ORGANISATION TRAINEESHIP SEGMENT

ORGANISATION ACTION COMPONENT

“STUDY OF MFIs FROM FINANCIAL MANAGEMENT PRESPECTIVE”

Host Organisation: FRIENDS OF WOMEN WORLD BANKING,

AHEMDABAD.

Submitted by: Deepak Kumar Jha

Faculty Guide: Prof. Prabal Kumar Sen

INSTITUTE OF RURAL MANAGEMENT ANAND

2005

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 ACKNOWLEDGEMENT

First of all I am thankful to Institute Of Rural Management Anand and the OTS
(organisation traineeship segment) Co-ordinator Prof. Jayant Negi who provided me the
two months to understand an organisation from different aspects. I am also very thankful
to Prof. Prabal Kumar Sen, my faculty guide for his guidance and support.
I must be equally thankful to the organisation, Friends of Women World Banking
(FWWB) for giving me the same opportunity. I am very thankful to Daksha N. Saha for
her guidance during the whole study. I must be thankful to the staff of the FWWB, in
particular to Deepak Kindo and Abhisekh.
I am also very thankful to Bharti Integrated Rural Development Society and to
Star Microfin Service Society, situated in Nandyal Andhra Pradesh. I must be thankful to
all the staff of both the organisation and in particular to Mr.R.R.Paul, CEO of BIRDS, P.
Prashad, finance manager of BIRDS and to Prof. S. C. Hassan, CEO SMSS and
Chandrasekhar, Finance manager SMSS.

Deepak Kumar Jha

(25011)

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 EXECUTIVE SUMMARY
Project Title: Study of Micro-Finance Institution from financial management
perspective.
Organisation: Friends of Women World Banking, Ahamdabad
Reporting Officer: Daksha N. Shah, Head, Credit department
Faculty Guide: Prof. Prabal Kumar Sen
Students’ Name: Deepak Kumar Jha (25011)
Objectives: the objectives of the study were to understand the different financial
practices, reasons behind and the implications of various financial practices. One of the
objectives was to find if money is laying idle somewhere.
Scope of the study: The study was confined to two of the ID partners of FWWB, namely
BIRDS and SMSS situated in Andhra Pradesh. .
Methodology: The organisations to be studied were chosen by the FWWB. I visited both
the organisations, talked with the CEOs, the Finance Manager and other staff members. I
studied their way of doing the business by visiting the field and then went through
different ledgers and accounts.
Findings: The major finding include, both the organisation is over dependent on FWWB
for their fund. ( BIRDS 73% and SMSS 81%), determination of interest rate without
keeping into consideration the effective rate of interest., poor liquidity management
which costs them very high ( Rs. 91832 to SMSS, Rs.125589 to BIRDSMF) for half the
year. it also includes different aspects of budget preparation and some local need based
product like one meeting the funeral expenses of the members and their spouse.
Recommendations: Mainly suggestions are made to reduce the liquidity management
costs. The major suggestions are to make the loan instalments smaller in amount,
available at short notice and more in numbers. The repayments by the MFIs to the
organisations should be made of smaller period, weekly if possible instead of quarterly.
The budget preparation should be done with more precision and monthly instead of
yearly. The loan amount to be disbursed should be based on this monthly budget. The
organisations should get into the strategic relationship with other funding agencies for
getting the fund and if possible for short notice funds.

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 LIST OF CONTENTS

LIST OF CONTENTS PAGE NO.

1. INTRODUCTION………………………………….1
2. OBJECTIVES………………………………………2
3. METHODOLOGY…………………………………2
4. THE ORGANISATIONS………………………….4
5. FUNCTIONS……………………………………….5
6. PRODUCTS………………………………………...6
7. PORTFOLIO……………………………………….11
8. CAPITAL AND FUNDS…………………………...17
9. ANALYSIS OF FINANCIAL STATEMENTS.….20
10. BUDGET……………………………………………26
11. PARTNERSHIP AND SECURITISATION……...28
12. LIQUIDITY…………………………………………29
13. SUGGESTIONS……………………………………33

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 TABLE OF GRAPHS

NAME OF THE GRAPH……………………………………… PAGE NO

Graph 1: loan disbursement (in monetary terms) cycle wise in BIRDSMF....12

Graph 2: distribution of loan cycle wise……………………………………..12
Graph 3: disbursement of SMSS cycle wise…………………………………13
Graph 4: disbursement of SMSS cycle wise (number of members)…………14
Graph 5: Capital structure of BIRDSMF…………………………………….18
Graph 6: Capital structure of SMSS………………………………………....18
Graph 7: income of the BIRDSMF……………………………………….….21
Graph 8: expenditure side of the BIRDSMF…………………………….…..21
Graph 9: assets side of the balance sheet of the BIRDS………………….….23
Graph 10: Receipt side of the receipt and payment account of SMSS………24
Graph 11: Payment side of the receipt and payment A/c of SMSS………….24
Graph 12: assets side of the balance sheet…………………………………...25
Graph 13: assets side of the balance sheet from SMSS balance sheet……….26
Graph 14: closing bank account of SMSS……………………………………30
Graph 15: closing bank account of BIRDS…………………………………..31

LIST OF ANNEXURE
TITLE OF THE ANNEXURE SERIAL NO.
RATIO ANALYSIS ANNEXURE 1
BANK ACCOUNT BALANCES OF SMSS ANNEXURE 2
BANK ACCOUNT BALANCES OF BIRDS ANNEXURE 3
ANNUAL REPORT OF BIRDS ANNEXURE 4
FINANCIAL STATEMENTS ANNEXURE 5

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 14.INTRODUCTION

MFIs, in recent past have developed themselves into strong informal financial
intermediaries. They captured the market where the formal institutions could not
penetrate because of the inherent limitations in their system or some other reasons.
MFIs succeeded because they adopted the bottom-up approach. The target population
was the poor ones and MFIs moulded their ways and products according to the needs
of these people. However, the growth in the MFIs and their services in various forms
i.e. credit, deposits and insurance etc. has been astounding. These institutions need to
be very informal and simple so that the poor can access them easily and need to be
financially well managed so that they can provide the services for longer period of
time. This dual responsibility of social orientation and financial sustainability makes
the path very difficult.

No social orientation of an MFI can run for long if the financial viability is not
there. That’s why financial viability is now one of the most important concepts in
MFIs. It basically means the MF business should be generating as much income at
least that can cover the cost it is incurring In the case of MFIs because of their nature
of services, products and clients they have to incur more operating and administrative
expenses. It actually puts more pressure on the institution to manage their resources
well and financial management is one of the many tools used for that purpose. it calls
for a good understanding of the business, the context and local preference in financial
behaviour, assessment of cash requirement for short as well as long term, loan, grants
and donations the MFIs can avail, operating and non operating expenses,
determination of interest rate on different loans, repayment schedule, equity capital,
loan portfolios both in terms of quality and quantity. Financial viability in my
understanding is more than just survival. It also talks about the efficient system,
checks and balances and control systems and shock absorbing capacity, lack of which

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is one of the main reasons many credit cooperatives failed. So as a financial
intermediary with the social responsibility, an MFI has to strike a balance between its
social and financial efficiency.

