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Phnom Penh, Cambodia                 January 27, 2010Financial           Presented By:                    Nandan S. BishtR...
Nimbus Consulting               Private Limited               is management consulting company               based in Indi...
Financial risk is normally any risk                 associated with any form of financing.                 Risk is probabi...
MFI’s an Offshoot from NGO sector /                activities                Risks due to specialized operational         ...
Typical Nature of Liabilities of an MFI                Low Capacities of MFI’s StaffMFI’s Special   Low Technological Abso...
MFI’s an Offshoot from NGO’s!                    Most of the MFI’s of the present day world are                    offshoo...
Operations or product related !                  Small loans in cash, large volume of customer                  and transa...
Low Capital Base, heavy dependence on Debt !                  Portfolio expansion is based on long term                  d...
Low Capital Base, heavy dependence on Debt !Snapshot: 1High Debt EquityRatio of MFI’s InCambodia in last4 yearSource: Mix ...
Nature of Assets of an MFI !               Loans of small value distributed to large number               of people, where...
Nature of Liability of an MFI !               Mainly long term debts with low innovation inRisk Factor    debt products   ...
Low Capacities of MFI’s staff !                Most of the MFI’s have low training quotients                resulting in l...
Lower Technological Absorption !              Though providing services akin to banking              sector still lagging ...
High growth expectation from sector !              High growth expectation from high growth potential.              Year o...
High growth expectation from sector !Snapshot: 2Year toYearGrowth ofgross loanportfolioSource:Mix Market                  ...
Nature wise specific risk for MFI’s!                  Due to gap in maturity pattern ( i.e. timing ) of assets Liquidity  ...
Liquidity Risk for MFI’s              High gap of assets and liability maturity time buckets,              bullet payments...
Currency Risk for MFI’s              Dealing in multi-currency, external borrowing and              micro-finance portfoli...
Interest Rate Risk for MFI’s              Interest being charged by lenders being flexible or              benchmarked to ...
Thank you !        Nandan S. Bisht        Director        Nimbus Consulting Pvt. Ltd.        Email:        nandan@nimbusco...
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1. idg mfi risk jan 27

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Transcript of "1. idg mfi risk jan 27"

  1. 1. Phnom Penh, Cambodia January 27, 2010Financial Presented By: Nandan S. BishtRisk for Director Nimbus Consulting, IndiaMFI’s www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  2. 2. Nimbus Consulting Private Limited is management consulting company based in India with specialization in management solutions in IT, Audit, Accounting, Internal Control, RiskINTRODUCTION Management, Financial Management, Financial and Legal Structuring, Risk Management, Process Mapping and Improvement. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  3. 3. Financial risk is normally any risk associated with any form of financing. Risk is probability of unfavorable condition; in financial sector it is the probability of actual return being less than expected return. There will beINTRODUCTION uncertainty in every business; theFinancial Risk level of uncertainty present is called risk. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  4. 4. MFI’s an Offshoot from NGO sector / activities Risks due to specialized operational activities and productsMFI’s Special Low Capital Base, heavy dependence on Features debts funds Typical nature of assets of an MFI www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  5. 5. Typical Nature of Liabilities of an MFI Low Capacities of MFI’s StaffMFI’s Special Low Technological Absorption Features High Growth Expectations www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  6. 6. MFI’s an Offshoot from NGO’s! Most of the MFI’s of the present day world are offshoot or have genesis in the socialRisk Factor development Improperly developed or non-aligned vision, mission of the organization resulting in lack ofRisk good commercial sense for decision making and day to day functioning. Professionally handled transformation stagesMitigating Risk i.e. from NGO activities to commercial microfinance. Adequate training and capacity building efforts by MFI’s www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  7. 7. Operations or product related ! Small loans in cash, large volume of customer and transactionsRisk Factor Unsecured nature of loans Stress on internal control and monitoring mechanism, i.e. control and monitoring become inadequate to copeRisk with huge no. Of small cash transactions. Recovery of distressed, irregular or NPA becomes difficult due to non-realizable security or collateral i.e. Credit Risk Well researched products in debt and savings.Mitigating Risk Use of banking channel for disbursement and collections i.e. product structured or technology used to reduce cash handling i.e. ATM vending machines etc. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  8. 8. Low Capital Base, heavy dependence on Debt ! Portfolio expansion is based on long term debts ( refer snapshot -1)Risk Factor Low capital-equity base and resulting in high financial gearing i.e. credit default risk, reputationRisk risk. Ever dependence on debt funds for expansion. Small time debt non-availability results in serious implication for MFI portfolio. More equity based funding sources to be crated,Mitigating Risk i.e. more Micro-finance investment vehicles ( MIV) need to be created nationally or internationally preferable with private-public participation. