What is management?

Answer: A set of Activities (Planning & decision making, Organizing, Leading, implementing and Controlling) directed at an organizational resources (human, finance, physical & information etc.) with the aim of achieving organizational goals in an efficient (using resources wisely and in a cost-effective way) & effective (making the rite decision and successfully implementing them) manner.

Definition of Manager

Someone whose responsibility is to carry out the management process.

What is management process?

Answer: Planning & decision making, Organizing, Leading, implementing and Controlling.  (Using organizational resources)

Who are Active Members?

Answer: Members or client of groups who attend the group meetings, deposit savings and repay the loan installments regularly following the rules and regulations of the institutions. In operational sense, an active member refers to a member who has saving with the institution and the institution did not cancelled `membership’ of the person concerned for any reasons.

Who are Borrower?

Answer: The members of the groups who have borrowed loan from and still have loan outstanding with the institution are referred to as borrowers.

What does savings mean?

Answer: It generally refers to money deposited, may be with self of the person, or with another individual or institution. People also deposit or save money with the microfinance institutions, cooperative societies, self-help groups and others. In microfinance accumulation of savings by the agencies is part and parcel of their credit delivery system. The ability to save consistently is considered by the agencies an important indicator of the ability to pay back loans. Savings also reduce dependence on external funds for revolving loan fund.
From the member’s point of view, savings is an asset for future use in emergency, and on saving they also get interest.

How do savings services help poor people?

Answer: Savings has been called the “forgotten half of microfinance.” Most poor people now use informal mechanisms to save because they lack access to good formal deposit services,. They may tuck cash under the mattress, buy animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be risky—cash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well – one cannot sell just the cow’s leg when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers.

What is Loan Portfolio or Loan Outstanding?

Answer: The principal amount of loans outstanding in a microfinance institution. Projected interest or service charge is not usually considered as a part of the portfolio. Principal outstanding is an asset for an MFI; interest or service charge contributes to the income of an MFI and is recorded as revenue.

What is Group Guarantees ?

Answer: Many MFIs facilitate the formation of groups whose members jointly guarantee each other’s loans. Guarantees are either implicit guarantees, with other group members unable to access a loan if all members are not current in their loan payments, or actual guarantees, with group members liable if other group members default on their loans.

Repayment Rates

Although repayment rate is popular measure used by the donors and the MFIs, it does not in fact indicate the quality of the loan portfolio. Rather, the repayment rate measures the historical rate of loan recovery.
Repayment rates measure the amount of payments received with respect to the amount due. It is a good measure for monitoring repayment performance over time. It is also useful for projecting future cash flow, because it indicates what percentage the amount due can be expected to be received, based on past experience.

 

Defining Delinquency

The policy used by an MFI to define delinquent loans directly influences the portfolio quality ratios and the determination of the MFI’s level of risk. If an MFI defines past due (overdue, delinquent) only after the loan term has ended, the portfolio quality will mean little. The date tah loan term ends has no relevance to the amount of time a loan is overdue. What matters is the amount of time that has passed since th borrowers stopped making payments.

Different methods of calculating Interest Rate

The Flat Method: In this method interest is calculated as a percentage of the initial loan amount rather than the amount outstanding (declining) during the loan term. Using this flat method means that the interest is always calculated on the total amount of loan initially disbursed, even though periodic repayments cause the outstanding principal to decline. Often, but not always, a flat rate will be stated for the term of the loan rather than as a periodic (monthly or annual) rate.
The Declining Balance Method: This method calculates interest as a percentage of the amount outstanding over the loan term. Interest calculated on the declining balance means that the interest is charged only on the amount that the borrower still owes. The principal amount of a one-year loan, repaid weekly by installments of principal and interest, reduces or declines every week by the amount of principal that has been repaid. This means that borrowers have use of less and less of the original loan each week, until at the end of the year when they have no principal outstanding and have repaid the whole loan (assuming 100 percent repayment).

What is Lending Interest?

It is interest paid by the clients on loans amount borrowed from the MFIs. In microfinance there various ways to calculate lending interest by the borrowers. Two methods are popular: flat method and declining balance method. There are diversified rates of lending interest, ranging from 10 percent to 20 percent in flat method, while in declining balance method the MFIs generally charges 27 percent.

What is LLP?

Answer: The MFIs are to classify loans as “Regular”, “Watchful”, “Substandard”, “Doubtful” and “Bad” on annual basis. After classifying loans the Microcredit Organization is to create loan loss provision at the following rates:

Loan Classification No. Of Days Outstanding Percentage of Principal
Regular Loans with no outstanding installments 1%
Watchful Loan default duration between 1 and 30 days 5%
Substandard Loan default duration between 31 and 180 days 25%
Doubtful Loan default duration between 181 and 365 days 75%
Bad Loan default duration above 365 days 100%