15.OBJECTIVES

The objectives of the study are

15.1.to study the current financial practices in the MFIs
15.2.to understand the reason behind the various financial practices
15.3.to understand the implications of different practices
15.4.to study the idle money.
15.5.to study the present checks and control system existing in the organisations.

16.METHODOLOGY

The methodology adopted for the study includes visit to two prominent
organisations working in the area of micro finance. The organisations were Bharati
Integrated Rural Development Society (BIRDS) situated in Nandyal and Star
Microfin Service Society (SMSS) situated in Velgode, Andhra Pradesh. The data
requirements were basically of quantitative nature, but some qualitative information
was also collected.

16.1.Data Requirements

I collected data on quantity and quality of portfolio, and on the mechanism

adopted for determining the interest rates, loan loss reserve and write offs.
Information was collected also on organisation’s capital structure and fund position,
about its income and expenditure and about other financial practices and products
employed by the organisation.

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 16.2.Methods Of Data Collection

The method of data collection was basically document based and individual
based. The documents which were relevant and referred to were the financial
statements of the organisations, income statements, receipt and payment account,
balance sheets, their monthly reports prepared for the FWWB, different ledgers like
bank account, cash accounts and others. I also had informal interaction with the
CEOs, finance department staffs and other staffs like branch and operation officers.
So the data sources were primary as well as secondary.

16.3.Limitations

The study has many a limitations which are described below.

16.3.1.Time: - Time was a constraint as I was to complete my study within four
days of stay and for some of the aspects like how they manage their liquidity
four days are very short period of time.
16.3.2.Language: Sometimes language also acted as barriers as except the
management level staff very few people were able to speak English or Hindi.
16.3.3.Organisational Rules: Because of the business nature and secrecy required
some of the information were not accessible but it was very less and I must
say that both the organisations and the staffs helped me in collecting the data
and figures.
16.3.4.Organisation Specific: This study is done only in two of the organisations
so its generalisability is very limited but the problems they are facing
certainly reflects the problems or limitations of the other MFIs.
16.3.5.Collection of manual data: ledgers were kept manually individual and
group wise in the respective branch in both the organisations. Both the
organisations have yet to become fully computerised. So collecting data on
many counts like disbursement of loan amounts, internal group savings were

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 very difficult. Even the computerisation of data is also selective in some
sense like that does not provide any information about the internal savings.

17.THE ORGANISATIONS

For the study purpose two institutions were selected BIRDS microfin society and
SMSS both in Andhra Pradesh. The selection of the institutions was done by the
sponsoring organisation (FWWB). Here I am presenting a brief introduction to both
the organisations

17.1.BIRDS

Bharati Integrated Rural Development Society (BIRDS) is a Non Governmental

Organisation registered under societies’ registration act 21 of 1860, in the year 1991.
The organisation is involved in various developmental interventions in rural society to
improve the condition of the rural society of the region. With the rise of micro finance
and its impact on poor people BIRDS took up MF activity in the year 1998, with the
credit support from RMK, NMDFC, TBF, FWWB and BASIX. With the increase in
the MF activities and also as per the funding agencies suggestion BIRDS in the year
2004 separated its micro finance activity under the name of BIRDS Microfin Society.
This is operating with five branches in Allagadda, Kolimingundla, Proddatur and two
in Nandyal. The total outreach of the organisation as on June 2005 is 12434 women
members under 1226 groups within 383 centres. Total loan outstanding comes to
Rs.36224540 and total number of loan acounts made is 10112 thereby the average
loan amount is Rs.3582. Cumulatively it has disbursed a loan amount of
Rs.160314500.

17.2.SMSS

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 Star Microfin Service Society (SMSS) is the child organisation of the NGO Star
Youth Association (SYA). SYA has been working in Velgode, Kurnool district of
Andhra Pradesh for long. It has been doing all sorts of social work in that area.
Because of the growth in the micro finance activity and its importance, on November
14, 2002 it set up a different organisation SMSS to take care of the micro finance
activities. SMSS is registered under the Indian Societies Act (35) of 2002. It has three
branches in Atamakur, Sirvel and Velgode each. Total outreach as on May 2005 is to
the 11620 members under 2324 groups within 89 centres. The total loan outstanding
is Rs.22731070 and the total number of loans is 5152. Total cumulative amount
disbursed is Rs.120194463.
Both the organisations are working on the Grameen model. Earlier SMSS was
using the SHG model but suffered a lot. Both the organisations have many similarities
in their style of functioning and their monitoring method but they also have many
differences which we will discuss in forthcoming pages.

18.FUNCTIONS

Both the organisations have almost the same way of functioning. All the groups
are divided among the credit or loan officer according to the regional proximity. The
credit or loan officers divide all the groups in five days and then they compulsorily
visit the particular groups specified for that date. They collect the repayment and
other charges and disburse the loan amount. Their visit starts around seven in the
morning and they come back to the office by 11 to 12 o’clock in the noon. Here they
report their collection to the account department, the MIS department and then
deposit the amount collected. Then they prepare the next day’s collection and
disbursement requirement. They get the same report called collection sheet detailing
the next day’s collection and disbursement from the MIS department. Both the sheet
must match. If there is any disbursement to be made on the next day they get the
money. After that they leave for the new group formation, confirmation and
verification. The report submitted by the credit officers to the MIS department and to

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the finance department will be processed there and should match with their projection
and calculations as well. Then this is reported to the finance manager who reports to
the CEO. In case of withdrawal of any type, it can be done only under the signature of
the CEO, president and the treasurer.
As the branches get the daily report from the credit officer they get an accurate
projection for the next week collection and disbursement. This is being deposited in
the head office every Saturday when all the branch managers’ report to the head office
and accordingly the branch managers get the predated cheques for the day before the
day of disbursement, if necessary. The branches are not authorised to withdraw the
money from the bank account at their will. So, daily all the collection get deposited
into the banks and all the withdrawal are done from the banks itself. They don’t keep
high amount of cash with them at the end of the day.

All the transactions are maintained manually in both the organisations and in
accounting software Tally. All the financial transactions are also recorded in software
called Financial Information and Monitoring Organizer (FIMO). The transfer of the
data from the manual form to the software is going on at war level and within one to
two months that will be complete. All the accounts are kept in double accounting
system under cost conventions and on accrual system, assuming the principal of
going concern.

