ANALYSING THE COSTING OF PRODUCTS AND

SERVICES OFFERED BY GRAMEEN KOOTA TO ITS

CLIENTS

Submitted by

Naveen Kumar Mallik (25029)

Mousom Mitra (25078)

ORGANISATION TRAINEESHIP SEGMENT

PRM 2004-06

Submitted to
Dr. H. S. Shylendra

GRAMEEN KOOTA, BANGALORE

JULY, 2005

INSTITUTE OF RURAL MANAGEMENT, ANAND

1
 ACKNOWLEDGEMENT

We would like to thank IRMA and Grameen Koota for providing us with the learning
opportunity by being a part of a Micro Finance Institution. We would also like to thank Mrs.
Vinitha Reddy (Chief Executive Officer, Grameen Koota) for providing us the needed
support.

We would further like to extend our gratitude towards Mr. Suresh K.K. (Chief Operating
Officer, Grameen Koota) and Prof. H.S. Shylendra for the guidance and valuable insights
they provided us during the whole exercise.

Last but not the least; we thank all employees of Grameen Koota for giving us the needed
support and making our stay a memorable and educative one.

Naveen Kumar Mallik

Mousom Mitra

2
 EXECUTIVE SUMMARY

Project Title: Analysing Costing of Products and Services of Grameen Koota

Organisation: Grameen Koota, Bangalore.
Reporting Officer: Mr. Suresh K. K, Chief Operating Officer, Grameen Koota
Faculty Guide: Dr. H.S. Shylendra
Students’ Name: Naveen Kumar Mallik and Mousom Mitra

Objectives: The objective of this project was to undertake a study into the functioning of
Grameen Koota, in terms of analysing the costing of products and services offered by
Grameen Koota to its clients and also understand the financial implication of running a micro
finance programme.
Methodology: As the objective of the exercise is tracing the cost of the organisation back to
the products, costs are allocated to products by working down the income and expenditure
account line-by-line, deciding on what basis each line or allocation unit should be assigned.
The allocation bases are quantified and used to allocate costs to different products. Next a
notional charge or transfer price is levied on loans and applied to savings products, reflecting
the fact that capital for lending is mobilised from savings.
Limitations:
 The method relies heavily on subjective input
 Simplistically allocates costs and fails to capture the essence of the processes and
activities.
 Volume-related allocation bases fail to account for product diversity and over burden
“large” products.
Findings: The final costing of the products and services revealed the following results:
 All products are straddled with heavy shares of sustaining costs.
 Income generating loan (IGL) is the only product that is making a positive financial
contribution.
 Two loans products (supplementary and emergency) are small in number and amount.
 Group fund loan does not earn any interest and process is too complicated.
 Savings are not contributing financially and administratively cumbersome.
 Voluntary savings is not voluminous which is reflected by portfolio volume of just
eleven percent.
Recommendations:
 As the current strategy of Grameen Koota is to expand, it needs to maintain the
overheads especially at the head office at the current levels.
 The incentive package to the employees should be reviewed and if necessary portfolio
quality and target oriented incentive package be incorporated.
 The role of savings needs to be looked into and if critical, redesigning and
incorporating at least cost recovery measures like service charge and nominal interest
on Group Fund Loan should be put in place.
 Review the impact of the cost and operational efficiency measures by.
o Strengthening the MIS at the Transaction Reporting System level to facilitate
the Management Reporting System.

3
 o The costing activity can be used as steeping stone for graduating towards
Table of Contents
activity based costing as the organization had never conducted any such
studied prior to this one.

1 INTRODUCTION...............................................................................................................................................1
1.1 GRAMEEN KOOTA’S VISION................................................................................................................................1
1.2 GRAMEEN KOOTA’S MISSION..............................................................................................................................1
2 OPERATIONS AT GRAMEEN KOOTA.........................................................................................................2
2.1 OPENING A NEW BRANCH.....................................................................................................................................2
2.1.1 Surveying for a Branch: Along with the area map, the villages should to be surveyed by a team of
three to four staff over a period of two or three days. The area should be mapped with approximate
distances, villages and target population.......................................................................................................2
2.1.2 Location of the Branch: The location of the branch should be a center place for 100 villages. The
villages should fall within a radius of 20 Kms from the Branch. The place should have a Scheduled Bank,
Petrol Pump near by. The surrounding villages should have enough poor to form 70 full Kendras. Where
one Kendra consists of 2-4 groups of 10 women. ..........................................................................................2
2.1.3 Branch Staff: Each Branch will be headed by a Branch Manager, four Kendra Managers & one
watchman cum cook.......................................................................................................................................2
2.1.4 Branch Building: The branch building should be adequate to house both the office and the hostel.
The accommodation will have one hall, two or three rooms, a kitchen and two bathrooms.........................2
2.1.5 Equipment & furniture for Branch Building: All the branch offices should have only the standard
equipment and furniture as per the norms of the organisation......................................................................2
2.2 STARTING NEW KENDRAS......................................................................................................................3
2.2.1 Village Surveys for starting Kendras: Village survey data forms are used to gather information from
the village people (Anganwadi workers, school teacher, Panchayat leaders, people at the tea shops etc).
All details are collected orally and filled only after coming out of the village, because the people may
fear/ misunderstand/ object or give false information. .................................................................................3
2.2.2 Selection of the Village: After bringing back the completed village data form to the office, feasibility
of working in the village is discussed with the Branch Manager, only then the selection is made................3
2.2.3 Mini Meetings (informal): Two or three visits are then made to the village and meeting with group of
people are conducted informally, where a brief detail of Grameen Koota is given. Arrangements for the
formal projection meeting are made at this stage..........................................................................................3
2.2.4 Projection Meetings (formal): The venue and time is decided upon to conduct formal projection
meeting. Everyone in the village is invited by for the projection meeting by going door to door. The local
contacts that have already been established is then used to mobilize the people for the projection meeting.
All the staff in the branch including the Branch Manager and Area Manager conduct the projection
meeting...........................................................................................................................................................3
2.2.5 Criteria for Group Formation: There can be only five members in a group. The members of the
group should only be women, ........................................................................................................................4
From the same village,..................................................................................................................................4
Approximately of the same age group, .........................................................................................................4
Same socio-economic background, ..............................................................................................................4
Must enjoy mutual trust, ...............................................................................................................................4
Only one member from each household .......................................................................................................4
There should not be close relatives in the same group..................................................................................4
2.2.6 Group Formation: Once the interested women have registered their groups, an introduction is given
about Grameen Koota, criteria for group formation, and group responsibilities. Once the group is formed,
they are informed about the reasons for collecting the Basic Data of the Members.....................................4
2.2.7 Basic Data of Members: The Basic Data of the members is filled in the prescribed form at the
respective group member’s houses. All the group members are present when this information is being
gathered. At each members house all the family members are included in conversation during information
gathering. Husbands and elders in the house are informed about Grameen Koota’s rules and regulation in
brief. ..............................................................................................................................................................4
2.2.8 Compulsory Group Training (CGT): 5 days Compulsory Group Training in new village & 3 days if
the Kendra is 6 months & has already 2 groups. As the Kendra can be started with two groups but ideally
one Kendra should have four groups so for the next groups after first two Kendra manager will arrange
only three days CGT. In CGT members are informed about the programme and scheme of Grameen

