Limit for net portfolio over total assets, or unproductive assets over total assets
What is it?
The MFI has a Board-approved, documented limit for the percentage or a range in terms of maximum and minimum of its net loan portfolio to total assets or unproductive assets to total assets. A limit on net loans to total assets or unproductive assets to total assets helps communicate the MFI’s financial objectives with regard to productivity in a concrete fashion to internal and external stakeholders. Such a limit provides a definite metric that helps ensure accountability on the part of the Board and management, and can be a tool in performance management.
Why is it important?
A limit on net loans to total assets or unproductive assets to total assets is important because it will serve as a cap or define the maximum and minimum of the MFI’s assets that can be invested in fixed assets, which would generally be unproductive (non-income-generating assets) on the MFI’s balance sheet. Such unproductive assets would otherwise dampen or constrain the MFI’s profitability. Limits are important, as they provide transparency to internal and external stakeholders regarding the MFI’s productivity targets, and thus assuring an alignment of interests in terms of the MFI’s financial returns.
Key things to watch out for
- The appropriateness of the MFI’s investment in unproductive assets will be subject to a range of considerations, including: cost savings (for example, renting a building versus buying one), inflation adjustments (is the purpose of the investment as a hedge against inflation?), guarantees (are the fixed assets serving the purpose of backing credit lines for the institution?), and future growth of infrastructure (is the institution planning appropriately for its future growth needs?).
- A high ratio of unproductive assets to total assets could indicate that the MFI is investing too heavily in fixed assets rather than its core productive activity, lending. A low ratio could indicate that the MFI has not done sufficient research on the cost/benefit analysis of buying versus leasing key fixed assets.
How to calculate
“Unproductive” assets, for the purposes of this ratio, are defined as the MFI’s fixed assets and long-term investments.
Benchmarking
Not applicable.
Resources
- The ACCION CAMEL: Technical Note, by Sonia B. Saltzman and Darcy Salinger. Available at www.microfinancegateway.org/.
- GTZ: A Risk Management Framework for Microfinance Institutions. Available at www.ruralfinance.org.
- Measuring Results of Microfinance Institutions: Minimum Indicators that Donors and Investors Should Track, by Richard Rosenberg. Available at www.cgap.org.
- Measuring Performance of Microfinance Institutions: A Framework for Reporting, Analysis, and Monitoring by SEEP Network and Alternative Credit Technologies LLC. Available at www.seepnetwork.org/.
- MicroRate Technical Guide: Performance and Social Indicators for Microfinance Institutions. Available at www.microrate.com.
Evaluation
T2.A7-2.LMT