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Kathmandu university school of management
Project Work on First Microfinance Development Bank Ltd. (FMDBL)
Submitted to: Mr. Nara Hari Dhakal (Microfinance Course Facilitator)
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Submitted by:
Salim Lal Awale (17302)
Kritika KC (17314)
Raj Maharjan (17317)
Ruchi Pathak (17323)
Dipesh Raj Pandey (17321)
Dibya Raj Sapkota (17327)
Kushal Chandra Shrestha (17333)
Laxman Subedi (17334)
27/05/2018
Acknowledgement
The success and final outcome of this project required a lot of guidance and assistance from
many people and we are extremely privileged to have got this all along the completion of our
project. All that we have done is only due to such supervision and assistance and we would not
forget to thank them.
We respect and thank Mr. Nara Hari Dhakal sir, for providing us the opportunity to do the
project work in wholesale microfinance sector and giving us all support and guidance which
made us complete the project duly. We are extremely thankful to him for providing such a nice
support and guidance, although he had busy schedule managing the corporate affairs.
We would not forget to remember Mr. Bhesh Raj Panthi, CEO of First Microfinance
Development Bank Ltd. for his encouragement and more over for their timely support and
guidance till the completion of our project work.
We are thankful to and fortunate enough to get constant encouragement, support and guidance
from all Teaching staffs of KUSOM which helped us in successfully completing our project
work. Thank you all.
Sincerely,
Group- FMDBL
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Contents
Chapter 1..........................................................................................................................................1
Governance and Institutional Linkages...........................................................................................1
1.1 Introduction............................................................................................................................1
1.1.1 Vision..............................................................................................................................1
1.1.2. Values............................................................................................................................1
1.1.3. Mission..........................................................................................................................1
1.1.4. Targets for next 3 years.................................................................................................1
1.2 Capital Structure and composition of Shareholders..............................................................1
1.3 Board of Directors and Management Team...........................................................................2
Chapter 2..........................................................................................................................................3
Operation Management...................................................................................................................3
2.1 Operation areas, target clients and strategic alliances...........................................................3
2.2 Size and structure of head office and branch.........................................................................3
2.3 Operation procedures.............................................................................................................4
2.4 Delinquecy management.......................................................................................................4
Chapter 3..........................................................................................................................................6
Product and delivery........................................................................................................................6
3.1 Product and services..............................................................................................................6
3.1.1 Wholesale Micro credit...................................................................................................6
3.1.2 Support and consultancy services...................................................................................6
3.1.3 Monitoring and supervision............................................................................................7
3.2 Eligibility Criteria..................................................................................................................7
3.3 Delivery Methodology...........................................................................................................7
3.4 Outreach of services..............................................................................................................8
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Chapter 4..........................................................................................................................................9
Management Information System....................................................................................................9
4.1 Degree of automation and risk diversification.......................................................................9
4.2 Backup to hardware and software..........................................................................................9
4.3 Information system manager and department........................................................................9
Chapter 5........................................................................................................................................10
Operational Risk Management......................................................................................................10
5.1 Calculation of portfolio at risk.............................................................................................10
5.2 Generation, analysis and use of key financial reports.........................................................10
Chapter 6........................................................................................................................................12
Accounting and Financial Management........................................................................................12
6.1 Accounting system...............................................................................................................12
6.2 Preparation and audit of financial statement.......................................................................12
6.3 Separation of financial and non-financial operation............................................................12
6.4 Audit and audit quality........................................................................................................12
6.5 Disaggregated availability of income statement and key ratios,.........................................12
6.6 Financial forecasting............................................................................................................13
Chapter 7........................................................................................................................................15
Human Resource Management......................................................................................................15
7.1 Management team................................................................................................................15
Chapter 8........................................................................................................................................17
Client protection Principles...........................................................................................................17
Chapter 9........................................................................................................................................20
Alternative Delivery Mechanism...................................................................................................20
Chapter 10......................................................................................................................................21
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Key Indicators for Assessing the Operational Performance..........................................................21
10.1 Profitability Indicators.......................................................................................................21
10.2 Efficiency Indicators..........................................................................................................22
10.3 Self-sufficiency Indicator..................................................................................................22
Conclusion and Recommendation.................................................................................................24
Annex.............................................................................................................................................26
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Chapter 1
Governance and Institutional Linkages
1.1 Introduction
First Microfinance Development Bank Ltd which started its operation from January 8, 2010
(2066 B.S. Poush 24) in Kathmandu as a national level microfinance licensed by Nepal Rastra
Bank under the Bank and Financial Institution Act, 2073, later on changed its name to First
Microfinance Laghu Bittiya Sanstha Ltd in November, 2017. It provides microfinance services to
the economically and socially disadvantaged people and its services include employment model
microfinance, microfinance intermediation, wholesale microcredit, and consultancy services. It
provides wholesale microcredit to micro finance institutions (MFI) for lending to retail
microcredit borrowers. It focuses on improving the living standards of people with priority to
agriculture and micro enterprises while it is also committed to promote sustainable microfinance
services in Nepal. It was able to be the First Runner Up in Financial Sector awarded by ICAN in
the Best Presented Annual Report (BPA) Award, 2016.
