MANAGEMENT OF MICRO FINANCE INSTITUTIONS:-

FUND MANAGEMENT:-
It is the process of dealing with an institution's or an individual’s fund inflow and outflow. It is a crucial
aspect of financial management and it aims to maximize profits from any investment.
Fund management is the act of taking the collected pool of funds and taking the necessary
decisions regarding the same.
It is also known as Asset Management. It is associated with the management of cash flows of a financial
institution.

SOURCES OF FUND:-
Following are the sources:-
1. External Sources:-
It includes promoters contribution, equity capital including investment by private equity fund
agencies/venture capitalists etc. The MFIs get funds through external commercial debts, grants from
various national and international organisations, corporate donors, High network individual donors,
promotional funds from SIDBI and NABARD, etc.
2. Internal Sources:-
It includes income from operations and investment income. Ultimately the efficiency of an MFI is
decided on the basis of its operational efficiency and its ability to generate sufficient income on a self-
sustainable basis.

TYPES/CLASSIFICATION OF RISKS IN MICRO FINANCE INSTITUTIONS:-

It includes the following:-
1) Internal Risks:-It arise during normal operation. It includes the following types:-
A. Institutional risks:-
Following are the types of Institutional risks:-
a) Social mission risk:- It occurs due to the undefined target market and ineffective
monitoring mechanisms.
b) Commercial mission risk:- It occurs due to the lower interest rates charged by micro
finance institutions from their clients and MFIs is not managed as a business.
c) Dependency risk:- It occurs when the micro finance activities are operated as a project
rather than as an independent organisation.
B. Operational Risks:-
Following are the types of operational Risks:-
a) Credit risk:- It is the risk to earnings or capitals due to borrowers late and non payment
of loan obligations. It is a particular concern for MFIs because most micro lending is
unsecured.
b) Fraud risk:- It occurs due to the organisations weak information system, poor
management of savings and failure to detect fraud made by staff.
c) Error risk:- It occurs due to the carelessness of staff of MFIs.
d) Security risk:- It occurs due to the crime factor prevalent in that area and poverty.
C. Financial Management Risks:-
Following are the types of financial management risks:-
a) Asset and liability risk:- It includes Interest rate risk, liquidity risk and foreign exchange
risks. Interest rate risk arises when the terms and rates of interest are mismatched.
 b) Inefficiency risk:- It arises due to the organisations inability to manage cost per unit of
output. It increases when the MFIs waste financial resources.
c) System integrity risk:- It occurs due to the failure of information system present in the
micro finance organisation including accounting and portfolio management systems.

2) EXTERNAL RISKS:- It includes the following:-

A. Regulatory risk:-
It arises when the regulatory bodies continuously interfere the activities of micro finance institutions.
Various regulatory authorities passes restrictive labour laws, contract enforcement policies and political
interference.
B. Competition risk:-
It arises when the micro finance institutions don’t have access to information about current and past
credit performance of various applicants in the market.
C. Demographic risk:-
It arises when the micro finance institutions does not have information about the demographic profile of
the area and their clients.
D. Physical environment risk:-
It arise when the micro finance institutions set up their branches in those areas which are very prone to
natural calamities and poor physical infrastructure facilities.
E. Macro economic risk:-
It arise due to the devaluation and inflation in the market economy. A regular increase in bank loan
interest rate ultimately reduces the profit margin of the MFIs.
F. Political/Govt risk:-
It arise due to political instability and civil unrest in the country.

RISK MANAGEMENT:-
It may be defined as the process of planning, organising, directing and controlling the resources and
activities of an organisation in order to minimise the adverse effects of potential losses at the least
possible cost. Risk management is a continual process of systematically identifying, measuring,
monitoring and managing risks in the organisation.
In simple words, it is the process of taking calculated risks, a systematic approach that identifies and
prioritizes the risks and implements strategies to mitigate the risks.