19.PRODUCTS

19.1.BIRDS

19.1.1.Loan Product:
The organisation has one loan product which is given for the productive purposes. It
is given on the group basis. Every group has at least 10 members and maximum of
the groups have only ten members. The group theory also supports the small group

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size for better group dynamics and monitoring. All the members in the group are
women. There is a period of four weeks to consolidate the groups and also for the
group to understand the rules of micro finance. After the four weeks only the loan
amount is being disbursed. This rule is applicable only in case of new groups and for
the first cycle of loan. The loan amount varies according to the cycle of loan.
RS.5000, Rs.7500, Rs.10000 and Rs.12500 are the amount of the first, second, third
and fourth cycle respectively. The interest rate charged on the loan amount is 18% flat
and 16% flat. It depends on the rate of interest payable to the fund available. Before
disbursing the loan an amount of 2% of the loan amount is collected from the client
for LPF (Loan Protection Fund). This LPF is being created to compensate the default
made by the clients.

19.1.2.Insurance Product:
It is forwarding two types of insurance products of LIC (Life Insurance Policy). One
is Jansree Bheema yojana (JBY) and Group Insurance (GI). All the groups and all the
members are covered under these two schemes compulsorily. Actually organisation is
using these insurance schemes to check the group strength and solidarity. For the
insurance the combined premium comes to Rs. 150 which organisation has divided
into five equal instalments of Rs. 30 which they collect every week since the time of
the formation of the group. Out of Rs.150, Rs.100 is collected against JBY and rest
against GI. Under JBY both husband and wife are covered under this scheme. It’s a
central government sponsored, subsidy scheme, where central government also
contributes a matching amount of Rs. 100. Under JBY, the sum assured is Rs. 20000
for natural death, Rs. 50000 for accidental death, Rs. 25000 for partial disability and
Rs. 50000 for permanent disability. JBY was started in September 2003.Under the
group insurance scheme Rs. 50 is paid as the premium and the sum assured is
Rs.5000 for natural death and Rs.10000 for accidental death. Till June 2005 the total
insured members under GI are 22881 and under JBY are 22917 with the premium
amount to Rs.850230 and Rs.2291700 respectively. Total claims received under GI
are 54 and under JBY are 192. The claim settlement amount from LIC comes to
Rs.1898720. The organisation only gets the 4% of the premium collected against the

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operating expenses in JBY and in GI, no incentive is there. The organisation is eager
to do the insurance business on its own only if IRDA permits. As the huge margin
LIC is making only on the basis of the collection the organisation has made is
Rs.1243210 without taking into consideration the government grant of Rs.2291700
under JBY. Their rationale is when they are doing all the field work why can’t they
launch the insurance product of their own.

19.1.3.Funeral Expenses:
The organisation has a scheme of providing the funeral expenses of Rs.500 and a
garland of Rs.20 if any of the member or spouse of the member dies. This fund was
created earlier from the contribution of the members but now the organisation is
carrying it on its own. Since July 2004 to July 2005 organisation has made the
expense of Rs.63090 on this account. This amount is also get adjusted against LPF.

19.1.4.Savings or Contribution:
This is not actually a product but a solution to a problem. In almost every cycle the
loan amount with the interest were coming to a figure which was not round like in the
first cycle they have Rs.116 as the principal and interest but it will create the problem
of coins. In maximum of the cases they were getting the Rs.6 in coin so they made it
round by adding Rs.4 and the amount to be collected became Rs.120. the organisation
pays interest on it at the rate of 6%. This money indicates two things. First how much
cheaper it is to collect the money from the members instead of getting a fund from
somewhere else. Second it creates the stake of the group in the assured repayment of
the loan. At the end of the month of June 2005 the organisation was having
Rs.3533507 while as per the regulations it should be below Rs.300000.

19.2.SMSS

19.2.1.Loan Products:
The SMSS is having these loan products: -

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 a) Income Generating Activity (IGA) loan: The loan is disbursed to the group
after the four weeks of formation means at the fifth meeting day after the
formation. Before that members have to pay Rs. 50 as member admission fee
and Rs. 60 as annual membership fee and 4% of loan amount against the Loan
protection fund (LPF) and Family Protection Scheme (FPS) and another 4%
against Micro Credit Protection Schemes (MCPS). This has to be made before
30 days from the date of disbursements in 4 weekly instalments. The amount
of loan varies with cycle. The amount for the different cycles are Rs.5000,
Rs.7000, Rs.9000, Rs.12000 and Rs.15000 for first, second, third, fourth and
fifth cycle respectively.
b) Consumption loan: The only difference in methodology is member has to pay
6% against LPF, and FPS.
For both the IGA and consumption loans the term is of 50 weeks and the
maximum ceiling is of Rs. 15000 with the flat interest rate of 15%.
c) Loan on phone: This loan is provided on the phone to the active borrowers in
case of some urgency. Loan term is of 50 weeks with a maximum ceiling of
Rs.5000 on flat rate of interest of 12%. Only 15 members availed this loan
during the last financial year.
d) Agriculture loan: Two major differences are payment of 8% against LPF, FPS
and mortgage of original pattadar pass books. It is provided for 100 weeks for
a maximum amount of Rs.12000 with a flat interest rate of 12%. The
repayment schedule is monthly or quarterly.
e) Housing and sanitation loan: Here again the payment against LPF, LLP, FPS is
8% and they will have to mortgage original land holding house patta. The loan
term is of 150 weeks and the maximum amount is of Rs.15000 with a flat rate
of interest of 12%. The repayment schedule is monthly.
Although the organisation has many products in its loan product portfolio but
except IGA loan other products are dead products. They are dead products in two
senses, first there is no member availing those products and second the organisation
has also stopped promoting these products. In case of loan on phone only 15 members
availed it last financial year.

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 19.2.2.Micro Insurance Products
SMSS has introduced two micro insurance products namely (1) Family
Protection Scheme (FPS) and (2) Micro Credit Protection Scheme (MCPS) since
January 2002.

19.2.2.1.Family Protection Scheme (FPS)

The poor women who are enrolled in SHGs/SLGs of Velgode, Atmakur, and
Sirvel have to be compulsorily the member of this scheme. The member should not be
more then 55 years old is the only condition for the members. The term is of one year
and the premium is 1% of the loan amount. Risk coverage is like this:

Risk Risk Coverage

Natural of client or client’s Rs.5,000/- + Rs.500/- for
husband funeral expenses
Accidental Death of Rs.10,000/- + Rs.500/- for
Spouse funeral expenses
Any type of Death to client Rs.5,000/- + Rs.500/- for
funeral expenses as well as Write-
off the loan outstanding of the
client

This FPS product has been

i) Linked with the ICICI PRU Suraksha (RP): The scheme is specially
designed for SHG members and clients of micro credit Programmes. As
Nodal agency, SMSS pays the premium to ICICI @Rs.50/- per client and
client’s spouse per annum towards sum assured is Rs.5,000/-.