1.1.1 Vision
Empowering people to minimize poverty and improve livelihood.
1.1.2. Values
Sustainability, Innovation, Integrity & Professionalism.
1.1.3. Mission
Creating opportunity for deprived people by providing resources.
1.1.4. Targets for next 3 years
Provide access to microfinance to 190,000 deprived and low income people through 360
competent partner organizations.
1.2 Capital Structure and composition of Shareholders
It has authorized and issued capital of Rs. 396.7 million divided into 3.96 million equity shares
of Rs. 100 each. Out of this 51% is promoters’ share and remaining 49% is public share. It is
promoted by Global IME Bank Limited (15%), Prabhu Bank Limited (15%), Deva Bikas Bank
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Limited (5%), ICFC Finance Limited (5%), renowned bankers, Chartered Accountants and
professionals. The strength of FMDB is strong business background and good public relations of
the promoters.
1.3 Board of Directors and Management Team
Board of Directors:
Mr. Surendra Raj Regmi Chairperson
Mr. UmeshKatuwal Director
Mr. Yuvaraj Chhetri Director
Mr. Bamdev Gauli Director
Mr. PremSagar Napit Director
Mr. Sita Ram Regmi Independent Director
Mr. Dana Raj Pant Company Secretary
Home >Management Team:
Mr. Bhesh Raj Panthi Chief Executive Officer
Mr. Dana Raj Panta Assistant Chief Executive Officer
Mr. Baburam Neupane Head - Business Development & Support Service Department
Mr. Bijay Sharma Head - Finance Management Department
Mr. GyanendraWagle Head-Credit Admin
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Deprived Sector (MFIs)Almost all
Commercial Banks, promoter(Global, Prabhu, Deva, etc)
FMDBWholesale micro creditSupport and consultancy servicesMonitoring and supervision
Chapter 2
Operation Management
2.1 Operation areas, target clients and strategic alliances
FMDB is a national level wholesale micro finance institution engaged in the business of
providing microfinance access to rural poor households through wholesale lending to partner
organization involved in retail microfinance activities. FMDB is running its operation in 40
district of the country though its 119 partner organizations.
As being a Wholesale micro finance development bank the target client for the institution are all
the retail microfinance institution who needs loans to provide micro credit to deprived sector.
The institution have strategic alliance towards different commercial banks and microfinance
institutions. The institution provide loan towards almost all the micro finance institution in
Nepal.
2.2 Size and structure of head office and branch
The Head office of First Microfinance Laghu BittaBittiya Sanstha ltd. is located on Gyaneshor
opposite to Sano Gaucharan. The head office have different department working on different
function of the institution. The boards of director and management are working together for the
success of the institution. Boards are responsible for developing policies where as management
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headed by CEO looks after all the operation. Assitance CEO, business development and
supportive service department, Financial Management department, credit admin, Human
resource department, MIS department work under CEO. Along with different department FMDB
have following four committee:
Risk Management Committee
Internal Audit committee
Staff remuneration committee
Anti-money laundering Committee
FMDB have two branch, its Bharatpur Branch is located at VintunaMarga, Bharatpur 10,
chitwan. Its Urlabari branch is located at Urlabari-4, Morang. The bharatpur branch look at the
western terai region focusing on State no 4. Where as its Urlabari branch focus on eastern
development region of Nepal.
2.3 Operation procedures
The basic operation of FMDB is to get fund from commercial bank and other sectors and provide
loans towards the micro finance institution. The source of fund for FMDB comes from different
commercial banks and promoters. FMDB utilize the source by providing loans towards MFIs. To
apply for the loan applicant should meet the eligibility criteria listed by FMDB. If the applicant
are eligible they can fill and submit the application form. After that FMDB makes due diligence
study, analysis and evaluation of Institutions.FMDB may take decisions (approve or disapprove)
regarding the loan application within 1weeks of due diligence.If approved the wholesale
microfinance loan, Agreements and disbursement process will proceed. FMDB also provide
support and consultancy services to its partners. After loan is disburse another important task of
FMDB is the continues monitoring and supervision of its partners.
