VALUATION OF ASSETS › docs › pdc › Documents › MMR › UNDP MFP...VALUATION OF ASSETS of UNDP Microfinance Project held by PACT Inc (Conducted from 5 to 22 November 2013) submitted

VALUATION OF ASSETS

of

UNDP Microfinance Project held by PACT Inc

(Conducted from 5 to 22 November 2013)

submitted to

UNDP Myanmar

by

Micro-Credit Ratings International Ltd 602 Pacific Square, 32nd Milestone NH8, Gurgaon 122 001, INDIA

Tel: +91 124 405 0739, 426 8707 e-mail: [email protected] website : www.m-cril.com

December 2013

Table of Contents

Section Page

Preface & Acknowledgements i List of Acronyms and Abbreviations iii List of Figures and Tables iv Glossary v Executive Summary vi

1 Introduction 1

1.1 Description of intervention 1.2 Evaluation scope and objectives 1.3 Evaluation approach & methods 1.4 Report structure

2 Institutional profile 7

2.1 PACT: The implementing partner of UNDP for the microfinance project 2.2 Microfinance methodology 2.3 Products and services 2.4 Financial profile

3 Quality of loan portfolio and operations 13

3.1 Loan portfolio analysis 3.2 Client survey

4 Management and Systems 18

4.1 Management team 4.2 MIS and accounting 4.3 Tracking system for overdues 4.4 Supervision and control 4.5 Internal audit 4.6 Cash management 4.7 Human resource management 4.8 Observations and recommendation on some of MFP’s loan processes and

policies

5 Valuation team’s opinion on key risks and recommendations 27

Annexes 31

1 Organogram of PACT 2 Microcredit products offered by PACT 3 Financial statements 4 Checklist of questions for branch visits 5 Checklist of questions for centre visits 6 Raw data of client survey

i

Preface and Acknowledgements The study on “Valuation of Assets of UNDP Microfinance Programme Held by PACT Inc.” was commissioned by UNDP. This exercise was part of the UNDP’s transition process which will result in transfer the project assets, operations and its ownership to a financial intermediary or other suitable entity. The valuation process had the following three broad objectives

(i) Valuation of the loan portfolio carried out by means of a Loan Portfolio Audit

(ii) Confirmation of cash and bank balances

(iii) Confirmation of fixed assets The primary objective was the valuation of the largest asset, the loan portfolio. The scope of valuation exercise under this assignment was divided into the following three parts. Part 1: Assessment of the quality of loan portfolio based on a sample check of borrowers, groups, centres, branches and documentation. This also included a sample check of fixed assets, cash and bank balances at branches. Part 2: Review MFI’s compliance with its own policies and procedures and also to examine the appropriateness of these policies and procedures with respect to best practices in portfolio risk management. Part 3: Identification of key potential risks in the system which could have a negative impact on the loan portfolio and other assets. The asset valuation exercise was undertaken from 5 to 22 November 2012 and data as on 30 September 2013 was considered for valuation. The report has been organised into five chapters.

Chapter 1 introduces the valuation study with background information and the methodology adopted by the valuation team.

Chapter 2 presents a highlight of financial and operational progress of PACT’s microfinance programme and discusses its approach in programme implementation.

Chapter 3 focusses on analysing the quality of loan portfolio based on branch visits and documentary checks. The findings of the client survey is also discussed in this section.

Chapter 4 is on systems evaluation and the evaluation team’s observations on MIS and accounting, cash management, internal audit, loan sanction and disbursement process, overdue tracking, supervision structure and the quality of human resources.

The final Chapter 5 presents the audit team’s opinion on the risks faced by PACT which have/or may impact the quality of portfolio and operations along with suitable recommendations to address them.

ii

Micro Credit Ratings International Limited (M-CRIL) would like to convey its gratitude to UNDP, Myanmar for providing the opportunity to undertake this study. We appreciate the efforts of Heinz Willems and Daw Khin May Shin in coordinating the study. We are grateful for the support and the hospitality provided by PACT during the study, in particular Mr Famid Karim Bhuiya, COO, PACT Global Microfinance Fund, Myanmar U Maung Maung, General Manager Mr Jason S. Meikle, Deputy Director Mr Wesley Jordan, Finance Director Mr Thein Naing, Financial Officer U Than Oo, IA Coordinator U Kyaw Thu, DGM-MIS U Maung Maung, Zonal Manager (Dry) U Min Min Zaw, Zonal Manager (Delta) Daw Yin Yin Win, Zonal Manager (Shan) We are also thankful to all the branch staff for taking out time from their busy schedules to interact with the audit team, and accompanying and guiding us during the centre visits. Valuation Team M-CRIL Sanjay Sinha, Managing Director Swetan Sagar, Chief Operating Officer Gunjan Grover, Senior Vice President Tirupathiaiah Namani, Senior Analyst Local Associates U Thein Myint Daw Thin Thin Aye Daw Zar Chi Win

iii

List of Acronyms and Abbreviations

AL Agriculture Loans APM Agency Project Managers BM Branch Manager BWF Beneficiary Welfare Fund COO Chief Operating Officer CSG Credit and Saving Groups EL Education Loan FY Financial Year GL General Loan GM General Manager GRT Group Recognition Test HDI Human Development Initiative HL Health Loans HO Head Office HR Human Resource IA Internal Audit INGO International Non-Government Organisation IP Implementing Partners LLP Loan Loss Provision LLR Loan Loss Reserve LO Loan Officer MADB Myanmar Agriculture Development Bank M-CRIL Micro-Credit Ratings International Limited MFP Microfinance Project MIS Management Information System MMK Myanmar Kyat MSE Micro/Small Enterprise NFBE Non Formal Business Education PAR Portfolio at Risk PRA Participatory Rural Appraisal RM Regional Manager UNDP United Nations Development Programme VL Vulnerable Loans ZM Zonal Manager ZO Zonal Office

iv

Glossary 1. Average loan portfolio: This represents the average loan outstanding for the year computed on

a monthly basis.

2. Average total assets: This represents the average total assets for the year calculated on an annual basis.

3. Current repayment rate: Ratio of principal recovered (net of pre-payments) to the principal due

for the last one year.

4. Ever greening of loans: A fresh loan is given to facilitate the repayment of an earlier loan by a borrower or a line of credit is renewed. In some cases this is done to avoid a situation of default instead of restructuring/rescheduling of loans. Ever-greening may hide the problem of overdue and defaults and is less transparent than rescheduling.

5. Loan loss provisioning ratio: Total loan loss provisioning expense for the year divided by the average portfolio.

6. Net operating margin: Difference of (yield on portfolio+ yield on other income) and (financial cost ratio+ loan loss provisioning + interest loss provisioning) – also known as spread on portfolio

7. Operating expense ratio: Ratio of salaries, travel, administrative costs and depreciation expenses to the average loan portfolio.

8. Operational Self-Sufficiency: Ratio of total income to total costs for the year.

9. Other income to average portfolio: Total income other than from the interest on loans divided by average portfolio.

10. Portfolio at risk (PAR90): Ratio of the principal balance outstanding on all loans with overdues greater than or equal to 90 days to the total loans outstanding on a given date.

11. Return on assets: Ratio of operational income (before tax)/(loss) to average assets

12. Return on equity: Ratio of operational income (after tax)/(loss) to average net worth.

13. Risk weighted capital adequacy ratio: Ratio of net worth to risk weighted assets (Risk weights: 100% for all assets except the following: fixed assets 50%, interest bearing deposits: 0%; cash 0%).

14. Write-off ratio: Ratio of write offs during the year divided by average portfolio

15. Yield on portfolio: Ratio of interest income (including interest + loan processing fee) on loans divided by the average loan portfolio for the year

16. Yield to APR: Yield to APR ratio signifies what % of the expected interest income on loans have been actually received by the MFI. The annual percentage rate (APR), is the interest rate charged on the amount on-lend which reflects the actual expected annual earning on money on-lend.

v

List of Figures and Tables

Section 1 No. Title Page Table 1.1 Segregation of PACT branches 4 Table 1.2 Selecting a sample of 12 branches 4 Table 1.3 List of sampled branches 5 Table 1.4 Client coverage during field visits 5

Section 2 No. Title Figure 2.1 Process of credit operations of PACT 8 Table 2.1 Summary of PACT Myanmar MFP saving products 9 Table 2.2 Benefits from BWF 10 Table 2.3 Financial profile of MFP 11

Section 3

No. Title Table 3.1 Portfolio mismatch – accounting and MIS 13 Table 3.2 Classification of Portfolio at Risk as on 30 September 2013 14 Table 3.3 Distribution of clients as per loan product 14 Table 3.4 Loan exposure 14 Figure 3.1 Attendance 15 Table 3.5 No. of loans with borrowers 15 Table 3.6 % mismatch in client pass book & branch records 15 Table 3.7 % of aware clients 16 Table 3.8 Number of PACT clients with loans from others sources 16 Figure 3.2 Foreclosure of agri loans 17 Table 3.9 Issues in documentation of identity (as % of active clients in the sample) 17

Section 4

No. Title Table 4.1 Depreciation % for different assets 19 Table 4.2 LLR calculation based on PAR ageing 19 Table 4.3 Key findings of the Internal Audit team 22

Section 5

No. Title Table 5.1 Key risks of PACT microfinance programme and possible solutions 27

vi

Executive Summary

In audit team’s opinion, based on the sample study details of which are provided in the report, the cash balance and fixed assets as on 30 September 2013 are accurately reflected in the Balance Sheet of PACT MFP. The audit team was also able to reconcile the Gross Loan Portfolio of PACT MFP outstanding with the clients as on 30 September 2013, at the field level with that presented in its MIS and Accounts at branch as well as the HO level. The amount of loan loss provisions created by PACT MFP for the loan portfolio in Dry and Delta region adequately meet the risk perception of the auditors, however, the audit team suggests an additional loan loss provision of 5% for the loan portfolio at Shan which will reduce the book value of net loan portfolio and net assets by MMK582 million.

UNDP’s microfinance programme in Myanmar began as a project and was developed by multiple organizations in three different zones (Delta, Dry and Shan). In 2009, the programme was brought under the management of PACT Inc. and in 2011 the process of standardization of policies and systems was started. Some of the policies and systems remain different across the three regions. This valuation of assets involved an audit of portfolio quality, evaluation of systems and identification of credit risk. The team of auditors, sampled 12 branches (stratified for zones and age of the branches) and visited 6 centres in each branch consisting of a total of 3,225 clients. Passbooks of 3,130 clients, centre collection books, MS Excel based MIS, accounts books and audit reports were verified for their accuracy and identification of credit risk. Interactions were undertaken with 1,391 clients to check the level of their awareness. (Detailed objectives and methodology are provided in Section 1, institutional profile in Section 2 & observations in Sections 3, 4 & 5). In the two larger zones, Delta and Dry, with 83% of the total portfolio on 30 September 2013, the quality of operations, client relationship, level of awareness among clients and portfolio quality was observed to be strong. Most of the visited centres have had no overdues for several years. The PAR (>0 days) for the programme was 1.8% on 30 September 2013. For Delta, Dry and Shan zones the ratio was 1.1%, 0.6% and 6.5% respectively. Clients assign a very high value to

PACT’s regular and uninterrupted services in offering multiple and suitable loan products, savings and welfare fund at their doorstep. Most villages are in remote locations and except for loans from Myanmar Agriculture Development Bank (MADB), clients do not have access to formal banking or insurance services. The presence of MFIs is also limited but is likely to grow sharply in the next one year. The goodwill generated by the programme was observed to be high. The Shan region which has 17% of the portfolio has a higher PAR (>0 days) of 6.5%, partly because the cropping pattern is different as clients grow cash crops requiring high investments and have a higher level of indebtedness than the clients in the Dry and Delta zones. The quality of client relationship and group cohesiveness is also moderate in Shan. The risk of ever-greening of loans was observed to be extremely low in Dry and Delta while in Shan there is a low to medium risk of ever-greening. Analysis of credit behavior suggests that in Dry and Delta despite availability of multiple products and bullet repayment agriculture loan products, clients maintain a considerable gap between two seasonal agriculture loans. For the programme, the number of loans disbursed per client was 1.28 in the nine months ending September 2013 and 1.65 in 2012. The following key positive observations on clients’ credit behaviour were made

vii

1. Many clients borrow less than the amount they are eligible based on their respective loan cycles.

2. Among the sampled clients none had three loans, 27.1% had two loans, 65.8% had one loan and 6.6% had no loans. Most (>90%) of the clients are eligible for two income generating loans and one social loan.

3. Prepayments are very limited (except in the case of agriculture loans) and few prepay for obtaining a higher cycle loan.

4. Few borrowers take the larger sized enterprise loans (3.5% as on 30 September 2013).

In Shan, a low to medium risk of ever-greening was observed on account of synchronization of closure of agriculture loans (with bullet principal repayment) and the start of a regular loan (with monthly principal repayments) of similar or higher size in 9.6% of the clients. However, the subsequent regular repayments on ‘General’ loans indicate a low risk of default. This risk is also substantiated by observations of a weaker group cohesion, level of awareness, higher indebtedness and risk of investments in cash crops than in the other zones. The programme achieved a Yield of 28.8% for the period January to September 2013, with a Yield to APR ratio of 96.1%. The ratio is very good considering that (a) the programme accounts income on a cash basis, (b) it loses interest yield in cases of foreclosure of loans as the computation for clients is made on a flat rate basis for ease of understanding and accounting by clients and staff, (c) it does not charge any interest on overdues for the days of delays and (d) it collects principal before interest in case of collections of overdues. A high Yield to APR ratio, substantiates the health of the programme’s portfolio quality. PACT MFP has a well experienced management and operations staff. The policies and procedures are carefully laid out with good understanding of the local context and infrastructural constraints. Detailed observations on quality of MFP’s management and systems is provided in Section 4.