19.2.2.2.Micro-Credit Protection Scheme [MCPS]:

The scheme is applicable only to those who have taken loan from SMSS under
MCP. The client pays 4% of the loan amount to cover the risk. If any loss occurred to
the property (cattle) which is bought by the loan, due to an unfortunate fateful event,

15
the remaining loan instalment would be scrapped so the debtors need not to pay the
remaining instalments. Immediately the member will be given a new loan after
assessing circumstances of the loss of property. If any member does not pay the
instalments in time, or the property is lost due to theft, or it is misused, then such
properties are not covered under this scheme. According to the decision of the SHG
group, the protection will be provided. This scheme will not be applicable to those
who do not use the loan for the purpose it is taken. If any group gives false
information to SMSS regarding protection and if that information is found false, the
SMSS will not provide any type of assistance to such faulty groups.
This MCPS product has been linked with the HDFC Chubb. The scheme is
specially designed for cattle insurance of micro credit Programmes. As Nodal agency,
SMSS pays the premium to HDFC Chubb 3% of loan amount towards sum assured is
return of entire loan amount.
It is very difficult to calculate the break-even points for each of the products
because the operating expenses are not separate, same staff is doing all the
operational work. Except the staff salaries and some other expenses every expense are
variable. So there is no way to divide the fixed expenses without guess work.

19.2.3.Saving or Contributions:
This organisation also collects the contribution or savings in other words from the
members to round off the amount so that it can save the hassle of carrying too much
coin. The organisation is paying an interest of 6% on the contribution. Total
contribution it was having as on June 2005 was Rs. 817187.

20.PORTFOLIO

In both the MFIs the quality of portfolios was very good that will reflect in the
ratios given below. In BIRDS I found the repayment rate at 100% and also there was
no PAR (portfolio at risk as > 30 days). In SMSS the repayment rate for the last six
months from January 2005 to June 2005 was 96.723% and it is having a PAR (as of

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more then 30 days) of 0.56% at the end of the month of the June. The PAR has been
continuously decreasing here. The reason of the quality of PAR and repayment rate,
as per the SMSS, is because of their earlier lending policy. Earlier they used to lend
on SHG pattern in which repayment used to be due monthly instead of weekly. This
resulted in high repayment instalment and that was probably the main reason of
default. Since it has gone for the Grameen bank model, in which it gets the repayment
from group weekly not a single group has defaulted. Still the PAR and lower
repayment rate (in comparison to BIRDS) is only because of the old loan made.
In quantitative terms the portfolio size of the BIRDS as on 30th June 2005 was
Rs.36224540, no loan was having more than two weeks default. So PAR was at zero.
It has 12434 women members under 1226 groups. Total number of loan outstanding
stands at 10112 which means 2322 members were not active borrowers for the time
being. Out of 10112 the loan in first, second, third and above third cycles are 5491,
2650, 1414 and 557 respectively. So loan distributed in the first cycle stands at
Rs.27455000, in the second cycle it is Rs.19875000, in the third cycle it is
Rs.14140000 and in the higher amount categories it is Rs.6962500. this can be
explained better with the help of the graph below:
Graph 1: loan disbursement (in monetary terms) cycle wise in BIRDSMF

10%

21% 40% 1st cycle

2nd cycle
3rd cycle
4th cycle& above

29%

Sources: monthly reports prepared for FWWB

Graph 2: distribution of loan cycle wise (in terms of number of members)

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 6%
14%

1st cycle
2nd cycle
3rd cycle
54%
4th cycle &above
26%

Sources: monthly reports prepared for FWWB

So if seen in two broad categories 5491 were the new members and 4621 were
the old members. Where the first cycle loan comprises only Rs.27455000 the higher
cycle loans give the figure of Rs.40977500. The two graphs above clearly indicate
that almost 60%of the amount is going in the hand of some 46% of the members.
Although 54% of the members are in the first cycle but as per the loan amount they
are getting just 40% of the fund. It reduces the risk of the portfolio because the
customers in the second cycle or the higher ones have established their credentials by
paying the first cycle loan. The other point is because it’s the higher cycle loan so it’s
going in to the hand of micro-enterprisers and to those who have already established
their income generating operations. So it increases the debt paying capacity and
decreases the risk of the portfolio and also the operating cost in comparison of the
cost involved in formation of the new groups. The problems are if the default will
occur in these cycles amount wise it will cost the organisation a lot and monitoring
the money consumption is more difficult.
In case of SMSS the loan portfolio is of Rs.20715156 as of June 2005. Out of this
Rs.111493 is the outstanding principal amount due which has exceeded the 30 days.
Again the reason is the earlier made loans. Total outreach the organisation has is
11170 women members. Out of which 5318 are active members. Out of 5318
members 2336 are in their first cycle and 1602 are in their second loan cycle, 1118 are
in third cycle and 262 are in fourth or higher cycle. Going by the amount disbursed
for the first cycle, second cycle, third cycle, fourth cycle and above are as follows

18
respectively Rs. 11875000, Rs 10864000, Rs. 8775000, Rs. 3050000. This can be better
explained with the help of the graph below:
Graph 3: Disbursement of SMSS cycle wise (in monetary terms):

9%
35%
25% 1st c yc le
2nd c yc le
3rd c yc le
4th c yc le

31%

Sources: monthly reports prepared for FWWB.

Graph 4: Disbursement of SMSS cycle wise (number of members)

5%
21%
1st cycle
44%
2nd cycle
3rd cycle
4th cycle
30%

Sources: monthly reports prepared for FWWB

So, it can be seen from the above two graphs that 44% of the members are
availing just 35% of the loan amount while the other 56% are having the 65%
amount. Again the same argument works here that because in the higher cycle most
are the loans are to the established micro enterprises that will utilise the loan for
business enhancement where risk is low in comparison of establishment of new
enterprise. The concentration of the money in the higher cycle of loan programme in
both the organisation indicates that these amounts are not for initiating the new
venture but to enlarge one where the monitoring of the consumption of the money is
more difficult. The ratio analysis of the portfolio is below.

