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

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Tracking Financial Performance Standards of Microfinance Institutions5. While such relationships could often be specific to the model of Microfinance adopted by the MFI, itsstrategic context and other issues germane to its existence, the key issue here is that such a longitudinalcomparative analysis provides a sound historical basis for understanding the relationships and arriving atan “optimum”.6. If applicable and necessary and without confounding the levels of analysis that may exist, managers couldcompare operating units and determine where they might need to minimise costs, maximise revenues and/or do both to increase profitability. This is the diagnostic issue where the MFI management can attempt toanalyse various relationships and attempt to answer questions such as, “how to reduce costs and/or increaserevenues to ensure higher profitability?The various statements/reports/records required for calculating EFFICIENCY RATIOS are given belowStatements/Reports Required for Calculation of Efficiency RatiosStatement/Reports / Records RequirementsPortfolio Report with Aging AnalysisBalance SheetIncome StatementLoan Ledger (Individual)Yes, this is requiredCould be used if appropriately structured, especially toinclude information on past due and restructured loansYes, this is requiredYes, required and very important5.2.1 Operating Cost RatioOperating Costs during period_________________________________Average Outstanding Loan PortfolioTrend - A decreasing Operating Cost Ratio is positiveStandard Proposed by Sa-Dhan – Operating Cost Ratio should not exceed 20%5.2.1.1 What is meant by the Operating Cost Ratio? - Simple DefinitionF Operating Cost Ratio is a percentage (%)F This ratio is perhaps the best indicator of the overall efficiency of a lending institution. For this reason, theratio is also commonly referred to as Administrative Efficiency ratio: it measures the institutional cost ofdelivering loan services. The lower the Operating Cost Ratio, the higher the efficiency of an institution.F This ratio is affected by increasing or decreasing operational costs relative to the average loan portfoliooutstanding.88
Performance Standards - Concept, Definitions, Calculation and Methodological Issues5.2.1.2 What does it measure?F It is the key measure of the efficiency of the lending operations. If the performing assets are primarily loansfunds, this ratio shows how much the institution must spend on all operating costs (salaries, rent, office,vehicles, etc.) to keep a unit of money loaned out for one year’s time.F If an institution selects an efficient methodology and employs a highly productive staff, the operating costratio will drop, resulting in a more sustainable institution. In an organisation, a downward trend in thisratio highlights the increasing efficiency of the organisation.5.2.1.3 What minimum records are required for calculating the ratio?F Loan ledger with disbursement, schedule and repayment data on each individual loan backed-up acomprehensive credit policy outlining various terms and conditionsF Aggregation of the loan ledger data with regard to delinquent and current loans – either a simple agingtable or comprehensive portfolio reportF Key financial statements like the Balance Sheet and Income Statement, appropriately constructed5.2.1.4 What events/activities affect (distort) the Operating Cost Ratio?F Portfolio size, loan size, methodology and salary incentives have an impact on this ratio. Portfolio sizematters and while small MFIs can become more efficient by growing, beyond a point, the importance ofeconomics of scale diminishes rapidly and other factors become crucial.F Loan size certainly has a much stronger impact on efficiency.F Also, the operating expenses of rural MFIs are much higher since their clients are more widely dispersed.Hence, rural programmes tend to have higher operating cost ratiosF Standardisation of Microfinance operations should also help in a reduced operating cost ratioF This ratio is also affected by unreported and/or hidden subsidiesF Organisations providing micro-credit as well as other services can allocate costs in such a way that theircredit operations look more efficient than they really areF When MFIs allocate costs to subsidiaries or do not carry them on the books at all, for instance whendonors meet certain costs, such as paying for consultants or health workers collect loans/savings – this ratiois affected5.2.1.5 How to calculate the ratio?1. From the income statement, sum all expenses {refer Table 8 (a), IS 20)} related to the operations of theMFI. These typically would included:1. Salaries and Benefits {refer Table 8 (a), IS 14)}2. Administrative Expenses {refer Table 8 (a), IS 15)}3. Occupancy Expenses {refer Table 8 (a), IS 16)}4. Travel {refer Table 8 (a), IS 17)}5. Depreciation {refer Table 8 (a), IS 18)}6. Other {refer Table 8 (a), IS 19)}Interest and provision expenses and extraordinary expenses should not be included89
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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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REFERENCESBarrel, Margaret, Michael
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