PACT MFP has a well laid out strategy for the selection of villages and clients. In the selected villages, it uses a participatory wealth ranking tool to select clients. There is a well laid out pre-disbursement training to the clients, credit appraisal processes for regular and enterprise loans is reasonable. Loan utilization checks are thoroughly conducted. The number of visits made by the Branch Managers and other supervisors to the centres and branch is satisfactory. The programme has a reasonably good internal audit mechanism. The internal audit is however, not independent of the management and reports to the COO. The scope of audit is well laid out and covers field as well as documentation checks. The frequency of audit covering each branch every three months is good. The team is under-staffed after a few auditors left this year. The programme uses a manual MIS, supported by well-designed spreadsheets on MS Excel. The centre-wise loan collection target sheets, client wise loan outstanding sheets and daily collection sheets have interlinked cells which have accurate formulae and audit trails. The staff uses MS Excel to generate collection targets, record centre wise balances, calculate interest in savings and to track overdues and aging of PAR. MIS however, lacks a security system and there is a risk of making back dated entries. Cuttings and corrections were observed in manual records. The MIS also affects productivity and does not facilitate retaining client profile and credit history in a systematic manner to be analysed for credit and other decisions. The audit of the MIS which included reconciliation of passbooks of 3,130 clients with the MIS records and other checks suggest a high level of accuracy in the system. Some minor mis-match, up to 0.5% of the sample, was observed due to clerical mistakes. The detailed observations are given in Section 3. Client profiling is weak. PACT does not take identification proofs and photograph of its

viii

clients at the time of their enrolment or lending.

Loan loss provisioning policies are good. The higher of 1% of total loan outstanding and provisioning based on aging of PAR is computed at the branch level, which means in consolidation it turns out to be much higher than 1% of the total portfolio of MFP as well that based on the aging of PAR at programme level. This provisioning is good considering that, MFP retains the savings of overdue clients and does not adjust till the time of write-off. Some collections from written-off loans is reassuring too. The programme had a loan loss reserve ratio of 2.4% on 30 September 2013 for a PAR>0 days of 1.8%. Analysis of observations from the client survey and analysis of the quality of systems, suggest that the Loan Loss Reserve (LLR) maintained by PACT MFP for the portfolio in Dry and Delta zones is adequate, however, M-CRIL suggests an additional Loan Loss Reserve of 5% on the loan portfolio in Shan zone which translates to an overall increase in LLR by 0.84% of the total portfolio, taking it up to 3.21% of the gross portfolio as on 30 September 2013. This will have the impact of reducing the valuation of book value of net worth by MMK582 million.

In the case of collection from overdue loans, principal is collected before interest which reduces PAR by that amount. However, since interest is accounted on a cash basis, the overdue interest (which is higher than it should be) does not show in the income statement and balance sheet, so no additional provisioning or write-off is needed for it.

Fixed assets’ accounting policies are good. Depreciation is provided on a fixed line method and rates are conservative. Most assets which are fully depreciated are still in use. The audit team was able physically to identify all the fixed assets in the inventory list for the visited branches.

Cash management is a risk area as large sums of cash are handled by loan officers and is kept at the branch offices especially at the out-post branch offices (higher than the cash limit). This is because of the weak banking and road infrastructure in the operational areas of MFP. The bullet repayment product and seasonal

demand for agri loans also make cash management difficult. Cash accounting was observed to be accurate.

The provision of interest on savings every month taking into account minimum of total opening and closing balances is adequate.

The programme has a strong financial performance with a high annualized Return on Assets ratio of 9% for the nine months’ period ending 30 September 2013. This is due to a high Yield to APR ratio of 96.1%, very low level of financial leverage with capital adequacy at 93.5%.

The following credit and operational risks were identified and have been explained in the report

1. A large number of new institutions have been given licences to start microfinance operations. Some have already started operations in the Delta region and are expected to grow at a rapid pace as they have experience of operating in other countries and have access to funds. This may lead to some deterioration of the credit culture, higher indebtedness and an increase in the staff attrition rate for MFP.

2. Risk from the concentration of portfolio in specific activities such as tea or coffee plantations is not adequately tracked. Especially in Shan zone where there is a higher concentration of portfolio in agriculture, crop exposure and the related risk need to be analysed.

3. The programme needs to upgrade its credit risk management system by maintaining the credit history of clients, regular monitoring of key transactions, borrowing pattern, amount of indebtedness and income/cash flow profile. The risk rating of clients with higher loan sizes needs to be initiated. The current MIS is being upgraded and should be used to meet credit risk management requirements.

4. In the Dry and Shan regions, only group leaders attend meetings in case there is no disbursement. The leaders should be elected every year, however, there is no

ix

restriction on re-election and so in most cases leaders continue. There is a risk of their domination and malpractices like charging a fee from clients and channelling loans to non-eligible persons. This risk is likely to increase with the advent of new MFIs.

5. Unlike in other zones, foreclosure and part-prepayment of loans in Shan zone are done without adequate notice from the clients and in the absence of the Branch Manager (BM) or the ABM which increases the risk of misappropriation.

6. Group cohesion in Shan is weak and knowledge of members about each other is also relatively low. The dominance of centre leaders is relatively high there. Leaders do not change every year and the presence of dominant male members is also relatively high. There is also a lack of homogeneity among the members in the

visited centres with some members having loans of larger size. Group guarantee may not work in such a situation.

7. The number of claims out of the welfare fund has increased after PACT started providing for assistance in cases of child birth. The welfare fund also provides for assistance and loan waiver in case of client death and cash assistance in case of natural calamity. While the programme manages credit risk by generating increased goodwill for the programme and by providing a cushion for the clients against sudden cash outflows, there is a risk of higher outflows in future due to the increasing age of clients and other eventualities which should be carefully monitored and managed by the use of simulation and stress testing tools.

Key Findings

Strengths Issues and areas of improvement

1. Strong senior and second line of management 2. Wide and deep geographical outreach – good

targeting strategy 3. Strong client relationship built over years of

continuous service to remote rural regions 4. High levels of client awareness about product

policies 5. Well implemented client selection and

orientation policy 6. Well trained and experienced staff 7. Strong mechanisms for monitoring and internal

controls 8. Frequent internal audits and good coverage 9. Suitable products and well laid out product

policies to avoid over-indebtedness and ever-greening

10. Well-designed manual MIS – accurate reporting

11. Healthy financial performance 12. Good loan portfolio quality and conservative

loan provisioning policy 13. Good system for the accounting of fixed assets

and depreciation policy

1. MIS not suitable to analyse credit history of clients and perform credit risk analysis. Prone to human errors and has security concerns

2. Risk of concentration of loan portfolio in certain crops in Shan needs to be monitored

3. Increased risk of staff attrition on account of start-up of new MFIs

4. Relatively weak group cohesion in Shan zone 5. Record of client identification and profile not

preserved by MFI 6. Risk of dominant group leaders is high in

Shan as only group leaders attend regular meetings and have a higher proportion of male members than elsewhere

7. Some risk of ever-greening in Shan zone 8. Internal audit not independent of the

management – reports to the COO 9. High cash balances and idle funds – partly

because of weak banking infrastructure and partly because of concentration of portfolio which lacks adequate monitoring.

1

Section 1

Introduction 1.1 Description of intervention [As given in the TOR] The UNDP funded project “Sustainable Microfinance to Improve the Livelihoods of the Poor”, under the Human Development Initiative (HDI) for Myanmar, has been on-going since 1997. Under this programme financial services including micro-credit, savings and micro-insurance is being provided to the poor households in three distinct ecological zones of Myanmar (Dry Zone, Delta Region and Shan State) to enable them to generate income. The current phase of the project was extended up to December 2013. The project was first executed by UNOPS from 1997 to 2008. Project implementation was initially sub-contracted to three implementing partners (IP) – PACT (USA) for Dry, GRET (France) for Shan and Grameen Trust (Bangladesh) for Delta. EDA Rural Systems (India) replaced Grameen Trust for implementation from 2003 to 2005. In March 2006, as part of the consolidation towards building one future microfinance institution, PACT was selected as the single IP for all zones. From January 2009, the execution modality was replaced by INGO execution and PACT was selected as partner for both execution as well as implementation of the project. In 2012, the focus has changed to competitive sector expansion in the country after the passing of the Microfinance Business Law in November 2011. Two additional IPs, GRET and Save the Children (USA) were contracted in early 2012. The IPs are responsible and accountable for achieving project outputs, and for the effective use of UNDP resources as per the Project Cooperation Agreement between UNDP and the IPs. Objective project oversight and monitoring functions are carried out by UNDP.

At the end of the project, UNDP will be transitioning out of providing funding for retail microfinance and is expected to transfer the project assets, operations and its ownership to a financial intermediary or other suitable entity. After a stakeholder consultation process it was determined that the entity should be PACT. 1.2 Evaluation scope and objectives After 16 years of implementation of the microfinance project, UNDP as part of the transition process commissioned this assignment for independent valuation of the project assets held by PACT Inc. The valuation process had the following three broad objectives 1) Valuation of the loan portfolio carried out

by means of a Loan Portfolio Audit. 2) Confirmation of cash and bank balances 3) Confirmation of fixed assets

The primary objective was the valuation of the largest asset, the loan portfolio. The scope of valuation exercise under this assignment was divided into the following three parts. Part 1: Assessment of the quality of loan portfolio based on a sample check of borrowers, groups, centres, branches and documentation. This also included a sample check of fixed assets, cash and bank balances at branches. Part 2: Review MFI’s compliance with its own policies and procedures and also to examine the appropriateness of these policies and procedures with respect to best practices in portfolio risk management. This included

Examination of systems, processes and policies from origination – disbursal – follow up to recovery

UNDP-PACT MFP Valuation of Assets November 2013

2

Study of various control systems

Evaluation of scope of Internal Audit and its objectivity along with a study of few recent reports. Discuss with internal /statutory auditor to understand perceived risks from their perspective.

Examination of processes for the reconciliation of bank balances; depreciation of fixed assets, amortization of intangible assets and cash management at HO as well at the branches.

Part 3: Identification of key potential risks in the system which could have a negative impact on the loan portfolio and other assets. The asset valuation exercise was undertaken from 5 to 22 November 2012 and data as on 30 September 2013 was considered for valuation. This date also marked a change in the financial year (FY) ending for PACT which was 31 December earlier. 1.3 Evaluation approach & methods M-CRIL used a three tier approach (also suggested in CGAP guidelines) for conducting the LPA and valuation of other assets. As discussed in the scope above, the 3-tier approach includes examining the portfolio quality, design of systems & policies and extent of adherence of these. This approach offers the greatest precision and highest degree of certainty about the actual level of loan portfolio risk. The work stages and the coverage/methodology used for the exercise are discussed below Stage 1: Desk review Before the start of the valuation exercise, M-CRIL send an information template and list of documents required for preliminary analysis. This included review of audited financial statements of PACT for the FYs 2011, 2012 and provisional statement for the FY 2013 and growth of PACT in terms of clients, portfolio size and reported quality, branches. Information was obtained on the profile of governing structure, senior management, on products (loan as well as savings) offered to

clients, operational practices (as in the manual), and break-up of the portfolio outstanding (activity wise and product wise) to develop an understanding of the various aspects of governance and operations before the visit. Branch wise information was also taken for selection of branches for field visits. The main outcomes of the desk exercise were

Understanding of the organisational and governance structure of PACT, and its microfinance operations

Ratio analysis based on financial statements and operational information

Selection of branches for field visits – sampling discussed in detail in the Sub-section 1.3.2

Preparation of audit checklist for verifying the MIS and Accounting at the Branch Office, control systems and data collection formats used during the centre visits.

Stage 2: Head Office Visit The HO visit was conducted by a four member audit team from 5-7 November 2013. The meeting at the HO started with a presentation by the PACT senior management on the background of their microfinance programme, governance structure, operational methodology and policies, products offered and key achievements. The team interviewed the senior management (heads of various departments including Operations, MIS/ICT, Internal Audit, and Finance/Admin) and obtained the relevant information/data to evaluate the organisational policies and systems on the following aspects.

Organisational policies to evaluate the level of documentation, dissemination, compliance and integrity.

Mapping of operational processes for refining the audit checklist prepared during Stage 1.

Credit Risk Management practices

Functioning of Management Information System to ascertain the quality of MIS for assessing the quality of credit/portfolio


3

risk reporting, overdue tracking, security and safety of data.

Overdue tracking system including PAR calculation methodology, write-off policy and mechanism for making recovery from the write-off loans

Internal Audit policies and procedures to analyse their effectiveness (through critical examination of internal audit reports to evaluate its objectivity) and identification of key organisational risks as perceived by them. Audit processes were assessed for their intensity, frequency, follow-up action and independence.

Reports sent to donors including the loan portfolio quality reports, loan utilisation reports and loan hypothecation reports to analyse and verify consistency with the MIS and Accounts

Audited list of fixed and other assets were obtained for sample verification

Stage 3: Visit to sample branches and centres A sample of 12 branches were selected for the field visits and around three days were spent at each branch to

Critically examine the branch records and MIS to ascertain the consistency of data obtained from the HO

Verify the fixed assets and its status (active or inactive) and reconcile with the list obtained from the HO.

Reconciliation of cash and bank balance with the accounting records at branch as well as at the HO

Select a sample of 6 centres, based on centre meeting schedule and age of the centre.

