FISE TOOL. A Quadruple Bottom-line MFI Branch Performance Rating Tool. Presented by Dr.N.Jeyaseelan, At the UN Solution Exchange s

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1 FISE TOOL A Quadruple Bottom-line MFI Branch Performance Rating Tool Presented by Dr.N.Jeyaseelan, At the UN Solution Exchange s Micro finance Community Visioning Workshop Held at New Delhi on 11 th October Dr.N.Jeyaseelan, Micro Finance Consultant, Madurai. vijayjeyaseelan@yahoo.co.in Mobile:

2 FISE TOOL A Quadruple Bottom-line MFI Branch Performance Rating Tool By. Dr.N.Jeyaseelan 1 i. Introduction: In India, the Self Help Groups based micro finance delivery system is recording an exponential growth in the last few years. The major micro finance programs are SHG Bank linkage program and Lending to SHGs through MFIs. Under the SHG Bank linkage program of NABARD, as of Mar 2007, cumulatively 2.0 lakh SHGs have been credit linked with the banks and the bank loan disbursed amounts to Rs millions benefiting around 37. million poor households. The outreach under the MFIs model upto Mar 2007 as reported by Sa-Dhan (Quick report 2007) is 8.23 million with a loan portfolio outstanding of Rs.4270 millions. NABARD s mission is to reach 22 million poor through 30 lakh SHGs by This target will be achieved much ahead with the current phase of expansion. But all these growth in numbers has thrown a set of challenges on the players like cut throat competition in the field, multiple borrowing by members, staff turn over, negative criticism about cost covering interest rates of MFIs, defaults in SHGs and SHGs not graduating to micro enterprise stage and thereby not able to repay the big loans, all of which have started affecting the smooth functioning of MFIs resulting in pressure on their bottom-lines. ii. Need for the tool: Non Governmental Organizations facilitate the formation and development of SHGs. Of late, the support cost given by the donors or government agencies to NGOs for SHG promotion have come down or almost stopped. The SHG training reimbursement cost to NGOs also has been reduced. Most of the NGOs are finding it difficult to meet their operational cost. To make the operations sustainable and to increase the outreach, many NGOs are turning themselves 1 Dr.N.Jeyaseelan, holds a Ph.D in Micro finance. He has piloted many micro finance projects, products and processes in his 1 years of SHG banking experience with a bank. He has done assignments on micro credit / micro insurance for UNDP, UNOPS, IFAD & GTZ in India & abroad. He has several publications to his credit. He was involved in development of MF / Entrepreneurship training manuals and conducted many training of trainers programs. He has won the United Nations Solution Exchange s Micro Finance community Knowledge Promoter Award Now, he is a free lance consultant based at Madurai. 2

3 into MFIs. This kind of role transformation is taking place in India at a faster rate. At present there are around MFIs in India. The MFIs remain largely unregulated in India, except for NBFC category, which is regulated by Reserve Bank of India (RBI). Most of the MFIs have been formed under Society s act or Trusts act. Some are being registered under the MACS (Mutually Aided Cooperative Society) or co-operative law or as a Section 2 company (a non profit company). NGO turned MFIs are strong in social mobilization and lack professional management capacity in finance. The rating services for MFIs are limited as it is offered by a few companies in India and the small MFIs can not afford to have the professional rating as it costs around Rs80,000 per rating. Even the grant for rating from NABARD is available only, in case where the MFI s portfolio size is of a minimum of Rs0 lakhs. Most of the times, these rating reports stay with the top / middle management and do not reach the branch level team. Hence, there is a need to internalize the process of rating within MFIs and the branch team has to be trained to use the rating process for improving their performance. The author has developed a Double bottom line MFI branch rating tool last year and had given a training on how to use the tool to a set of Branch heads of a MFI. The tool had 26 parameters. But, the branch heads are not using the tool, as they find it difficult to work out some ratios like Capital Adequacy Ratio and Financial Self Sufficiency ratio. Hence, an attempt has been made to evolve a simple tool, which will cover all the key functional areas as well as that all the branches of MFIs can use them iii. Objectives of evolving the Rating tool: Evolving the FISE tool has the following objectives. To make the MFI Branch team know about their performance. To enable the staff team assess the MFI branch Performance in terms of Financial, Institutional, Social and Environmental parameters. To facilitate MFI s branch to know their weak area, so that they can focus attention on them and pave way for holistic development. 3

4 To enable the MFI to compare the performance of its branches on quadruple bottom-lines. iv. Rating Parameters: The present tool (as given in annexure:i) is based on FISE (Financial, Institutional, Social and Environmental ) parameters. For assessing each parameters, some sub-parameters and indicators have been evolved. Balanced weights have been assigned for all the 16 parameters viz 7-Financial (40%), 6- Institutional (30%), 2-Social (20%) and 1- Environmental (10%) parameters. v. Rating process: The rating process involves the following steps. Formation of an internal rating team in the branch & training them on using rating tool by the Branch head. Collection of audited financial statements for the latest financial year, MIS reports for verification by the rating team. Rating team s Interaction with the members of Branch Level Client s Consultative Committee. Rating is to be done by a staff team and to be verified by the branch head. Each parameter is assessed and the points are awarded. Based on the cumulative points awarded, the grades are assigned to MFI branch. The rating results are sent to MFI management and shared with all the stakeholders including community members. vi. Conclusion: Based on the results of rating, the branch can take corrective actions to reorient their strategy. This will help the branch to avoid mission drift and enable its members and community to see a holistic development. 4