4
 Koota, the responsibility of Kendra Manager, Branch Manager, Kendra and group leader as well as
members. Kendra Manager also insures in CGT that every member know how to signature. The Branch
Manager makes an appraisal during the CGT and also conducts a re-interview of the members................4
2.2.9 Group Recognition Test (GRT): The Area Manager conducts GRT to approve the Kendra on
successfully completion of members’ test, after the Branch Manager has recommended the group after the
appraisal during CGT.....................................................................................................................................4
2.2.10 Starting the Kendra Meetings: Kendra meetings are conducted at a common place and time. A
common place is selected like the school, community hall, or a large open space to accommodate 40
members, seated freely. The location is preferably in the center of the village which all the people use
commonly. This is to give visibility and transparency to the Kendra Meeting. A convenient time for all the
members, in the morning hours is fixed. Once the Kendra meeting place and time are fixed it cannot be
changed unless in exceptional circumstances with full approval of the Kendra............................................5
2.2.11 Membership/Subscription fee:.............................................................................................................5
All the members of Grameen Koota are issued identity Cards with the photograph of the member duly
stamped by the branch....................................................................................................................................5
All the members have to pay an annual membership/subscription fee of Rs.25/- for the next four years... .5
This membership/subscription fee is taken from all the members during the time of putting the loan
application......................................................................................................................................................5
The members have to pay the fee and also provide two passport size photographs for issuing Identity
Cards..............................................................................................................................................................5
The Identity Card has to be renewed every year by the members.................................................................5
2.3 KENDRA MEETING PROCEDURES..........................................................................................................................5
CHAPTER 3..........................................................................................................................................................7
3 GRAMEEN KOOTA PRODUCTS AND SERVICES.....................................................................................7
3.1 SAVINGS PRODUCTS............................................................................................................................................7
3.1.1 Group Fund Savings (GFS)...................................................................................................................7
3.1.2 Voluntary Savings (VS) .........................................................................................................................7
3.1.3 Kendra Fund (KF).................................................................................................................................8
3.1.4 Emergency Fund (EF)...........................................................................................................................8
3.2 LOAN PRODUCTS................................................................................................................................................8
3.2.1 Income Generation Loan (IGL) and Welfare Loan (WL)......................................................................8
3.2.2 Supplementary Loan (SPL) ..................................................................................................................9
3.2.3 Welfare Loan (WL)................................................................................................................................9
3.2.4 Group Fund Loan (GFL).......................................................................................................................9
3.2.5 Emergency Loan (EL)..........................................................................................................................10
3.2.6 Special Loan (SL)................................................................................................................................10
4 SCOPE OF STUDY...........................................................................................................................................11
4.1 OBJECTIVES.....................................................................................................................................................11
4.2 CIRCUMSTANCES FAVOURING ALLOCATION BASED COSTING...................................................................................11
4.3 ADVANTAGES OF ALLOCATION BASED COSTING (TRADITIONAL METHOD)...................................................................12
4.4 LIMITATIONS OF THE STUDY...............................................................................................................................12
4.5 OVERVIEW OF THE EXERCISE..............................................................................................................................12
5 METHODOLOGY............................................................................................................................................15
5.1 CHOOSING ALLOCATION UNITS............................................................................................................................16
5.2 DECIDING ON ALLOCATION BASES........................................................................................................................16
5.3 QUANTIFICATION OF ALLOCATION BASES.............................................................................................................18
5.4 MAKING TRANSFER PRICING ADJUSTMENT..........................................................................................................19
5.5 ADJUSTMENTS FOR SUPPLEMENTARY LOAN............................................................................................................21
5.6 FINAL COSTING OF PRODUCTS.............................................................................................................................22
CHAPTER – 6 ......................................................................................................................................................23
6 FINDINGS.........................................................................................................................................................23
7 SUMMARY AND ANALYSIS..........................................................................................................................26
8 RECOMMENDATION ....................................................................................................................................32
9 REFERENCES..................................................................................................................................................33

5
6
 List of Tables and Charts

Table 1: Circumstances favouring the adoption of either Activity or

11
Allocation Based Costing (Cracknell and Sempangi 2002)…………..
14
Table 2: Core Process and Activities of Grameen Koota Field Level Staff……
17
Table 3: Allocation Bases and its Application …………………………………
18
Table 4: Percentage of Total cost Allocation Base wise and product wise………18
20
Table 4: Percentage of Total cost Allocation Base wise and product wise ……..20
20
Table 6: Cost of Funds ………………………………………………………..
20
Table 7: Percentage change in income due to transfer pricing adjustment ………20
21
Table 8: Annualization of income and expenses for supplementary loans………21
22
Table 9: Final cost of servicing products and services ………………………..
Table 10: Percentage Costs of Activities and its percentage of costs at
23
Branch Level……………………………………………………………….
Table 11: Percentage of Time Utilized by Kendra Managers for the Core
24
Activities and its Respective Costs ………………………………….
16
Table 12: Percentage Time Utilized by the Branch Manager for the
25
Core Process and its Respective Cost……………………………….
18
Table 13: Percentage Time Utilized by the Area Manager for the Core
25
23
Process and its Respective Cost………………………………………
26
24
Table 14: Income, Expenditure and Margin Per account and product wise…
… 25
27
25
Table 15: Unadjusted Operating Expenses Product wise and at Head Office
28
30
Level and Branch Level ……………………………………………..
Table 16: Financial and Viability Analysis of Loan and Saving Products……..30

Chart 1: Hybrid Model of Allocation………………………………………….

Chart 2: Percentage of Total Expenses of Grameen Koota on Allocation
Base Wise……………………………………………………………..
Chart 3: Percentage Costs of Core Activities………………………………….
Chart 4: Percentage of Time Utilization for Kendra Manager………………..
Chart 5: Percentage of Time Utilization for Branch Manager…………………
Chart 6: Percentage of Time Utilization for Area Manager……………………
Chart 7: Percentage of Inflows due to different Savings and Loan Products…..

7
Chart 8: Percentage of outflows due to different Savings and Loan Products….
List of Annexure
Annexure 1: Details of product and services provided by Grameen Koota…. i
Annexure 2: Portfolio volume, accounts and transactions…………………….. ii
Annexure 3: Allocation Bases and rationale used……………………………… iv
Annexure 4: Time sheet for Kendra Manager…………………………………. ix
Annexure 5: Time sheet for Area Manager…………………………………….. xiii
Annexure 6: Time sheet for Branch Manager…………………………………….xiv
Annexure 7: Salary allocation for BM, AM and HO………………………….. xv
xvi
Annexure 8: Branch level allocation………………………………………………
Annexure 9: Transfer pricing adjustment……………………………………… xvii
Annexure 10: Adjustments for supplementary loan…………………………….. xix
Annexure 11: Final costing of products and services…………………………… xxii
Annexure 12: Consolidated cost allocation…………………………………… xxvii

8
 List of Abbreviation

ABC: Activity Based Costing

AM: Area Manager
BM: Branch Manager
CEO: Chief Executive Officer
CGAP: Consultative Group to Assist the Poor
COO: Chief Operating Officer
DM: Divisional Manager
EF: Emergency Fund
EL: Emergency Loan
FM: Finance Manager
GFL: Group Fund Loan
GFS: Group Fund Saving
GK: Grameen Koota
IGL: Income Generating Loan
KF: Kendra Fund
KM: Kendra Manager
MFI: Micro Finance Institution
SL: Special Loan
SPL: Supplementary Loan
VS: Voluntary Saving
WL: Welfare Loan

9
10
 Chapter -1

1 INTRODUCTION

Grameen Koota was visualized in 1997 based on a book “Gives us Credit” by Alex Counts,
giving an account of the impact of micro-credit on the lives of the poor in Bangladesh and
USA. Highly inspirational stories of large numbers of people rising above the poverty line
through the use of micro-credit motivated the Trustees of T. Muniswamappa Trust to replicate
a similar program for the benefit of the poor in the surrounding villages of Avalahalli.
Grameen Koota started operations from 30th May 1999, with the help of seed capital funding
from Grameen Trust, Bangladesh to initiate a Grameen Bank Replication Program.
Grameen Koota aims at serving the poor women by delivering timely credit to them. With
these loans the women harness their own skills and natural business acumen to transform
their family’s economic status

1.1 Grameen Koota’s Vision

“We envision building a Micro-finance institution, which will eventually be owned, managed
and used by the poor women.”