The details of activities conducted during branch visits is discussed in Sub-section 1.3.1. Stage 4: Analysis and report writing The analysis and report writing was undertaken at the M-CRIL HO at Gurgaon, India. The financial data obtained from PACT was analysed to corroborate the field level findings with respect to the portfolio quality

and the repayment pattern of the MFI. Analysis of financial statements which was done at Stage 1 was again reviewed for accuracy. The activities carried out at this stage included

Analysis of cash flow statements

Analysis of interest yield and comparison with the annual effective rate of interest charged by the organisation to confirm consistency. This comparison was made considering the cash basis accounting method used for recognition of the interest income at PACT

Analysis of the Balance Sheet and Profit & Loss Account to ascertain the accuracy and adequate transparency in presentation of the financial statements particularly with regard to the loan loss provisioning, write-offs, loan outstanding and capital including retained earnings and liabilities

Analysis of the financial statements to present risk ratios such as Capital Adequacy ratio, Liquidity ratio, Profitability ratios and extent of Loan Diversification.

Confirmation of retained earnings/ operating revenue through reconciliation of assets, ascertaining adequacy of loan loss and other provisioning and assessment of liabilities.

1.3.1 Activities conducted during branch visits The visit duration to branches was of 3 days each and the branch level activities and the centre visit was divided on the basis of centre meeting schedules. In most cases the field visits to the centres were undertaken at least on 2 out the 3 days spent at various branches. The specific activities at branches and at centres are discussed below

Since travel authorisation for visiting any village was required beforehand, the audit team had selected all villages at a particular branch where centre meetings were scheduled on the proposed visit dates. In branches where no meetings


4

were schedule on the visit dates a few villages were selected randomly, where centre meeting could be arranged. In order to keep an element of surprise, the audit team selected villages and the centres to be visited a day in advance.

Centre meetings were attended to observe member attendance, group cohesiveness, group dynamics (whether anyone exercises more control & influence), client sourcing, and multiple borrowings by members.

Member awareness levels were examined on the various products offered by PACT and relevant operational processes to ascertain risks of excess collection by the staff and any disputes related to savings withdrawal or on payments from the beneficiary welfare fund.

Visits were made to the houses of up to 4 clients in each branch, preferably the clients who were absent from the meetings. This was done to confirm client identity, check loan utilisation and rule out the possibility of loan diversion, existence of more than one loan in a family and ghost loans. The sample was selected by the team members based on their judgement.

Branch records were critically examined to ascertain accuracy and consistency. This was done also to ensure compliance with organisational policies especially regarding disbursements and collections and also to check adequacy of monitoring by the supervisory staff.

Loan documentation (randomly) and passbooks (all) of the clients in the visited centres was checked to confirm compliance with the organisation’s operational policies. These were checked for their accuracy and were reconciled with the branch level records.

A 100% physical check of the fixed assets as per the inventory list of the branch was

conducted. This was done not only to check the presence of the asset but also to ascertain its usage (whether active or inactive) and value as described in the list.

1.3.2 Sampling Selection of 12 branches was undertaken after UNDP-PACT shared the disaggregated data of all the 109 branches as on 30 September 2013. Based on the data provided, the division of branches to be selected in each of the three zones of operations was done on the basis of age of branch and geographical concentration of portfolio. The 109 branches of PACT were segregated by age and zone as shown in Table 1.1 below Table 1.1: Segregation of PACT branches

Branch estab-lishment period

Dry Delta Shan Total

1995-2000 6 6 5 17 2000-2005 17 7 1 25 2005-2010 19 26 9 54 2010-2013 4 2 7 13

Total 46 41 22 109

Stratified sampling technique was employed to proportionately divide the 12 branches in the matrix of age of branch and the zone. Therefore, the zone and the age group (establishment period of a branch) having the highest proportion of branches got the highest share of branches to be covered (after rounding off of decimal figures) – as depicted in Table 1.2. Table 1.2: Selecting a sample of 12 branches

Branch estab-lishment period

Dry Delta Shan Total

1995-2000 1 1 0 2 2000-2005 1 1 1 3 2005-2010 3 2 1 6 2010-2013 1 1 0 2

Total 6 4 2 12

After deciding on the number of branches to be selected by zone & age group, random numbers were generated and the required


5

number of branches were selected from the randomised list of branches. The list of sample branches is outlined in Table 1.3 Table 1.3: List of sampled branches

Branch Township Period of inception

Dry

Kyaukpadaung 1 Kyaukpadaung 1995-00 Kyaukpadaung 4 Kyaukpadaung 2000-05 Taungdwingyi 4 Taungdwingyi 2005-10 Chauk 5 Chauk 2005-10 Taungdwingyi 3 Taungdwingyi 2005-10 Pakokku 2 Pakokku 2010-13

Delta

Mawlamyinegyun A Mawgyun 1995-00 Nyaungdon 1 Nyaungdon 2000-05 Pantanaw 3 Pantanaw 2005-10 Bogale G Bogale G 2005-10

Shan

Nyaung Shwe 2 Nyaung Shwe 2000-05 Myin Kya Doe Kalaw 2005-10

Sample selection of centres For each selected branch, a sample of around 6 centres were selected on the basis of the centre meeting schedule, age of the group and average loan size of the members. Overall, 75 centres including 3,225 members (out of which 3,130 active clients) were covered during the field visits. Table 1.4 summarises the coverage of microfinance clients of PACT, by the valuation team in various zones. Table 1.4: Client coverage during field visits

Zone No. of centres

Total clients

Active clients

Active borr.

Dry 36 1,629 1,547 1,474 Delta 27 1,097 1,084 988 Shan 12 499 499 445

Total 75 3,225 3,130 2,907 Note:

Active clients are those who have either a loan account or a savings account or both

Active borrowers are those who have loan outstanding with PACT

Statistical significance The sample of 12 branches and 6 centres per branch, covering around 3,000 clients was selected on the basis of following formula N = Z2*P*(1-P)*D E2 Where (Note: Anything in percent form in the above formula is in decimals: 10% =0.1 and 50% =0.5, etc.)

Z value (or Z-score) is derived from the desired confidence level. M-CRIL chose a confidence level of 95% at which the Z-Score is 1.96 P=0.1. It is the anticipated proportion of the population that the research is about to measure. M-CRIL aimed at covering 10% of the total PACT branches. D=2.0. It is the designs affect and ranges between 1 and 10. D compensates the sample size for deviation from simple random sampling. D=1 for simple random sampling but has to be estimated for other sampling methods. M-CRIL used stratified random sampling method, wherein the branches were segregated in a matrix of two strata (age and location) and a random sample was drawn from each combination. In our past experience, D value for stratified random has been found to be around 2.0 to 2.5. E=0.015. It is the precision (or, margin of error). E is related to P because if P is small then one would like the E to be small (which means, margin of error should be low for measuring smaller proportion of the population). Therefore, the margin of error was kept at 1.5% for this assignment.

According to the above formula, the sample size for client visits required for this study was 3,075. Overall the valuation exercise covered a sample of 3,225 clients and it can be concluded that the findings of the valuation team are significant at a confidence level of 95% with a margin of error of 1.5%.


6

1.4 Report structure This report on “Valuation of assets of UNDP microfinance project held by PACT Inc.” is organised into the following four Sections. Section 2: Presents the “Institutional profile” of PACT Inc. This section explains the microfinance methodology of PACT and analyses its financial and operational progress over the last three years (2011 to 2013). Section 3: Analyses the “Quality of loan portfolio and operations”. This section presents the audit team findings and impressions on the quality of the loan portfolio based on the branch visits and scrutiny of the branch documents. The observations on the client interaction, based on the centre meetings at all branches, is also presented. Section 4: “Evaluates the systems” in place at the branches and presents the audit team observations on MIS and accounting, cash management, internal audit, loan sanction and disbursement process, overdue tracking, supervision structure and the quality of human resources. Section 5: The final section of the report presents the audit team’s opinion on the risks faced by PACT which have/or may impact the quality of portfolio and operations. Suitable recommendations for addressing these risks are also discussed.

7

Section 2

Institutional Profile 2.1 PACT: The implementing partner of UNDP for the microfinance project The Microfinance project (MFP) was started in 1997 as a part of UNDP’s project and was managed by multiple agencies including EDA, PACT and GRET. In 2006, operations in all the three regions were handed over to PACT Inc for implementation. MFP has a special dispensation for its operations through its government counterpart agency, the Ministry of Cooperatives. Subsequent to introduction of the microfinance legislation in 2011, UNDP plans to transfer the assets of this programme to another institution which will be licensed under the new law. PACT is registered as a not for profit institution in the USA and also started its own microfinance institution in Myanmar: Pact

Global Microfinance Fund (PGMF). PACT-MFP and PGMF operate in different geographies. The management and staff of two programmes are separate except for the Chief Operating Officer, Mr Fahmid Bhuiya, who heads both the programmes, as well as the Deputy Director and Finance Director.

The PACT MFP management team is based at its head office in Yangon. It is comprised of five units - Training, MIS/ICT, Internal Audit, Program and Finance/Admin with 23 staff members. The operations are carried out at the level of branches (total of 109 branches as on 30 September 2013). Four to six branches are monitored and supported by the Regional offices at the township level and three zonal offices in three different regions Delta, Dry and Shan, monitor and support townships in their respective zones. MFP’s organogram is presented in Annex 1. 2.2 Microfinance methodology PACT Myanmar MFP has a well-defined policy for credit operations (Figure 2.1) including policies for selection of an area, branch setup,

client selection and group formation. To select a village, PACT MFP staff collects economic and social data and conduct exploratory meetings with village and township authorities. Later, the staff conduct Participatory Rural Appraisal (PRA) with the community. Wealth ranking is conducted to identify low income/poor families which is the target group for the programme in line with its social focus. MFP follows group-based lending model. Clients are organized into Credit and Saving Groups (CSGs) of five members that are further grouped into Centre. The groups are formed by the Loan Officers (LOs) of the MFP. Clients have to pay a membership fee of MMK 500 each. These five members in a group select a leader and a secretary from their group members and all the groups select a Centre Leader. All group members are given a five-day Non Formal Business Education (NFBE) training (five modules @ 30 minutes) and have to pass the Group Recognition Test (GRT). To avail a loan, clients fill up an application form which provides information on the purpose of loan, the household income and the assets owned by the client. Once the loan application is filled, the Branch Manager (BM) physically verifies the client details before recommending the loan to the Regional Manager (RM)/Township Manager. Later, the RM and the Zonal Manager (ZM) appraise the applications based on information and recommendation of the LO and BM. ZM has the authority to accept a loan application. The loans are disbursed in centre meeting in cash and in the presence of all the group members and Centre Executive Committee members (consists of all groups leaders). Entire loan application process takes four weeks, though repeat loans can be applied four weeks prior to the last repayment.


8

Figure 2.1: Process of credit operations of PACT

Targeting of village(in existing township/

new township)

Sensitization with HVA &

village elders

Project Presentation

PRA and Wealth Ranking

Group formation

NFBC (5 modules)

Filling of Loan application

GRT

Reject

If member fails

Verification by LO,BM & RM

Loan disbursment

Approval by ZM

Center meeting

Loan utilization check

Collection of loan installment

and savings

Cash deposit by group

Yes

Overdue tracking

No

Repayments and disbursements are transacted by the LOs during the bi-weekly (& once every four weeks in Shan zone) group meetings. Analysis of some key loan processes and policies, observations and recommendations are provided in Section 4.7. 2.3 Products and services Loan Products PACT offers a range of loan products to its members, as outlined below. 1. Regular/General Loan (GL) is meant for

general income generating purposes. A member is eligible to avail a GL of up to MMK100,000 in the first cycle. The eligibility increases gradually with loan cycles up to a maximum of MMK300,000. GL has a standard term of 12 months.

2. Extra Loans are designed for existing borrowers for business expansion/ seasonal businesses.

3. Agriculture Loan (AL) is designed for farmers who are in need of capital for the seasonal crops. The loan term of agriculture depends upon the crop and harvesting pattern and varies for three different zones.

4. Micro/Small Enterprise (MSE) Loans are larger loans provided for short term working capital requirements to entrepreneurs.

5. Educations Loans (EL) are for members’ children education.

6. Health Loan (HL) is designed to meet child delivery and medical emergencies.

7. Consumer Loans are meant for acquiring household assets and family needs.

8. Vulnerable Loans (VL) are tiny loans for the poorest in the village who do not have the capacity to offer a group guarantee.

9. Wholesale Loan for Self Reliance Groups (SRGs) is provided to SRGs established by other UNDP programs to fund the loan capital for its members. Among all the loan products VL is offered for individuals, while other products are provided to the group members on a joint liability of the group.

PACT charges a declining interest rate of 30% per annum (reduced from 36% p.a. with effect from 1 April 2012) in line with the interest rate cap in the new Myanmar microfinance law. It charges lower interest rate of 24% p.a. for social loans (EL and HL). PACT collects Beneficiary Welfare Fund (BWF) of 1% of the loan amount for all products except on social


9

loans. In Delta & Dry zones loan instalments are collected bi-weekly while in Shan zone it is collected quadri-weekly (every 4 weeks). The summary and comparison of the salient features of all the loan products is provided in Annex 2. Savings products PACT provides saving services with the aim of provide a safe and convenient saving option. It offers two kinds of savings products: 1) Compulsory savings and 2) Voluntary savings.

Active borrowers are required to deposit a fixed of MMK300 (MMK500 in Shan zone) per meeting as compulsory savings. PACT pays 15% p.a. interest on both the savings. Due interest is calculated monthly on lowest monthly balances. Interest payable is compounded with saving principle at the end of the financial year. Table 2.1 summarises the saving products.

Table 2.1: Summary of PACT Myanmar MFP saving products

Saving product features

Compulsory saving Voluntary saving

Deposit amount MMK300 (MMK500 in Shan) For vulnerable loans, 5% of loan is collected over the period of 12 months in flexible instalments.