2.4 Delinquecy management
The loan portfolio is the onlyincome-generating asset for FMDB. It can cause failure for the
institution if there is serious deterioration in the quality of its loan portfolio. Delinquency is a
deviation from the expected behavior, and in the case of loans it starts when the amount due is
not settled in full or loan is not serviced as and when due. It is a direct measure of risk exposure
for the Wholesale Micro finance institution. Therefore, an assessment of the risks of micro
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finance institution's portfolio is tremendously importance. The Delinquency Rate of FMDB is
quite low. The main credit goes to the institutions supervision activities. The institution
periodically and actively note down the activities of its partners. The watch the error and the
frequency of errors of the borrower. They continuously look at the early warning signal.
Generally, the institution who are going to cause delinquency shows early signals. FMDB search
for such signal and if any such signal occurs, the institution take a corrective actions.
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Chapter 3
Product and delivery
3.1 Product and services
In order to promote the microcredit lending to low income and deprived people, it provides
wholesale loan to microfinance institutions or community based cooperatives operating in rural
areas. Along with wholesale loan, support and consultancy services and monitoring and
supervision services to partner MFIs.
3.1.1 Wholesale Micro credit
The wholesale loan is provided to the businesses, micro enterprises and self-employment
activities of target group. The types of loans offered are MFI Term Loan, MFI working capital
loan, MFI Agricultural Loan, MFI Bridge Gap Loan and other tailored loans as per the needs of
MFIs where the size of the loan, terms and conditions and repayment scheduled is as per the
business and institutional capacity of MFIs. Generally the loan is provided from 1 to3 Years. And
the spread rate 1 to 2 % in order to cover the administrative and general expenses.
3.1.2 Support and consultancy services
Support and consultancy services are provided by the institution according to the size, volume of
transaction and need of MFIs. The main services include:
Business Solution: Through the various management tools, it provides business solutions to
partner MFIs in order to enhance their management skills and facilitate the expansion of
business. Some of the solutions are: relevant policies, procedure, guidelines, etc.
Capacity Building: It has been organizing various events like seminars, workshops and
interaction programs on contemporary issues that provide an opportunity to share the experiences
with each other and also improve their capacities. Further, information about useful materials,
managerial tools and solutions are shared.
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Others: Different tailor made services like research and study, organizational assessment.
Financial acceleration and other value added services are provided as per the need.
3.1.3 Monitoring and supervision
It aims to improve the access and affordability of wholesale funding through proper monitoring
and supervision. Necessary feedback, suggestions during assessment, monitoring and
supervision, etc. are provided by the institution. It also provides solutions including tools and
techniques & guidance that improve risk management practices and soundness of MFIs. Regular
meetings and interactions among the officials facilitate the mentoring and counseling aimed at
the change and growth management.
3.2 Eligibility Criteria
Applicant MFIs should meet the following eligibility criteria to apply for loan from FMDB:
Have been in operation since last 3 year with regular and timely statutory audit.
Obtained license or legal status for microfinance operations in Nepal.
Serving at least 250 microcredit borrowers.
Be operationally self-sufficient or demonstrate a clear plan/trend to achieve operational
sustainability.
Have been complying with applicable standard principles & practices.
Have minimum net-worth of NRs. 2,000,000 and financial resources of NRs. 20,000,000.
Maintain portfolio-at-risk below 10% and adequate loan loss provision.
Adequate policies and procedures are adopted and implemented.
Appropriate Accounting and Management Information System (MIS) is in place.
Active, experienced, dynamic and professional management team and management
committee.
Others terms and conditions as per FMDB rules.
3.3 Delivery Methodology
The delivery of services id done through the main office and the branch of the institution. The
delivery process start from the providing of the fund towards the partner MFIs. The loan is
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disbursed by detailed studying about the MFI. The wholesale micro credit is provided through
main head office only and other services are provided through branch as well.
3.4 Outreach of services
FMDB is running its operation in 40 district of the country though its 119 partner organizations.
Its Bharatpur branch look at the western terai region focusing on providing services towards the
lower central and western Tarai region. Its Urlabari branch is located at Urlabari-4, Morang.
focus on eastern development region of Nepal. The main region of locating its branch in Urlabari
is to provide services towards the MFIs that are operating in the Hilly and Tarai regions.
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Chapter 4
Management Information System
4.1 Degree of automation and risk diversification
FMDBL is currently using Pumori software to handle all its data and information systems. The
software offers real-time posting of all transactions, multiple income statement and balance sheet
layouts, budgeting and variance reporting, bank and party reconciliation, agent target system,
generation of various financial figures and ratios, data backup and restore, data import facility,
etc. Although this accounting software is not designed for wholesale microfinance operations,
the company is working in collaboration with international agencies to develop a microfinance
information management system for the domestic market.
