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

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Tracking Financial Performance Standards of Microfinance Institutions5.2.2 Total Cost RatioOperating Costs during period + Cost of Funds + Loan Loss Provision________________________________________________________________________Average Outstanding Loan PortfolioTrend - A decreasing Total Cost Ratio is positive but sufficient attention must be given to the cost of fundsaspects and also loan loss provision createdStandard Proposed by Sa-Dhan – Total Cost Ratio should not exceed 30%5.2.2.1 What is meant by the Total Cost Ratio? - Simple DefinitionF Total Cost Ratio is a percentage (%)F Like the operating cost ratio, this ratio is an indicator of the overall efficiency of a lending institution. Thelower the total Cost Ratio, the higher the efficiency of an institutionF However, because costs of funds and loan loss provision are included here, greater care must be exercisedwhile interpreting the ratio5.2.2.2 What does it measure?F If the performing assets are primarily loans funds, this ratio shows how much the institution must spendon all costs (salaries, rent, office, vehicles, sourcing capital and making provisions etc.) to keep a unit ofmoney loaned out for one year’s time.F If an institution selects an efficient methodology and employs a highly productive staff, the total cost ratiowill drop, resulting in a more sustainable institution. In an organisation, a downward trend in this ratiohighlights the increasing efficiency of the organisation. But, again because the cost of funds and loan lossprovision are included, a decreasing ratio may not necessarily be good (or positive) because the numeratorcan be decreased by accessing subsidised funds as well as having lower provisions than mandated by theportfolio quality.5.2.2.3 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 constructed5.2.2.4 What events/activities affect (distort) the Total 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.92
Performance Standards - Concept, Definitions, Calculation and Methodological IssuesF Also, the operating expenses of rural MFIs are much higher since their clients are more widely dispersed.Hence, rural programmes tend to have higher total cost ratiosF Standardisation of micro-finance operations should also help in a reduced total 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 affectedF Finally, because the cost of funds and loan loss provision are included, a decreasing ratio may not necessarilybe good (or positive) because the numerator can be decreased by accessing subsidized funds as well ashaving lower provisions than mandated by the portfolio quality5.2.2.5 How to calculate the ratio?1. From the income statement {refer Table 8 (a)}, sum all expenses related to micro-financing, including costof fund and loan loss provision. These typically would included:I. Operational Costs {refer Table 8 (a), IS 20)}a) Salaries and Benefits {refer Table 8 (a), IS 14)}b) Administrative Expenses {refer Table 8 (a), IS 15)}c) Occupancy Expenses {refer Table 8 (a), IS 16)}d) Travel {refer Table 8 (a), IS 17)}e) Depreciation {refer Table 8 (a), IS 18)}f) Other {refer Table 8 (a), IS 19)}II. Cost of Funds {refer Table 8 (a), IS 9)}III. Loan Loss Provisions {refer Table 8 (a), IS 11)}2. From the portfolio report (refer Table 13 - row P6), calculate the average outstanding portfolio during theperiod (for instance, a year) using the following procedure:a) Divide the period (year) into appropriate sub-periods – for example, a year could be dividedinto 12 sub-periods of a month each (see Table 14)b) Take the actual loans outstanding at the beginning of the period (say April 1 st , 2001)c) Add to this the sum of loans outstanding at the end of each sub-period (i.e., month)d) Then compute Average Loan Outstanding as followse) Average Loan Outstanding (During Period) = B + E1 + E2 +E3+ ... E 12133. Divide Total Costs during period by Avg. Loans Outstanding to get Total Cost Ratio93
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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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