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

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Tracking Financial Performance Standards of Microfinance Institutions5.1.2.6 Are Repayment Rates indeed reliable and valid indicators of asset quality?F While they are indeed useful, repayment rates are not reliable and valid indicators of asset (portfolio)quality.F As evident from the example given in Table 12, it is possible to have a very high repayment rate and yet avery high portfolio at risk - in excess of 80% (illustration is given at end of this section).F While many MFIs use repayment rates to measure default risk in a portfolio, it must be remembered thatrepayment rates primarily express the amount paid by clients as a percentage of the amounts due fromthem.F They do not measure default risk in a portfolio.F In fact, the portfolio outstanding does not appear in the numerator or denominator in the repayment rateformula. Therefore, using repayment rates to get a measure of the default risk is inappropriate.Calculation from Table 12 (see table below) demonstrates as to why Repayment Rates are not a Reliable/Valid Indicator of Portfolio QualityIndicator Formula Value(in %)Cumulative Repayment Rate (CRR)PAR (Portfolio at Risk)Portfolio at Risk AdjustedColumn IX Total – Column XI TotalColumn VI Total 99.66%Column XIII TotalColumn XII Total 38.79%Column XIII TotalColumn XII Total - (Sum of Row 13+14, Column XII) 81.19%86
Performance Standards - Concept, Definitions, Calculation and Methodological Issues5.2 EFFICIENCY AND PRODUCTIVITY STANDARDSEfficiency Ratios1. Efficiency ratios help answer the question as to whether the institution serves as many people as possiblewith its resources for the lowest possible cost2. They measure the cost of providing services (loans) to generate revenue. These costs are referred to asoperating costs and should include neither financing costs nor loan loss provisions3. Total operating costs can be stated as percentage of three amounts to measure the efficiency of the MFI: theaverage portfolio outstanding or average performing assets or total assets. For a more detailed analysis,operating costs can also be broken down to measure efficiency of specific cost elements such as salaries andbenefits, occupational expenses such as rent and utilities, or travel4. For MFIs that mobilise deposits, efficiency ratios will be somewhat different because additional operatingcosts are incurred to collect deposits. Therefore, efficiency ratios of MFIs that collect deposits should notbe compared to MFIs that do not collect deposits. This analysis focuses only on the credit operationsIn MFIs, three key factors influence the level of activities and hence operating costs:1. Turnover of the loan portfolio (related to loan term)2. Average loan size3. Maturity (or experience) of the institution. 12The impact of these three factors and the corresponding efficiency of operations can be analysed by looking atoperating costs as a percentage of portfolio outstanding and at the costs associated with lending on a per unitof currency basis or a per loan basis. All of these ratios have important implications for the cost of capital forthe ultimate client - the rural and urban poor. These two efficiency ratios are:1. Operating cost ratio2. Total Cost RatioUtility of Efficiency Ratios1. Efficiency ratios provide information about the rate at which MFIs generate revenue to cover their expenses2. By calculating and comparing efficiency ratios over time, MFIs can determine whether they are indeedmaximizing (optimising) the use of their resources3. Efficiency ratios can be used to compare performance over time as well as measure improvements in anMFI’s operations across an extended time period. This is the descriptive part where one can understand, “howthe MFIs performance has changed over time?”4. By taking the performance of the MFI as a whole, branches, credit officers, or other operating units (asappropriate), an MFI can begin to determine the “optimum” relationships between key operating factors(including inputs and outputs).12The maturity of the institution refers to how long the programme has been operating: are systems well developed? are staff fullytrained? has a reasonable scale been reached? In short, is the institution well advanced along the learning curve? does it have a goodexperience curve?87
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TECHNICAL TOOL SERIES 1TRACKING FIN
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INTRODUCTION TOMICROFINANCE STANDAR
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5. PERFORMANCE STANDARDS - CONCEPT,
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ACKNOWLEDGMENTSThe need of the oper
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Tracking Financial Performance Stan
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TermStatement of Profit and LossStr
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REFERENCESBarrel, Margaret, Michael
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Tracking Financial Performance Standards of ... - Sa-Dhan

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