On this page, we have uploaded the Gauhati University Micro-finance B.COM 4th Semester, Unit 4 "Management of MFIs" Notes, Which can Be Useful for B.com Final Exams.
Also useful for Dibrugarh University, Rabindranath Tagore University, Hojai B.Com 4th Sem Students.
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UNIT -4
Management of MFIs
Q.What is Fund Management? What are the requirements of Fund Management?
Ans:- Fund Management is the process in which a company takes the financial assets of a person, company, or another fund management company and uses the funds to invest in companies that use those as an operational investment, financial investment, or any other investment to grow the fund; post which, the returns will be returned to the actual investor and a small amount of the returns are held back as a profit for the fund.
Requires;
1. Exhaustive knowledge of the market and the current trends in financial affairs.
2. A clear understanding of fund flows (both inflow and outflow).
3. Capability to analyze complex financial information and draw statistical conclusions.
Types of Fund Management;
(i) Mutual Fund. (ii) Trust Fund. (iii) Pension Fund. (iv) Hedge Fund.
Q.Who is a fund manager? Explain the responsibilities of the fund manager and working style.
Ans:- A fund manager is an investment professional who is appointed by a mutual fund company or trustee to manage one or more schemes offered by the fund house. This individual is responsible for managing a fund’s portfolio and taking responsibility for all its trading activities. They implement the investment strategy of the fund they manage to achieve their investment objective. Typically, a fund manager is a highly experienced professional who has cut their teeth in research as an analyst. It is, after several years of experience in market analysis, that an individual may get to manage a scheme on his/her own.
Responsibilities of Fund Manager;
1-Asset Allocation: The class of asset allocations can be debated, but the standard divisions are Bonds, Stocks. Real estate, and Commodities.
II-Long-term Returns: It is essential to study the proofs of the long-term returns against various assets and holding period returns (returns accruing on average over multiple lengths of investment).
III - Diversification: Going hand in hand with asset allocation, the fund manager must consider the degree of diversification, which applies to a client under their risk appetite.
Fund Manager Style or Approach;
(i) Growth Style: The managers using this style greatly emphasize the current and future Corporate Earnings.
(ii) Growth at Reasonable Price: The Growth at Reasonable Price style will use a blend of Growth and Value investing for constructing the portfolio.
(iii) Value Style: Managers following such a response will thrive on bargaining situations and offers.
(iv) Fundamental Style: This is the basic and one of the most defensive styles which aim to match the returns of the benchmark index.
(v) Quantitative Style: The managers using such a style rely on computer-based models that track the trends of price and profitability.
(vi)Risk Factor Control: This style is generally adopted for managing fixed-income securities which take into account all elements. (vii) Bottoms-Up Style: (viii)Top-Down Investing:
Q.. What is Risk Management? Why Risk is Important in MFIs.
Ans:-Risk management is identifying, assessing, and controlling threats to an organization's capital and earnings. These risks stem from a variety of sources including financial uncertainties, legal liabilities, technology issues, strategic management errors, accidents, and natural disasters.
Why risk is Important ;
Risk management has perhaps never been more important than it is now. The risks modern organizations face have grown more complex, fueled by the rapid pace of globalization. New risks are constantly emerging, often related to and generated by the now-pervasive use of digital technology. Climate change has been dubbed a "threat multiplier" by risk experts.
A recent external risk that manifested itself as a supply chain issue at many companies -- the coronavirus pandemic -- quickly evolved into an existential threat, affecting the health and safety of their employees, the means of doing business, the ability to interact with customers, and corporate reputations.
Q.Discuss the various types of Risk Management.
Ans:- (1) Financial Risk:-Financial risk is the possibility of losing money on an investment or business venture. Financial risk is a type of danger that can result in the loss of capital to interested parties:
(a) Credit Risk: Financial risk management requires a sophisticated Credit risk. Credit risk is the risk to earnings or capital due to a borrower's late and non-payment of loan obligations.
(b) Liquidity risk: Another type of financial risk is liquidity risk.
(c) Interest rate risk: Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates. This risk affects the value of bonds more directly than stocks.
(d)Foreign exchange risk: Foreign exchange risk is the potential for loss of earnings or capital resulting from fluctuations in currency values.
(e) Investment portfolio Risk
(2) OPERATIONAL RISKS: Operational risk is another type of risk that MFIs face. Operational risk arises from human or computer error within daily product delivery and services.
(a) Translation Risk:- Transaction risk exists in all products and services. It is a risk that arises daily in the MFI as transactions are processed.
(b) Fraud Risk:-Effective internal controls play a crucial role in protecting against fraud in microfinance organizations.
(3) Strategic Risk:- Strategic risks include internal risks like those from adverse business decisions or improper implementation of those decisions, poor leadership, or ineffective governance and oversight.
(a) Governance Risk:-One of the most understated and underestimated risks within any organization is the risk associated with inadequate governance.
(b)Business environment risk: Business environment risk refers to the inherent risks of the MFI's business activity and the external business environment.
(c) Regulatory and legal compliance risk.
Q. Discuss the Risk Management Framework.
Ans:-1. Identifying, assessing, and prioritizing risks.
2. Developing strategies and policies to measure risks.
3. Designing policies and procedures to mitigate risks.
4. Implementing and assigning responsibilities.
5. Testing effectiveness and evaluating results.
6. Revise policies and procedures as necessary.
Q. Write a short note on the performance management of MFIs.
Ans:- Performance Management equips staff at financial institutions across emerging economies with frameworks and tools to manage people effectively. To sustain the business of financial institutions, leaders and managers must focus on 'performance. This means helping staff to maintain quality, efficiency, productivity, cost-effectiveness, and ethical business practices.
A ration are discuss below;
1. Portfolio to Assets:- This ratio demonstrates how much an MFI has allocated to its loan business.
2. Cost Income Ratio:- This ratio shows cost as a percentage of revenues and provides an indication of how efficient the MFI is.
3. Cost per Active Client:- This ratio expresses operating expenses as a percentage of active clients.
4. Borrowers per Loan Officer:- This measures the loan application load per loan officer.
5. Active Clients per Staff Member:-This metric demonstrates the overall productivity of each member of the MFI's staff who manages clients.
6. Client Drop Out Rate:- This metric shows the percentage of clients that had no transaction activity with the MFI in the designated period.
7. Average Outstanding Loan Size:- This measures the average outstanding loan balance per borrower.
8. Average Loan Disbursed:- This metric shows the average value of each loan disbursed.
9. Average Deposit Account Balance:- This average can provide information on the socioeconomic level of the client base.
10. Average Deposit Account Balance per Depositor:- This average provides a ratio for analyzing client outreach for deposit-taking MFIs.
Q. Discuss how operational efficiency and productivity can be measured.
Ans:- 1. Opportunity to develop cross-discipline expertise:- With proper training and orientation to the employees from time to time, the productivity of the employees can be enhanced.
2. Raise the corporate culture:- Every workplace has a unique culture. Not only does it depend on the product or services that the company offers but its core values.
3. Effective communication:- Communication is a signific.. criterion for raising the efficiency of the organization as a whole.
4. Appropriate technology:- To perform well, one needs the right tools. Most often, this is in the form of new technology that assures and assists the staff.
5. Appreciate:- Nothing can provide more joy than a few words of appreciation. No employee works for money alone.
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