1.2 Grameen Koota’s Mission

“Our mission is to help poor women in rural areas and urban slums with micro-credit, to
work themselves and thereby their families out of poverty. To constantly deliver need based
financial services in a cost-effective manner and to become financially sustainable Micro-
Finance Institution for the poor.”

Chapter -2

1
2 OPERATIONS AT GRAMEEN KOOTA

2.1 Opening a new branch

2.1.1 Surveying for a Branch: Along with the area map, the villages should to be surveyed
by a team of three to four staff over a period of two or three days. The area should be
mapped with approximate distances, villages and target population.

2.1.2 Location of the Branch: The location of the branch should be a center place for 100
villages. The villages should fall within a radius of 20 Kms from the Branch. The
place should have a Scheduled Bank, Petrol Pump near by. The surrounding villages
should have enough poor to form 70 full Kendras. Where one Kendra consists of 2-4
groups of 10 women.

2.1.3 Branch Staff: Each Branch will be headed by a Branch Manager, four Kendra
Managers & one watchman cum cook.

2.1.4 Branch Building: The branch building should be adequate to house both the office and
the hostel. The accommodation will have one hall, two or three rooms, a kitchen and
two bathrooms.

2.1.5 Equipment & furniture for Branch Building: All the branch offices should have only
the standard equipment and furniture as per the norms of the organisation.

2
2.2 STARTING NEW KENDRAS

2.2.1 Village Surveys for starting Kendras: Village survey data forms are used to gather
information from the village people (Anganwadi workers, school teacher, Panchayat
leaders, people at the tea shops etc). All details are collected orally and filled only
after coming out of the village, because the people may fear/ misunderstand/ object or
give false information.

2.2.2 Selection of the Village: After bringing back the completed village data form to the
office, feasibility of working in the village is discussed with the Branch Manager,
only then the selection is made.

2.2.3 Mini Meetings (informal): Two or three visits are then made to the village and
meeting with group of people are conducted informally, where a brief detail of
Grameen Koota is given. Arrangements for the formal projection meeting are made at
this stage.

2.2.4 Projection Meetings (formal): The venue and time is decided upon to conduct formal
projection meeting. Everyone in the village is invited by for the projection meeting by
going door to door. The local contacts that have already been established is then used
to mobilize the people for the projection meeting. All the staff in the branch including
the Branch Manager and Area Manager conduct the projection meeting.

History of Grameen Koota, its rules and regulations, criteria for group membership is covered
in the projection meeting within 30 minutes. Then the meeting is opened up for discussion.
The village people are clearly informed about the next visit of the staff and the interested
women can register themselves with the staff in that visit.

3
2.2.5 Criteria for Group Formation: There can be only five members in a group. The
members of the group should only be women,

• From the same village,

• Approximately of the same age group,

• Same socio-economic background,

• Must enjoy mutual trust,

• Only one member from each household

• There should not be close relatives in the same group.

2.2.6 Group Formation: Once the interested women have registered their groups, an
introduction is given about Grameen Koota, criteria for group formation, and group
responsibilities. Once the group is formed, they are informed about the reasons for
collecting the Basic Data of the Members.

2.2.7 Basic Data of Members: The Basic Data of the members is filled in the prescribed
form at the respective group member’s houses. All the group members are present
when this information is being gathered. At each members house all the family
members are included in conversation during information gathering. Husbands and
elders in the house are informed about Grameen Koota’s rules and regulation in brief.

2.2.8 Compulsory Group Training (CGT): 5 days Compulsory Group Training in new
village & 3 days if the Kendra is 6 months & has already 2 groups. As the Kendra can
be started with two groups but ideally one Kendra should have four groups so for the
next groups after first two Kendra manager will arrange only three days CGT. In CGT
members are informed about the programme and scheme of Grameen Koota, the
responsibility of Kendra Manager, Branch Manager, Kendra and group leader as well
as members. Kendra Manager also insures in CGT that every member know how to
signature. The Branch Manager makes an appraisal during the CGT and also conducts
a re-interview of the members.

2.2.9 Group Recognition Test (GRT): The Area Manager conducts GRT to approve the
Kendra on successfully completion of members’ test, after the Branch Manager has
recommended the group after the appraisal during CGT.

4
2.2.10 Starting the Kendra Meetings: Kendra meetings are conducted at a common place and
time. A common place is selected like the school, community hall, or a large open
space to accommodate 40 members, seated freely. The location is preferably in the
center of the village which all the people use commonly. This is to give visibility and
transparency to the Kendra Meeting. A convenient time for all the members, in the
morning hours is fixed. Once the Kendra meeting place and time are fixed it cannot be
changed unless in exceptional circumstances with full approval of the Kendra.

2.2.11 Membership/Subscription fee:

• All the members of Grameen Koota are issued identity Cards with the photograph of
the member duly stamped by the branch.

• All the members have to pay an annual membership/subscription fee of Rs.25/- for the
next four years.

• This membership/subscription fee is taken from all the members during the time of
putting the loan application.

• The members have to pay the fee and also provide two passport size photographs for
issuing Identity Cards.

• The Identity Card has to be renewed every year by the members.

2.3 Kendra Meeting Procedures

The following steps are conducted in sequential manner while handling the Kendra meetings.

1. Starting and Closing time of Kendra Meeting

2. Seating Pattern of the Members
3. Member pledge (at the beginning of Kendra meeting)
4. Staff pledge (at the beginning of Kendra meeting)
5. Greetings & General talk
6. Election of Kendra Leader & Secretary
7. Introduction of new groups
8. Signature of Members in Minutes book
9. Collections of savings & loan repayments in groups
10. Collection of Voluntary Savings
11. Pass Book entries

5
12. Fines from late comers
13. Announcements
14. Loan utilization report by Group Leaders
15. Attendance register to be marked
16. Grameen Koota Loan Applications
17. Husband’s Signature
18. Grameen Koota Loan Disbursement
19. Group Fund Loans & Savings Withdrawal
20. Voluntary Savings withdrawal
21. Visitors to Kendra meetings to be introduced
22. Minutes Book writing
23. Kendra leaders Signature on Collection Sheet
24. Members & Staff Pledge (at the end of Kendra meeting)

6
 Chapter 3

3 Grameen Koota Products and Services

The products offered by Grameen Koota are distinct in nature from one another in certain
number of ways. In order to understand the implication of the differences that might affect
the costing procedure one needs to understand the nature of these products.

3.1 Savings Products

3.1.1 Group Fund Savings (GFS)

This is a compulsory saving done by all the members. There are two types of practices for
this in the branches. After joining the Kendra, all the group members start saving Rs.5/-
(rupees five only) every week. These savings should be done as long as the members of the
group are in the Kendra. Once they receive loans, the members have to increase their savings
by one rupee for every 1000 rupees of loan taken from Grameen Koota. This is called Profit
Savings and is added to her group fund savings only. This profit saving have two benefits
first, it will enhance the saving habit of member and second, the saving will savings will be a
collateral for the loan. This was the practice in older branches of Area-1 of GK. But now
except older Kendras of Areas Area-1, all the member deposit Rs.10/- every week as group
fund savings (Margin Money-1) and also there is no profit savings in these branches.
Through out the CGT, the members have to save Rs.2/- (rupees two only) every day as
Training Savings. This ‘training savings’ is also added to the group fund savings of the group.
Each group will be issued one group fund savings pass book. Grameen Koota pays 6% per
annum interest on these savings. These savings can be withdrawn only if a member drops out
of the group or when a group fund loan is taken from this account with the approval of all
their group members.