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 20.1.Interest Determination

Here I wanted to study how these organisations are determining their interest rates
and what are the things they take into consideration. In both the organisations the
interest rate is being determined by the simple margin basis. In BIRDS, the
organisation has a policy of keeping a margin of 4% to 5% without considering the
effective rate of interest. When it was availing the loan from FWWB at the rate of
13.5% it was on lending it on 18% flat rate where effective rate of interest will be
37% but with the decrease in the rate of interest from FWWB of 2% they are charging
at 16% flat where the effective rate of interest was coming to 32.7%. In case of SMSS
they are charging at the rate of 15% flat which means the effective rate of interest is
30.5%. One reason SMSS can’t keep the rate higher, as told by the finance staff, is the
intervention of district administration in interest rate determination. They start asking
too much questions regarding the high rate of interest and so the organisation can’t
keep it higher then 15% or it may have to bear the consequences. Anyway here also
the method for determining the interest rate is again margin basis only.
In both the organisations they are charging same rate of interest in every
geographical area while the other MFIs working in the area that can be recognised as
competitors are having different rate of interest for different areas based on the
environment. It varies in other organisation from 12% flat to 60% flat.

20.2.Loan Loss Reserves

In both the organisations they are keeping the loan loss reserve of 1% of the
portfolio outstanding at the end of the year. As per the collection BIRDS doesn’t have
any bad loan as repayment rate on the monthly basis is 100%. It has a write off of
Rs.402203 in the balance sheet of year 2005 that came from the Rudraveram and
kolimigundia branches. While Rudraveram branch was working in the rural area
Kolimigundia is working in the semi-urban area. Now Rudraveram branch has

20
stopped its working there and in other branches the monitoring and group formation
has became stricter. So those bad debts are coming from the old portfolio.
In SMSS, although the organisation in its earlier micro-finance activities has
faced the delinquency problem but since it has changed the method of lending from
SHG base to Grameen pattern and has started collecting repayment weekly it has
decreased its PAR from 0.98%in the July 2004 to 0.76%in June 2005. All the new
loans made in the new pattern has almost 100% repayment rate (as per 30 days). The
loan loss reserve they are keeping is necessary because of two reasons. One they are
the growing organisations and are exploring the new area. So with the enlarged
portfolio they will have greater risk. Second, in case of any natural calamity or
change in the economic situation if the loan loss occurs they can meet that.
Both the organisations maintain contingency reserve (BIRDS 1% and SMSS
0.76%) which is for any contingencies occurred. So it’s not much different from the
LPF in that way.

20.3.Loan Protection Fund:

The LPF can be illustrated as the indigenous practice. The main purpose of
the LPF is to protect the loans made which can go bad. This simply means it is a
protection against the write offs. In this way the name is different but this fund is
serving the same purpose as the loan loss reserve. The major thing in case of the LPF
is it is contributed by the members only. So, the risk is being passed to the members
from the organisation. At present BIRDS is charging 2% and SMSS 1% upfront
against LPF. It helps in creating the group pressure or peer pressure also. So it is a
type of caution money which also helps in maintaining the portfolio quality.

20.4. Write offs:

As I have already mentioned that in the new loans where the repayment is made
weekly up to yet they haven’t done any write offs. The only types of write off in both
the organisation are those where the client has died. This expense is taken care from

21
the loan protection fund (LPF). In the balance sheet of the BIRDS of the year end
March 2004 is of Rs.402203 and in case of SMSS they have not done any write off.
Those write offs deducted against the LPF is not shown in the balance sheet in either
of the case.

21.CAPITAL AND FUNDS

In both the organisations the capital fund is made of two broad components. They
are
1) Loan funds: This fund consists of loan taken from the different funding
agencies or from the sister organisations. As per the balance sheet as on 31-03-2005,
the SMSS was having loan from two organisations one FWWB which stands at
81.53% of the total capital fund available, second was from the sister organisation
which was SYA. The loan from SYA makes approximately10% of the total capital
fund.
At the same time in case of BIRDSMF 73% of the capital fund comes from
FWWB, 22% comes from the sister organisation and other sources.
So in case of both the organisations large chunk is coming from one funding
agency. The effect of this funding is multifaceted. FWWB doesn’t give only the
money they need but also the capacity building trainings and exposures. The major
effect of this funding can be seen in the determination of the interest rate. Interest rate
as I have described under the determination of interest rate head, is solely based on
4%-5% margin over the rate of interest charged by FWWB without considering the
effective interest rate. The other funds they are getting are cheaper comparatively but
their availability is not very certain. This is the reason why BIRDSMF has shown
loan from FWWB under the head of secured loans.

22
 2) Internally generated capitals: in capital fund 5% approximately comes from the
profit appropriation from the past years and taken together with capital grants and
members’ contribution it comes to 10% in BIRDS. In case of SMSS the surplus and
the reserves contribute to 8.9%.
The capital structure of both the organisation can be explained with the help of the
graphs below:

Graph 5: Capital structure of BIRDSMF

10%
5%
12% FWWB
BIRDS
other sources
capital grants & other reservs
73%

Source: financial statements of BIRDSMF

Graph 6: Capital structure of SMSS

3% 6%
10%
FWWB
SYA
capitalised profit
reserves

81%

Source: financial statements of SMSS

So, in both the cases the internally generated capital including capital grants
are below or equal to10% which means still the shock absorption capacity of the
organisation is very low. By shock absorption capacity I mean here the capacity to

23
stand on its own in case funds from outside decline drastically. In both the
organisation the dependence on the FWWB is too high for loan fund. This is the only
external agency in both the organisations which is providing substantial fund. This
overdependence on one source of fund is from nowhere a prudent decision from
organisations point of view. They must try to diversify their borrowings portfolio or
their growth may suffer.
The other thing is almost all the financial policies of the organisations will be
guided by the policies and requirement of the funding agencies. For example one
branch of BIRDS was working in the rural area but it got lots of bad loan in its
portfolio. The options open to the organisation were either it increase its operational
activity in that area or quit that area. Going for the first option means more
operational expenses and still result can’t be assured while in the second option
means more concentration in the new and safer areas. Wisely enough, organisation
shifted its concentration towards the slums at the taluka level or the city level. This
was a safe proposition. One of the reasons of such policy change was the strictness of
the funding agencies towards the repayment rate, PAR and operational and financial
self sufficiency ratios but this is not the only reason for such a shift in the policy. It
also comes from the organisation’s aspiration to be ranked good by the rating
agencies which in tern assures the easy fund availability. The separation of the micro
finance activity from the parent organisations in both the cases have occurred because
of the funding agencies demand and the same feeling prevailing in the organisation.
The need of strong MIS has always been stressed by the funding agency so that
monitoring of the field work as well as money can be made easier. The monthly
report for the FWWB in a particular format has shaped the reporting system in the
organisation and it has become an important report inside the organisations also. One
thing which is very different in FWWB funding is it treats the organisation more like
a partner rather then just a profit yielding client. This is quite obvious from the visits
paid by the staff to see the operational capacity and loopholes that is patched by
providing different trainings and exposure.
The other part is the loan delivery is hassle free in FWWB once it is granted. This
is one of the main reasons these organisations are still a bit reluctant about getting the

24
fund from other sources like banks but with the level of growth they have, they will
not have other option in near future. Even at this level of operation it will be more
prudent to have strategic relationship with some other funding partners. It will also
help the organisations in decreasing their expenses on account of maintaining the
liquidity. Even FWWB has a restrictive loan policy.