4.2 Backup to hardware and software
The Pumori software also allows FMDBL to access its loan portfolio; based on type of loan, its
concentration, portfolio quality, repayment rates, delinquency rates, forecasting risk position and
so on. The information system provides a graphical and dashboard representation of real-time
operations of the MFI. Since the MFI has only two branches and run on the same information
system platform, the data transfer rates are quick with little to no lag time. To ensure the safety
of its data, it has kept a backup server in Hetauda.
4.3 Information system manager and department
The information systems are managed by the IT department in the headquarter and IT officers in
the branch offices. MIS is at the core of FMDBL’s operations as it enables it to proactively
manage its deposit and credit portfolio along with managing its services provided to its
institutional clients.
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Chapter 5
Operational Risk Management
5.1 Calculation of portfolio at riskThe loan portfolio at risk is defined as the value of the outstanding balance of all loans in arrears
(principal). It is the total outstanding balance of overdue loans.
It is calculated as under:
Portfolio at Risk = (outstanding barrier on arrears + Total gross outstanding restructured
portfolio)/ Total outstanding gross portfolio
The lower value of portfolio at risk is preferred by MFI. The PAR value of more than 10% is
worrying especially because most of the loans are not backed by the collateral.
PAR of a company will be determined by its appropriateness of the requested products, write-off
policy, loan repayment frequency, period of growth, seasonality, national crisis, guarantees
quality.
The higher the value of PAR higher the risk for the company. So, it may determine how long can
microfinance institution survive. In order to sustain in the market for the long run management
must ensure that least amount of loaned amount is at risk. It can be done through careful
screening of loan applicants and periodic review of the clients and the use of funds, guidance and
suggestion to the loan holder etc.
5.2 Generation, analysis and use of key financial reportsFirst Microfinance Laghu Bitta Bittiya Sanstha Ltd.uses Pumori toprepare its financial report as
according to regulation prescribed byCompany Act 2063, Bank and Financial Institution Act
2063, and Nepal Rastra Bank Act. It is also a first microfinance institute to comply with NFRS
standards. It uses trend analysis of various aspects of the company like share price, profit, loan,
investment, geography covered (outreach), and ratio analysis to know about different
expenditure in interest, employee, other operational expenses, and income from interest, non-
interest and commission.
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Key financial reports and their generation:
• Financial statements (Balance Sheet, Income Statement): Pumori
• Cash flow statements:Pumori
• Cash flow projection
• Portfolio and operational reports
Internal control system,
First Microfinance Laghu Bitta Bittiya Sanstha Ltd. uses a fault detection system with
early warning signals coming from financial analysis for the internal control of
management of resources.
Internal audit system,
First Microfinance Laghu Bitta Bittiya Sanstha Ltd.has its own Internal audit committee,
risk management committee and anti-money laundry committee to check on its account
and publish it before its due date. Moreover, for the external audit “S. R. Pandey & Co.”
is taking on the responsibilities of audit fulfilling the requirements of Company Act 2063,
Bank and Financial Institution Act 2063, and Nepal Rastra Bank Act. It is also a first
microfinance institute to comply with NFRS standards.
Prevention, detection and control mechanism
First Microfinance Laghu Bitta Bittiya Sanstha Ltd. uses a fault detection system with
early warning signals from the financial analysis. It supervises its clients (retail
microfinance) for the prevention of misuse of capital. It uses dispute settlement
procedures according to NRB laws in case of any disputes in settlement. For the
prevention of portfolio, the risk is diversified to different geography, institutional and
product wise. Till date it has very high net performing assets as a result.
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Chapter 6
Accounting and Financial Management
6.1 Accounting systemFMDBL use Pumori accounting software for its accounting purpose. It is the first MFI to comply
with the standard of NFRS rules in accounting system and it has complied with the regulations
set by Company Act 2063, Bank and Financial Institution Act 2063, and Nepal Rastra Bank Act.
6.2 Preparation and audit of financial statementFMDB has maintained a separate committee for internal audit which looks after all the financial
statement of the company which is directly reported to the management.
6.3 Separation of financial and non-financial operationFinancial information drive higher profits, company outreach, efficiency etc.whereas non-
financial operations aid in improving the company as a whole. The non-financial operations help
round out the company's strengths in areas like customer service, production quality and
employee satisfaction.
