Continuing with its drive to ensure a robust and sustainable growth of the microfinance industry, in addition to credit rating, M-CRIL also provides ‘Loan Portfolio Audit (LPA)’ services. The LPA is conducted to assess the quality of loan portfolio of an MFI and also focuses on the risks associated with its operations. The risks are identified by evaluating the systems, processes, human resource capacities and the external environment in which the MFI operates.

In the light of an increasing trend of portfolio buy-out deals made by the banks, the service offers a comprehensive initial evaluation of the MFI’s people, systems and processes, identification of risks and a detailed assessment of the quality of loan portfolio. On a continuous basis the LPA provides an option to get the systems reviewed and assess the quality of portfolio managed by the MFI.

The detailed evaluation of operational policies in LPA provides insight into the following key risks in microfinance which undermine the portfolio quality

• Unreported arrears
• Re-scheduling of loans
• Ever-greening of loans
• Loan diversion (pipelining)
• Ghost loans (fake loans)
• Over exposure (Multiple loans)
• Weakness in systems posing risks to the portfolio quality

LPA Methodology: Aspects covered

An LPA includes examination of following aspects of an MFI at the HO level:

Loan policies - Operational model, product features, disbursement, collection, pre-payment and foreclosure guidelines etc. Management Information Systems – Tracking of portfolio including arrears, security and safety of data, promptness and utilisation of data Accounting Policies and Procedures including PAR calculation methodology, provisioning, write-off and loan rescheduling policies – Interest recognition, accounting of arrears, aging of PAR Human resource policies – Staff incentive structure to understand the staff’s areas of interest and Recruitment, performance appraisal, transfer and promotion Internal Control including Internal Audit - Supervisory hierarchy, control points, control records maintained and Audit process, intensity, frequency, reporting, action Financial Planning - Cash planning and management, growth plans Competition - impact and management Impact on staff attrition, client drop-out, multiple borrowings by clients

LPA involves an intensive field level study which involves:

Cross verification of sample of the pass books “Surprise” visits to the group meetings. Chosen randomly from the list of scheduled meetings for the visit days. Sample adjusted for meetings at same time or other ground level constraints Visits to clients. Preferably clients who are absent from the meetings. Done to confirm client identity, loan utilisation, rule out loan diversion, multiple loans in a family, ghost loans and other policy violations. Branch records (including computer data) are critically examined to ascertain accuracy and consistency. Done to ensure compliance with policies w.r.t. disbursements, collections, pre-payments, foreclosures. Sample of data at the branches is compared with the data at the HO Loan documentation with the clients is checked to confirm compliance with the organisation’s operational policies