22.ANALYSIS OF FINANCIAL STATEMENTS

22.1.BIRDSMF

The organisation prepares the income and expenditure account annually and the
balance sheet. These two statements are enclosed with 15 schedules describing in
detail each of the major head of the Income and expenditure A/c and the balance
sheet. The description below is on the basis of the audited statements of the year
ending March 2005.
22.1.1.Income And Expenditure Account: In the income side there are two broad
categories that are
a) Financial services to poor women in joint liable groups and
b) Other income from financial services.
In financial services to poor women in joint liable groups there are two items
one is interest on loans and the other is interest on bank account which are explained
in schedule 10 and 11 respectively. Interest on bank deposit is the interest generated
by the deposit amount in the bank. In other income from financial services come
member enrolment fee, loan protection fee, and incentive from FWWB receivable,
documentation charges, miscellaneous income and service charges. All these incomes
are coming form the micro finance activities only and not from any other services.
In the expenditure side the major division is of cash expenditure and non cash
expenditure. In case expenditure the items are financial cost, personnel cost and

25
administrative and other operational expenses. Their details are given in the schedule
no. 12, 13, and 14 respectively. The financial cost is variable cost which varies not
directly with the disbursement but with the fund availed by the organisation. The
personnel is semi variable as there is a certain level after which the expense will
increase like the new field officer will take care of the groups above 500 members so
till 500 members the expense will be fixed and after that it will be variable.
Operational and administrative expenses are in most of the cases fixed in nature
except few items like travel and transportation expenses, incentives to SHGs,
reporting fees etc. In the non cash items, major items are bad debts written off,
reserve for loan losses, for contingencies and provision for interest payable etc. the
nature of the income and expenditure can be explained with the help of the graph
below:

Graph 7: Income of the BIRDSMF

15%
0%

int. on loan
Int. on deposit
other services

85%

Graph 8: Expenditure side of the BIRDSMF

18%
financial cost
7% 45%
personnel cost
adm initstrative& operational
non cash expenses
11%
non cash reserves
19%

Sources: Income and Expenditure A/c of BIRDSMF

26
 From the graphs above it is obvious that the 85% of income comes from the
interest on loan portfolio and almost 15% from other charges like membership
enrolment fee, loan protection fee, Incentives from FWWB, documentation charges,
miscellaneous income and service charges. Out of total expenditure 45% is going on
financial cost, 30% is going on administrative and operational heads including salary,
26% are non cash items where 7% is the non cash expenses and 18% is the non cash
reserves.
The income and expenditure account shows the excess of income over expenses
of Rs.1642464 which is 21.38% of the total income. No adjustment against the
inflation or the subsidy is being done at present. Reserve for loan loss is kept at flat
1% of the loan outstanding portfolio but it needs to be taken note of that organisation
collects 2% of loan amount as LPF from the members itself which is for the same
purpose. In this year the organisation has treated the LPF as their capital income and
has shown the amount in the current liability account but from the next years onwards
50% of the LPF will be treated as revenue and 50% as capital income. So 50% of the
LPF will go directly to the capital fund

22.1.2.Balance Sheet

I have described the capital side under the capital and fund head. So I am skipping
that part here. The assets side of the balance sheet consists of fixed assts, current
assets and deduction of current liabilities and provisions. The fixed assets are of
Rs.614055 and fixed assets to total assets ratio comes at 1.7%. The deprecation has
been charged against the assets as per the block of assets. The largest part of assets
side comes from the loan provided to the groups, as the loan term is of one year only
they are treated as current assets. Only the loan amount disbursed comes to 87.33% of
the total assets. It indicates that the largest part of the fund is used for the on lending
purposes. Almost whole the loan fund and the capital fund (excluding reserves) are
being utilised for the loaning purposes. Around 12.66% is kept engaged for liquidity
and other uses. The contribution which is a type of saving mobilised from the
members has been shown in the current liability. Ratio of saving mobilised to total

27
liability is 6.7% approximately (Rs.3533507). This fund is very cheap for the
organisation in terms of rate of interest and it needs no extra operational cost but as
per the norms it should not be higher then Rs.300000. the assets side of the balance
sheet can be presented with the help of this graph.

Graph 9: Assets side of the balance sheet of the BIRDS as on 31-03-2005

8% 4%
BIRDSMF

2%
loan
fixed assets
oth. Current assets
cash&bank

86%

22.2.SMSS

22.2.1.Receipt And Payment And Income And Expenditure A/C

Here the organisation prepares the income and expenditure A/c, receipt and
payment A/c and the balance sheet. The statements are not very explanatory but are
prepared in simple manner to give a good overall understanding of the situation. From
its Receipt and payment account it is quite clear that it has got funds from three
sources during the year the highest amount or Rs. 30926225 came from the
repayments of borrowers and then Rs.20000000 from FWWB the third head is of loan
received from SYA which comes to Rs.6577381 and in the payment side the major
heads are loan disbursement which is Rs.36180646, loan repay to SYA which is
Rs.20875440 and loan repayment to FWWB which stands at3747780. The
contribution and payment to different heads can be represented in the graph ahead.

28
 Graph 10: Receipt side of the receipt and payment account of SMSS
11%
RECEIPTS

48% repayments
31% SYA
FWWB
other sources

10%

As is obvious from the graph above the 48% of the receipts is from repayments
from the groups while 31% is from FWWB the other head contribute to 21%. The
payment side can be explained from the graph below:

Graph 11: Payment side of the receipt and payment A/c of SMSS

5% PAYMENTS
6%

disbursement
SYA
32% 57%
FWWB
overheads

29
 The largest part of the receipt is going in disbursement then it is being utilised in
paying the loan of SYA, a very small percentage has gone to FWWB and only 5% has
been spent on both the heads expenses as well as expenditures. Almost 89% of the
funds are coming from the repayments and loan from FWWB and SYA and 95% of
receipt has been used for disbursement and repayment to SYA and FWWB. Here
because the base is same we can directly make one inference that the while 48% is
coming from the repayment 57% is being reinvested in the loan to the members. So
an increase of 18.75% in the loan portfolio has been noticed. The other thing is from
FWWB the organisation is getting 31% of fund and paying back just 6% so the
retention is of 25% while the inflow from the SYA is 10% and outflow on this part is
32%. This proposition is not very just in one way, it is actually replacing the low
interest loan with the high interest loan and thereby the cost of fund will go up. This
analysis is on the basis of Receipt and payment account while the BIRDS one is on
income and expenditure account.