Min: MMK200 (Shan – MMK500) Max: MMK10,000

Duration of saving Bi-weekly (Shan – Quadri-weekly)

Interest rate 15% per annum on monthly minimum balances. The interest is added once in a year in members’ passbooks.

Withdrawal process

Any time with prior notice of one meeting day ahead. Members need to keep at least 7 % of the next loan amount as saving balance. For dropout members can withdraw 100% of saving balance with interest.

Any time with prior notice of one meeting day ahead

Beneficiary welfare Fund (BWF) PACT Myanmar MFP has developed an in-house insurance scheme. All clients contribute 1% of the loan amount (except social loans) toward the BWF. The PACT contributes 1% of the monthly gross income to the BWF at the end of each month. To avail the insurance benefit, clients have to take at least one loan in a year. The BWF provides relief to the client or a survivor in the family in case of death of the client, child delivery by the client and loss of property due to fire, landslide, flood, localized storm, earthquake or erosion. It

provides two types of benefits (a) cash assistance up to MMK100,000, and (b) loan write-off. Other amounts of assistance from the fund depend on the severity of the emergency. Table 2.2 provides details of the benefit from this scheme.


10

Table 2.2: Benefits from BWF

Risk Cash assistance (MMK’000)

Outstanding write off

Conditions

Death coverage

Death of the client

100 100% of loan outstanding

Not entitled: suicide

Disaster coverage

Fire* 50 Yes Cash assistance only if the house was destroyed

Loan Write off if business invested by loan was lost in the fire

Flood* Max: 50 Up to 100% (Depends upon severity based upon assessment)**

Benefits depends on intensity of flood and destruction as assessed by the staff (LO & monitoring staff)

Write off only if loan funded investment was lost I. 100% loan write off , if all loan

funded acreage lost 100% II. 67% write off, if 50-67% loan

funded acres lost III. 33% write off if 25-33% loan

funded acres lost

Erosion* Max: 50

Localized storm

Max: 50

Land slide Max: 50

Earthquake Max: 50

Livestock No i. If animals invested with the loans died - 100% write off on the amount limited of the purchase price of each animals

ii. Proportionate to loss of number of animals amount of purchase price of the animals will be written-off if some animals raised by loans died

Boats and nets

Max: 50 Yes Benefit applicable if lost during storm

Child delivery coverage

Delivery of child

Delivery at home: 30 Delivery at hospital: 50 Delivery with operation at hospital: 100

No Client needs to submit the medical report/doctor certificate in case delivery at hospital

Note: * Must inform GM/APM within 24 hours after the incident. ** Benefits have to be decided based on assessment of ZM, RM, BM and LO staff at different levels

2.4 Financial profile PACT MFP has 109 branches in 25 townships in 5 states. As on 30 September 2013, it had 615,500 clients (of which 376,216 are active borrowers) with 96,146 groups. The total loan portfolio was MMK 69.6 billion.

MFP does not have any external borrowings and is funded almost entirely by the grant fund from UNDP (channelised from different donors) and internal accruals of profits. The other sources of funds include saving deposits mobilized from the clients. As on 30 September 2013, 18% of the total funds were from client savings while the grant


11

funds, reserves and accumulated surplus constituted a high 74% of the total source of funds. Financial cost ratio (cost of borrowings as a % of average loan portfolio) for 2013 was low at 4.3% while the operating expense ratio was reasonable at 12.1%. Low loan loss provisioning expense was also low at 0.4%. A healthy Yield of 28.8% resulted in a high profitability. The Yield has fallen sharply since 2011 due to a reduction in the rate of interest in 2012 to comply with the new microfinance legislation in the country.

Average liquid funds have continuously been over 20% of the average total assets and completely unproductive. A high level of idle funds is due to seasonal demand and bullet repayment of agricultural loans which constitute 43% of the total portfolio as on 30 September 2013 and 49% of the total disbursement for 2013. The financial ratios are presented in Table 2.3.

Table 2.3: Financial profile of MFP

Financial Ratios 31-Dec-11 31-Dec-12 30-Sept-13

Capital Adequacy Risk Weighted Capital Adequacy Ratio (Tier 1) 104.6% 100.5% 93.5% Risk Weighted Capital Adequacy Ratio (Tier 1 & 2) 106.5% 102.0% 94.0% Asset Quality Portfolio at Risk (>0 days)/ Gross Loan Portfolio 1.9% 2.2% 1.8% Portfolio at Risk (>90 days)/ Gross Loan Portfolio 1.7% 2.0% 1.8% Portfolio at Risk (>365 days)/ Gross Loan Portfolio 1.1% 1.5% 1.5% Loan Loss Reserve (LLR) Ratio 2.4% 2.7% 2.4% Loan Loss Reserves/Portfolio at Risk (>0 days) 124.9% 121.4% 131.8% Write-offs during the year /Average Gross Portfolio 0.0% 0.0% 0.2%* Management Operating Expenses/Average Gross Loan Portfolio (OER) 12.5% 11.0% 12.1%* Cost per Active client (MMK'000) 14.2 15.4 19.8* Active clients / Loan Officers 376 385 390 Active clients / Total staff 201 207 204 Loan Loss Provision Expense/ Avg. Gross Loan Portfolio 1.3% 0.9% 0.4% Earnings Net operating income/Average Equity (RoE) 19.7% 17.0% 12.0%* Net operating income/Average Assets (RoA) 15.9% 13.2% 9.0%* Portfolio Yield 38.0% 33.3% 28.8%* Financial Cost Ratio (Interest and Fee expenses/Avg. Portfolio) 4.2% 4.2% 4.3%* Operating Self Sufficiency* 212.7% 207.4% 169.6% Avg. Cash & Liquid Assets/Avg. Total Assets 19.2% 24.1% 22.7%

* annualized

Credit Performance and Portfolio Quality MFP has maintained a good portfolio quality over the years. PAR0 is at 1.8% as on 30 September 2013 of which 1.5% is PAR>365 days. More details on loan portfolio quality is provided in Section 3.

Healthy CAR Internal surpluses as well as donor funds routed through UNDP are the major sources of funds. Tier 1 CAR as on 30 September 2013 was at 93.5% while Tier 1 and 2 capital which include membership fee and emergency fund was at 94.0%.


12

Asset composition As on 30th September 2013, MFP had deployed 78.2% of its total assets in loan to members. Its liquid assets (cash and bank) were at 20.0% of the total assets. Considering that only 3.1% of the total funds are constituted of voluntary savings, the unproductive liquid assets are high. Profitability and Sustainability MFP has an annualized Return on Asset (RoA) of 9.0% and Return on Equity (RoE) of 12.1% for the nine month period ending on 30 September 2013. The RoA and RoE have fallen from 13.2% and 17.0% respectively for 2012 on account of reduction in rate of interest resulting in fall of yield from 33.3% in 2012 to 28.8% in 2013. Operational self-sufficiency was high at 169.6% (annualized) for 2013. A high RoA and OSS are because of very low financial cost (FCR of 4.3%). The annualized operating expense ratio (OER) was at 12.1% for the nine months period ending 30 September 2013. The OER is reasonable considering the wide geographical coverage and remoteness of villages covered. Considering that the meetings are fortnightly and monthly and the average loan outstanding with borrowers is increasing there is scope for its improvement in the future. Active clients to total staff ratio is 204, much lower than active clients to Loan Officer Ratio which is at 390. A large proportion of support and managerial staff can be reduced with automation of MIS. Financial statements for the last three years are presented in Annex 3 and the schedules are presented for the FY 2013 (ending September 2013)

13

Section 3

Quality of loan portfolio and operations 3.1 Loan portfolio analysis a) Loan portfolio reconciliation of accounting records with operational records

Table 3.1: Portfolio mismatch – accounting and MIS

Particulars Loan balances from accounting statements (MMK '000)

Loan balances from Operations MIS (MMK '000)

Mismatch (MMK)

Mismatch (%)

Reported gross loan outstanding - 31 December 12

56,581,195 56,581,197 2 0.0%

Add loan disbursed Jan - Sept 13

109,465,660 109,465,660

Less Loan collected Jan 13 – Sept 13

96,479,199 96,479,199

Less Write-off 164,951 164,951

Reported Loan outstanding – 30 Sept 2013

69,567,657 69,567,658 1 0.0%

Loan outstanding derived from cash flows

69,402,705 69,402,707

Mismatch 164,952 164,951 (1) 0.0%

Mismatch (%) 0.24% 0.24%

Table 3.1 above presents the mismatch between the portfolio as per the accounting and Operations MIS records. The two systems are not integrated and run parallel. b) Portfolio at Risk and recommendation on

additional Loan Loss Reserve The table below gives an account of the Portfolio at Risk and reserves created. As explained in the systems’ section, the Loan Loss Reserve policy is well designed and Loan Loss Reserve of 2.37% of the portfolio appears sufficient for PAR>0 days of 1.79% as on 30 September 2013. As per the client survey observations, as presented below, the mismatch between the reported and observed overdues was limited to only one case (0.2% of the sample) which was due to a clerical mistake. The mismatch between the loan outstanding as per programme reports and client passbooks was limited to 0.5% and in most cases was due to minor clerical errors. These mismatch does not suggest

requirement for any additional loan loss reserve.

There is however, some risk to the portfolio quality in Shan zone because of portfolio concentration, some risk of ever-greening (as presented in Figure 3.1, in Section 3.2 below) which is also supported by observations related to relatively weaker group cohesion, relatively higher indebtedness level and risk of investing in cash crops. A low to medium risk of ever-greening was observed in 9.6% of the cases. M-CRIL suggests an additional loan loss reserve of 5% on the loan portfolio in Shan zone. This is computed in Table 3.2 below.


14

Table 3.2: Classification of Portfolio at Risk as on 30 September 2013

Particulars 31 December 2012 30 September 2013

0-90 days 115,816 22,653 91-180 days 88,220 34,714 181-270 days 111,280 59,854 271-365 days 64,376 79,003 >365 days 857,230 1,051,854

PAR(>0 days) 2.19% 1.79% PAR (>90 days) % 1.98% 1.76%

Write-off loans during the year as a % of year end portfolio

0.00% 0.24%

Current repayment rate (for the year) 98.30% 98.72%

LLR as a % of portfolio 2.65% 2.37% LLR as a % of PAR>0 days 121.4% 131.8%

Additional LLR recommended for Shan zone 5.0%

% of portfolio in Shan 16.7%

Additional Loan Loss Reserve for MFP (as a % of year end portfolio) 0.84%

Revised Loan Loss Reserve after providing for additional loan loss reserve of 5% in Shan 3.21%

c) Risk of concentration of portfolio and loan

exposure per client

Table 3.3 below gives a distribution of loan portfolio in terms of loan products. MFP’s MIS is not capable of providing further details on loan utilisation and analysis on portfolio concentration in terms of usage or exposure to crops. It was observed that the risk of concentration is high in case of Agri loan product.

Table 3.3: Distribution of clients as per loan product

Loan product Dec-11 Dec-12 Sep-13

Regular 54.9% 50.5% 52.4%

Agri 38.9% 43.6% 46.3%

Micro-enterprise 4.8% 4.3% 3.5%

Extra 0.2% 0.3% 0.5%

Consumer 0.4% 0.4% 0.3%

Healthcare 0.2% 0.1% 0.1%

Education 0.0% 0.0% 0.0%

Vulnerable 0.1% 0.0% 0.0%

SRG 0.4% 0.7% 0.7%

Table 3.4 suggests that the average loan size has not changed much over that last one year even though the clients are eligible to higher

loan size with each cycle. Exposure to higher loan sizes is extremely limited which is also reflected in low exposure to Micro-enterprise loan product. The average loan outstanding amount with clients fluctuates sharply with seasons due to high exposure in bullet repayment Agri loan product.

Table 3.4: Loan exposure

31 Dec

2012 30 Sep

2013

Average loan outstanding per client (MMK ‘000) 152 185 Average loan disbursed per active client (MMK ‘000) 302 291 Average loan size (MMK ‘000) 183 228 Average number of loans disbursed/ client during the year 1.65 1.28* Note: Nine months period ending 30 Sep 2013

3.2 Client survey

As illustrated in Table 1.4 in Section 1, the client survey covered 3,130 active clients including 2,924 active borrowers across the 12 sample branches. The interactions with the clients can be categorised into four broad categories and the observations of the audit team is presented below.


15

3.21 Reconciling centre records with branch records Reconciliation of the (i) number of members, (ii) number of loans (income generating,

social and consumer loans) with the members,

(iii) value of loan outstanding and (iv) date of disbursements of loans, (v) savings balance (compulsory as well as

voluntary), (vi) interest paid on savings and the (vii) matching of overdue amount as reflected

in the centre records and the branch records was done during the centre visits.

While attendance and head count of number of members and those with (active borrowers) and without loans (dormant members) was done during the centre meeting, for reconciliation of records, the member pass books were collected and 100% check was done with the collection book maintained at the branch. The findings are presented below. Attendance: The overall level of attendance of the clients (including dormant clients) was good at around 82.5% - as shown in Figure 3.1. Not surprisingly the attendance level of dormant clients was low at 23.6% as majority of them had stopped savings. The dormant clients who attended meetings were those who had temporarily not taken their next cycle loan but were continuing to make compulsory and voluntary deposits. 3.22 Awareness level However, the attendance of clients in Shan zone (<70%) was much lower in comparison to that in Dry (~85%) and Delta (>81%). This indicates the difference in the centre strength

and behaviour across regions, with Shan region showing a relatively inferior trend which is evident on other aspects as well (discussed in sub-sections following this). It was noticed that in Shan, unlike in Dry and Delta the sub-group cohesiveness in a centre was missing. Number of PACT loans with clients: The data collected from the visited centres indicate that 92.9% of the active clients were active borrowers and 0.5% of them were waiting for their next loans while 6.6% were dormant clients (having only savings balance with PACT). Majority (65.8%) of borrowers had just one loan while 27.1% had two loans. The overall average number of loans per active borrower was around 1.3 - highest in Dry followed by Shan and Delta Zones. Table 3.5 shows the number of loans with borrowers in the three zones. Table 3.5: No. of PACT loans with borrowers

Zone Active clients with Av. No.

