AROHAN

A New Age Urban Focused MFI

Amit Kumar Dutta

Roll No.
U210002
Ex-PGP –
2010-13
Overview of the Company

In 2006 Arohan Financial Services Limited started microfinance operations and since
then the Company is providing financial services to urban and rural population
following Joint Liability Groups (JLGs) methodology. The Company provides small tickets
loans for tenure of 45-57 weeks without any collateral security. At present Arohan is
operating their business in West Bengal and Bihar with two products viz. Saral Product
(for economically active women) & Bazar Product (for vendors in the authorized
markets selling household commodities, generally perishables).

By March 2014 Arohan aims to reach 2million customer with a portfolio of Rs. 15,000
million.

2.00 Objectives

The project aims at evaluating the overall financial position of Arohan Financial
Services Ltd (AFSL) and for that a comparative analysis of balance sheet and income
statement is being done. In addition of that s financial ratios are also presented with
respect of another MFI so that the management of Arohan can judge their position in
the MFI industry. For that financial statement of Village Financial Services Private
Limited (VFSPL) has been considered. The logic behind choosing VFSPL is the similarity
of operation, client base, size of portfolio and also the place of business.

3.00 Analysis of Balance Sheet

Balance sheet for the financial year ended on March 31, 2010 has been taken for
analysis and for that a common size statement is prepared with respect of financial
year 2008-09 and 2009-10.In common size statement each items are expressed as a
percentage of total asset. This exercise is aimed to understand the important changes
in comparison of previous year 2008-09. In addition of that trend analysis is also being
carried with respect of previous year so that financial growth of the company could be
assessed.

Further to understand the overall position of Arohan in MFI industry common size
statement with respect of financial year 2009-10 is also being compared with the
position of VFSPL.

3.01 Shareholder’s Fund

In any particular date the shareholder’s fund represents the percentage of total
assets owned by the investors of the company and rest of asset will be claimed
by the creditors. In 2009-10 shareholder’ fund i.e. capital and reserve & surplus
is increased by 96% and 36 % respectively. It is representing 13.93%
(8.48+5.45) ownership down from 20.78% in previous year. In comparison of
VFSPL ownership percentage is slightly better as in VFSPL the percentage of
ownership at the end of the FY 2009-10 was 12.68% even though the percentage
of new capital infusion is AFSL is less. This is possible as AFSL more percentage
of surplus than VFSPL.
.
Common Size Balance Sheet and Change in Accounts, FY 2008-09 & FY 2009-10

AFSL VFSPL
Amount in Rs. % Common Size
2009-10 2008-09 change 2009-10 2008-09 2009-10
SOURCES OF FUNDS
Shareholders' Funds
Capital 92,318,710 47,101,000 96 8.48 10.81 11.01
Reserves and Surplus 59,317,169 43,500,024 36 5.45 9.98 1.67
Loan Funds
Secured Loans 937,587,583 345,181,371 172 86.08 79.19 87.32
Deferred Tax Liability - 121,397 (100)
Total 1,089,223,463 435,903,792 150 100.00 100.00 100.00
APPLICATION OF FUNDS
Fixed Assets
Gross Block 15,054,556 5,883,704 156 1.38 1.35 0.77
Less : Depreciation 4,483,799 779,747 475 0.41 0.18 0.25
Net Block 10,570,757 5,103,957 107 0.97 1.17 0.52
Capital Work-in-progress 351,600 1,264,492 (72) 0.03 0.29 -
10,922,357 6,368,449 72 1.00 1.46 0.52
Investment 500,000 - 100 0.05 - 0.04
Deferred Tax Asset - - - 0.02
Current Assets, Loans & Advances
Cash and Bank Balances 134,601,265 10,476,992 1,185 12.36 2.40 19.03
Others Current Assets 21,329,023 7,650,002 179 1.96 1.75 1.15
Loans and Advances
Loans to Microfinance Borrowers 946,919,486 419,052,582 126 86.94 96.13 80.72
Less: Provision for Doubtful Loans 5,310,305 585,797 807 0.49 0.13 0.02
941,609,181 418,466,785 125 86.45 96.00 80.70
Total Current Asset 1,097,539,469 436,593,779 151 100.76 100.16 100.88
Less: Current Liabilities & Provisions
Liabilities 6,420,236 3,885,221 65 0.59 0.89 1.73
Provisions 13,318,128 3,173,216 320 1.22 0.73 1.27
Total Current Liabilities 19,738,364 7,058,436 180 1.81 1.62 3.00