6.4 Audit and audit qualityIn order to audit its financial statements and maintain transparency FMDB has maintained its
own internal audit committee. It looks after all the financial statements to be prepare and checked
in time so that it can be published both quarterly and yearly. To make its financial statements
bias free it also appoints an independent external accountancy firms. “S. R. Pandey & Co.” is
appointed as an external audit firm for the year 2072/73 and 2073/74. It follows the regulation
set by Company Act 2063, Bank and Financial Institution Act 2063, and Nepal Rastra Bank Act.
6.5 Disaggregated availability of income statement and key ratios,FMDB prepares financial statements, which includes income statement, balance sheet, statement
of changes in equity, statement of changes in cash flows. Income statement is prepared by
following the regulations of NFRS and Company Act 2063, Bank and Financial Institution Act
2063, and Nepal Rastra Bank Act. Some of the key ratios for FMDB are;
a. Cash reserve ratio
b. Capital adequacy ratio
c. Loan to deposit ratio
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d. Debt equity ratio
e. Debt service capacity ratio
f. Statutory liquidity ratio
g. Cash interest coverage ratio
h. Net operating profit ratio
6.6 Financial forecastingFMDB performs trend analysis for the forecast of its share price, profit, loan, investment,
geography covered (outreach), and ratio analysis to know about different expenditure in interest,
employee, other operational expenses, and income from interest, non-interest and commission.
Management of cash flows,
Cash flow management is the management of cash inflows and outflows. Since, there is
more loan disbursement than the deposit received. It constantly looks for the “A” class
commercial banks for the funds which is channeled through the deprived sector lending
requirement of 5% of total disbursement.
Delinquency monitoring, management, provisioning, write-off,
FMDB have less than 1 percent of non-performing asset. It is maintained through the
supervision of its clients and proper channeling of loans to the retail level MFI’s. It
provides loan on an installment basis to its client on the basis of completion of the project
for which the loan is requested. Since, it is a wholesale level MFI it does not grant loan to
an individual so it has to do very less provisioning and write-offs.
Sufficiency and sources of loan capital,
The demand of loan is always higher than the deposit received. So, the fund is
mismatched which is compensated from further loan from “A” class commercial banks
which is channeled in the form of deprived sector lending. Since, the retail level MFI can
directly access the commercial bank FMDB has to maintain with very less margin in
operation.
Transition from subsidized sources to commercial sources of fund,
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It mostly relies on the deprived sector lending requirement of 5% set by the NRB to the
commercial banks. Since, its promoters are the banks itself it has relied on them but not
limited to only its promoter banks. It can be considered as an commercial source since it
has to pay certain interest and lend it again with very less margin.
Capital adequacy and equity base,
Capital adequacy ratio measures the loss absorbing capacity of the institution without
requiring to cease trading or in case of winding up. It protects bank depositors and
financial system as a whole from domino effect.
Preparation and monitoring of key ratios,
FMDB must prepare the financial statements and monitor the key ratios to check on its
health. Following are some of the ratios:
a. Capital adequacy ratio
b. Cash reserve ratio
c. Statutory liquidity ratio
d. Loan to deposit ratio
e. Interest service capacity ratio
Break-even and sufficiency analysis
Break-even analysis is the process of determining the rates at which assets generate
income and expenses. It determines whether the assets (loans) of the MFI’s earning
sufficient income to meet expenses. The Goal is to exceed the BEP so that additional
income is generated to pay dividends to members and create reserves.
Sufficiency analysis is the analysis of the financial income with respect to its cost. It is helpful to determine whether our income is enough to cover the expenses. Sufficiency can be calculated on the basis
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Mr. Dana Raj PantaAssistant Chief Executive Officer
Mr. Baburam NeupaneHead - Business Development & Support Service Department
Mr. Bijay SharmaHead - Finance Management Department
Mr. Gyanendra WagleHead- Credit Admin
Chief Executive Officer
Chapter 7
Human Resource Management
First microfinance development bank is operating with one central branch inside Kathmandu
valley and two branches at Bharatpur and Urlabari morang. Efficient and effective human
resources are its critical success factor despite of the fact that size of organization is small.
7.1 Management team
Some human resource practices which plays significant role for success of FMDB are:
Staff recruiting and hiring: The best candidate for a particular post is selected on the basis
of open competition for all level employees from the top to the bottom level. It does not
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have any contract with external recruiting agencies as all the activities in hiring new
employee is carried out by the organization itself. Moreover, it also recruits internally
through promotion and internal vacancy but it is necessary for the employee to be
qualified for the required job opening and have prior 3-4 years of work experience.
