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

Performance Standards - Concept, Definitions, Calculation and Methodological IssuesChapter5PERFORMANCE STANDARDS - CONCEPT, DEFINITIONS,CALCULATION AND METHODOLOGICAL ISSUESIn chapter 2 we learn about the conceptual framework of financial performance standards and their basicfeatures. Also, we learnt about the broad thematic areas of financial performance of an MFI and standardsrecommended by Sa-Dhan under each thematic area of financial performance.In this chapter we will try to define each of the broad areas of financial performance standards suggested by Sa-Dhan, identify specific indicator(s) for each performance area, provide conceptual & operational definitions ofthese indicators along with a discussion of their strengths/weaknesses and identify key methodological issueswith regard to their calculation.5.1 ASSET QUALITY STANDARDS1. Asset Quality Standards signify the performance level of the most important asset (loan portfolio) ofan MFI. It helps management and other stakeholders to know whether the institution is doing aresponsible job of managing its portfolio. More specifically, it tells that what portion of loan portfolio(asset) is good or bad.2. This group of ratios are very crucial for an MFI because the “loan portfolio” is the primary incomegenerating asset of a micro-finance institution3. The risk that some of the loans will not earn expected revenue and may not be paid back (at all) is veryreal and must be anticipated as business risks.4. Management of the twin risks of repayment of principal amount and of interest income are crucialbecause of their impact on overall viability of the micro-credit operation.5. Therefore, timely and periodic monitoring of this group of ratios would enable MFIs to detect delinquencyon performance of loans given by the MFI.6. The key Asset Quality Ratios to be monitored 10 are Portfolio at Risk and the traditionally used CurrentRepayment Rate, despite it not being a genuine measure of portfolio quality.7. The various statements/reports/records required for calculating Asset Quality Ratio are given belowStatements/Reports Required for Calculation of Assets Quality RatiosStatement/Reports / Records RequirementsPortfolio Report with Aging ScheduleBalance SheetLoan Ledger (Individual & Aggregated)Yes, this alone is required and sufficient. But, the agingof loans must be done in an accurate manner.Could be used if appropriately structured, especially toinclude information on past due and restructured loansYes, required and very important10These are generally calculated for Principal Amounts but most of the same concepts can be applied for interest payments as well.71