One loan

Two loans

No loans

of loans

Dry 797 495 73 1.34 Shan 317 128 54 1.29 Delta 763 225 96 1.23

Total 2,059 848 223 1.29

Matching of loans and savings records: Reconciliation of client loans cards with branch collection books showed that mismatch has been very low and in almost all cases it was due to un-updated client pass book while the branch records were found correct. Table 3.6 shows the mismatches found in such records.

Table 3.6: % mismatch in client pass book & branch records

Zone Loan O/s

Disb. Date

Comp. Sav.

Vol. Sav

Sav. int.

paid

Dry 0.3 0.0 0.0 0.1 1.0 Shan 0.2 0.0 1.6 0.2 2.2 Delta 0.9 1.2 0.1 0.3 0.0

Total 0.5 0.4 0.3 0.2 0.7

0%

25%

50%

75%

100%

Overall Active clients Dormant clients

Figure 3.1: Attendance

Dry

Delta

Shan


16

Some errors were found in calculation of interest paid on compulsory and voluntary savings – 15% on monthly minimum balance, payable once at the end of financial year. These errors were mainly due to wrongly accounted minimum balance for calculations. For loans with over dues, no mismatch was observed in the loan card and collection book. 3.22 Awareness level Awareness level of the clients on the loan terms and conditions and the use of beneficiary welfare fund was ascertained through separate interviews of randomly selected group members. Overall 45% (1,400 out of 3,130) of the active clients were interviewed separately during the centre meetings and their responses were matched with the centre collection book. The observations are presented in Table 3.7. Table 3.7: Client awareness

Zone % of clients aware about

Loan purpose

Loan tenure

No. of Instalments

repaid

Welfare fund

Dry 98.4 100.0 99.5 99.5 Shan 86.0 94.7 93.0 93.8 Delta 99.7 100.0 100.0 100.0

Total 98.7 99.8 99.6 99.6

It is evident that client awareness was very high on all respects. The awareness level on usage (purpose) of loan seemed high mainly because of the practice of PACT staff of correcting the purpose details in the collection book at the time of loan disbursement or after loan utilisation check if any difference was found. However, the level of awareness of clients in Shan Zone was comparatively less than of the other Zones. As explained above this was due to lower group cohesiveness and also lower attendance during centre meetings. Apart from these, some questions were asked to the group as a whole on other aspects like savings withdrawal policy, loan utilisation checks done the PACT loan officers, number of

loans that a member can have etc. The awareness level on these was also good except the withdrawal policy on compulsory savings. 3.23 Credit discipline The credit discipline at the centre level was evaluated both in terms of the group behaviour in borrowing prudently and also by way of policy adherence by PACT branches to ensure that good credit discipline is maintained. Table 3.8 shows that around 9.8% of the active clients had loans from other sources apart from PACT. This was evident in all zones but the value of other loans in Shan (found up to MMK 2 to 3 million) was much higher than in Shan in comparison to Dry and Delta. In the Nyaung Shwe township of Shan Zone it was observed that a number of PACT clients had borrowed from local agriculture companies that provide credit in kind (seeds and fertilizers) to farmers and moneylenders were quite active as well. In Dry and Delta Zones, clients had mainly borrowed from Myanmar Agriculture Development Bank (MADB). Table 3.8: Number of PACT clients with loans from others sources

Zone % clients with other loans

1 addn. source

2 addn. Source

Dry 11.0 170 0 Shan 9.6 22 26 Delta 8.1 88 0

Total 9.8 280 26

It was also seen that many clients had just one loan from PACT when they were eligible to have more number of loans – clearly indicated that in most cases the groups had good credit discipline. In Dry the current discipline may be due lack of credit options and the high value they assign to the services provided by PACT. It is the opposite in Shan and it can be seen that many clients have borrowed high value loans from two additional sources which was around 5 to 10 times higher than what PACT could offer.


17

The observations on branch adherence of policies particularly on foreclosures and part-prepayments of agriculture loans is shown in Figure 3.2. Since agriculture loans have bullet repayments of principal amount, as per policy, PACT did not allow disbursement of the next agriculture loan on the same date. However, there could be coincidence of a regular loan maturing and the client taking the next regular loan on the date of closure of an agriculture loan. If an agriculture loan is foreclosed or part-prepayment is made it generally gives an indication that the borrower has surplus cash and wants to pay off or reduce the loan burden. Therefore, the borrower opting to take another loan and of a higher value than that of the foreclosed amount on the same date, raises suspicion on ever greening of loans. Also, since Agri loans have bullet repayment, clients may take another loan to make loan repayment on time and to avoid a default. While in Dry Zone only 3 cases (just 0.2% of Dry sample) were observed and in Delta region no such cases were found, in the Shan State a 48 cases (around 10% of the Shan sample) of closure, foreclosures or part-prepayments were observed that were followed by disbursement of a similar or higher value regular loan on the same date. In case of top-up loans and mid-term loans on a few cases of policy deviations were observed in the Delta region (0.6% of the sample). The top-up loans pertains to social loans and consumer loans, but at any point in the time a

client could have at the most two income generating loans and 1 social or consumer loan. If a client has an MSE loan only one additional social/consumer loan can be taken. The MSE loan policy came into effect only in January 2013 and therefore many cases were observed in all zones of clients having both regular and MSE loans. 3.24 Documentation of client identity PACT relies on sub-group members, group leaders and the centre chief for identification of a client. Table 3.9 shows the cases in which loan cards were not found with the members and where proof of identity was not documented. Table 3.9: Issues in documentation of identity (as % of active clients in the sample)

Zone Loan cards not found

Identity proof not taken

Dry 0.0 94.5 Shan 23.2 100.0 Delta 0.3 100.0

Total 3.9 97.3

In Shan State, four centres visited in Nyaung Shwe Township were default centres and none of the borrowers had their loan cards with them. In Delta region only a few cases of missing loan cards was observed but overall the valuation team was able to finds issued loan card with majority of clients. PACT MFP introduced (on a pilot basis) the practice of issuing identity cards which included client photograph, national registration number, and address in some of the urban centres but it was not scaled up. Among the 75 centres visited during the field survey PACT ID cards was found in only two centres. It was however, noted that most of the clients have the national registration numbers which could have been recorded in the loan cards or collection books as a proof of identity.

0.2% 9.6% 0.0%

75%

80%

85%

90%

95%

100%

Dry Shan Delta

Figure 3.2: Foreclosure of agri loans

Next loan given on the same date

Foreclosure policy followed

18

Section 4

Management and Systems 4.1 Management team PACT MFP has a strong senior management and middle management team. The team of senior managers including the COO, Mr Fahmid Bhuiya, Deputy Director, Mr Jason Meikle, Finance Director, Mr Wesley Jordon and General Manager U Maung Maung are highly experienced professionals. The team possess sound international as well local experience. Senior operations team members including the head of three zones possess adequate field experience and expertise. Senior and middle management personnel spend adequate time on field monitoring, review of policies, up-gradation of systems and risk management issues. 4.2 MIS and accounting PACT has a manual cum MS-Excel based MIS and accounting system. Accounting is decentralized and each level is a profit centre. LOs maintain manual centre registers (collection books) and carry them along with target sheets to the field. A centre register is a ledger of all loan accounts of all the clients in a centre. This serves as the primary document for accounts and MIS. Target sheets are prepared from the Excel based system which stores centre wise records of transactions. If the amount collected differs from the amount as per the target sheet, LO prepares a deviation report. All deviation reports are approved by the BM. After collecting the savings and/or loan from the client, the LO transfers the cash to the Cashier, who makes entries in the daily collection register according to the amount of loan and savings collected. The summary of daily collection registers is transferred to the Cash Book which is prepared manually by the Accountant. All field level expenses are made by the branches and vouchers are generated at the branch level. Apart from the collection

registers, each branch maintains comprehensive borrowers wise Excel based reports providing the outstanding balances of loans, date of disbursement and amount disbursed, saving balances and calculates interest. Financial statements (Receipts and Payments, Income Statement, Balance Sheet and Portfolio Report) are prepared by each branch on a monthly basis and are submitted to the Regional Office which is then consolidated at Regional, Zonal and HO level. Financial ratios are calculated at all the levels. It takes about 15 days from the beginning of every month to collate the data at each level and to consolidate it at the HO. Expenses of HO, ZO and RO are allocated to branches every quarter. Depreciation on fixed assets is also computed quarterly. It was observed that the staff makes a good use of MS Excel to generate target, record centre wise balances, calculate interest on savings and for the overdue tracking and aging of PAR. No major lapses were found in the accounts and MIS in HO and branches. However, the current MIS is time consuming, has security issues, does not allow deeper analysis into various financial and operations numbers, does not maintain historical data and is difficult to monitor. Lack of rule enforceability features in Excel sheets leave ample scope for manual errors and manipulations. For instance, in case of client death, the target is altered even before zone approves for loan write-off, which is technically a wrong practice. Recognition of Income and Expenses All incomes are recognized on cash basis and operational expenses are recognized on accrual basis.


19

Depreciation policy Fixed assets’ accounting policies are good. Depreciation is provided on a conservative basis. Most assets which are fully depreciated are still in use. Each branch maintains a fixed asset register and reconciled to the quarterly financial statements. All assets including scrap value assets are also maintained in the asset register. The depreciation is calculated on a quarterly basis using Straight line method. As per policy, depreciation on fixed assets is provided at rates as shown in Table 4.1. Table 4.1: Depreciation % for different assets

Asset classification Depreciation % p.a.

a. Vehicles 25 b. Furniture & fixture 20 c. Computer & Accessories 35 d. Electrical Equipment 35 e. Office equipment 35

Loan Loss Provisioning (LLP) PACT has a good LLP policy in place. Each branch maintains a loan loss reserve at the maximum of either 1% of the gross outstanding portfolio or a percentage based on PAR aging, which means in consolidation it turns out to be higher than 1% of the total portfolio of PACT as well one based on aging of PAR at the PACT level. Saving balances of clients are ignored while computation of loan loss reserve. The LLR based on PAR aging is calculated as shown in Table 4.2: Table 4.2: LLR calculation based on PAR ageing

Period of delinquency/ Default

LLR %

Less than 90 days 25 90 -180 days 50 181 – 270 days 75 More than 271 days 100

As explained in Section-3 Loan loss Reserve appears adequate for Dry and Delta zones, however, for Shan region an additional LLR of 5% is recommended.

Write-off Policy As per policy, all loans where installments of principal and interest remain overdue for 365 days from the date of expiry of the loan tenure are written off. The respective branch has to submit the write off proposal to the regional office. RM has to forward the application to the ZM who is to verify and sanction write off with the approval of the HO. PACT MFP had written off loans only once in January 2013 since inception. Following minor issues were identified 1. The non-refundable membership fee @

MMK500 per member is recorded as a liability rather than as income. This is done as a historical practice when this fee was supposed to be used only for member welfare.

2. In Delta zone, allocation of cost of supervisory level (RO and above) was not done till September 2013 while in other zones it was being done. This distorts the comparison of performance of different zones to some extent.

3. Collections from overdue clients is adjusted first towards principal and not interest. This reduces PAR by that much, however, since interest is accounted on cash basis the overdue interest is not part of the balance sheet and thus there is no impact on the valuation of assets.

4. In Delta zone, all default loans are classified under >365 age category in the MIS. The Loan Loss Reserve though is calculated correctly.

PACT plans to migrate data from Microsoft Excel to a more robust database management system and also put in place a robust client identification technology. It also plans to put in a place a robust data input form for the branches, which would reduce the scope of errors.