Net Current Assets 1,077,801,105 429,535,343 151 98.95 98.54 97.88

Misc. Exenditure - - - - - 1.54
Total 1,089,223,463 435,903,792 150 100.00 100.00 100.00

3.02 Loan Funds

In microfinance the growth of any company is depends on the quantity of the

debt that managed by each individual organization. All the debts are secured
and actually taken from public as well as private sector banks and financial
institutions like SIDBI etc. In Arohan it represents 86% of the total assets as
increased by 7% from previous year. In comparison to Arohan the performance
of VFSPL is little better as they manage to get fund equivalent to 87.32% of its
total assets. However it’s really credit for Arohan that they able to manage fund
without providing any personal guarantee to the lenders. But in contrast in VFSPL
has got the loans against personal guarantee provided by their promoter.

3.03 Fixed Assets

 Typically in microfinance industry fixed assets represents very small percentage
of its total asset as promoters and board of directors of the company is more
interested to use the capital for business. In Arohan it represents only 1% of its
total asset and the trend analysis shows that it reduced by 72% in comparison of
last year (0.46% of total assets). However comparative analysis with VFSPL
shows that there is an opportunity for Arohan to reduce such percentage as in
VFSPL it only shows 0.52% of its total assets.

3.04 Investment & Deferred Tax Assets/Liabilities

In 2009-10 AFSL as well as VFSPL invested Rs. 5 lacs which representing 0.05%
and 0.04% of its total assets respectively. Deferred tax liabilities as well as
deferred assets is not being compared as it represents very small percentage of
its total assets and do not have any material impact on the financial position of
AFSL or VFSPL.

3.05 Current Assets

In case of AFSL cash and bank balance representing 12.36 % of its total assets
which has been substantially increased by 1185% (9.94% in terms of common
size statement) in comparison to previous year. Therefore AFSL has lost an
opportunity to earn interest income as funds are lying ideal. However the overall
performance of AFSL is better than VFSPL as in their cases cash and bank
balance was 19.03% of its total assets.

Common size statement shows that in 2009-10 other current assets is slightly
increase by 0.21% (1.96 – 1.75) of its total assets. Trend analysis shows 179%
growth in comparison of previous year. In case of VFSPL it represents 1.15% of
total assets which is down by 0.81%.

Loans portfolio is the major part of current assets in case of both the company. It
also represents the overall growth position of any microfinance company.
Common size statement shows that in 2009-10 the net portfolio of AFSL is
representing 86.45% of its total assets and in comparison of previous year down
by 9.55% (96.00 – 86.45). As per trend analysis the overall growth of the
portfolio represents 126% growth with respect of FY 2008-09. The position of
VFSPL shows that loan portfolio represents 80.72% of their total assets as their
percentage of cash & bank balance shows higher figure than AFSL.

The overall growth of current assets is more or less same in case of both the
companies. The yearly rate of growth of AFSL is 1.51% of the previous year as
revealed from trend analysis.

3.06 Current Liabilities & Provisions

In 2009-10 current liabilities of AFSL are reduced by 65% which actually

representing 0.59% of the total assets. In case of VFSPL it shows 1.73% of the
total assets. However in comparison of last year the liability of AFSL is increased
by 320% on account of provisions. The percentage of provisions with respect of
total assets is 1.22% where as in case VFSPL it represents 1.27% of its total
assets.

In case of AFSL the total current liabilities & provisions represents 1.81% of its
total assets where as in case VFSPL it is 3%.
 3.07 Misc. Expenditure

AFSL does not have any miscellaneous expenditure which is pending for
amortization. However in case of VFSPL it represents 1.54% of its total assets.

4.00 Analysis of Profit & Loss Account

Profit & loss account shows the overall performance of the company for a given period
of time. During 2009-10 AFSL earned Rs. 158.17 lacs profit after paying tax. To analysis
the profitability of the company trend analysis is being done to assess the growth rate
of income and expenditure with respect previous year’s performance. In addition of
that a common size statement is also made. For that income & expenditure of the
company are expressed as a percentage of gross loan portfolios as a common practice
in microfinance industry.

Further income and expenditure of VFSPL are also expressed in terms of gross portfolio
for comparison.

4.01 Interest on Loans

The main source of income of any microfinance organization is interest income

against loans. In 2009-10 interest income of AFSL is increased by 144.69% and it
represents 15.20% of its gross portfolio. The growth in terms of interest income
is slightly low in VFSPL as it shows 14.42% of the gross portfolio.