3.1.2 Voluntary Savings (VS)

This is an optional savings product. Those members who want to increase their savings can
open this voluntary savings account. The members can deposit or withdraw money during the
Kendra meetings, but should maintain a minimum balance of Rs.25/- (rupees twenty five

7
only) in their account. Any amount can be deposited and withdrawn subject to the maximum
of the collection in any Kendra meeting. If the member wishes to withdraw an amount more
than the collection, she can do so by informing one week in advance. In case of emergency
she can even intimate the Branch Manager over phone two days earlier. In the accounts of
Grameen Koota Voluntary shaving is mentioned as Margin Money – 2. For voluntary savings
Grameen Koota pays interest at the rate of 4% per annum.

3.1.3 Kendra Fund (KF)

This is also a compulsory saving. All the members on joining the Kendra should save Re.1/-
(rupee one only) every week as long as they stay in the Kendra. This fund is used for
purposes defined by the Kendra and can be withdrawn by the Kendra leader and secretary on
approval by all the members of the Kendra. This fund must be used for developmental
activities only. All the fines collected are deposited in this Kendra Fund only. In GK account
it is mentioned as Village Development Fund and no interest is paid by GK on this fund.

3.1.4 Emergency Fund (EF)

This is also a compulsory saving. Two percent of the GK loan taken by the member has to be
deposited in this fund, in 50 equal weekly instalments along with the loan repayment. In case
of death of the member, her outstanding loan amount is written off from members’ loan
account (members dependent or his group member are not required to repay the loan after
member’s death) and Grameen Koota pays from this fund a compensation of Rs.500/- is to
her family if she is less than one year old at Grameen Koota... If the member is more than one
year old at Grameen Koota the compensation is Rs.1000/-.

3.2 Loan Products

3.2.1 Income Generation Loan (IGL) and Welfare Loan (WL)

This is the first loan given to the members. This loan is strictly for investing in income
generating activities only. In the first year an IGL of up to Rs.7000/- can be taken.
Subsequent IGL amounts are Rs.10000/-, Rs.13000/-, Rs.16000/-, Rs.18000/- and Rs.
20000/- in 2nd, 3rd, 4th , 5th and 6th year respectively. In cases where the first IGL issued was
less than Rs.5000/- it is recommended that subsequent loan amount is not more than 150% of

8
the previous loan amount. Members can have only one IGL at a time. Larger IGL of 200% of
the previous loan can be given, irrespective of the loan cycle, if an increased cash flow is
demonstrated for 20 weeks in a special savings account which is voluntary. On issue of this
larger IGL these special savings can also be withdrawn. Requests for larger IGL should be
cleared with Area Manager. Repayment period for these loans is 50 weeks. Borrowers have
to repay this loan in 50 weekly instalments with 18% service charge and 2% emergency fund.

3.2.2 Supplementary Loan (SPL)

Members are eligible for this only after 25 week of repayment of IGL. Members who have
utilized the IGL well or those who had a loss, but are regular in their attendance have
demonstrated good trust worthiness and group characteristics, which need a little extra
investment to enhance or recoup their project, can be issued these loans. In the first year an
SPL of up to Rs.2000/- can be taken. Subsequent SPL amounts are Rs.3000/-, Rs.4000/-,
Rs.5000/-, in 2nd, 3rd, 4th year and thereafter. Repayment period for these loans may be 25 or
50 weeks. Borrowers have to repay this loan in 25 or 50 weekly instalments with 18% service
charge and 2% emergency fund.

3.2.3 Welfare Loan (WL)

These loans are given for building toilets, houses, acquiring assets, higher education, etc. The
amount of loan and repayment period is need based and is decided by Head Office. The
housing and assets welfare loan need collateral security. Members can take either IGL or WL
at a time. Borrowers have to repay Welfare Loan in 50 weekly instalments with 18% service
charge and 2% emergency fund.

3.2.4 Group Fund Loan (GFL)

This is the loan that is being provided to the members primarily from the group funds savings
account and no interest is charged on this amount. Even no processing fee is taken from the
members. In this members can take 50% of individual Group Funds Savings. This product
exists only in old Kendras of Area-1.

9
3.2.5 Emergency Loan (EL)

This is also a kind of Group Fund Loan which is being provided to the members primarily
from the group funds savings account. Emergency Loans are issued to members only on the
approval of Kendra. Member can take loan up to Rs.1000/- and they have to repay it in 10
weekly instalments. No interest is charged on this amount. Only processing fees of Rs.15 up
to Rs.500/- and Rs.30 up to 1000 rupees is collected.

3.2.6 Special Loan (SL)

This loan is provided to the members once in a year for insurance purposes like to take
insurance policy (Arogya Raksha, a scheme of ICICI, Lombard) for their family members.
The insurance fee per member per annum is Rs.120/- and member have to pay Rs.3/- per
week per person. Grameen Koota pay this amount to Insurance Company and it get back in
40 weeks from the members. This is pilot project started by Grameen Koota on 1st February
2005.

10
 Chapter – 4

4 Scope of Study

4.1 Objectives

• To better understand the cost implications of running a microfinance program.

• To assess the costs associated with individual products and their contribution towards
long-term sustainability.
• To determine the cost distribution among core processes and activities.

4.2 Circumstances Favouring Allocation Based Costing

In allocation based costing, costs are allocated to products by working down the income and
expenditure account line-by-line, deciding on what basis each line or allocation unit should
be assigned. The allocation bases are quantified and used to allocate costs to different
products. Next a notional charge or transfer price is levied on loans and applied to savings
products, reflecting the fact that capital for lending is mobilised from savings. The objective
of the exercise is to determine the viability of the products and services offered by the
organisation.

Table 1: Circumstances favouring the adoption of either Activity or Allocation Based Costing
(Cracknell and Sempangi 2002)
Circumstance Rationale Advocating Allocation Based Costing
Management The organisation posses moderate level of MIS support at the ground
Information Systems level, however the software used are based on Grameen Bank’s model
and are not yet customised to the needs of the organisation
Administrative burden The staff time needs under this method is relatively moderate. The
study is based on the details provided by the data that was present in the
movement registers mentioned at the branch levels.
Staff capabilities The staff capabilities of the organisation can be said to be moderate,
however there is still lack of professional mangers in the organisation.
Experience This method is chosen because the organisation as well as us had no
prior experience of costing of products and services for an MFI. This
can be taken as the first step towards graduating towards Activity Based
Costing (ABC)
Where Head Office This method is further advocated because with the expansion phase the
Costs are a high organisation is going through the setup expenses as part of the total
percentage of total costs expenses is quite high and the head office expense as proportion of total
expenses stands out to be more than fifty five per cent, which is
extremely high.

11
 Multi Product This method is more appropriate when the institution is offering more
Institution than one product. In case of GK, it is presently serving four loan and
four savings products. Future plans are there to diversify into insurance
products also.
Outputs The outputs obtained provides a quick overview of the actual costs that
the organisation is incurring in servicing the products, however more
detailed exercise needs to be conducted in order to know the exact cost
incurred in the processes and activities of the organisation.
Requirement for This method is appropriate in the case of GK because the need for
training training is quite low considering the time frame of the project work.

4.3 Advantages of allocation based costing (Traditional Method)

Besides the factors mentioned above allocation based costing are most suited for an
organisation, which is in the growth stage, and the MIS is moderately developed. This
method depends less on the strength of the information system of the organisation and hence
can be easily applicable. Moreover once the information system within the organisation is
strengthened it can be used as a tool to upgrade towards activity based costing and cross
checking the results to check for consistency. The relative advantage of using this method
when compared to others can be summarized as follows.
 Fewer steps
 Quicker, simpler and less expensive
 Consistent with income statement
 Can be powerful when used to target additional investigations

4.4 Limitations of the Study

 The method relies heavily on subjective input

 Simplistically allocates costs and fails to capture the essence of the processes and
activities.
 Volume-related allocation bases fail to account for product diversity and over burden
“large” products.

