ACCOUNT OFFICER’S BASIC TRAINING Procedures for Filling up the Debt Capacity Analysis

STEP 1 STEP 1 : Select the most appropriate column for doing the Debt Capacity Analysis ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income Equivalent of WEEKLY Net Income Equivalent of SEMI-MONTHLY Net Income Equivalent of MONTHLY Net Income Amount Available for Debt Service Adjusted Debt ______ % Maximum Loan Amount for _____ weeks/months

STEP 2 STEP 2 : Transfer the Net Income values of the various columns into the selected Debt Capacity Column and convert their values ItemDailyWeeklySemi-MonthlyMonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME 861( 4,000 )( 3,140 )5,232 DEBT CAPACITY ANALYSIS Transferring Net Income Values If the DAILY column is selected, transfer the converted net income values of Weekly, Semi- monthly and Monthly columns Converting Net Income values To convert WEEKLY Net Income values to its daily equivalent, divide the amount by 7 (or the number of effective operating days To convert SEMI- MONTHLY Net Income values to its daily equivalent, divide the amount by 15days To convert MONTHLY Net Income values to its daily equivalent, divide the amount by 28 (or the number of effective operating days)

ItemDailyWeekly (Selected Debt Capacity Column) Semi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861( 4,000 )( 3,140 )5,232 DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income 6,027 = 6,027 x 7 Equivalent of WEEKLY Net Income ( 4,000 ) = -4,000 x 1 Equivalent of SEMI-MONTHLY Net Income Equivalent of MONTHLY Net Income ( 785 ) = -3,140 / 4 Amount Available for Debt Service Adjusted Debt ______ % Maximum Loan Amount for _____ weeks/months * -861 x 7 days ** -3,140 / 4 weeks Sample : If Weekly Column is selected

Specific guidelines for converting Net Income: Values – left areincluded in the analysisPositive balances to the left of the selected Debt Capacity Column are included in the analysis since these refer to cash flows that have already been received by the client right are not to be included in the analysisPositive balances to the right of the selected Debt Capacity Column are not to be included in the analysis –Why? Columns to the right often refer to longer time frames – future cash flows – and including these figures could overstate the figures of the Debt Capacity Column

ItemDailyWeekly (Debt Capacity Column) Semi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861 4,0003,1405,232 DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income 6,027 Equivalent of WEEKLY Net Income 4,000 Equivalent of SEMI-MONTHLY Net Income 0 Equivalent of MONTHLY Net Income 0 Amount Available for Debt Service 10,027 Adjusted Debt 35 % 3,509 Maximum Loan Amount for _____ weeks/months 42,434  Term : 3 months Interest ; 2.5%/month

ItemDailyWeekly (Debt Capacity Column) Semi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861 4,0003,1405,232 DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income 6,027 Equivalent of WEEKLY Net Income 4,000 Equivalent of SEMI-MONTHLY Net Income 0 Equivalent of MONTHLY Net Income 785 3,140 / 4 Amount Available for Debt Service 10,812 Adjusted Debt 35 % 3,784 Maximum Loan Amount for _____ weeks/months 45,760 Term : 3 months Interest ; 2.5%/month

 Including positive net income values from longer time frame columns could unduly bloat maximum loan amounts  For conservatism (considering loans are character- based/collateral free), long time-frame positive values should not be included. Positive net income value columns could serve as buffer fund should daily or weekly cash flows not turn out as expected. Long time-frame columns (e.g. semi-monthly, monthly) with positive net income values indicate sufficient cash flow to support expenditures in those periods.

STEP 3 : STEP 3 : Compute the AMOUNT AVAILABLE FOR DEBT SERVICE by adding up the equivalent Daily, Weekly, Semi-monthly and Monthly Net Incomes ItemDaily (Selected Debt Capacity Column ) Weekly (Selected Debt Capacity Column Semi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861( 4,000 )( 3,140 )5,232 DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income 6,027 Equivalent of WEEKLY Net Income ( 4,000) Equivalent of SEMI-MONTHLY Net Income 0 Equivalent of MONTHLY Net Income ( 785) Amount Available for Debt Service1,242 Adjusted Debt ______ % Maximum Loan Amount for _____ weeks/months

STEP 4 : Compute the ADJUSTED DEBT CAPACITY by multiplying the Amount Available for Debt Service by the Adjusted Repayment Capacity Rate (ARCR) The client’s debt capacity, represented by the Amount Available for Debt Service, should be adjusted for: 1.Unforeseen events or circumstances that would reduce the applicant’s income or increase expenditures (e.g. illness, other household emergencies); and 2.Errors in the assumptions or estimates used in preparing the applicant’s Cash Flow.