4.02 Loan Processing Fee

At the time of providing loans to the customers a processing fee is collected which
represents 5.60% of the gross portfolio. Income from loan processing fee (LPF) is
increased by 134.41% with respect of prior year as revealed from trend analysis. In
case of VFSPL the percentage of LPF is 1.59% of its gross portfolio which is substantially
less than AFSL.

4.03 Other Income

Trend analysis shows a substantial growth of 592.57% with respect of prior

year’s figure. However in comparison with VFSPL the growth is not substantial. In
case of VFSPL it represents 1.79% of gross loan portfolio whereas in case of AFSL
it is only 0.17%.

4.04 Employee Costs

In comparison of previous year employee cost is increased by 116.95% however

in comparison of VFSPL it is down by 0.85 %( 6.38 – 5.53) as expressed in terms
of percentage on gross loan portfolio. Further common size statement shows
marginal reduction of cost as compared with prior year.

4.04 Administrative Expenses

The administrative expenses of AFSL are considerable high in comparison of

VFSPL. In case of AFSL it represents 3.64% of its gross portfolio whereas in case
VSFPL the percentage is 2.29%. In comparison of previous year administrative
 expenses, as expressed in terms of gross portfolio, more or less same even
though there is a 126% growth in gross loan portfolio. Administrative expense is
increased by 126.29% with respect of prior year.

Common Size Profit & Loss Account and Change in Accounts

AFSL VFSPL
Amountin Rs. Common Size
%
2009-10 2008-09 change 2009-10 2008-09 2009-10
INCOME
Interest on Loans 143,896,937 58,807,374 144.69 15.20 14.03 14.42
Loan Processing Fees 52,986,292 22,604,558 134.41 5.60 5.39 1.59
Other Income 1,644,060 237,385 592.57 0.17 0.06 1.79
Total 198,527,289 81,649,317 143.15 20.97 19.48 17.79
EXPENDITURE
EmployeeCosts 52,346,056 24,128,632 116.95 5.53 5.76 6.38
AdministrativeExpenses 34,441,485 15,219,958 126.29 3.64 3.63 2.29
Financial Expenses 75,807,941 26,827,521 182.58 8.01 6.40 7.00
Provisions & WriteOff 6,377,576 746,860 753.92 0.67 0.18 0.33
Depreciation 3,859,779 540,944 613.53 0.41 0.13 0.14
Total 172,832,837 67,463,915 156.19 18.25 16.10 16.13
ProfitBeforeTax 25,694,452 13,803,516 86.14 2.71 3.29 1.66
Provision for Tax 9,877,307 3,448,419 186.43 1.04 0.82 0.70
ProfitAfter Tax 15,817,146 10,355,098 52.75 1.67 2.47 0.96

4.05 Financial Expenses

Financial cost is mainly representing borrowing cost of debt and it is the main
cost for any MFI.

There is considerable increment in borrowing cost. Trend analysis shows

182.58% increment against previous year’s figure. It is also high in comparison
to VFSPL even though there is a 126% growth in gross loan portfolio. In case of
AFSL it shows 8.01% of gross loan portfolio whereas it is 6.40% in case of VFSPL.

4.06 Provisions & Write Offs

There is substantial increment in provisions & loan write offs trend analysis
shows 753.92% increment against previous year’s figure. It is also high in
comparison to VFSPL even though there is a 126% growth in gross loan portfolio.
In case of AFSL it shows 0.67% of gross loan portfolio whereas it is 0.18% in case
of VFSPL.

4.07 Depreciation

Trend analysis shows that in comparison to the prior year there is a substantial
increment of 613.53% with respect of depreciation. In case of AFSL it shows
0.41% of gross loan portfolio whereas it is 0.14% in case of VFSPL.

4.08 Profits before Tax

 There is a considerable growth of 86.14% against prior year’s figure. However it
terms of gross portfolio it is reduced by 0.58% (3.29 - 2.71) as revealed from
common size statement. It happens as the rate of increment of financial cost is
more than the rate of increment of income.

4.09 Provision for Tax

In comparison of previous year provisions for tax is increased by 186.43% which

is also high by 0.34 %( 1.04 – 0.70) in comparison to VFSPL.

4.10 Profits after Tax

Profit after tax is increased by 52.75% against prior year’s figure. However it
terms of gross portfolio it is reduced by 0.80% (2.47 – 1.67) as shown in common
size statement. It happens as the rate of increment of financial cost is more than
the rate of increment of income. However in comparison to VFSPL the position of
AFSL is better. In case of AFSL it shows 1.67% of gross loan portfolio whereas it is
0.96% in case of VFSPL.