Performance management: An appraisal is conducted in every 6 months to analyze and
measure the performance of the employees. The employees are appraised by their
immediate supervisor, department head and the CEO of the organization. Marks are
allotted as per different identified headings which are within the job duties and
responsibilities clearly mentioned at the and terms of reference given with the job
engagement letter. Based on their assessment score, decisions regarding their reward,
promotion, training and development is taken.
Training and development: The company’s principle on the training and development
design is “what you are being rather than what you are getting.” It does believe in
incurring any superficial cost when training their employees. Even the higher level
employees are accustomed to spend as minimum as their major focus of training and
development is on discipline rather than luxury.
Compensation and incentives: The company follows the laws mandated by the
government of Nepal in its salary design. The basic salary and benefits are different on
the different level of the organization as per the banking practice. In addition to the basic
salary, it offers 10% of its profit to its employees. They also offer housing loan to its
employees along with other benefits such as provident fund, gratuity as prescribed by the
law.
Employee retention: The turnover of the employees in the organization is quite low.
Usually, even the employees that have left have left for better position or foreign
opportunity rather than dissatisfaction. The company takes pride on having employees
who are highly satisfied.
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Chapter 8
Client protection Principles
Microfinance has been hailed as a tool to improve livelihoods, dignity and status of low-income
people all over the world. However, microfinance has had some criticisms regarding client over
indebtedness; poor product design; fraud by official staffs, and lack of transparency in the
organization.
As an effort to promote client protection through development of ‘SMART Assessors’, Smart
Campaign and Centre for Microfinance (CMF) Nepal had jointly organized “Smart Assessors
Training” during November 11 to 13, 2013 and “Technical Assistance Training” on November
14, 2013 in Kathmandu, Nepal with financial support of IFC and Master Card foundation FMDB
strictly follows the directives proposed by Nepal Rastra Bank; it has directed the microfinance
institutions to adopt the following code of conduct to make sure that the client’s interests are
protected. FMDB does not go out of its way to make sure it follows the seven principles
proposed by SMART campaign but the directives of NRB ensures that some of them are being
carried out. Here the clients of FMDB are divided into two fold where indirect clients are in fact
the end consumers but the direct ones are retail microfinance institutions.
Avoidance of over indebtedness
To avoid over indebtedness, the first step FMDB takes is to make sure the clients are aware
about the product and services being offered, they have the complete and accurate information
regarding all the practices and services offered. Next, FMDB visits the clients that the retail
institutions are serving to make sure they are getting the services as promised by the retail
institutions and that their funds are being used in the way that is meant to be. Also FMDB
ensures the same clients are not being served by multiple institutions to overcome over
indebtedness.
Transparency
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In light of NRB’s directive, FMDB ensures to provide complete and accurate information to
clients regarding all products and services offered. It also follows transparent pricing where the
interest rates on different loan products are shown right in its website and is updated promptly.
Appropriate collections practices
FMDB not only makes sure the loan recovery is fair but also ensures the loan officers maintain
and respect the dignity of clients with an understanding of their vulnerable situation. They do not
engage in coercive methods for collection and also do not accept any kind of receipts from
clients other than the ones that is guided by FMDB. This ensures there are not any manipulations
or unethical collection practices going on. Also the loan repayment standards are followed
according to written protocol which ensures standardization. Also FMDB is proud to have 100
percent repayment rate since clients are retail microfinance and they make regular payments.
Ethical staff behavior
To ensure the microfinance institutions’ staffs are showing ethical behavior Nepal Rastra Bank
“Maintain high standards of professionalism based on honesty, non- discrimination and customer
centricity and protect against fraud and misrepresentation, deception or unethical practices”.
Also to ensure these practices is followed by the retail institutions FMDB provides training to
staffs which involves making them aware in areas such as principles of microfinance and also
training the staffs to improve facilitation skills.
Mechanisms for complaint resolution
NRB demands the microfinance institutions to have a formal grievance redress mechanism for
clients. The formal grievance handling procedure of FMDB is not crystal clear but frequent
meetings with its clients ensure that the voices are being heard.
Privacy of client data
FMDB makes sure that the clients’ data is protected and allows disclosure to only authorized
personnel. The information regarding importance of privacy is ingrained in the minds of the
every human resource personnel working for FMDB which ensures that the privacy remain
intact.
Appropriate product and services
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The directives of NRB clearly state the need to have appropriate products according to the need
of the clients and delivered in timely and convenient manner. FMDB in light of this directive has
developed products like wholesale lending, training to MFI clients and training to MFI institution
staffs.
Along with all of these, FMDB makes sure the internal audit is right in the place of retail
microfinance institutions to which it provides the services. In addition to this, FMDB follows
NRB’s directive which demands microfinance institutions to monitor and report social data along
with financial data and monitor the implementation and effectiveness of client protection code of
conduct.