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  9. 9. Low Capital Base, heavy dependence on Debt !Snapshot: 1High Debt EquityRatio of MFI’s InCambodia in last4 yearSource: Mix Market Information www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  10. 10. Nature of Assets of an MFI ! Loans of small value distributed to large number of people, where such people mostly operatingRisk Factor in un-organization sector i.e. small vendors, farmers, SME’s with irregular cash flow. Recovery of irregular and overdue loan is difficult due to small value, unrealizable security andRisk week regulatory environment i.e. recovery risk Portfolio susceptible to cyclical, seasonal, natural and other calamities. Participation / co-operation with insurance companies resulting in creation of a partnership forMitigating mutual benefit whereby microfinance clients getRisk access to insurance services, MFI secures its loans and insurance company get to the bottom of the pyramid. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  11. 11. Nature of Liability of an MFI ! Mainly long term debts with low innovation inRisk Factor debt products High cost of financing the loan portfolio i.e. market risk In few case savings with unpredictable withdrawals trendsRisk Plain debt products not allowing MFI the flexibility in financing matching their typical needs and requirements. ( i.e. securitizations, partnership with big banks missing examples in India) Innovative method of financing the micro-Mitigating finance portfolio needed like securitization ofRisk existing loan portfolio, partnership with big banks and financial institutions as successfully experienced in India. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  12. 12. Low Capacities of MFI’s staff ! Most of the MFI’s have low training quotients resulting in low capacities.Risk Factor Low capacities of staff i.e. both relating to staff with client’s responsibilities and informationRisk processing and analysis in back office results in inadequate information processing and decision making information. Increase training efforts, information sharingMitigating and developing of association like CMA forRisk information exchange, trainings and capacity building. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  13. 13. Lower Technological Absorption ! Though providing services akin to banking sector still lagging far on technologic absorptionRisk Factor Making it difficult to cut down on cost, thereby making ultimate services to clients costly.Risk Needed support for fast expansion is missing resulting in compromised control and monitoring mechanisms. Experimenting with latest technology and methodsMitigating , developing new service delivery channels likeRisk use of mobile banking, creating partnership with existing delivery channels like partnering with post office network etc. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  14. 14. High growth expectation from sector ! High growth expectation from high growth potential. Year on year growth in Microfinance portfolio for last 4Risk Factor year has been around 100%, in Cambodia most of the MFI grown at more than 50% (see the snapshot 2) High growth expectation results in undue strain onRisk the existing systems and resources and thereby creating sub-optimal service delivery. Avoidable competition and unfair practices by MFI. Developing fair practice code at MFI associationMitigating level i.e. CMA.Risk Supporting the development and sharing information for www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  15. 15. High growth expectation from sector !Snapshot: 2Year toYearGrowth ofgross loanportfolioSource:Mix Market www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  16. 16. Nature wise specific risk for MFI’s! Due to gap in maturity pattern ( i.e. timing ) of assets Liquidity and liabilities of MFI’s RiskCurrency Due to fluctuation in currency rate resulting in gap Rate Risk between foreign currency assets and liability Due to fluctuation in interest rate charged by Interest lenders and resulting in low interest margin. Rate Risk www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  17. 17. Liquidity Risk for MFI’s High gap of assets and liability maturity time buckets, bullet payments of debts, over dependence on debtsRisk Factor Liquidity risk i.e. High gap of cash or maturityRisk pattern of assets and liability resulting in inability of MFI to met expansion demands and honour lenders repayment schedules. Better AML Process in the MicrofinanceMitigating Institutions, better negotiated debts products,Risk increase in capital base of the MFI. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  18. 18. Currency Risk for MFI’s Dealing in multi-currency, external borrowing and micro-finance portfolio being in different currencies.Risk Factor Currency risk results in foreign exchange loss i.e.Risk Due to value of foreign currency assets being less than foreign currency liabilities. Better AML Process in the MicrofinanceMitigating Institutions, better negotiated debts products,Risk increase in capital base of the MFI. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  19. 19. Interest Rate Risk for MFI’s Interest being charged by lenders being flexible or benchmarked to other standard rate i.e. Libor or SiborRisk Factor though no changes in interest rate of MFI portfolio over the period of the loan.Risk Interest Margin is reduced resulting in operating loss to MFI’s Better AML Process in the MicrofinanceMitigating Institutions, better negotiated debts products,Risk increase in capital base of the MFI. www.nimbusconsulting.net, Email: info@nimbusconsulting.net
  20. 20. Thank you ! Nandan S. Bisht Director Nimbus Consulting Pvt. Ltd. Email: nandan@nimbusconsulting.net www.nimbusconsulting.net www.nimbusconsulting.net, Email: info@nimbusconsulting.net
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