In the example below, the ARCR used is 35%. This means that the lender assumes that only 35% of the client’s debt capacity will be used for paying the new loan. By using a small portion of the client’s debt capacity, the lender is given a higher assurance that the loan is well within the client’s capacity to pay. ItemDailyWeekly Semi- Monthly Monthly MONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861( 4,000 )( 3,140 )5,232 DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income 6,027 Equivalent of WEEKLY Net Income ( 4,000) Equivalent of SEMI-MONTHLY Net Income 0 Equivalent of MONTHLY Net Income ( 785) Amount Available for Debt Service 1,242 Adjusted Debt 35%435 Maximum Loan Amount for _____ weeks/months

STEP 5: Compute the Maximum Loan Amount to be given to the client by using the Loan Size Multiplier Depending on the MFI’s policy, the formula for the Loan Size Multiplier may vary

Formula for Loan Size Multiplier

PolicyFormula Interest amortized (Standard) (Adjusted Debt Capacity) * (No. of Installment Payments 1 + (Interest rate per month * No. of months) Interest discounted (deducted up-front) (Adjusted Debt Capacity ) * (No. of Installment Payments) Interest discounted / contractual savings 10% of loan installment (Adjusted Debt Capacity) * (No. of Installment Payments) 1 + Contractual Deposit Rate Interest amortized / contractual savings 10% of loan principal (Adjusted Debt Capacity) * (No. of Installment Payments) 1 + [(Interest rate * No. of Months) + Contractual Deposit Rate] Interest amortized / contractual savings 10% of loan principal & interest payment (Adjusted Debt Capacity) * (No. of Installment Payments) ((1 + (Interest rate * No. of Months)) * (1 + Contractual Deposit Rate)]

Interest amortized (standard) Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments) 1 + (Interest rate per month * No. of months) 1 + (Interest rate per month * No. of months) Example: Loan Term:3 mos. (91 days) Frequency of Payment: Daily Interest Rate:2.5% per month Max. Loan Size = (62.10) * (65) 1 + (.025*3) =4, =3,754.88

The computed maximum loan amount is shown in the cash flow template as follows: If a weekly amortization schedule is desired, the size of the weekly installment is computed by multiplying the adjusted daily debt capacity by 5. In the example above, the weekly installment will be: * 5 days = P ItemDailyWeekly Semi- Monthly Monthly MONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861( 4,000 )( 3,140 )5,232 DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income 861 Equivalent of WEEKLY Net Income (571.43) Equivalent of SEMI-MONTHLY Net Income Equivalent of MONTHLY Net Income (112.14) Amount Available for Debt Service Adjusted Debt 35% Maximum Loan Amount for _____ weeks/months 3,754.88

Interest discounted ( deducted up-front ) Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments) Example: Max. Loan Size = * 65 = 4,036.50

Interest discounted / contractual savings 10% of loan installment Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments) 1 + Contractual Deposit Rate 1 + Contractual Deposit Rate Example: Max. Loan Size= * = 3,669.55

Interest amortized / contractual savings 10% of Interest amortized / contractual savings 10% of loan principal payment Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments) 1 + [(Interest rate * No. of Months) + Contractual Deposit Rate] 1 + [(Interest rate * No. of Months) + Contractual Deposit Rate] Example: Max. Loan Size= * [(.025*3) +.10] = 4, [ ] = 4, = 3,435.32

PolicyMaximum Loan Amount Interest amortized (Standard) 3, Interest discounted (deducted up-front) 4, Interest discounted / contractual savings 10% of loan installment 3, Interest amortized / contractual savings 10% of loan principal 3, Interest amortized / contractual savings 10% of loan principal & interest payment 3,413.53

21 Lending to Microenterprises without analyzing the cash flow … CHANCE … is like playing darts blind-folded. Determining how much loan the bank should give to a client is left to CHANCE.

Thank you!