5 Annexure: I. FISE TOOL. A Quadruple Bottom line MFI Branch Performance Rating tool Sl.no Parameters 1.FINANCIAL: 1.1 *Loan disbursement per year / Loan officer i. If 27 lakhs and more () ii. If 18 lakhs to less than 27 lakhs (3) iii If less than 18 lakhs (2) 1.2 *Outstanding portfolio per Loan officer i. If 1 lakhs and more () ii. If 10 lakhs to less than 1 lakhs (3) iii If less than 10 lakhs (2) 1.3. *No. of active borrowers per loan officer i. If 300 and more () ii. If 200 to less than 300 (3) iii If less than 200 (2) 1.4 Portfolio at Risk >30 days (PAR) i. If PAR is 2% or less (10) ii.if PAR is above 2% but up to % (7) iii.if PAR is more than % (3) 1. Operational Self Sufficiency : (OSS) i. If more than 13% () ii. If 100% to 13% (3) iii.if less than 100% (2) 1.6 Operational Efficiency Ratio (OER) i. If 10% or Less () ii. If more than 10% and upto 1% (3) ii. If more than 1% and upto 20% (2) 1.7 Depth of outreach (Average Loan size per a/c) i. If average loan balance below Rs200 () ii. If average loan balance Rs201 Rs000 (3) iii.if average loan balance above Rs.000 (2) 2. INSTITUTIONAL: 2.1 i. If the branch has evolved the shared vision & and displayed at the branch () ii.if the branch has evolved the shared vision & but not displayed at the branch (3) Maximum points 10 Awarded points

6 2.2 Functioning of Branch Level Clients Consultative Committee a. If the branch has implemented any 3 changes (for cost reduction / revenue generation) (for cost reduction / revenue generation) as suggested by BLCCC in the last 12 months. () b. If BLCCC s suggestions resulted in any 2 changes in the last 12 months (3) c. If BLCCC s suggestions resulted in any one change in the last 12 months (2) 2.3 Information disclosure and Transparency. (i.sharing the details on audited annual financial performance with all the stake holders in various media. ii. Explaining to the clients about the effective cost structure for various services offered, iii. Involving the field staff in program budget planning and monitoring.) Both I, ii & iii in practice () Any two in practice (3) Any one in practice (2) 2.4 Staff turn over during the last one year. i. If more than 3 left (0) ii. If between 1-2 (3) iii.if no staff turn-over () 2. Promotion of staff to higher cadre: i. If any of 2 branch staff or more promoted during the last one year () ii.if only one staff promoted (3) 2.6 Participation by all the staff in trainings in last one year. i. If all the staff participated in 1 program () ii. If 7% of staff participated in 1 program (3) iii.if 0% of staff participated in 1 program (2) 3.SOCIAL: 3.1 If any infrastructure addition or change in service delivery in EDUCATION due to MFI branch in the last 12 months or any education related programs held by the branch. i. In 4 villages (10) ii. In 2 village (7) iii In 1 village (3) 3.2 If any infrastructure addition or change in service delivery in HEALTH due to MFI branch in

7 the last 12 months or any health related programs organized by the branch. i. In 4 villages (10) ii. In 2 village (7) iii In 1 village (3) 4.ENVIRONMENTAL: 4.1 If the branch has taken up any program on natural resource conservation, community asset maintenance (water bodies renovation) or any programs on green environment (tree planting) or use of non conventional energy ( promoting bio fuels, solar energy and so on ) in the last 12 months. i. In 4 villages (10) ii. In 2 village (7) iii In 1 village (3) 10 ABSTRACT: 1. FINANCIAL INSTITUTIONAL SOCIAL ENVIRONMENTAL 10 GRAND TOTAL 100 GRADES: i. If more than 80 points : A + - Excellent Performance ii. If between : A - Good iii. If between : B - Satisfactory iv. If less than 60 : C - To be improved. Note: All the performance figures are for full financial year or as on the last day of the financial year, as the case may be. Date: Rating jointly done by: Verified by: * The benchmarks indicated here are based on the current status of some MFIs in South India. The MFIs shall revise the benchmarks to suit to their context. 7

8 Definitions: Active borrower: Client with a loan outstanding Total unpaid balance of all overdue loans of above 30 days. Portfolio at Risk = x 100 >30 days. Gross portfolio outstanding Operating income OSS = x 100 Personnel + Admn + Financial cost + Loan loss provision Personnel cost+administration cost+in-kind donation** OER = x100 Average portfolio outstanding ** In-kind donation: During some period (e.g. while transforming from NGO to MFI), salary of some staff is not borne by the MFI, but borne by the parent NGO and this cost is deemed as in-kind donation. BLCCC- (Branch Level Clients Consultative Committee) BLCCC is meant for involving the client s participation in designing and reorienting the branch operations. BLCCC is an informal body of 20 to 30 community leaders drawn from the operational area of the branch. BLCCC shall meet bimonthly and shall make suggestions to the branch for client responsive changes. Information disclosure & Transparency: Information disclosure & transparency aims at making available the vital financial information (source & cost of funds, application of funds, effective costs to clients for various services and profits generated and so on) to all the stakeholders, especially clients, so that giving no room for others to carry out criticism on the cost covering rates charged by MFIs. Involving the staff in budget planning & monitoring adds to transparency. Staff Turn over: It refers to the staff, who leave the organization for some other job or to other organization. Turn over affects the continuity in the field. 8