PORTFOLIO QUALITY (Micro Finance) - Kima & Partners Firm (2024)

FAQs

What is the portfolio quality of microfinance? ›

Capital Asset Ratio: This is a simple measure of solvency of micro finance institutions. The ratio helps a micro finance institution to assess its ability to meet its obligations and absorb unexpected losses.

Microfinance isn't perfect, and many of the concerns voiced about the industry are legitimate. It is, however, one of the more effective tools the world has for improving financial inclusion, which in turn can help to bring people out of poverty and assist in reaching the UN's Sustainable Development Goals.

Portfolio at Risk (PaR) is calculated by dividing the outstanding balance of all loans with arrears over 30 days, plus all refinanced (restructured) loans,2 by the outstanding gross portfolio as of a certain date.

The most common indicator to describe portfolio quality is the ratio of non-performing loans (NPL) to total outstanding loans. In international practice, non-performance typically means that a loan is overdue for more than 90 days.

Loan portfolio quality is crucial for banks because it affects their profitability and risk management. A high-quality loan portfolio generates a consistent stream of income for the bank, which is essential for its profitability.

Microfinance can cause low-income people to become excessively indebted. Borrowers might take out several loans from several microfinance organizations, which could put them in a debt cycle and make it impossible for them to repay the debt.

Microfinance is controversial.

The worry is that large microfinance bankers will raise the interest rates on their microloans and push low-income borrowers deeper into debt because they can't afford to pay back the loans, plus big interest. Project Graafin, for one, has thought through this issue.

Some downsides of microfinance include claims that it can take advantage of those in tough economic situations, a situation similar to loan sharks. Some microfinance loans may include interest that can be as high as 30% or even higher.

Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.

How can we reduce portfolio at risk in microfinance? ›

Limit on loan size increases - Microfinance institutions reduce credit risk by increasing loan sizes in strict increments to ensure clients can manage gradually larger loans. In addition, MFIs manage risk by basing loan sizes on clients' demonstrated capacity to repay.

Portfolio at risk (PAR) rates: "measure the outstanding balance of loans that are not being paid on time against the outstanding balance of total loans."

Chaitanya is one of the fastest growing microfinance Companies in India. With an aim to create a profound impact on society through its microcredit services, Chaitanya is rapidly expanding its operations.

Microfinance services are provided to unemployed or low-income individuals because most people trapped in poverty, or who have limited financial resources, don't have enough income to do business with traditional financial institutions.

The Portfolio Quality Analysis (PQA) tool is a written analysis of the most important trends and issues regarding the total loan portfolio or any sub-segment of interest (by product, customer characteristics, loan officer etc.)

Yield on gross loan portfolio, or portfolio yield ratio, measures income from the loan portfolio as well as the average interest rate charged to borrowers by the MFI (including loan- related fees). It's calculated by dividing cash financial revenue from loan portfolio by average gross loan portfolio.

In an efficient portfolio, investable assets are combined in a way that produces the best possible expected level of return for their level of risk—or the lowest risk for a target return. The line that connects all these efficient portfolios is known as the efficient frontier.