4.5 Overview of the exercise

12
The costing exercise for the study can be broadly classified into two phases. Phase-I
commenced in the month of June 2005 and lasted till the end of that month. During this phase
the primary objective was to choose a representative branch, which caters all the products and
services of Grameen Koota. “Kagglipura” and a newly opened branch at “Sira” were taken
for pilot testing the costing plan that was to be implemented. In consultation with the staff
and mangers at the branches, activity dictionaries were prepared during this phase. Thus, the
emphasis laid primarily was to identify the core processes of the organisation and associated
activities that are performed. Based on the information gathered by means of field visit staff
timing were noted down and a sample costing exercise were carried out. The data thus
obtained were analysed and put forward to the Chief Operating Officer and other staffs at the
head office level for further discussion. Based on the recommendation an exhaustive activity
list was prepared which is enclosed in table-2 and the allocation of salary of Kendra Manager,
Branch Manager and Area Manager are in table -11, 12 and 13 respectively.
The next phase of the exercise commenced during the month of July 2005 after the review of
phase-I results. During this phase the objective was firstly to choose a period of study that
would have all the requisite details needed for the exercise. Financial year 2004-05 was taken
as the period of study because the organisation possessed detailed information about the
accounts and transactions during this period. The next step was to choose branches, which
can give us the approximate details about the actual time taken for various activities. For
achieving this purpose details from three more branches namely “Chelur”, “Channapatna”
and “Hulliyar” were taken. The source of the data primarily consist of the movement registers
that are exhaustively maintained at the branches, in addition to that field visit were made to
note down staff timings for activities like CGT, Kendra meetings, SED (Social Economic
Development Workshop) etc. The data regarding the activities were collected for a longer
period nearly six months (same financial year) and was extrapolated for a year. Subsequently
the data obtained were used to quantify allocation bases and final costing of the products was
done. The results thus obtained were interpreted and suggestions and recommendations were
passed on to the organisation.

Table: 2 Core Process and Activities of Grameen Koota Field Level Staff

13
 Core Processes Activities

Starting a New Kendra Village Surveys

Projection Meetings
Member Basic Data Form
Compulsory Group Training
Group Recognition Test
Group Formation
Reinterview (Interview done by Branch Manager)

Kendra Meeting Preparation for centre meetings

Travelling
Admin tasks (Attendance etc.)
Writing loan and savings cards

Servicing Savings Products Closure of accounts / Dropouts

Opening voluntary account passbook

Making Loans Receiving and Review of application

Writing Loan Application
Approval of loans
Pre-disbursement procedures at center

Servicing Existing Loans LUC (Loan Utilizing Check)

Portfolio Management (incl. preventive visits)

Handling Cash Transactions Cash collections (loans and savings)

Cash disbursements (loans and savings)
Handing over cash to second signatory
Cash Flow including withdrawals

Sustaining Activities Monitoring and Supervision

SED (Workshop)
Case Study
Others
Training

Office Work Preparing Passbook

Completing Loan Application
Collection/Disbursement Register Maintenance
Ledger Maintenance
Voucher Preparation
Preparing Vault Register
Data Entering
Miscellaneous

Chapter 5

14
5 Methodology

1.As the objective of the exercise is tracing the cost of the organisation back to the products,
as well as to check the viability of the product and services offered by GK costs and revenue
are allocated to products by working down the income and expenditure account line-by-line,
deciding on what basis each line or allocation unit should be assigned. The allocation bases
are quantified and used to allocate costs to different products. Next a notional charge or
transfer price is levied on loans and applied to savings products on portfolio volume basis,
reflecting the fact that capital for lending is mobilised from savings. We also try to follow the
methodology of Microsave costing tool for micro finance institutions as far as it was
applicable in our case that is “Cracknell David, Sempangi Henry and Wright A.N. Graham,
Costing and Pricing of Financial Services A toolkit, MicroSave”

The first step of the costing exercise has been identification of the products and services
offered by Grameen Koota. This was followed by the following steps.

 Choosing allocation units.

 Deciding on allocation bases.
 Quantifying allocation bases.
 Making a transfer price adjustment.
 Adjustments for supplementary loan.
 Final costing of products.

In addition to these a time sheet was developed to identify the core processes of the
organisation by way of field visit and subsequently staff salaries at the Branch level are
allocated on the basis of the core processes and activities performed. A sample time sheet is
attached as annexure 4.

15
 Loan Product#1

Core Process#1
Transactions

Transactions

Portfolio

Loan Product#2
Staff Costs Core Process#2 Non Staff Costs
Staff Time

Portfolio

Sustaining Activities
Savings Product#1

Equal

Chart 1 : Hybrid Model of Allocation

(Source: CGAP-Costing of Products and Services of MFI)

Based on this the staff costs are allocated on the basis of the processes and activities using
time sheet study of approximately six months and the data has been extrapolated to a year.
This time sheet study has been based on data inputs from seven branches. The source of the
data has been the movement registers of the past year plus the on site field level study of the
various processes.

5.1 Choosing allocation units

Allocation units are the items of income and expenditure that are going to be allocated across
Grameen Koota’s different products. In our case this is done following the organisation’s
chart of accounts. The full list of the allocation units along with the rationale used in deciding
them is attached in Annexure – 1 of this report.

5.2 Deciding on allocation bases

An allocation basis is the criterion followed in allocating or distributing costs (units) to

products of an organisation. The criteria will vary depending on the cost item (i.e. the
allocation unit). There are two types of costs and income sources for an organisation. They
can be broadly classified as direct and indirect. Further these cost structures vary at the
branch level as well as the head office level. Some cost items (allocation units) can be
directly attributed to a specific product and are therefore fully allocated to that product.

16
Others, e.g. office rent, are shared between products and criteria have to be identified to
distribute the cost across the products of the organisation on the most fair and accurate basis
possible. The process of determining the allocation bases has been done through a
brainstorming session with the finance department of the organisation.

Cost structure for organisation

Relationship to product: Direct Indirect
Allocation Basis: Direct Time/Direct Staff Transaction Portfolio

Some allocation units are direct and their allocation is very straightforward. However most
cost items (allocation units) do not fall into this category and the degree to which they are
indirect varies. Proper rationale has been developed to allocate costs on the basis of allocation
bases. As a general guideline, the closer an indirect cost item is to the specific customer
transaction level the more appropriate it has been to use an allocation basis based on staff
time or the numbers/costs of direct staff. At the other end of the scale, strategic and overall
functions, such as senior management, has been allocated to the products using the (gross
average) portfolio basis as this gives the closest indication of each product’s contribution to
the organisation’s performance as a whole. Support functions and sustaining activities, and
less direct activities (e.g. middle management) have been allocated primarily on transaction
and equal basis. Some of the allocation bases that have been used are listed in table. A more
detailed break up of the allocation bases is included as annexure.
Table 3: Allocation Bases and its Application

Allocation Basis Application

The proportion of staff time across products over a defined period
Staff time
of time based on timesheet data.
Number of The total number of transactions per product over a defined period
Transactions as a percentage of all transactions.
Number of
The number of accounts as a proportion of total accounts.
Accounts
The proportion of the average product portfolio over a defined
Portfolio volume
period – both loans and savings balances.
Each product is given an equal share when the resource used or
Equal
generated is generic.