20

4.3 Tracking system for overdues PACT has systems and procedures in place for tracking the overdues which involves centre leaders, the BM, the RM, village leaders and religious leaders, if needed. The collection register as well as MS-Excel based MIS statements provide information on the overdues. Past overdues are added to the current demand in the statement. The overdue information is consolidated, which is directly monitored by the RM and the ZM. The BM is required to report overdues on the same day to the RM and also follow up with the delinquent groups/members. For further follow-up the RM visits the groups together with the LOs. The tracking of overdues mechanism seems sufficient, although in the few areas where the group cohesion broke down a more concerted follow-up is needed. Overdue management is less effective for Shan zone as indicated by PAR>0 days of 6.5% as on 30 September 2013. To a certain extent, savings assist the PACT to enforce group guarantees, as well as helping clients in smoothening their cash flows. However, staff is not permitted to adjust clients’ savings with the overdues and audit observations suggest compliance with the policy. 4.4 Supervision and control PACT’s operations team is well organised and well-resourced to effectively supervise the activities of all the branches. The span of control is narrow and there is sufficient hierarchical control through ABM, BM, RM and ZM. Majority of branches are located in the township office where the RM and Internal audit team are placed. All financial transactions of township based branches are monitored by the RM. Supervisors are not given specific targets to visit field but there is a system for preparing formal monitoring schedules. These schedules are prepared by supervisors and are

submitted to their immediate seniors. Any change in monitoring schedule is required to be approved by the supervisors. The RM is required to visit all the branches in the township on a regular basis. At the Branch level, the BM and ABM are responsible for supervising the LOs and ensuring compliance of procedures. During branch visit, supervisors verify sample accounts and verify various operational activities. They prepare a branch visit report and submit it to their supervisors. However, branches do not have a monitoring register and do not get copy of the monitoring reports. PACT MFP’s policies and procedures are adequately documented and updated regularly. The list of important policies and updates is given in Annex 6. The system contains sufficient checks and balances at each stage of the loan approval process. Each loan is appraised by BM, reviewed by RM and sanctioned by the ZM. To minimise operational risk, loan recovery amount and disbursement amounts are not commingled. However at some of the visited branches in the Dry zone, the LOs follow a different practice and use the amount collected in making disbursements. This issue is discussed in detail under ‘Cash Management’ in sub-section 4.6. The programme has loan policies to reduce unstructured loan or saving collections to reduce the risk of misappropriation of funds and has also devised certain policies to avoid ever-greening of overdue loans. These have been discussed earlier. PACT-MFP also has a LO rotation policy according to which a LO is assigned to a different set of centres after every two years. However this policy is not practiced strictly and Loan Officers in many cases continue beyond two years. Rotation of LOs allows cross checks on the practices followed by them and can also bring out a possible policy violation. Prolonged association of a centre with the same LO can also lead to increased key person risk. The policy needs to be


21

implemented better by the supervisors and needs to be reported better by the internal auditors. As mentioned earlier, the accounting is decentralized and each township has a Bank Account. The RM, the Project Accountant and one branch staff are signatories and any two have to sign a cheque. The ZM has been authorized to change signatories of the account, if needed. Each branch has a safe to keep the cash. Two keys are required to open the safe and these are kept with two different staff. The branch can keep a maximum cash balance needed for next four days’ disbursements. The BM/RM monitor cash balance every day. End of day cash reconciliation is verified by the BM/RM and bank reconciliation is done monthly by the branches, ZO and the HO. The staffs carry a lot of cash during disbursements. 4.5 Internal audit PACT has an Internal Audit (IA) division headed by the IA Coordinator who reports to the Chief Operating Officer. The internal audit is thus not independent of the management but is part of it. The IA division is guided by a well-documented IA Charter which details out the scope, audit methodology and the responsibility of the auditors. Auditors are graduates and experienced who are trained in microfinance operations. They undergo an on-the-job training by the senior auditor of a two member teams that conduct audit visits. The Head of IA of Zone provides additional inputs during monthly audit review meetings.

The IA team is decentralized with a strength of 33 members including an IA Coordinator based at the HO and 3 Zonal IA Heads. The remaining 29 are senior or junior auditors positioned in township offices in the three zones. The Delta Zone IA team is short of 5 staff and PACT is in the process of finding appropriate candidates for filling the vacancy. Therefore, in Delta one member team has been conducting IA due to limited staff.

The IA team has an annual audit plan with monthly break-up, and approved by the COO. The audit of branches are done on a quarterly basis and the duration of visits depends on the size of branch ranging from 7 to 12 days. Audit of Zonal Office and HO are beyond the scope of audit at present. The audits do not have the surprise factor due to the visit authorization requirement and the branches know the visit date of the audit team well in advance.

The audit function is process based. The approach of the IA was observed to have a higher emphasis on the documentation and verification of records/registers and less on field observation. The individual branch audit reports are comprehensive which includes the auditor’s observation, determining correct procedure in case of policy violations, recommendations to improve the operations, and resolutions reached between the auditor and BM to address the issues. The BM is expected to rectify the mistakes and submit a compliance report to the RM and ZM within a month. The branches are not graded on the basis of their audit performance. Table 4.3 summarises the main findings of the IA team as observed from their reports.


22

Table 4.3: Key findings of the Internal Audit team

Key findings Risk - as identified by the valuation team)

Incidence (no of cases) Low - <10 Medium - 10-100 High - >100

Two or more clients from same household Over-indebtedness Low

Group leaders take higher amount from clients than what is to be repaid (charge fee).

Risk of increased leader dominance, loan diversion, pooling and delinquencies

Low

Loan diversion – loan shared with other members (group leader in this case)

Risk of over-indebtedness, leader dominance, loan diversion, pooling and delinquencies

Low

Impersonation of a member. Loan disbursement and other transaction made with a different person.

Risk of delinquencies Low

Delay in recording transactions in passbooks, centre collection register, ledger

Increases the risk of making back date entries

Medium

Subsequent loan sanctioned and disbursed before repayment of the previous loan.

Risk of over-indebtedness, ever-greening. Difficult to track because of manual MIS.

Low

Weak credit appraisal for agri and MSE loans – cash flows, harvesting time not accurately computed.

Risk of delinquencies, prepayments, foreclosures

Medium

Loan disbursed amount higher than the loan approved amount

Risk of delinquencies Low

Savings withdrawal without proper authorization and missing client signature. Saving withdrawal not documented properly.

Risk of misappropriation and can also affect portfolio quality

Medium

Inaccurate wealth ranking due to errors in documentation, inaccurate client profile (baseline data)

Weak targeting, lack of homogeneous groups, dominant members

Medium

Errors in interest calculations on saving balances Can impact client relation Medium

Errors in calculating loan collection target Can impact overdue tracking and calculation

Medium

Loan utilization checks not completed Medium

Incomplete loan documentation and/or missing signatures

Medium

All group members not present in the meeting when disbursement is made

Medium

4.6 Cash management

Cash planning and liquidity management is the responsibility of the zonal team and is done on the basis of monthly forecasts sent by the branches through their township offices. Funds are allocated by the ZO either by transferring from its own account or by allocating from neighbouring branch(es)/

township(s) with surplus cash. Funds are physically transferred to respective branches or deposited in the township bank account. In case funds are insufficient, the ZM sends request to HO for fund transfer from other zones.

At branches, the monthly fund requirement plan is prepared by the concerned BM and


23

checked and verified by the respective RM and then forwarded to ZO. Fund plan is a summary of sources and uses of fund with bi-weekly (Quadri-weekly in Shan zone) break up. Branches have limits with respect to cash and the RM monitors compliance with these limits by branches. The limits assigned are different for township based branches and out-post branches and revised from time to time. Overall the branches can keep cash equal to for next 4 days disbursements and expenditure. In most of the branches visited, the cash at branch was within limits. However, since there are no avenues in the country for short term investment of idle funds, the branches tend to have a high liquidity to manage their cash flows. The idle cash and bank balance as on 30 September 2013 was very high at MMK 17.8 billion, which was 20.3% of the total assets (and 112% of total client deposits). For better control of cash at the branch level (& also for accounting purpose) PACT has a policy of providing advance to the LOs equivalent to the value of disbursements planned for the day. This enables to LOs to arrange cash in bundles according to specific disbursement amounts for various clients and saves time during group meeting. The chances of errors of counting cash and adjusting from the repayments from borrowers who repay in currency of various denomination is also avoided. However, it was noticed that in two branches (Taung Dwin Gyi 3 and 4) this policy is not followed. Though the LOs take the full advance, they leave the cash with cashier which is recorded in a cash left register and adjusted when they deposit the collections made during the day. Though comingling of cash increases risk of ever-greening to some small extent, it reduces the amount of cash that needs to be handled by the loan officers. The cash based system of collections and disbursements (because of financial and physical infrastructure limitations in the country) poses the risk of loss of cash as large sums of cash are handled by the loan officers (which can go upto MMK20 million a day

during agricultural season). However, no case of theft or loss of cash has been reported so far. There is no facility for cash-in-transit and cash-in-vault insurance either. 4.7 Human resource management PACT, Myanmar does not have a separate HR department. HR management is divided among the operation, finance and training departments. Most of the crucial decision making functions relating to HR management such as recruitment, transfer, dismissals and appraisals are taken by the operations team. However, PACT has well designed and documented HR systems and processes including a policy for recruitment, induction, remuneration, trainings need assessment and exit surveys. Recruitment is generally initiated through advertisements at township level verbal communication of requirements during centre meetings. Most of the candidates apply through references. However, in the new areas, the management is finding it difficult to identify candidates through referrals. Applicants selected after a written test and interview undergo a 5-day orientation programme before they are offered the job. Going ahead PACT plans to recruit mainly at the LO level and the senior positions would be filled by internal promotions. The management also realizes that capacity building of the staff is one of the key factors for efficient functioning of the project. The quality of staff at branch as well as Zone/HO level is good. The field staffs are reasonably qualified and have the requisite expertise to carry out their roles and responsibilities effectively and efficiently. They are well aware of the systems and processes and are tactful in handling clients. Staff appraisals are conducted annually to gauge skill levels but do not analyze quantitative performance objectives and are used more as a tool to assess staff promotion. PACT does not have any incentive system as


24

the staffs are expected to put in a high level of performance at all times. Staff attrition rate is reasonable at 6.9% during January to September 2013, showing a reduction from 9.6% during previous year. However, the attrition rate is higher in some of townships (like Mawgyun, Nyaungdon) due to competition from other MFIs/NGOs. Although staff exit interviews are conducted, a more proactive approach to determine staff motivation is lacking such as the conducting of regular staff satisfaction surveys or consolidation of the staff evaluation results. PACT need to provide a much greater emphasis on staff satisfaction & therefore retention as after the enactment of the Myanmar Microfinance Law in November 2011 many large MFIs have become interested in starting operations in the country and in near future they could be the potential recruiters of experienced personnel of PACT.


25

4.8 Observations and Recommendation on some of MFP’s loan processes and policies

Process Policy Observations Recommendations

Targeting for new villages

1. The target village needs to be accessible by road or river.

2. The closer the market place the better the viability of the financed micro enterprise

3. Having village clusters provides greater efficiency 4. Expansion into new villages only makes sense if

there are enough potential clients (15 -25 clients per village) (means population density)

a. Some project villages are far from the market place (>70kms).

b. Significant number of villages in Delta zone have limited accessibility in rainy season.

PACT may consider a zone specific targeting policy

Client recruitment and group formation in new villages

In new villages Step-1: sensitization meeting with the village authority, village elders and village representatives Step-2: Project presentation meeting with the entire community. (conduct PRA and wealth rating) Step-3: group formation process (includes baseline data collection, individual interviews and collection of loan applications) All three activities are scheduled to take place on different days; have to be completed within 7 days.

No deviation was observed in process. Branches keep data related to the group formation process. However, during staff interactions, some of branch staff stated that the actual time exceeds seven days in some cases due to distance and limited awareness of members in new villages.

No

Group size i. The ideal group size is five. If group size goes down to less than four, these groups have to be reorganized either by merging them with another group or by identifying new members. If the required number of new members cannot be identified within six months, Centre Committee can decide to merge the group with another group with the consent of the LO and the concerned groups.

Some groups with less than three members were observed. The group as well as Centre Committee are trying to identify new members.

If group/ centre committee is unable to identify new member(s), groups need to be merged with the consent of the members.

If existing groups already have 5 members, PACT-MFP needs to modify the policy and allow group with 6 or 7 members so that members of smaller groups can join existing groups.


26


Member/ Group eligibility

1 Member must be from low income families/poor 2 Members must be:

a. Willing to take leadership within the group b. Willing to stand for each other c. Willing to follow group rules d. Willing to undertake credit and saving activities e. Willing to undertake income-generating

activities

a. Most of the members are from low income categories with similar economic status. However, in Shan homogeneity was less than in Dry and Delta zone

b. The assessment team observed that few members (incl. few leaders) are of higher economic status than others.

c. There is system of wealth ranking to rule out the non-poor, but this is not strictly followed as has been identified by several internal audit reports too.

Supervisors need to pay more attention to PRA and wealth assessment tool. Action should be taken on internal audit observations.

Center size The Centre should have 3-12 groups (15-60 members)

Most of the branches are within the size. Some centres with higher number of members were observed. For instance following centres have more than 60 clients (or 12 groups). a. Kyee Aung 1, Taung Dwin Gyi 3 branch b. HKyaunt Kwin 1, Taung Dwin Gyi 4 branch c. Phauk Seik Kone 1, Taung Dwin Gyi 4 branch d. Phauk Seik Kone 2, Taung Dwin Gyi 4 e. Myin Sa Kaw-1, Pakokku 2 members f. War Taw, Nyaungdon-1 branch It was observed that Los find it difficult to manage the centre and identification of clients is also difficult.

Bigger centres should be split. Efforts to split a centre should start before it reaches 60 as even a size of 60 is difficult to manage. The limit should be strictly enforced.

Centre meeting schedules

To allow surprise checks by supervisors and auditors, updated Centre meeting schedule should be available at branches, township and zonal offices.

No formal centre wise schedules available at branches in Delta and Shan while in some branches in Dry these were not updated.

Branch staff need to prepare a centre meeting schedules and share with the RM and ZM. The meeting schedule should be made part of the new MIS software.


27


Rotation of loan officers within one branch

Centres assigned to a LO need to be changed every two years. This is a control measure and to facilitate cross verification.

In some of the visited branches this policy was not strictly followed.

BM, RM and ZM need to ensure rotation of centres with the LOs within 2 years.

Prepayment and Foreclosure

1 Part Prepayments are not allowed 2 Foreclosure is allowed, but the subsequent loan

should be given after the end of original loan tenure.

3 A prior notice for foreclosure of loans needs to be given by the client

In Shan: Part prepayments were accepted. No prior notice was given for making part prepayments or foreclosure.

In Delta & Dry: Subsequent loans were given before the end of the original loan tenure in case of foreclosure of General Loans.

To avoid ever greening and over indebtedness, PACT should include previous loan closure date as part of credit appraisal. The internal auditor and supervisors should then verify the implementation of such policy.

Withdrawal of savings

1 Members can withdraw both the savings (compulsory and voluntary) with prior notice in the previous meeting.

2 Members need to maintain 7% of the loan amount in compulsory savings balance. In case of drop-out they can withdraw 100% of their savings balance.

3 In case of voluntary saving, member can withdraw 100% of saving balance any time with prior notice.

a. A vast majority of members lack clarity on the policy of withdrawal of compulsory savings balance. Many believe they can withdraw only 50%.