5.00 Ratio Analysis

In addition of comparative analysis ratio analysis is also being done as shown below:

AFSL VFSPL
Particualrs Terms
2009-10 2008-09 2009-10
Return on Investment Ratio
Profit After Tax
Return on Assets (%) 1.43% 2.34% 0.93%
Total Assets
Profit After Tax
Return on Net Worth (%) 10.43% 11.43% 6.75%
Net Worth
Profit After Tax
Return on Portfolio 1.68% 2.47% 1.19%
Net Portfolio
Profit After Tax +Pref Dividend
Earning Per Share 3.36 2.63 1.21
Weighted Avg. no. of Share
Solvency Ratio
Capital
Capital / Asset Ratio 8.32% 10.63% 10.69%
Total Assets
Loan Fund
Debt / Equity Ratio 10.16 7.33 7.93
Capital
Profit before Interest & Tax +Non cash charge
Interest Coverage Ratio 1.39 1.53 1.26
Interest Expenses
Liquidity Ratio
Current Assets and Loans & Advance
Current Ratio 55.60 61.85 33.68
Current Liabitities & Provisions
Loan Loss Reserve
Loan Loss Reserve Ratio (%) 0.56% 0.14% 0.02%
Gross Loan Portfolio
Profitibility Ratio
Financial Income
Operating Self Sufficiency (%) 113.92% 120.67% 99.18%
Financial & Operating Exp.+Loan Provisions
Operating Expenses
Operating Cost/ Total Asset (%) 15.59% 15.23% 15.88%
Total Assets

5.01 Return on Investment

Except earnings per share all other ratios of AFSL, related to return on
Investment, is being reduced in comparison to prior year. However in comparison
 to VFSPL all the ratios are showing better capacity of AFSL to provide more
return to their investors.

Return on Asset Ratio is reduced from 2.34% to 1.43% even though it is better
than VFSPL. The Return on Asset Ratio of VFSPL is 0.93%. Return on Net worth is
reduced from 11.43% to 10.43% even though it is better than VFSPL. The Return
on Net worth of VFSPL is 6.75%. Similarly Return on Portfolio is reduced from
2.47% to 1.68% whereas it shows 1.19% return in case of VFSPL.

Increment of earnings per share (from 2.63 to 3.36) indicates less capital
infusion and higher rate of return to the shareholders. All this ratios

5.02 Solvency Ratio

In 2009-10 Capital Asset Ratio is being reduced from 10.63% to 8.32% but Debt
Equity Ratio is increased from 7.33 to 10.16. However both the ratios are
indicating more dependence of AFSL’s on debt instead of own capital. Debt
Equity ratio of VFSPL shows that debt is equal to 7.93 times of capital and
comparatively less dependence on debt.

Reduction of Interest coverage from 1.53to 1.39 also indicates that AFSL’s
capacity of paying interest on debt is deteriorating. However the till the date of
financial statement they have sufficient profit to pay the cost of debt. Further in
comparison of VFSPL the position of AFSL is better as VFSPL has lower interest
coverage ratio of 1.26 times.

5.03 Liquidity Ratio

Current Ratio of 55.60 times indicates strong liquidity of AFSL however in

comparison of prior year it has been reduced from 61.85 times to 55.60 times.
Further in comparison of VFSPL the liquidity position of AFSL is better as in case
of VFSPL shows lower Current ratio of 33.68 times.

In comparison to previous year Loan Loss Reserve Ratio is substantially increase

from 0.14% to 0.56%. Further in comparison with VFSPL it is higher by 0.54%
(0.56 – 0.02). This also indicates that in AFSL rate defaulter customers is
increasing. However as the percentage of is very low in comparison of loan
portfolio AFSL does not have any problem to settled their creditors.

5.04 Profitability Ratio

In comparison to previous year operating self sufficiency ratio is being

deteriorated by 6.76% as the financial expenses of AFSL are increased
considerable (shown in comparative analysis). However in comparison to VFSPL
(99.18%), the position of AFSL is better and they able to generate profit (before
tax) of Rs. 13.99 after incurring Rs. 100 to meet the all relevant expenses.

In comparison to previous year Operating Cost ratio is slightly increased from

15.23% to 15.59% which also reduced the overall percentage of profit. However
in comparison to VFSPL (15.88%), the position of AFSL is better and they are able
to generate more profit than VFSPL as their operating cost is down by 0.29%.