Understanding Microfinance Performance of Rural Banks through the MABS EAGLE Standard and Rating System

Presentation Outline I.Background on the EAGLE Rating System II.The EAGLE Rating Process III.The EAGLE Components IV.The EAGLE Grades V.Performance

Background The EAGLE Rating System assesses theThe EAGLE Rating System assesses the performance of the micro-enterprise finance performance of the micro-enterprise finance portfolio; portfolio; A management tool for rural banks forA management tool for rural banks for monitoring and evaluating factors affecting monitoring and evaluating factors affecting its microfinance operations. its microfinance operations.

EAGLE Rating Process 5. Conduct EAGLE Validation 4. Compute Initial EAGLE rating 6. Compute Final EAGLE Rating 2. Satisfy Microfinance-specific Minimum Criteria 3. Submit Various Bank Reports to MABS for Computation of EAGLE Rating 1. Satisfy Bank-Wide Minimum Criteria Bank

The EAGLE Rating Process Step 1. Satisfy Bank-wide Criteria 1. BSP CAMELS rating  3 & above for the past 2 years 2. Overall past-due ratio  less than 15% for the past year 3. Capital adequacy  At least 12%

The EAGLE Rating Process Step 2. Satisfy MF-Specific Criteria 1. Recipient of MABS Compliance Certification 2. Experience in microfinance operations  at least one (1) year 3. Number of active microfinance borrowers New Banks (4 years or less): At least 1,000 Young Banks (over 4 years to 8 years): At least 1,000 Mature Banks (over 8 years): At least 2,000

The EAGLE Rating Process 5.With MIS capability to produce PAR reports with portfolio ageing 6.Has been reporting to MABS for at least one year 7.Has Operations Manual Step 2. Satisfy MF-Specific Criteria (contd.) 4. Dedicated and trained loan officers for microenterprise finance activities  3 (full-time)

The EAGLE Rating Process a.MABS Performance Monitoring System (MPMS) reports b.Other bank reports, such as: CSOC CSIE Schedule of Microfinance Loans CSIE on Microfinance Program Schedule of Deposit Liabilities, By Size of Accounts Step 3. Submit various required reports to MABS

EAGLE Computation and Validation MABS Performance Monitoring System (MPMS) reports Loan Portfolio Balance Number of active borrowers outstanding Number of microfinance field staff Total financial expenses Portfolio at risk more than 30 days Portfolio at risk more than 7 days Total financial income Total direct operating expenses Step 3. Submit various required reports to MABS INFORMATION REQUIRED FROM BANKS DRAWN FROM THE MPMS:

EAGLE Computation and Validation CSOC /BS Step 3. Submit various required reports to MABS

EAGLE Computation and Validation CSIE/ IS Step 3. Submit various required reports to MABS

EAGLE Computation and Validation Sched of MF Loans Outstanding

EAGLE Computation and Validation RB Form 3A.1

EAGLE Computation and Validation Schedule 5, RB Form 2A

E E – Efficiency – 30% A A – Asset quality – 30% G G – Growth – 10% L L – Liability structure – 10% E E – Earnings – 20% The EAGLE Components

Cost Efficiency (10%) -Highlights personnel and administrative expenses relative to the loan portfolio Loan Officer Productivity* (20%) - -Measures the average number of borrowers managed by each account officer. Breakdown into: - -Individual loan minimum of 150 borrowers = 10 % - -Group Loan minimum of 300 borrowers = 10 % The EAGLE Components Efficiency (30%)

The EAGLE Components Asset Quality (30%) PAR > 7 days (10%) and PAR > 30 days (10%) PAR > 30 days (10%) -Show the degree of risk of the total microfinance portfolio Loan Loss Reserve Ratio (5%) -Indicates the degree of protection of the bank against expected losses due to delinquency Loan Loss Rate /Write-off Ratio (5%) - Indicates the level of actual and adjusted write-off over ave. loan outstanding.

Growth in active clients (5%)Growth in active clients (5%) –Active borrowers as of end of period vs. active borrowers as of end of previous period Growth in loan portfolio outstanding (5%)Growth in loan portfolio outstanding (5%) –Loan portfolio as of end of period vs. loan portfolio as of end of previous period The EAGLE Components Growth (10%)

The EAGLE Components Liability Structure (10%) Deposit to Loan Ratio (10%)Deposit to Loan Ratio (10%) –Looks at the ability of the bank in terms of liquidity management.

Bank-wide Gross Loan Portfolio Total Bank-wide Deposit Liabilities =

The EAGLE Components Earnings (20%) Loan Portfolio Profitability (20%) - measures the bank’s ability to generate earnings with a given asset base.

