Margaret, Michael
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