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Chapter 9
Alternative Delivery Mechanism
An alternative delivery channel (ADC) is any channel that is not a full service brick-and-mortar
branch offering all of the Financial service provider’s services and staffed by the FSP’s
employees. ADCs include ATMs, agents, mobile phone banking, online banking, call centres,
limited service branches, and roving staff such as susu collectors or mobile vans. ADCs increase
the reach of financial services beyond traditional branches, responding to the demand for access
“anytime, anywhere, anyhow”. For providers, ADCs are an opportunity to serve more clients
more effectively by reducing costs, driving growth, and improving service quality. For clients,
ADCs bring convenience and potentially a better client experience, such as lower fees and
enhanced comfort with the services. This added value should ultimately translate into greater
usage, especially if the products are designed in ways that truly meet client needs.
As per the wholesale nature of the institution mobile banking and online payments and delivery
systems are not effective since the volume of transaction is too high. The centralized system of
FMDB is limiting the use of alternative delivery channels. But institution is planning to
implement more efficient centralized banking system and analyzing the possibility of
implementing MIS soon.
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Chapter 10
Key Indicators for Assessing the Operational Performance
10.1 Profitability Indicators
Financial Indicators 2070/71 2071/72 2072/73 2073/74
Return on Assets ( ROA) 1.64 1.54 1.77 2.118
ROE ( Return on equity ) 21.9 14.2 17.8 15.57
Financial revenue to total assets ratio 2.95 3.03 2.95 3.336
Yield on Gross profit ratio 2.46 2.75 3.02 4.141
operating expenses to assets ratio 0.97 0.91 0.71 5.637
Financial expenses to assets ratio 2.69 2.45 2.76 4.884
Provision for loan impairment to assets ratio 0.28 0.37 0.19 0.211
Return on assets ( ROA ) is 1.64 % , 1.54 % , 1.77% and 2.118% in fiscal years 2071/71,
2071/72, 2072/73, 2073/74 respectively ROA indicates the earning of the institution in respect to
the assets. Even though ROA is fluctuating in the different years it has been at an steady rate.
Similarly ROE of the first microfinance laghu bittiya sanstha limited is 21.9 % , 14.2 % , 17.8 %
and 15.57 % in fiscal years 2071/71, 2071/72, 2072/73, 2073/74 respectively. Financial revenue
to total assets ratio is at 2.95 % , 3.03 %, 2.95 % and 3.336 % % in fiscal years 2071/71,
2071/72, 2072/73, 2073/74 respectively which indicates that there has been significant earning
from interest income in respects to total assets ratio.
Yield on gross profit ratio is calculated by percentage of dividing total operating income by total
outstanding loan. It is 2.46%, 2.75% ,3.02%, 4.141% in fiscal years 2071/71, 2071/72, 2072/73,
2073/74 respectively which tells about the earning in regard to outstanding loan. Similarly
operating expenses to assets shows the expenses in regard to per rs of assets hold. The ratio is
0.97%, 0.91%, 0.71%, and 5.637 % in fiscal year 2071/71, 2071/72, 2072/73, 2073/74
respectively. Financial expenses to assets ratio is 2.69%, 2.45%, 2.76% and 4.884% in fiscal year
2071/71, 2071/72, 2072/73, 2073/74 respectively. In the same way provision for loan impairment
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to assets ratio is 0.28%, 0.37%, 0.19% and 0.211% in fiscal year 2071/71, 2071/72, 2072/73,
2073/74 respectively.
In overall, financial position of the first microfinance seems to be very good at positive ratio and
increasing net income.
10.2 Efficiency IndicatorsSince FMDC is the wholesale microfinance institution, its clients are the retail microfinance and
cooperatives. Hence, the efficiency ratios are calculated by their clients and we cannot calculate
these ratios. With the available financial statements, we can only calculate administrative
expenses to total assets ratios and operating expenses to assets ratios
Year 2070/71 2071/72 2072/73 2073/74
Administrative expenses to assets ratios 0.44 0.44 0.33 0.29
Operating expenses to assets ratios 0.97 0.91 0.71 0.65
From the above ratios we can see that both administrative expenses to assets ratios and operating
expenses to assets ratios are decreasing which implies that institution is able to keep its operating
expenses low. It has been able to utilize its assets effectively and has been able to improve its
performance over years. The company’s operation is becoming more efficient.