17
5.3 Quantification of Allocation Bases

After determining the allocation bases for use in the exercise, the next step is to decide the
ratios on the basis of which the value for each allocation unit will be apportioned among the
products it relates to. The process entails attaching weights to each product in proportion to
its fair share of that value.
Table 4: Percentage of Total cost Allocation Base wise and product wise
Group
Income
Fund
Generating Supplementary Emergency
Allocation Bases Loans &
Loans & Loans Loan
Special
WL
Loan
Equal 0.97% 27.14% 6.92% 14.25%
Loan portfolio 50.26% 7.64% 20.55% 17.78%
No. of Accounts 4.44% 7.52% 11.43% 9.90%
Portfolio Volume 20.86% 3.17% 8.53% 7.38%
Savings Portfolio 0.00% 0.00% 0.00% 0.00%
Staff time sheet 18.54% 47.29% 50.51% 48.90%
Transaction 2.69% 4.56% 2.08% 1.80%
Direct (For Insurance) 2.26% 2.68% 0.00% 0.00%
Total 100.00% 100.00% 100.00% 100.00%

Group
Voluntary Emergency Kendra
Allocation Bases Fund
Savings Fund Fund
Savings
Equal 5.68% 17.09% 6.18% 8.88%
Loan portfolio 0.00% 0.00% 0.00% 0.00%
No. of Accounts 17.95% 11.46% 19.54% 21.72%
Portfolio Volume 18.80% 23.92% 4.22% 2.55%
Savings Portfolio 3.80% 4.83% 0.85% 0.51%
Staff time sheet 42.91% 35.76% 46.72% 53.18%
Transaction 10.87% 6.94% 11.84% 13.16%
Direct (For Insurance) 0.00% 0.00% 10.65% 0.00%
Total 100.00% 100.00% 100.00% 100.00%
Percentage Cost on Allocation Bases
Transactio Insurance Equal
n Paid 4%
Staff time 2% Loan
5%
sheet portfolio
31% 32%

Savings
Portfolio c
1% Portfolio No.
Volume accounts
16% 9%
Equal Loan portfolio No. accounts
Portfolio Volume Savings Portfolio Staff time sheet
Transaction Insurance Paid

Chart 2: Percentage of Total Expenses of Grameen Koota on Allocation Base Wise

18
It can be observed that nearly thirty one percent of the organization’s expense has been
allocated by means of identification of core processes and activities. However due to lack of
quantifiable drivers some of the costs have not been allocated on their processes. Only four
percent of the GK’s expense has been allocated equally among the products; however the
products that are low on volumes have taken a excessive loading of cost on this account.
Besides this majority of the expenses have been allocated based on the loan portfolio, this
point is substantiated by the allocation bases that have been selected for each allocation units.

5.4 Making Transfer Pricing Adjustment

Financial institutions make money from accumulating the savings of their depositors and
lending a proportion of these funds to their borrowers. A transfer price adjustment reflects the
fact that funds for lending have been generated by mobilising deposits. The adjustment makes
a notional interest charge against loan products and credits this to deposit products. In the
case of Grameen Koota loan product is “charged” Rs 4,77,732.49 (from Table-30, Annxure-
9) for the money it has effectively borrowed from depositors’ savings, and this is credited
back to the savings product.

The transfer price adjustment is calculated on the basis of the average outstanding loans
whose funds have been sourced from deposits multiplied by a notional interest rate. The
notional interest is allocated back to savings products in proportion to their contribution to the
source of funds. The notional interest rate is nothing but the marginal rate at which an
institution is able to borrow funds. This approach argues that institutions should charge the
full opportunity cost of capital (the cost at which an institution would have to borrow funds in
order to finance its loan portfolio were deposits not being used). This approach is appropriate
in markets where either subsidised funds are available, as in the case of many donor
supported MFI’s like Grameen Koota. The cost of capital as in case of Grameen Koota comes
out to be 9.54 percent. This notional interest rate is calculated by dividing the interest and fee
expense incurred by the organisation during the financial year by the gross average funding
liabilities excluding the funds gathered from the saving deposits (Table -6). Figure for total
funding liabilities given in Table 6 is the sum of loans by commercial institutions and
subsidies loans from Table 5.

19
 Table 5: Inflow of Funds for Loan Disbursement

Average
Funding Liabilities Funding
Liabilities

Savings : Forced 74,22,829.2

Savings : Voluntary 15,59,097.9
Loans : Commercial
4,64,83,494
Institutions
Loans : Subsidized 33,81,197.5

Table 6: Cost of Funds

Cost of Funds 9.54%
Interest and Fee Expense 47,54,891.1
Total Funding Liabilities 4,98,64,691

Table 7:Percentage change in income due to transfer pricing adjustment

Group Fund
Income
Supplementary Loans & Emergency
Particulars Generating
Loans Special Loan
Loans & WL
Loan
Income
439,707.08 2,378.30 25,105.99 10,541.12
Deducted
Income
deducted as
percentage of 3.18% 2.67% 29.79% 3.33%
unadjusted
income

Group Fund Voluntary Emergency Kendra

Particulars
Savings Savings Fund Fund
Income
278406.0434 117751.0603 57431.99316 24143.39624
Added
Additional
Income as
percentage of 250.61% 311.85% 3.85% 27.26%
unadjusted
Income

20
 5.5 Adjustments for supplementary loan

It was observed that supplementary loan was active for just two months during the accounting
period chosen for costing exercise. Thus there arose the need to annualize the income and
expenses of the supplementary loan to prevent it from getting burdened of the heavy
sustaining costs that have been allocated equally. Subsequently the income and expenses that
have been allocated equally or based on staff time sheet where proportioned back from
supplementary loan to the other seven product based on their respective allocation bases.
Table 8 gives the overview of the adjustments that have been made; a more detailed view is
attached as Annexure 10.
Table 8: Annualization of income and expenses for supplementary loans
Income Group Group
Supplementar Special Voluntary Emergenc Kendra
articulars Generatin Fund Fund
y Loans Loans Savings y Fund Fund
g Loans Loans Savings

Adjustment
2,077.04 (14,539.29) 2,077.04 2,077.04 2,077.04 2,077.04 2,077.04 2,077.04
of Income
Adjustment
of Equal 12,174.75 (85,223.23) 12,174.75 12,174.75 12,174.75 12,174.75 12,174.75 12,174.75
Expenses
Adjustment
on Staff 21,583.11 (84,449.18) 31,377.06 2,623.92 9,338.81 2,737.22 9,338.81 7,450.26
Sheet
Total
Adjustment
33,757.86 (169,672.41) 43,551.81 14,798.67 21,513.56 14,911.97 21,513.56 19,625.01
of
Expenses
Net
(41,474.77 (12,721.63 (19,436.52 (12,834.93
Adjustmen (31,680.82) 155,133.12 (19,436.52) (17,547.97)
) ) ) )
t

As a result of this there is increase in income for supplementary loan by nearly rupees one
and half lakhs. However it still incurs nearly thirty percent of its expenses as cost incurred for
sustaining activities of the organisation.

21
5.6 Final costing of products

After quantification of the allocation bases the next step of the exercise is to put these back to
the products, along with that a review the allocation bases is done to identify the possible
errors that might have creped in deciding them. Upon finalization of this the cost of
individual products and services is identified and analysis and recommendation is passed to
the organisation. Table 9 provides the detail of the cost of the individual products and
services.

