Grameen Bank at a Crossroads

A few weeks ago, the Grameen Bank released its financial statement for 2009. I was curious about whether this would shed light on the rising delinquency that Grameen had already reported in its less comprehensive and unaudited monthly reports. The fate of the microfinance movement is entwined with what is going on behind these numbers.I didn't learn that much. Maybe someone more versed in financial statements of banks could glean more. But I did find two things worth highlighting.First, I found something that intensified my puzzlement about how Grameen records loans write-offs in its monthly reports, which in turn increased my doubts about Grameen's official repayment rates. To explain, I need to back up to a previous post. As I blogged before, the monthly statements imply that at least since June 2002, the Bank has not written off a single taka. How so? Consider this formula:Total loans at end of month=Total loans at start of month+New disbursements--New repayments--Write-offs.Every month, the Bank reports all the quantities in the formula except write-offs, so you can back out the write-offs. I did that and got a long row of zeroes. This discovery pointed to two possibilities: the Bank is not complying with regulations on when to write off loans; or the Bank is complying and doing something strange in the monthly data.Yesterday, I eliminated the first possibility, seemingly. While the financial statements have not in recent years provided specifics on write-offs, I noticed that until 2004, they did---and that the write-offs were not zero. In 2004, Grameen wrote off nearly 750 million taka, about 4% of its portfolio.Why don't these entirely appropriate write-offs surface in the monthly reports? I don't know. If you compare the December 2003 and December 2004 reports with the audited 2004 financial statement, you'll see they agree almost perfectly on end-of-year outstanding loan totals---that is, on the first two variables in the above formula. So the only way I can see to reconcile matters is to conclude that in the monthly reports, the Bank is embedding write-offs in the third and fourth variables, as negative disbursements or principal repayments. To wrap your head around that, notice that write-offs, "negative disbursements," and repayments all reduce outstanding loan balances. If the Bank counted write-offs as repayments in 2004, then it inflated its repayment rate from 95.5% to the reported 98.9%.On balance, it is hard to know whether to trust the Bank's repayment figures.The second point worth highlighting sounds worse than it necessarily is, but could signal a crossroads for Grameen: as of December 31 its capital adequacy ratio was barely above the legal minimum. The CAR is essentially the ratio between the Bank's capital---money on hand, such as profits accumulated over the years, that can cushion loan losses---and outstanding loans. Grameen's CAR has declined steadily since 2003 (see bottom of this), from 19.30% to 10.65%, 10% being the required minimum. In other words, as of December 31, if 10.65% of Grameen's loans went bad, it would be able to sustain the hit (footnote). More than that and it would teeter towards bankruptcy. (If you take out the dividend Grameen proposed to pay its client-shareholders this year, the ratio falls to 10.46%.)The main reason why the CAR has been falling---and why that is not necessarily bad---is that Grameen has been expanding its lending much more than its capital base. But with the additional (9%) growth in outstanding loans since December, Grameen must be at or below the legal minimum CAR of 10%.In theory, then, the Bank now must either stop the lending growth or find new equity investors to add to its capital base. Both options pose institutional challenges. If the Bank stops the growth, which since 2007 has occurred more by increasing credit per Grameen member than increasing Grameen membership, it may expose many bad loans. When credit per member is expanding, members can usually get a bridge loan from a friend or moneylender to help them finish paying one Grameen loan (plus interest), knowing that Grameen will immediately disburse a bigger loan. Such houses of cards may collapse when credit is tightened. More generally, if Grameen cannot promise all members continuing to access to new loans, that may undercut the most powerful incentive to repay old ones. And if Grameen puts less of depositors' savings into its credit operation and more into safe commercial bank accounts, it may be unable to earn returns that match the 10--12%/year it promised on long-term savings.If, on the other hand, Grameen goes to outside investors--public or private, foreign or domestic---it may face intrusive questions about its financial situation and management. Muhammad Yunus has long prized Grameen's independence, pointing out that it has taken no new donor money since 1995 (or early 1996). New investors might ask, for instance, exactly how the Grameen Bank calculates repayment rates and why the monthly data make it seem like it never writes off bad loans. They might ask how 12% interest will be paid if mainstream Bangladeshi interest rates stay low.This intrusive blogger has not received any response to such questions sent several months ago to Grameen management.(Spreadsheet with monthly Grameen data.)