LOs and BM need to orient the members on policy for the withdrawal of savings and its procedure.

Field checks

The ABM, BM, RM (separate), and internal auditor have to visit at least 25 active borrowers – based on loan disbursement list

Internal auditor visits at atleast 6 centres during the audit. S/he might cover more than 25 clients. There is no target for the monitoring staff (ABM/BM/RM). But, they visit the centres regularly, however, there is no record for how many clients have been visited.

Each branch should have monitoring visit register or reports.

28

Section 5

Valuation Team Opinion on Key Risks and Recommendations The key risks of PACT microfinance programme have been divided in five categories– (1)High (2) Medium-High (3) Medium (4) Low- Medium (5) Low. Table 5.1 below presents M-CRIL’s opinion on the risks faced and the recommendations for mitigating these risks.

Table 5.1: Key risks of PACT microfinance programme and possible solutions

Risk Description Risk category Remarks/Incidence Recommendations

Risk of ever-greening of loans in disbursing fresh loans on the date of foreclose of regular repayment loans and closure/foreclosure of bullet payment loans.

As per MFP’s policy, fresh loan cannot be given on the date of foreclosure. However, it was observed that in 43 cases (1.4% of clients), fresh loans have been given on the date of foreclosure of Regular loans and Agri loans. There is no policy on disbursing a fresh Regular loan in case of closure of Bullet repayment Agri loan 51 cases (1.6% of clients) were observed.

Low-Medium The risk is low-medium since Regular loans were foreclosed towards the end of loan term (2 to 7 instalments were remaining). In case of fresh loan after closure of an Agri loan, regular repayments were observed from the fresh loan disbursed. Higher incidence in Shan zone.

Policy should not allow disbursement of another any loan on the date of closure of a bullet repayment loan, foreclosure of any loan with more than a critical number of instalments (say >8 in case of fortnightly repayment and >4 in case of monthly repayment). The MIS should be upgraded and risk reports which can identify such borrowing pattern should be identified for the use of supervisors and internal auditors.

Human Resources – Risk of higher staff attrition

More than 100 institutions have been given microfinance licences under the new legislation. Some large microfinance institutions operating in India and Bangladesh have started or are planning to start microfinance operations in Myanmar. The attrition rate for 2013 is at reasonable 7% but there is a higher risk of increase in staff attrition next year.

High Staff attrition rate for Jan-Sep 2013 was at 6.9% an improvement from 9.6% during previous year.

Continuous monitoring of attrition rate, review of various HR systems such as performance appraisal, transfer and promotion policies, Staff grievance redressal systems remuneration policies. Exit interviews and satisfaction surveys can reveal strategies to minimise this risk.


29


Multiple lending One of key advantage to MFP’s programme is a strong client relationship which is helped by absence of other microfinance service provides. With the advent of more firms there will be an increased risk of multiple lending and subsequently over-indebtedness. This may affect MFP’s portfolio quality adversely.

Low-Medium MFP’s presence is in remote locations and has established strong relation with the clients over last many years. The impact of other MFIs is likely to take more than a year.

Understanding with other major MFIs, industry association to share data at the operations level. Steps for the formation of credit bureau and sharing of data with the bureau.

Concentration risk Though the programme has operations in a wide geography, it has a high concentration in agriculture (46.3%) and does not monitor crop-wise concentration. It was observed in the visited branches that there is a likelihood of concentration in some cash crops with specific risk factors which need to be monitored and managed.

Medium Development of MIS and collection of data from the clients. Data should be revised based on Loan Utilisation Checks.

Dominant leaders – risk of malpractices such as loan diversion, loan pooling, charging fee/commission from members.

In Dry and Shan, the meetings are attended only by the Group leaders except when fresh loan has to be disbursed. Group leaders do not change that often. In Shan zone there is a higher proportion of male members and the risk of dominance is higher.

Medium Policies to require all member meetings once in a period of 2 to 3 months even in cases where there is no disbursement. Maximum number of terms for leaders should be fixed.

Risk of the contagion effect of defaults on members in groups in Shan.

Group cohesion in Shan is weak Dominance of centre leaders is also relatively higher. Lack of homogeneity among the members was observed in some of the visited centres. These indicators suggest a risk of contagion effect of overdues wherein members show negative behavior when they see defaults made by other members in the group. This is also done by members to avoid the group guarantee.

Low-Medium Group composition may need revision if required by the members and to avoid members of very different income levels. Refresher trainings may be needed in some groups.


30


Risk of higher defaults among bigger sized loans.

MFP’s current MIS and credit risk management system is not geared to handle higher exposure on clients (>MMK1,000,000). The MIS does not maintain the credit history of clients. Borrowing pattern, amount of indebtedness and income/cash flow profile of clients is difficult to analyse.

Low-Medium The risk is low in Dry and Delta zone as member are show conservative credit behaviour (as explained earlier) but is medium in Shan where member take higher risk.

The newly developed MIS should provide credit risk reports based on client profile and borrowing pattern. Auditors and supervisors should give higher priority to clients with higher loan outstanding / multiple loans.

Risk of loss of cash due to theft.

Due to weak banking infrastructure and seasonal nature of disbursement and bullet collections in agriculture loan; branches keep a high cash balance and staff carries a high cash balance with them to and from the field. There is a risk of loss of cash and risk of personal injury to the staff due to theft.

Low-Medium Feedback from staff and management suggest a good law and order situation in all the regions.

Maximum cash limit policy should be strictly enforced. Excess cash should be banked more often. More diverse lending may help in reducing seasonal liquidity excesses.

Risk of misappropriation due to unstructured payments from clients

Part-prepayments, foreclosures and voluntary saving deposits and withdrawal pose a risk of unplanned and ad-hoc payments by clients. Manual receipts/passbooks and weak education/financial literacy among clients pose risk of misappropriation by staff. The policy does not allow part-prepayments in Dry and Delta region but it is permitted in Shan and part prepayments are also made. Foreclosure should be done with prior notice in the previous meeting and in the presence of BM, in Shan this is however, not practised.

Medium-High Awareness level among the clients in Dry and Delta zones is higher. Voluntary savings is not deposited in many centres in Shan zone and in Dry zone, the clients deposit a fixed amount of voluntary savings in each meeting which seems to be an informal arrangement made by the supervisors in Dry zone. These have reduced the risk in this category to some extent.

Unstructured payments should be permitted only with prior notice and if that exceeds a limit, presence of BM/ABM should be required (policy is followed in DRY and Delta but not in Shan). Narrower band for accepting variable voluntary savings can help reduce this risk in case of savings collection.

Risk of increased claims under the social welfare fund scheme

There is a risk of higher outflows in future due to increasing age of clients and other eventualities.

Low The fund has 3 income streams and the fund balance has been continuously increasing over the last 3 years. The current balance is high, around MMK5 billion (US$5 million).

Fund balances should be regularly monitored at branch, regional and zonal level to gain experience from their patterns and risk of increased outflow.

31

ANNEXES

32

Annex 1

Organogram of PACT

Training, MIS/IT, Internal Audit,

Program and Finance/Admin

UNDP

PACTExecuting & Implementing Agency

COO + 3 staff

SSID/Ministry of CooperativeCounterpart Department

Internal AuditDivision

Central Office, Yangon5 units, 23 staff including GM and Heads of Training,

MIS/IT, Internal Audit, Program and Finance/Admin

Delta31 staff

Dry 35 staff

Shan20 staff

Branches under each TownshipHeaded by a BM & supported by ABM (in larger branches), 10 LOs, 1 Accountant,

1 MIS Officer, 1 Cashie, 1 Helper and Boat Driver (as per requirement)Handling around >3,000 clients each (splits at 4,000 to 5,000)

Current operations in 109 branches: 46 in Dry, 41 in Delta & 22 in Shan.Average number of loan officers per branch was 8.8 as on 30 September 2013: 9.6 in Dry, 8.8 in Delta and 7.4 in ShanIn addition to the LOs the branches have around 5-7 additional staff depending on its size of operations.

Training, MIS, and Finance/Admin, Handling around >30,000 clients each (splits at 40,000 to 50,000)

Current operations in 25 townships: 11 in Dry, 7 each Delta & Shan.

On an average the RO has around five staff

33

Annex 2

Summary and Comparison of Salient Features of PACT loan products

Product Type

Region /Zone

General Loan (GL)

Extra loan MSE loan Agriculture Loan

Education loan

Health loan

Consumer Loan

Vulnerable loan

Wholesale Loan For special cases

Loan size MMK'000

Delta 100-300 based on loan cycle

50 Up to 500 300-1,500 100-400; Summer paddy: 150-450

Primary: 10 Middle: 25 Higher: 50

50 100 50 1,500-3,500 per group (based on loan cycle)

Dry Short-term loan: 500 Toddy palm/ tamarind /pottery business: 150

Shan Short-term festival loan: 500

Loan Tenure (Months)

Delta 12 12 7 12 Depending on the crop & harvesting pattern

6 6 12 12 12

Dry Short-term loan: depends upon festival duration Toddy palm: 6; Tamarind: 5

Shan Depends upon festival duration

Grace Period (GP) (No. of Installments)

Delta 1 1 4 1 Up to loan term

1 5+5 1 NA NA

Dry Short term: up to last installment Toddy palm / Tamarind/Pottery: 2

Shan Up to loan term 2+2

Rate of interest per annum

Delta/ Dry/ Shan

30% Declining

30% Declining

30% Declining

30% Declining

30% Declining

24% Declining

24% Declining

30% Declining

30% Declining

30% Declining

BWF (on loan amount)

Delta/ Dry/ Shan

1% 1% 1% 1% 1% Nil Nil

1% Nil 1%

34

Product Type

Region /Zone

General Loan (GL)

Extra loan MSE loan Agriculture Loan

Education loan

Health loan

Consumer Loan

Vulnerable loan

Wholesale Loan For special cases

Repayment term

Delta & Dry

25 Bi-weeks (P+I)

25 Bi-weeks (P+I)

14 Bi-weekly. I: 1-4 bi-weeks (GP) P+I: 5-14 Bi-weeks

25 Bi-weekly (P+I)

I: Up to loan term. P: In last installment

13 Bi-weeks (P+I)

12 Bi-weeks. I: Bi-weekly P: 50% of capital on 6th & 12th instl. each

25 Bi-weeks (P+I)

Flexible. I: Bi-weekly P: 50% of capital within 6 month

25 Bi-weeks. I: Biweekly P: As per the group

Short term: I: Up to loan term. P: In last installment Toddy palm/ Tamarind /Pottery: I: 1-2 bi-weeks (GP) P+I: 3-14 Bi-weeks

Shan 13 Quadri-weekly (P+I)

13 Quadri-weekly (P+I)

I: Up to loan term. P: In last installment



6 Quadri-weekly. I: Quadri-weekly P: 50% of capital on 3rd & 6th install. Each

13 Quadri-weekly(P+I)

Flexible. I: Quadri-weekly P: 50% of capital within 6 month

13 Quadri-weekly. I: Quadri-weekly. P: As per the group

Others Delta/ Dry/ Shan

After 6 months of 1st GL

2nd cycle & above borrowers eligible

2nd cycle & above borrowers eligible

3rd cycle & above borrowers eligible

Group is not required

% of portfolio 52.4% 0.5% 3.5% 42.5% 0.02% 0.1% 0.01% 0.7% Note: a. PACT MFP has stopped collecting processing fee from September 2012 to comply with the Myanmar Microfinance Law b. Part Prepayment is not allowed except in Shan c. Foreclosure allowed, but subsequent loan will be disbursed after the loan term in case of Agri loans. Regular loan disbursement is permitted

35

Annex 3

Financial Statements of PACT Myanmar MFP

Balance Sheet as on (Amount MMK 000)

31-Dec-10 31-Dec-11 31-Dec-12 30-Sep-13

ASSETS Current assets Cash on hand 936,713 1,491,190 1,662,987 2,231,168 Cash at bank 5,111,050 12,390,518 15,758,032 15,531,270 Advance payment 76,412 170,866 119,911 1,227,671 Stock 9,623 13,885 13,877 23,332 Loan portfolio

Current loans 35,287,655 43,005,367 55,346,274 68,319,578 Overdue loans 242,276 854,658 1,234,922 1,248,079

On balance sheet portfolio 35,529,931 43,860,025 56,581,195 69,567,657 (Loan loss reserve) (573,138) (1,067,238) (1,501,490) (1,645,559)

Net loans outstanding 34,956,793 42,792,787 55,079,705 67,922,098 Total current assets 41,090,590 56,859,246 72,634,512 86,935,540

Long term assets Net tangible assets 297,924 333,172 348,129 368,190

Total long term assets 297,924 333,172 348,129 368,190

Total assets 41,388,515 57,192,418 72,982,641 87,303,730

Liabilities and Net worth Current liabilities Compulsory saving 4,443,078 7,998,715 10,985,399 13,165,101 Voluntary saving 333,240 1,184,932 2,099,161 2,712,391 Interest payables on savings 598,212 1,741 1,741 18,939 Accrued expenses 4,689 7,596 3,985 13,640 Provision for BWF 1,226,804 1,995,433 3,324,874 4,965,259 Loan fund transfer - - - 1,124,178 Other liabilities 18,286 58,287 55,962 80,994

Total current liabilities 6,624,308 11,246,705 16,471,122 22,080,501

Non-current Liabilities Membership fees 205,932 223,322 259,761 273,665 Group fund 243,128 351,317 473,191 - General reserve fund 4,179 4,179 4,179 4,179 Emergency fund 129,105 129,105 129,105 129,105 Staff welfare fund 60,073 87,688 - -