Table 9: Final cost of servicing products and services

Income
Supplementary Group Fund Emergency
Products Generating
Loans Loans & SL Loans
Loans & WL
Operating Income 13,816,830.81 89,138.08 84,267.48 316,824.06
Unadjusted Operating
10,586,261.02 376,875.04 1,478,532.11 717,565.18
Expense
Unadjusted Operating
Expense after 11,025,968.10 379,253.34 1,503,638.10 728,106.30
Transfer Pricing
Adjusted Operating
11,057,648.92 224,120.22 1,545,112.86 740,827.92
Expense
Net Margin 2,759,181.90 (134,982.13) (1,460,845.38) (424,003.86)

Group Fund Voluntary Emergency

Products Kendra Fund
Savings Savings Fund
Operating Income 111,093.33 37,758.83 1,490,915.86 88,561.94
Unadjusted Operating
1,800,617.38 598,518.64 1,653,772.32 1,152,288.28
Expense
Unadjusted Operating
Expense after 1,522,211.33 480,767.58 1,596,340.33 1,128,144.88
Transfer Pricing
Adjusted Operating
1,541,647.85 493,602.50 1,615,776.84 1,145,692.85
Expense
Net Margin (1,430,554.52) (455,843.67) (124,860.98) (1,057,130.90)

22
 Chapter – 6

6 Findings

The costing exercise revealed that the organisation is incurring financial profitability from
only one of its product namely “IGL” or Income Generating Loans. The rest seven products
that is, the rest three loan products and the four savings product are not contributing
financially to the organisation. From the activity based on the staff time we find that nearly
thirty two percent of the branch level expenses is incurred on sustaining activities and nearly
forty seven percent of the staff salaries and welfare expenses contribute towards the same
activity. In Table 10 percentage activity cost shows that this is the percentage cost of each
activity out of total activity cost where percentage branch level expenses show the percentage
of cost for each core processes out of total branch level cost.
Table 10: Percentage Costs of Activities and its percentage of costs at Branch Level
Percentage Percentage
Sl. No. Core Processes Activity Branch Level
Costs Expenses
1 Starting a Kendra 15.15% 10.31%
2 Kendra Meeting 11.08% 7.54%
3 Servicing Savings Product 2.06% 1.40%
4 Making Loans 15.48% 10.53%
5 Servicing Existing Loans 5.23% 3.56%
6 Handling Cash Transactions 4.47% 3.04%
7 Sustaining Activities & Office Work 46.51% 31.64%

Activity Costs
15.15%

11.08%
46.51%

2.06%

15.48%
4.47% 5.23%

Starting a Kendra Kendra Meeting Servicing Savings Product

Making Loans Servicing Existing Loans Handling Cash Transactions
Sustaining Activities

Chart 3: Percentage Costs of Core Activities

Making loan take the major burden of the activity costs, which nearly account sixteen per
cent of the branch level expenses. The next major finding that we came across was in the case
of Kendra Manager’s salary allocation based on time sheet. Nearly fifty percent of their
salaries go towards sustaining activities and office work, which when considered with the

23
salary expense of fortyfive lakhs is considerably a huge amount. Table 11 gives a picture of
the time invested by the Kendra Managers for the core activities. For this time invested by
Kendra manager for the core activities collected from the movement register of six branches
for six month period and the percentage of time used in Table 11 show percentage of time
utilised by the Kendra Manager for these core activities out of total time given by them for
office activities. Similar exercise done for Branch Manager and Area Manager and the
findings is in Table 12 and Table 13 for Branch Manager and Area Manager respectively.
Table 11: Percentage of Time Utilized by Kendra Managers for the Core Activities and its
Respective Costs
Percentage of Cost Incurred
Sl. No Core Processes in Rupees
Time Used
1 Starting a New Kendra 7.49% 338,238.62
2 Kendra Meeting 10.26% 463,102.01
3 Servicing Savings Products 2.56% 115,775.50
4 Making Loans 19.23% 868,316.27
5 Servicing Existing Loans 4.43% 200,079.37
6 Handling Cash Transactions 5.56% 250,945.97
7 Sustaining Activities 4.98% 225,040.91
8 Office Work 45.49% 2,054,103.01

Total All Processes 100.00% 4,515,601.67

Kendra Manager
7%
10%
3%
46%

19%

5% 6% 4%

Starting a New Kendra Kendra Meeting

Servicing Savings Products Making Loans
Servicing Existing Loans Handling Cash Transactions
Sustaining A ctivities Of f ice Work

Chart 4: Percentage of Time Utilization for Kendra Manager

However from the comparative salary allocation for BM and AM we find a significant
difference in the allocation of their service times on processes. The relative time spend by
branch manager in starting a new Kendra is comparatively higher than that of area manager.
Moreover the time spent by BM in sustaining activities is more as compared to an average
area manager’s time spent on it. However we find that the time spent by AM in attending
Kendra meeting is comparatively higher than that for a BM.

24
 Table 12: Percentage Time Utilized by the Branch Manager for the Core Process and its
Respective Cost
Percentage of
Sl. No. Core Processes Total
Time

1 Starting a New Kendra 48.85% 406,842.57

2 Kendra Meeting 8.10% 67,432.47
3 Servicing Existing Loans 8.10% 67,432.47
4 Sustaining Activities 34.95% 291,083.49

Total All Processes 100.00% 832,791.00

Table 13: Percentage Time Utilized by the Area Manager for the Core Process and its
Respective Cost
Cost
Percentage
Core Processes Incurred in
of Time
Sl. No Rupees

1 Starting a New Kendra 40.33% 104799.31

2 Kendra Meeting 35.00% 90941.55
3 Servicing Existing Loans 10.00% 25983.3
4 Sustaining Activities 14.67% 38108.84

All Processes 100.00% 259833

Branch Manager Area Manager

15%
35% 10% 40%
49%

8% 35%
8%

Starting a New Kendra Kendra Meeting Starting a New Kendra Kendra Meeting
Servicing Existing Loans Sustaining Activities Servicing Existing Loans Sustaining Activities

Chart 5: Percentage of Time Utilization for Chart 6: Percentage of Time Utilization for
Branch Manager Area Manager

In terms of purely volume we can say that the majority of the expenses for both AM and BM
taken together goes towards starting new Kendra’s. However the share of cost for sustaining
activities is also relatively very high.
Chapter – 7

25
7 Summary and Analysis

As it was mentioned above that only one product that is, IGL is making financial contribution
to the organisation, However that does not give a real picture of unit cost for each product
because the portfolio volumes of the other products are relatively low and are sharing a heavy
load of the sustaining costs. Hence a more in-depth and efficient analysis of cost unit per
product using indicators like number of accounts and cost incurred in handling portfolio
volumes has been carried out.
One can easily identify that analysis based on number of accounts tells us
that every account of IGL gives us a return of nearly hundred and eight
rupees, whereas servicing supplementary loans is most costly for the
organisation. However the real cause of concern for the organisation is not
the supplementary loans but it should be group fund loans, because it
does not earn any return for the organisation. Moreover at this stage
supplementary loan is showing negative returns because it has been in
operation for only two months during the costing exercise and it is heavily
loaded with the sustaining costs of the organisation. Once the portfolio
volume of the supplementary loans increases and targeted returns are
achieved, it might contribute financially towards the organisation.
Table 14: Income, Expenditure and Margin Per account and product wise

Income Group Fund

Supplementary Emergency
Particulars Generating Loan Loan and
Loans Loan
and Welfare Loan Special Loan

Income per
460.76 49.22 7.81 69.83
Account
Costs Per
353.03 208.10 137.04 158.16
Account
Net Margin
in operating 107.73 (158.88) (129.23) (88.33)
the Account

Group Fund Voluntary Emergency

Particulars Kendra Fund
Savings Savings Fund
Income per
5.38 8.62 72.24 5.54
Account
Costs Per
87.25 136.65 80.13 72.08
Account
Net Margin
in operating (81.86) (128.03) (7.89) (66.54)
the Account

26
 On analysis of the savings products we find the same issue being raised,
with emergency fund showing negative returns. Though EF acts as source
of direct income for the organisation, current levels of low portfolio volume
accompanied by the high sustaining costs are making it financially
unprofitable. However the area where the organisation should really look
forward to is the VS. The portfolio volume figure of VS is 25 per cent of
savings portfolio but at the same time it is just 5 percent of total loan and
savings portfolio for VS indicates that it is not very popular with the
people and associated transaction costs are high when compared with the
returns. It can also say VS is not popular among the people because rest
75 per cent of savings portfolio is forced or compulsory saving. Moreover
savings products are administratively cumbersome and they are not much
contributing in acting as source of financing the loan products.