Average outstanding microloan portfolio for the Year being rated * Data culled from MPMS based on bank’s submission: Total financial income Less: Total financial expense Total direct operating expense Required Loan Loss Provision per BSP Circular 409 Net MF Operating Income Net MF Operating Income* = Loan Portfolio Profitability (20%)

EAGLE Standard Components Components (Indicators)Standard (EAGLE Score of 5) EFFICIENCY Cost efficiency< 10% Loan officer productivity – group loan> 300 Loan officer productivity – individual loan> 150 ASSET QUALITY PAR Over 7 Days< 5% PAR Over 30 Days< 3% Loan Loss Provision> 100% Loan Loss Rate< 2%

EAGLE Standard Components Components (Indicators)Standard (EAGLE Score of 5) GROWTH IN PORTFOLIO Growth in Active BorrowersNew: _______20% Young: _____ 15% Mature: ____ 10% Growth in Loan PortfolioNew: _______20% Young: _____ 15% Mature: ____ 10% LIABILITY STRUCTURE Liability Structure> 100% EARNINGS Earnings> 20%

Components Components (Indicators)Formula EFFICIENCY Cost efficiency Total Direct Operating Costs, Sum for Period being rated Avg. MF Gross Loan Portfolio, Period being rated Loan officer productivity – group loan Avg # active borrowers, Group Loans, For Period being rated Avg # MF field staff, Group Loans, 1 st 9 mos. for Period being rated Loan officer productivity – individual loan Avg # active borrowers, Indiv. Loans, For Period being rated Avg # MF field staff, Indiv. Loans, 1 st 9 mos. for Period being rated Performance Indicators & Corresponding Formula

Components Components (Indicators)Formula ASSET QUALITY PAR Over 7 Days Avg. Principal Balance of Loans with more than 7 days missed payment, for Period being rated Avg. Gross MF Loan Portfolio, for Period being rated PAR Over 30 Days Avg. Principal Balance of Loans with more than 30 days missed payment, for Period being rated Avg. Gross MF Loan Portfolio, for Period being rated Loan Loss Reserve Ratio Actual MF Loan Loss Provision Required MF Loan Loss Provision per BSP Circular 409 Loan Loss Rate Total MF Loan Write-Offs, for Period being rated Average Loan Portfolio Outstanding, for Period being rated Performance Indicators & Corresponding Formula

Components Components (Indicators)Formula GROWTH IN PORTFOLIO Growth in Active Borrowers (End of Rated Period, No. of Active MF Borrowers – End of Previous Period, No. of Active MF Borrowers) End of Previous Period, No. of Active MF Borrowers Growth in Loan Portfolio (End of Rated Period, MF Gross loan portfolio – End of Previous Period, MF Gross loan portfolio) End of Previous Period, MF Gross loan portfolio LIABILITY STRUCTURE Deposit to Loan Ratio Total Bank-Wide Deposits Total Bank-Wide Gross Loan Portfolio EARNINGS Loan Portfolio Profitability Net MF Operating Income Avg. Gross MF Loan Portfolio Performance Indicators & Corresponding Formula

Computing for the EAGLE Grade EAGLE grade is finally derived based on the computed overall weighted score. The component score is then weighted to arrive at a weighted component score. All weighted component scores are then added to get the overall weighted score. A component score is computed by getting the sum of the weighted scores of each component’s underlying indicators.

AA: Overall weighted score of 4.25 and above and no zero score for any individual component; To be qualified for an EAGLE Award, a candidate bank should have at least 500 average active borrowers over the last 3 months of the year. A: (i) Overall weighted score between 3.5 and 4.24; (ii) a bank with score of 4.25 and over but less than 500 ave. active borrowers over last 3 months B: Overall weighted score between 2.5 and 3.49 No grade: Overall weighted score less than Excellent microenterprise finance performance Very good Average Below average performance The EAGLE Grades

So, how did banks score in 2010??

Annual Assessment January – December banks were evaluated 4 scored AA; 2 are qualified for the EAGLE Award 14 scored A 21 scored B 11 No grade

MEASURING EFFICIENCY

Result: Efficiency

MEASURING ASSET QUALITY

Result: Asset Quality

MEASURING GROWTH

Result: Growth – No. of Borrowers MatureYoung

Result: Growth – Loan Portfolio MatureYoung

MEASURING LIABILITY STRUCTURE

Result: Deposit to Loan Ratio

MEASURING EARNINGS

Result: Earnings

SOME BANKS HAVE BEEN USING THE EAGLE SCORING SYSTEM TO ASSESS THEIR MICROFINANCE PERFORMANCE & EVALUATE THE AO AND BRANCH PERFORMANCE.

BANGKO KABAYAN IS AN EAGLE USER …. And… EAGLE WINNER SEVERAL TIMES.

THANK YOU!!!