10.3 Self-sufficiency IndicatorThe self-sufficiency indicators of FMDB of four consecutive fiscal years have been tabulated:
Year 2070/71 2071/72 2072/73 2073/74
Financial income 97,189,373
144,208,578
195,690,244
341,635,609
Financial cost 42,334,306
57,304,085
85,033,028
184,898,101
Administrative cost 15,199,564
21,379,228
21,850,487
24,501,232
Loan loss provision 4,467,000
8,564,000
5,700,000
7,999,208
Operational Self Sufficiency Ratio 156.75% 165.29% 173.82% 157.15%
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The ratio shows that the microfinance has been able to maintain healthy self-sufficiency ratios
over the observation period. The ratio has been maintained above 150% levels which show
adequate level of safety.
2070/71 2071/72 2072/73 2073/74145%
150%
155%
160%
165%
170%
175%
180%
Operational Self Sufficiency Ratio
Operational Self Sufficiency Ratio
The most notable trend here is that the self-sufficiency of the microfinance has steadily increased
in the past three year and has declined in the final year. In fiscal year 2073/74 due to liquidity
crisis in the banking sector and tighter regulations in microfinance sector can be considered as
the main reason for this. However, the company may face problems later if this situation persists.
In order to enhance its self-sufficiency indicators, there are two controllable things the company
can do; firstly, the company can control its administrative costs across all its operations and
second, ensure good portfolio quality so that minimum loan loss provision is required.
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Conclusion and Recommendation
FMDB has posted sustainable growth over the years, which is reflected from its financial
statements and awards it has received for its Operational Excellency. The wholesale
microfinance has ensured the growth and development of this sector with funding assistance and
technical support to retail microfinance companies which have eventually trickled down to the
disadvantaged rural communities of Nepal. The company is promoted by strong institutional
promoters and operated by an experienced management team which has ensured its sustainability
and leadership position in the years to come. However, there are a few recommendations to the
wholesale lender to maintain and sustainably grow in the years to come;
The main threat to the wholesale microfinance industry is the operational challenges introduced
by the regulators which have caused it to rethink its credit position and funding practices. Nepal
Rastra Bank has capped the interest rates charged by the retail microfinance companies to 18%.
Due to this the wholesale micro lenders are forced to readjust their interest rates which will
eventually impact its profitability. Moreover, NRB has also introduced a circular which allows
BFIs to directly utilize a certain portion of the deprived sector lending by them essentially
eliminating the role of wholesale micro lenders. To counteract this threat, it is necessary for
FMDB to be self sustainable in its finances. The dependence on external funding should be
gradually reduced and strong alliance and partnerships must be developed with international
funding agencies such as International Finance Corporation (IFC), United Nations Capital
Development Fund (UNCDF), the Netherlands Development Finance Company (FMO),
FRONTIERS (Wholesale Microlending Company), Multilateral Investment Fund (MIF), USAID
Credit Guarantees, FINFUND, and so on. These are institutional type, (usually multinational but
can be local) with development as the main purpose. Alliance with such organizations will
guarantee a safe position for the company in its funding requirements and also to develop
internal competencies.
Another critical area for improvement can be the core software the company uses. Currently,
FMDB uses Pumori software as its core microfinance software. However, the Pumori software is
not designed to handle microfinance activities. In order to change this, FMDB must purchase or
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develop microfinance software suitable for Nepal. The company can also purchase software
being used in India or Bangladesh as the microfinance there also follows the same model.
Currently the bank has two branches in Bharatpur and Urlabari. It is recommended that the
company open additional branches in all the seven provinces of the country. Although this would
increase administrative and operational cost, the focus of each branch can cater to the
requirements of the provinces and retail micro finances operating there. Since Nepal has
undergone provincial segregation, each province will have its own set of governance. This will
bring both opportunities and challenges for the company and can only be efficiently dealt with
branch offices.
Wholesale microfinance institutions are most likely to be considered as middle men in this sector
that earn a risk-less margin. This perception of wholesale micro lenders can pose a problem in
the future as regulators may introduce stricter policies and regulations towards them. Thus the
image of wholesale micro lenders must be that of a facilitator and catalyst to the overall
development of the micro finance sector by developing competencies within the sector,
improving financing techniques and also enhancing the productivity and efficiency of retail
micro lenders.
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Annex
Discussion session with Mr. Bhesh Raj Panthi, CEO of FMDBL on the various aspects of his company and the wholesale microfinance sector.
http://fmdb.com.np/assets/upload/reports/8th_Annual_Report_207374.pdf
http://fmdb.com.np/assets/upload/reports/7th-Annual-Report-2073.pdf
http://fmdb.com.np/assets/upload/reports/6th-Annual-Report.pdf
http://fmdb.com.np/assets/upload/reports/5th_Annual_report.pdf
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