Total non-current Liabilities 642,416 795,610 866,235 406,948

Total liabilities 7,266,725 12,042,315 17,337,357 22,487,449

Net worth Loan fund capital 13,012,622 16,006,886 17,692,054 21,075,436 Donated equity for operating exp. 889,411 1,054,344 1,258,911 1,605,747 Donated equity for Fixed assets 99,661 131,005 155,285 168,716 Retained net surplus/(deficit) 20,120,096 27,957,868 36,539,034 41,966,382 Total net worth 34,121,790 45,150,103 55,645,284 64,816,281

Total liabilities and net worth 41,388,515 57,192,418 72,982,641 87,303,730

36

Adjusted (with additional loan loss provision) Balance Sheet as on (Amount MMK 000)

31-Dec-10 31-Dec-11 31-Dec-12 30-Sep-13

ASSETS Current assets Cash on hand 936,713 1,491,190 1,662,987 2,231,168 Cash at bank 5,111,050 12,390,518 15,758,032 15,531,270 Advance payment 76,412 170,866 119,911 1,227,671 Stock 9,623 13,885 13,877 23,332 Loan portfolio

Current loans 35,287,655 43,005,367 55,346,274 68,319,578 Overdue loans 242,276 854,658 1,234,922 1,248,079

On balance sheet portfolio 35,529,931 43,860,025 56,581,195 69,567,657 (LLR – as per Balance Sheet) (573,138) (1,067,238) (1,501,490) (1,645,559) (Additional LLR for Shan region) (582,228)

Net loans outstanding 34,956,793 42,792,787 55,079,705 67,339,870 Total current assets 41,090,590 56,859,246 72,634,512 86,353,312

Long term assets Net tangible assets 297,924 333,172 348,129 368,190

Total long term assets 297,924 333,172 348,129 368,190

Total assets 41,388,515 57,192,418 72,982,641 86,721,502

Liabilities and Net worth Current liabilities Compulsory saving 4,443,078 7,998,715 10,985,399 13,165,101 Voluntary saving 333,240 1,184,932 2,099,161 2,712,391 Interest payables on savings 598,212 1,741 1,741 18,939 Accrued expenses 4,689 7,596 3,985 13,640 Provision for BWF 1,226,804 1,995,433 3,324,874 4,965,259 Loan fund transfer - - - 1,124,178 Other liabilities 18,286 58,287 55,962 80,994

Total current liabilities 6,624,308 11,246,705 16,471,122 22,080,501

Non-current Liabilities Membership fees 205,932 223,322 259,761 273,665 Group fund 243,128 351,317 473,191 - General reserve fund 4,179 4,179 4,179 4,179 Emergency fund 129,105 129,105 129,105 129,105 Staff welfare fund 60,073 87,688 - -

Total non-current Liabilities 642,416 795,610 866,235 406,948

Total liabilities 7,266,725 12,042,315 17,337,357 22,487,449

Net worth Loan fund capital 13,012,622 16,006,886 17,692,054 21,075,436 Donated equity for operating exp. 889,411 1,054,344 1,258,911 1,605,747 Donated equity for Fixed assets 99,661 131,005 155,285 168,716 Retained net surplus/(deficit) 20,120,096 27,957,868 36,539,034 41,384,154 Total net worth 34,121,790 45,150,103 55,645,284 64,234,053

Total liabilities and net worth 41,388,515 57,192,418 72,982,641 86,721,502

37

Income Statement for the period (Amount MMK ’000)

1-Jan-10 to 31-Dec-10

1-Jan-11 to 31-Dec-11

1-Jan-12 to 31-Dec-12

1-Jan-13 to 30-Sep-13

Income

Interest income on loans 11,013,315 13,660,474 15,808,122 13,210,040

Service fee 1,087,803 1,095,753 758,183 -

Pass books and other documentary fees 14,480 14,228 8,667 725

Other income 21,027 3,199 6,401 3,735

Total income 12,136,625 14,773,654 16,581,372 13,214,501

Financial costs

Interest on savings 789,984 1,269,726 1,637,587 1,494,920

Interest on others (incl. borrowings) 237,575 328,846 443,502 457,176

Bank Charges 16,983 17,853 20,014 25,039

Gross financial margin 11,092,082 13,157,228 14,480,268 11,237,367

Provision for loan losses 238,161 494,100 434,253 263,153

Net financial margin 10,853,922 12,663,128 14,046,015 10,974,214

Operating expenses

Salaries and benefits 2,800,894 3,297,085 3,758,559 4,047,180

Administrative expenses 694,487 947,224 1,015,996 980,749

Travel & accommodation 382,761 440,325 523,652 407,035

Depreciation 125,075 151,370 160,442 116,207

Other expenses - - 395 -

Total operating expenses 4,003,217 4,836,003 5,459,044 5,551,170

- - - -

Net surplus/deficit 6,850,705 7,827,125 8,586,971 5,423,044

38

Schedules to the Balance Sheet as on 30 September 2013 (Amount MMK ’000)

Loan portfolio

Principal amount outstanding Dry 32,961,196 Delta 24,471,010 Shan 10,887,372

Subtotal 68,319,578 Loans with arrears Dry 208,534 Delta 282,364 Shan 757,180

Subtotal 1,248,079 Gross portfolio 69,567,657 LLR Dry 473,950 Delta 374,346 Shan 797,263 Additional LLR for Shan 582,228

Subtotal 2,227,786

Net portfolio 67,339,870

Cash in Hand

Dry 1,684,742 Delta 374,530 Shan 170,741 Yangon 1,155

Subtotal 2,231,168 Cash at Bank Dry 7,143,177 Delta 4,643,161 Shan 3,714,483 Yangon 30,450

Subtotal 15,531,270 Cash in hand & bank Dry 8,827,919 Delta 5,017,690 Shan 3,885,225 Yangon 31,605

Total cash in hand & bank 17,762,439

39

Fixed asset and equipment

Dry Furniture 59,147 Vehicle 157,686 Computer and accessories 117,143 Electrical Equipment 34,586 Other Office equipment 83,764

Total cost of property and equipment 452,326 LESS: Accumulated depreciation (320,143)

Net property & equipment-Dry 132,183 Delta Furniture 51,783 Vehicle 147,632 Computer and accessories 85,973 Electrical Equipment 24,333 Other Office equipment 89,487


Net property & equipment-Delta 121,841 Shan Furniture 60,798 Vehicle 54,580 Computer and accessories 61,316 Electrical Equipment 14,836 Other Office equipment 59,608


Net property & equipment-Shan 92,126 Yangon Furniture 4,923 Vehicle 15,088 Computer and accessories 7,331 Electrical Equipment 36 Other Office equipment 7,147


Net property & equipment-HO 22,040

Overall net property & equipment 368,190

40

Other Assets

Dry Advance payment 53,423 Other receivable 2,035 Stock -

Sub total 55,458 Delta Advance payment 27,344 Other receivable - Stock 22,353

Sub total 49,697 Shan Advance payment 18,120 Other receivable 1,124,202 Stock 979

Sub total 1,143,301 Yangon Advance payment 2,448 Other receivable 100 Stock -

Sub total 2,548

Total other assets 1,251,003

Client deposits

Compulsory saving Dry 6,044,276 Delta 5,014,433 Shan 2,106,391

Subtotal 13,165,101 Voluntary saving

Dry 1,288,637 Delta 906,699 Shan 517,054

Subtotal 2,712,391

Total client deposits 15,877,491

41

Other liabilities

Dry Payable interest on Client Deposits - Other payable 21,136 Accrued expenses 1,911 Fund transfer to other zones 1,119,940 Beneficiary welfare fund 2,718,533 Withholding Tax on Staff Salary 240 Share part and membership fees 58,684 General reserve fund 4,179 Emergency fund 129,105

Sub total 4,053,726 Delta Payable interest on Client Deposits 18,939 Other payable - Accrued expenses 724 Fund transfer to other zones (2,001) Beneficiary welfare fund 1,637,469 Withholding Tax on Staff Salary 3,584 Share part and membership fees 174,637 General reserve fund

Emergency fund

Sub total 1,833,351 Shan Other payable 3 Accrued expenses 11,005 Fund transfer to other zones 4,851 Beneficiary welfare fund 609,256 Withholding Tax on Staff Salary 1,227 Share part and membership fees 40,345 General reserve fund

Emergency fund

Sub total 666,687 Yangon Other payable 40,337 Accrued expenses

Fund transfer to other zones 15,857 Beneficiary welfare fund

Sub total 56,193

Total other liabilities 6,609,958

42

Annex 4

Checklist Branch Visit Checklist for Verifying the MIS and Accounting at the Branch Office 1. Whether the number of centres/groups and number of clients as per the MIS reports match with

the meeting schedule and number of collection books (centre wise), if not record the mismatch number.

2. Please check if there are any part-payments or part-prepayments. As per the policy it is not allowed. Please note the cases, if observed.

3. Whether accounting of foreclosures and interest on foreclosed loans done correctly (verify if these are adjusted with the overdues).

4. Check if the next loan after foreclosure is given as per the policy which is it should be given after the end of the loan tenure of the first loan.

5. Check if the Top-up loan/Mid-term loan is given as per the policy. First loan should be GL. First Agri loan should be given after at least 6 months. Maximum two Income generating and one social loan can be outstanding at any time. In case of MSE only one social loan can be there.

6. Whether the accounting of arrears done correctly particularly with respect to the 1) number of

installments overdue, 2) clients with overdue 3) amount of overdue. Check the delinquency and default excel file for the branch for its accuracy. Verify the amount with the similar file at the township and zonal level.

7. Check cases of write-off and rescheduled loans – whether done as per the policy (write-off only after 3 years and with approval of the Head Office, rescheduling with BM’s approval). Match write-off balance at the branch with HO records.

8. Check if Aging of PAR is done correctly

9. Loan loss reserve maintained as per the policy and check the calculation

10. Whether loan has been given to clients with history of arrears? 11. Check the cash collection and accounting process.

12. Check the cash management including maintenance of cash at the branch for September and

October (up to next 4 days disbursement), transfer of cash etc.

13. Match cash and bank balance both physical as well accounting balance at the branch with HO reports.

14. Cross-verification with other accounting records like cash-book, receipts, vouchers and reconciliation of these with loan ledger.

15. Verify the bank and cash balance as in the funds' requirement sheet with that in the cash book

43

16. Match a sample (at least 50%) of fixed assets at branch with HO assets/inventory list

17. Check the depreciation computation - and provided quarterly. Also check whether assets and expenses are recognised as per the policy (usage of more than 1 year – fixed assets).

18. Check if the allocated cost from township has been included. 19. Check savings balance and reconcile it with HO records.

20. Check if the interest on savings is calculated correctly and as per the policy (monthly minimum

balance and accrued every month). 21. Check if the withdrawal of savings is as per the policy (apply one meeting in advance in writing

and up to 75% in case of compulsory savings). 22. Check PACT contribution to client welfare fund – 1% of the gross income of the branch.

23. Check claim settlement under the social welfare scheme. Check if receipts are issued. Look for

the cases of fake claims. Control Systems 1. Is branch internal audit report available? And check and make summary observations and follow

up action? Please note the critical observation in the audit report on which no action has been taken.

2. Verify the number of visits by supervisors and observations made by them.

3. Check if the meeting schedule at the branch is correct and updated.

4. Whether policy relating to the disbursement of loan has been followed. (at meeting place, disbursement amount is not adjusted with repayments).

5. Check clients with multiple loans. Note number of clients with 2 or more loans.

6. Find and note the experience levels of staff. Identify the problem of many new staff members.

7. Look if all these registers are maintained. a. Cash Book b. Deviation reports c. General Ledger d. Journal e. Fixed assets register f. Stationary and fuel consumption registers. g. Centre wise - collection book h. Claims under client welfare fund i. Loan disbursement register

44

Annex 5

Checklist of questions for Centre Visit At Branch – before Center visit

a. Obtain loan application and centre register for the centres being visited. b. Analyse loan application and credit appraisal reports of members in the group - whether the

credit history was looked into prior to giving individual loans, quality of cash flow and debt assessment, guarantor in case of MSE loans.

At the Centre

a. Identify members at the centre meetings with that in the MIS. Is the number of members in the group same as that in the branch records? Visit a few absent members from each centre.

b. Visit 4 absent clients to confirm their identity and check for fake loans or other problems. c. Look for presence of agents in the area/village. d. Please check if there are any part prepayments. As per the policy it is not allowed. Please note

the cases, if observed. e. Was there any claim in the center? If yes, how many days it took to settle the claim? Was

settlement receipt given? Check if the amount given was correct. f. Use Excel format to take data from the centre.

Center visit Questionnaire

Checking Qs - Yes & No 1. Is the member present during the center meeting? 2. Number of IG loans outstanding with the member 3. Number of social loans outstanding with the member 4. Is loan outstanding as per centre level record (passbook or the register) as on 30 September

2013 same as that in the records at the branch office 5. Is the date of disbursement in Centre level records same as that in the records at the branch 6. Is the compulsory savings as per the passbook same as branch level record 7. Is the voluntary savings as per the passbook same as branch level record 8. Does the interest paid on savings as per the policy 9. Does the overdue amount as per the centre level record match with the Branch records

Awareness Qs - Yes, No & partial 10. Was the loan used for same purpose as mentioned in the records? 11. Is client aware of the duration of the loan? 12. Is the client aware of number of installments repaid by her? 13. Is the client aware about the client welfare fund contribution and benefits

Subsequent and other loan Qs - Yes & No 14. Was the next loan not given on the day of closure, foreclosure, part-payment of agri loans 15. Was the next loan after foreclosure given as per the policy (or if there was no foreclosure)? 16. Was the mid-term loan (top up loan) given as per policy? 17. Does the client have loans from any other source apart from PACT? 18. If yes, from how many sources?

Identity and documentation Qs - Yes and No 19. Has Loan Card been issued to the client? 20. Has proof of identify been taken?