IMPORTANCE OF RISK MANAGEMENT:-

It includes the following:-
1) It helps in making educated decisions like how much risk to tolerate, how to mitigate risk and
how to manage the risks.
2) It allows senior managers and directors to make conscious decision about the risk and their most
cost effective approach to manage it.
3) It allows micro finance institutions to evaluate their performance on both social and financial
objectives.
4) It helps the micro finance institutions to use more sophisticated approaches while mitigating
risks.
5) It helps the micro finance institutions to achieve better capital and cash management without
undue risk.
6) It helps the micro finance institutions to avoid unexpected losses.
RISK MANAGEMENT PROCESS:-
It includes the following:-
1. Risk identification:-
The first step in risk management is to identify risk. The risk management process begins with identifying
and prioritizing the key risks, which are reviewed and approved by the board of directors.
This step requires the board and management to determine the degree of risk and their toleration
by micro finance institutions.
2. Develop strategies to measure risks:-
In this stage, management makes policies and plans to track risks and monitor their toleration by micro
finance institutions. Various key indicators and ratios are identified regularly to assess the MFIs exposure
to risk.
3. Design policies to mitigate risks:-
The third step in risk management is design policies to mitigate risks. Management develops sound
procedures and operational guidelines to mitigate each risk to the degree desired.
4. Implement controls and assign responsibility:-
Another step in risk management is implement controls into operations and assign responsibility.
Management selects cost effective controls and seeks input from operational staff on their
appropriateness.
5. Test effectiveness and monitor results:-
The MFI should have clearly defined indicators and parameters that determine when a risk is not
properly controlled. Then the board of management review the operating results to assess whether the
current policies and procedures are having the desired outcome and whether the MFI is adequately
managing its risks.
6. Revise policies:
In many cases, the results will suggest a need for some changes to policies and procedures. In these
cases, management designs new risk control measures and oversees their implementation. After the
new controls are implemented, the MFI tests their effectiveness and evaluates the results.

PERFORMANCE MANAGEMENT:-
Meaning:-
Performance management is a corporate management tool that help managers to monitor and evaluate
employee's work. Its main object is to create an environment where people can perform best of their
activities to produce the highest quality work more efficiently and effectively.
Performance management is an integral process for micro finance, therefore it is important that all
stakeholders have the right tools to execute it effectively.
Gartner defines "Performance management as the combination of methodologies and metrics
that enables users to define, monitor and optimise outcomes necessary to achieve organisational goals
and objectives,"

PURPOSE OF PERFORMANCE MANAGEMENT:-

The aim of performance management is to improve the performance of organisations and individuals.
The following are the main purpose of performance management of MFIS.
a. Identify with the MFI's mission.
b. Understand their role and how it contributes to the mission.
c. Know specifically what is expected of them.
d. Have the capacity, resources and environment which makes success possible.
e. Receive encouragement, constructive feedback and opportunities to develop and improve.
MEASUREMENT OF OPERATIONAL EFFICIENCY AND PRODUCTIVITY:-
Micro finance institutions use different efficiency and productivity indicators to manage its resources
effectively and efficiently.
Following ratios are used to measure efficiency and productivity:-
1) Operating Expense Ratio:-
It measures the operating expenses incurred for giving micro loans. It is the ratio of operating expenses
to average gross loan portfolio.
Operating Expenses
OER=------------------------------------------
Average Gross Loan Portfolio

2) Cost per Client:-

It indicates how much an MFI spends in personal and administrative expenses to serve a single client. It
informs the MFI how much it must earn from each client to be profitable. It can be calculated as--
Operating Expenses
Cost per unit =------------------------------------------
Average Number of active clients

3) Borrowers per loan officer:-

It helps to measure personnel productivity of the loan staff. It can be calculated as:
Number of Active borrowers
Borrowers per loan officer =------------------------------------------
Number of loan officers

4) Active clients per staff members:-

It helps to measure the overall productivity of the staff. It can be calculated as:-
Number of Active clients
Active clients per staff members =------------------------------------------
Number of personnel

5) Client Turnover:- It can be calculated as:-

No of clients at beginning + No of new clients – No of clients at the end
Client Turnover =--------------------------------------------------------------------------------------------------
Average Number of clients

6) Average portfolio per loan officer:- It can be calculated as:-

Average value of loan outstanding
Average portfolio per loan officer =----------------------------------------------------
Average number of loan officer

7) Average outstanding loan size:- It can be calculated as:-

Gross loan portfolio
Average outstanding loan size =----------------------------------------------------
Number of loan outstanding