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

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