Table 15: Unadjusted Operating Expenses Product wise and at Head Office Level and
Branch Level
Head Office Branch Level
Unadjusted
Head Office Branch Level Expense as Expense as %
Products Operating
Expense Expense % of Total of Total
Expense
Expense Expense
Income Generating
10,586,261.02 7,181,874.29 3,404,386.73 67.84% 32.16%
Loans & WL
Supplementary Loans 376,875.04 140,354.42 236,520.61 37.24% 62.76%
Group Fund Loans &
1,478,532.11 577,667.89 900,864.22 39.07% 60.93%
SL
Emergency Loans 717,565.18 280,254.15 437,311.03 39.06% 60.94%

Head Office Branch Level

Unadjusted
Head Office Branch Level Expense as Expense as %
Products Operating
Expense Expense % of Total of Total
Expense
Expense Expense
Group Fund Savings 1,800,617.38 681,109.03 1,119,508.35 37.83% 62.17%
Voluntary Savings 598,518.64 251,104.53 347,414.10 41.95% 58.05%
Emergency Fund 1,653,772.32 648,256.07 1,005,516.25 39.20% 60.80%
Kendra Fund 1,152,288.28 361,112.21 791,176.07 31.34% 68.66%

From table we find that IGL is taking the major brunt of sustaining cost of the HO and it
accounts for nearly seventy percent of its total expenses. Among the savings product
voluntary savings is incurring nearly forty two percent of its expense from sustaining the HO
expenses.

27
 One of the most critical parts of any costing exercise is to understand the implication of a
product from profitability and viability point of view.

Table 16: Financial and Viability Analysis of Loan and Saving Products

LOAN PRODUCTS
Income Generating
Group Fund Loan
Particulars Loan and Welfare Supplementary Loan Emergency Loan
and Special Loan
Loan
Rate: 18% flat
Rate: 18% flat Rate: Rs.30 as Rate: Interest-free
(approx. 34%
(approx. 34% eff.) Fee: transaction fee Fee: Fee: none Term:
eff.)Fee: 2% of
Loan Features 2% of amount upfront none Term: 10 decided by group
amount upfront Term:
Term: 50 weeks weeks Repaid: Repaid: decided by
50 weeks Repaid:
Repaid: weekly Weekly group
weekly
Proportion of
overall loan 92.04% 0.50% 5.26% 2.21%
portfolio
Proportion of
overall loan 96.57% 0.62% 0.59% 2.21%
portfolio revenue
Activity costs as
percentage of
28.81% 189.61% 70.47% 81.45%
loan portfolio for
this product
Activity costs as
percentage of all 80.45% 2.86% 11.24% 5.45%
loan activity costs
"Account
Profitability" from
130.52% 23.65% 5.70% 44.15%
the Viability
Analysis*
SAVINGS PRODUCTS
Group Fund
Particulars Voluntary Savings Emergency Fund Kendra Fund
Savings
Proportion of
overall savings 58.28% 24.65% 12.02% 5.05%
portfolio
Activity costs as
percentage of
31.96% 25.11% 142.28% 235.82%
savings portfolio
for this product
Activity costs as
percentage of all
34.59% 11.50% 31.77% 22.14%
savings activity
costs
"Account
Profitability" from
6.17% 6.31% 90.15% 7.69%
the Viability
Analysis*

28
From table we find that IGL is having the majority share in the loan portfolio as well as
revenue source for the loan products. Even supplementary loan on comparative basis is able
to earn more based on its loan portfolio and emergency loan is able to make break even on
that count. However Group fund loans are not registering returns in proportion of their loan
portfolio. This is primarily because of absence of any interest payment or service charge in
administrating this product. This product is administratively cumbersome for the organisation
but is critical for functioning of groups at the ground level. This fact is further substantiated
by the percentage figures of profitability analysis. The interpretation for the figures can be
taken in a way that, if the organisation is incurring hundred rupees on servicing an IGL loan it
is getting a return of about hundred thirty rupees while if the same amount is incurred on GFL
its getting a return of just five rupees.
The analysis of the savings product further amazes the complexity associated with servicing
savings product for an MFI. From table we find that GFS accounts nearly sixty percent of the
total savings portfolio, however it is incurring only one third of the cost incurred in servicing
the savings products. As compared to this EF is accounting for just twelve percent of the
portfolio but sharing ten times more cost in handing that volume. Analysing these two
products from profitability point of view one can view a stark difference, where GFS is able
to recover only six percent of the cost incurred in servicing it, EF is able to recover almost
ninety percent of its cost. The reason why the difference exists in cost recovery primarily lies
in the product design of the products. In case of GFS interest is paid at a rate of six percent,
whereas EF acts as a buffer in case of delinquency. Moreover the risk of delinquency is
transferred by GK to insurance agencies at a rate of 0.3 percent of the loan portfolio, whereas
it gets two percent earning on loan disbursement which is deposited to EF. Thus nearly 1.7
percent of the differences in this transfer of risk acts as a source for direct income for EF and
in tern the organisation.

29
 9.30%
Inflow Outflow
0.24%
0.69%
0.55% 6.24%
1.98% 0.53% 9.00%
0.56%
3.04%

7.84%

4.00%
60.15%

8.45%
1.28%
86.16%

Income Generating Loans & WL Supplementary Loans Income Generating Loans & WL Supplementary Loans
Group Fund Loans & SL Emergency Loans Group Fund Loans & SL Emergency Loans
Group Fund Savings Voluntary Savings Group Fund Savings Voluntary Savings
Emergency Fund Kendra Fund Emergency Fund Kendra Fund

Chart 7: Percentage of Inflows due to different Chart 8: Percentage of Outflows on different

Saving and Loan Products Saving and Loan Products
From chart & we can find the revenue generators and cash crunchers for GK. It is apparent that IGL is the main stay of the organisation and
accounts for nearly eighty seven percent for the total revenues of GK. Comparatively it is incurring only sixty percent of the total GK expenses.
EF accounts for nearly 9.3 percent of the total revenues for GK but is incurring only 9.0 percent of the total costs. However as the operating
expense of GK is more than its operating income, EF is not showing signs of financially contributing to the organisation. Moreover the portfolio
volume of EF is comparatively lower than the other loan products and hence it is straddled with heavy sustaining costs. One can make an
assumption over here is that, once the portfolio volume for other loan product increases the revenues earned by EF will be not only able to
recover its operating costs, but will also be able to get returns for the organisation.

30
Hence in a nutshell the key areas which we have found important during the costing exercise
can be summarised as follows.
 All products are straddled with heavy shares of sustaining costs (especially HO).
 Income generating loan (IGL) is the only product that is making a positive financial
contribution.
 Two loans products (supplementary and emergency) are small in number and amount.
 Group fund loan does not earn any interest and process is too complicated.
 Savings are not contributing financially.
o Administratively cumbersome
 Voluntary savings id not much acceptable to the members since the study shows that
75 per cent of savings is forced or compulsory.

31
 Chapter – 8

8 Recommendation

Based on the analysis that has been conducted the key areas where Grameen Koota should
look into can be summarised as follows.
 The traveling time of the Kendra Managers should be looked into, and location of the
branches and Kendra should be reviewed.
 As the current strategy of GK is to expand, it needs to maintain the overheads
especially at the HO at the current levels.
 The incentive package to the employees should be reviewed and if necessary portfolio
quality and target oriented incentive package be incorporated.
 The role of savings needs to be looked into and if critical, redesigning and
incorporating at least cost recovery measures like service charge and nominal interest
on GFL should be put in place.
 Review the impact of the cost and operational efficiency measures by.
o Strengthening the MIS at the Transaction Reporting System level to facilitate
the Management Reporting System.
o Graduate towards Activity Based Costing

32
9 References

2.Operating Manual Grameen Koota

3.Cracknell David, Sempangi Henry and Wright A.N. Graham, Costing and Pricing of
Financial Services A toolkit, MicroSave
4.www.cgap.org
5.www.grameenkoota.org

33
i