22.2.2.Balance Sheets

Coming to the balance sheet, here again the largest amount in the assets column is
of the loan dues from the members which accounts for 97.93% in that way the
utilisation of funds is comparatively better in this organisation. If we put the assets
side of both the organisation on the graph it will be clearer.
Graph 12: Assets side of the balance sheet of BIRDSMF.

30
 8% 4%
BIRDSMF

2%
loan
fixed assets
oth. Current assets
cash&bank

86%

In case of SMSS the graph is like this:

Graph 13: Assets side of the balance sheet from SMSS balance sheet.

cash&bank SMSS
other current
0%
fixed assets assets
1% 1%

loan
fixed assets
other current assets
cash&bank

loan
98%
From these two graphs above it is clear that the fund utilisation is more
concentrated towards the loan disbursement in SMSS then BIRDSMF. To get clearer
picture we can go through the ratio analysis of the organisation on different aspects
which is added in the annexure. In case of balance sheet provided to me I found one
inconsistency here that they are charging depreciation on computer at the rate of 10%
instead of 25-30%.

31
 23.BUDGET

In both the organisations the annual budget or projection is being made which
takes into consideration the repayment from the groups, disbursement to the groups,
assumed repayments of loan to funding agencies and administrative and operative
expenses. In SMSS they also prepare the monthly projection of the collection and
disbursement and the need of fund from outside. The basis of the calculation is very
simple they set a target for the new members to be included into the first loan cycle
then everything else automatically fall into the place. Once they have decided how
many members are to be taken into the disbursement can be projected for the first
cycle. The number of members in second and higher cycle is not set as target but on
the basis of the number of members in the first cycle. For an example if in the last
year say 10 members were in the first cycle which is of 50 weeks then those 10
members will be automatically transferred into the next cycle or the second cycle in
this example. So the assumption here is all the members will continuously avail the
loan. Once the number of members in all the cycles is decided the disbursement can
also be determined. Then comes the determination of the expenses, the number of
field officers get decided by dividing the number of total members (expected to be
active) by 500 (which is the maximum number one field officer will handle). Then the
calculation of salary trickle down from this but the salary of the other office staffs and
other administrative expenses are projected on the basis of the experience.
Now, while the annual projection is being done here it has some implied
assumption which limits its effectiveness. Some of them are as follows:
1) The entire target set for the first cycle members will be met every month.
2) All the members in the lower cycle will certainly join the next cycle
irrespective of their need.
3) The operational expenses are also based on the hunch.
4) All the demand or requirement of fund from the outside agencies will be met.
5) No capital expenditure is taken care of in the budgets like for assets purchase
or any other.

32
 Because of these limitations the monthly projections can give more precise
picture than the annual one. Although projections and budgeting is not yet taken very
seriously but with the increase in the portfolio size organisations need to have a more
accurate budget and projections. But still the budget making has been adopted in the
organisations is a good sign as it explain the growth plan of the organisation and also
how they are following that and how much they failed in achieving the target set. As
in case of BIRDSMF they set a target of 870 members in the first cycle for June 2005
and then has transferred the other members completing their loan cycle in that month
in the next cycle and thereby the total number of members availing loan in that
particular month was 1275 and the total cash inflow was projected at Rs.7742293 and
cash outflow was projected at Rs.12840289 so the need of external fund was expected
at Rs.5097996. In reality, the total number of loan disbursed was 990 so at other
counts it again came down. Total repayments were Rs.5846880 which is quite below
the projected Rs.7742293 which means it has been lagging behind in earlier months
also from its set targets. These data were taken from the yearly projection. Although
with the MIS implemented in the organisations, they will be able to have a precise
monthly projection but up to yet the monthly projection is also not very different from
the yearly ones. For example, SMSS projected that in March 2005 it will have the
collection from the members of Rs.5576495, total disbursement of Rs.6809000 but as
per the monthly report the organisation total actual disbursement was Rs.2614500 and
total repayments were Rs 3063864 way beyond the target. The main reasons for such
an inflated projection are: the projection was based on the yearly projection, the new
MIS system was not fully implemented (it is yet to and will take few more months) so
capturing the recent data was difficult because the book keeping was done manually.
The projections are not considered so important in the organisations to invest so much
of time and labour. Actually with less number of employees they can’t afford to spend
so much on a non-income generating activity.
As the organisations deal in money their working capital and liquidity
requirement will be higher but in the organisation the projection or the budget
includes all these aspects as the main reasons for working capital or liquidity are the

33
disbursement and repayments from the members and to the fenders. So there is no
need for a different calculation for them.

24.PARTNERSHIP AND SECURITISATION

This is one of the new ways of funding to the MFIs, developed by the private
banks basically. Under this scheme the MFI will get the money required for on
lending but the organisation will be doing the job of a mediator in strict sense. They
will be giving the loan and will be earning a certain amount of commission as decided
mutually and which varies from organisation to organisation. Members will have their
account not with the MFIs but with the bank itself but the operation will be done by
the respective MFI. To insure the involvement of the MFI after the loan disbursement
they have to give the First Loan Default Protection (FLDP). Under this scheme
respective MFI will give the guarantee to the first specified percentage of bad loan.
Generally it is 8% but it varies from organisation to organisations. It is in other terms
passing off the risk of write offs on the MFIs. The organisations I studied were
having some fear on some counts which are as follows:
1) They will lose their customer ultimately which they have gained with so much
effort.
2) The clause of Know Your Customer (KYC), in which they are asked to have
the detailed information of their customer like their house no., ration card no.,
their sources of income and other economic and social information. It is
bound to increase the cost of operation and it can have its own practical
problems like many people don’t like to reveal some information.
3) Stamp duty of Rs.20 was to pay on each of the loan made. This will increase
the transaction cost of the organisation.
4) The repayment period is of one year only with the weekly instalment. It means
they would not be able to rotate the money and thereby the organisations feel
that their yield on money will go down.

34
 5) They don’t like the different treatment with different organisation in terms of
interest rate, FLDP and others.

25. LIQUIDITY

25.1.SMSS

In SMSS on an average organisation is keeping Rs.1364207 with a standard

deviation of Rs.974900 to manage the day to day liquidity needs. In the last six
months the organisation has paid Rs.91832 as the interest on this amount. The high
standard deviation indicates the high fluctuation in the nature which can be seen in
the graph below.

Graph 14: Closing bank account of SMSS

bank account behaviour

3500000

3000000

2500000

2000000
amount

1500000

1000000

500000

0
123456781911
12
014
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182
-500000
days

Source: bank account of SMSS

35
 Here the black line at the top is of the closing balance of the bank account day
wise, the second top line that has gone upto Rs.2000000 two times represents the
withdrawal from the bank and the third one is of the deposits. As it can be obviously
seen from the graph that the organisation started with the bank opening balance of
Rs.519233 and through out the first quarter it has been building the surplus in the
bank account. On 23 March it has paid back to the FWWB and it has fallen very
drastically to below five lakh. Then again it has gone up to Rs.1700000 and
Rs.2100000 two times and has come down with the payment schedule of the FWWB.
As the organisation is availing approximately 87% fund from FWWB itself so with a
portfolio of Rs.19520777 and total fund availability of Rs.18683307 the payment in
large sum does affect the organisations cash flow. A study of the nature of cash flow
says that the items from where the amount is coming in the organisation are basically
are:
1) daily collection or repayment from the SHGs and SLGs
2) partial loan amount from the donor agency
The major outflow items are:
1) Disbursement of loan amount in the groups.
2) Payment of loan amount and interest to the funding agency.
3) Other expenses.
The graph above has already shown that whenever organisation is getting fund
from the funding agency the closing balance goes up and stands there for long period
while in the first three months the closing balance has been going up to pay the
amount of loan repayment in the third month only. For these three months the money
laying there has suffered the dual loss they are not bringing the interest on them in
bank but also they are not being utilised for the loan.

25.2.BIRDS

In BIRDS Micro Fin, the organisation is keeping Rs.1796587 on an average with

a standard deviation of Rs. 1208513 to manage its day to day transaction. In the last
six months organisation has paid Rs.125589 as the cost to keep this money. The high

36
standard deviation indicates the high level of fluctuation in the closing balance. This
is captured in the following graph:

Graph 15: Closing bank account of BIRDS

bank behaviour of birds

6000000

5000000

4000000
amount

3000000

2000000

1000000

0
123456781911
12
013
14
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-1000000
days

Source: bank account of BIRDS

Here again the black line which is at the top most of the time is of closing
balances of the bank accounts. The second line which is second highest most of the
time and has touched Rs.3000000 limit nearly three times is of the withdrawal and the
third line indicates the deposits. Here again the balance tends to be high at two
occasions, one when the organisation is getting the fund and other when the
organisation is paying back. The organisation also has very selected mode of inflow
and outflow. The modes of inflows are:
1) Loan funds
2) Repayments from the groups
3) Other income (from insurance product)
The major heads are the first two and the third stands at very low amount. The
major outflow heads are:
1) payment to loan
2) disbursements

37
 3) other administrative and operational expenses
In the organisation’s capital fund of Rs.33353172 the loan fund from FWWB only
makes 71% so the transaction with the FWWB has more effect on the cash balances
of the organisation. Almost all the time when the balance has gone up is because of
the transaction effect with FWWB.
The question is how is affecting the balances. As I have already mentioned the
major sources of inflows are loan funds and repayments from the groups so if the
organisations are getting any loan from FWWB it will go into its bank account and it
will be distributed among the groups in the forthcoming days. For example, In the last
six months BIRDS has got the loan amount four times, one time Rs. 1000000, one
time Rs2000000 and two times Rs.2500000. the organisation has paid back two times
as per the quarterly payment schedule, at one time the some of Rs.3020832 and at the
other Rs.3270832. it can be observed from the bank balances that higher the loan
amount taken, higher the amount staying in the bank for longer time. On the other
side to pay the quarterly sum they have to accumulate for around one month’s
contribution. This is creating the loss at two sides, one they are paying the interest for
the idle money and second they are loosing the investment opportunity of the money
by not lending them.
*all the data are taken from january2005 to June 2005.

26.SUGGESTIONS

The high balances after the loan taken and high balances to pay the high amount
of repayment can be minimized in various ways. One I can think of is like this:
Given the conditions of the MIS in both the organisations, they can very well
predict their fund requirement in one month advance with high level of precision.
They can also predict their collection at least four week or one month in advance. So
they are having a clearer picture of the next one month. The huge accumulation is
happening because of two reasons one because of the large amount of loan which
needs longer time to be absorbed and second, huge amount of repayments. Some of
the measures that can be taken to keep this money rolling are as follows:

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 1) The repayment schedule can be made monthly or weekly instead of quarterly. It
will not require the money to be accumulated for the whole month and that can be
utilised for the lending purposes. To be more precise, the repayment instalment
should be determined on the basis of the expected cash of flow to the borrowing
members or group.
2) The organisation should keep the funding agency informed about their next
month requirement date wise instead of the yearly projections.
3) The loan amount given to the organisation should be determined on the basis of
requirement predicted by the MIS of the organisation at the time of requirement so
that it can absorb the money within the short period of time. This calculation should
be done after taking into consideration the expected collection from the group.
4) The frequency of distribution of loan amount should be increased according to
the requirement of the organisation estimated by the MIS in one month advance and
not on yearly projection.
5) The organisation should try to get into some strategic relationship with some of
the funding agencies for short notice loan. It will fulfil their shortfall.
6) To make the Know Your Customers less painful the MFIs, on the lines of
scheduled commercial banks can obtain an undertaking from its members that they
will furnish the related information without hesitation. This can make the private
banks funding easier.
There was the fear in the organisations that if paid monthly the organisation will
not be able to rotate that money again and again and thereby will be loosing income.
This can be answered in two different ways, first if the organisation paying back
every month it needs not to keep that high level of saving with it. So, in that way
more money will be released for on lending. Second, the organisation can avail the
short loans at the same rate or at the lower rate of interest and thereby the increased
needs of money can be fulfilled without letting it stay in the bank for longer period of
time.

There are many points where there fear are right to some extent as the
environment is very vague and also the intention of the private bankers are not clear

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but as far as the fear against the repayment period and weekly instalment is concerned
that is baseless.
Even if organisation gets the money for longer period they will have to pay the
interest on that. The second point is as is already happening in the organisations their
liquidity requirement in the month of repayment will go up drastically where they
will loose the opportunity cost as well as will be paying the interest. Instead of that if
the repayment is weekly that money is not staying with the organisations and because
they will repay the sum they will collect and so they will not have the closing balance
in their bank account. The only problem can be of the new fund in case of new
disbursement but that can be meeting out with the new loan influx. If getting new
fund can be so easy and at short notice I think the organisations will gain in stead of
loosing. As far as other fears are concerned it will certainly increase the operation
expenses if KYC and stamp duty requirements have to be implemented and yet the
effectiveness will be a question. Regarding the difference in the treatment it is
certainly present there but the organisations can look at it from different points of
view. They should see if the proposal they are getting is more profitable than they are
availing only then they should go for that. They should not make a comparison
between the terms and conditions for different MFIs. They have to accept the hard
reality of the market which is quite different from those of adopted by the FWWB or
the other such funding agencies. In the market, the purpose of the existence for any of
the organisation includes profit which is not the case with the FWWB. So there will
be difference between the policies, payment terms, support and other things. These
organisations are to nurture the MFIs in the initial stage so that they can face the
market which is mainly characterized by competition.

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