Financial Policy For Ivcs.docx

INTEGRATED VILLAGE COOPERATIVE SOCIETIES (IVCS) FINANCIAL POLICY AND PROCEDURES.

MEGHALAYA LIVELIHOOD ACCESS TO MARKETS PROJECT (MEGHA-LAMP)

-2TABLE OF CONTENTS Sl No. 1. INTRODUCTION

Item

2.

INTERNAL AUDIT

3.

LINE OF AUTHORITY

4.

SEGREGATION OF DUTIES

5.

MANAGEMENT REPORTS

6.

BUDGETARY CONTROL

7.

ASSETS

8.

CURRENT ASSETS

9.

LIABILITIES

10.

EQUITY

11.

INCOMES

12.

EXPENDITURES

Page No.

-31 INTRODUCTION 1.1 Authority This manual has been developed by the FSD, MBMA. Compliance with the systems and procedures contained in this manual is mandatory for all the Integrated Village Cooperative Societies. 1.2 Terms and Definitions : A system of approved policy statements and corresponding Manual procedural guidelines and supporting forms that direct an organization towards its operational goals. : A stated course of action with a defined purpose and scope to guide Policy decision making under a given set of circumstances within the framework of corporate objectives, goals and management philosophies. : A series of prescribed steps followed in a definite regular order which Procedure ensure adherence to the guidelines set forth in the policy to which the procedures applies : An action, element or decision representing a prescribed step in the Activity procedure process. : A detailed component of an activity specifying required behaviour to Task complete the activity. : A pre-formatted document containing instructions and place-holder Form for data entry to monitor progress through a particular procedure and to ensure proper record-keeping.

1.3 The Background The Meghalaya Basin Development Authority under its Integrated Basin Development and Livelihoods Programme (IBDLP) has envisaged the setting up of home-grown community led institutions in the villages to deliver access to financial services in the rural areas of the State. This need for such institutions has arisen mainly because of the topography and the thin spread of banking network and Micro Financial Institutions in the rural areas. Financial inclusion cannot be achieved by relying solely on the formal banking network. Even in areas where banking services are available, banking procedures are cumbersome, distant and unfriendly to the rural population. The Primary Agriculture Credit Societies (PACS) or Service Cooperative Societies (SCS) as they are known today which were created to provide credit for agriculture and allied activities to the farmers/ entrepreneurs have been unsuccessful primarily due to the large area of operation of the societies and other factors. There is thus a strong need to innovate and design home-grown institutions rooted in the local culture to deliver sustainable financial inclusion. The cause for such an institution is further endorsed as it is felt that a grass root level institution can better understand the needs of the community and can respond to the related demands in a more flexible, friendly and expeditious manner. Accordingly, the idea of supporting the Integrated Village Cooperative Societies (IVCS) emerged. An IVCS in the simplest terms is a village self help group registered as a Cooperative Society under the Meghalaya Cooperative Societies Act (which provides a legal

framework for functioning of these institutions) with joint liability of all members and leveraging strongly on the social capital in the village communities of the State. The IVCS can provide thrift, credit other financial services and intermediation and undertake other economic income generating activities which can improve the welfare and livelihood of its members. These societies can be formed and promoted by fifteen adult residents of a village or along with adjoining villages in the case of small villages. Under the Meghalaya Livelihood & Access to Markets Project, each IVCS should strive to mobilise at least 400 members for it to become economically viable. Although the idea of single village cooperative societies have been discussed at various forums in the past in the country, the scales have always tipped in favour of large sized cooperative societies which led to the creation and promotion of Primary Agricultural Credit Societies (PACS) or Service Cooperative Societies (SCS) as they are known today. The nationalisation of banks in the late 60s was also with a view to enabling the spread of banking facilities to all parts of the country. These efforts and interventions have, to a large extent, succeeded in their objectives but the lack of access to financial services and basic banking facilities in the rural areas of Meghalaya is still a concern which needs to be addressed to urgently. Considering that the efforts by banks to expand further in the rural and interior villages in the State has slowed down owing, mainly to non-viability of operations in such areas, the entry of IVCS as an intervention or initiative to tackle and resolve this issue can be considered to be timely and highly innovative. 1.4 The Finance Function and Funding The Integrated Village Cooperative Society is funded by Members’ share contributions, deposits, Entrance fee, support from the Government, surplus from operations and external borrowing. The IVCS is headed by the Chairman and supported by the Secretary who is responsible for all the financial, administration and IT issues of the IVCS. 1.5 Basic Policy Statement The Integrated Village Cooperative Society is committed to responsible financial management. The entire society including the Management Committee and staff will work together to make certain that all financial matters of the organization are addressed with honesty, equality, respect, dedication, professionalism, integrity and in the best interest of the society. The Policy and procedural guidelines contained in this manual are designed to: a) Protect the assets of the IVCS b) Ensure the maintenance of accurate records of the Society’s financial activities. c) Ensure compliance with the Meghalaya State Co-operative Societies Act, the Society’s Bye-Laws. d) Ensure the Society’s expenditure and liabilities are incurred only when necessary and in accordance with pre-determined estimates. e) The investment objectives of the IVCS shall be guided primarily by the safety and liquidity of its funds, whether mobilised or borrowed, and a competitive rate of return. 1.6 Amendments to the Policy a) The Chairman of the Managing Committee of the IVCS has the responsibility for administering these policies and ensuring compliance with procedures that have been approved by the Managing Committee. b) Exceptions to written policies may only be made with the prior approval of the Management Committee. Changes or amendments to these policies may be approved by the Managing Committee at any 0time.

c) Any difficulties encountered in the implementation of this policy should be referred to the Managing Committee. 1.7 Applicability of Procedures These procedures shall apply to the financial administration of all activities of the IVCS except as may be provided by the Managing Committee. Every Committee member and staff will be expected to familiarize with and operate within the parameters of these policies and guidelines. 2. INTERNAL AUDIT The Finance Sub-Committee is responsible for performing the internal audit function to ensure compliance to the financial procedures as they are set out in these manual and approved by the Managing Committee from time to time. During the course of their audit the Sub-Committee may raise issues in their report concerning the administration of these procedures which the Secretary must comment on appropriately. 3. LINE OF AUTHORITY This will set out clearly who has the authority and financial responsibility for the Financial Assets of the IVCS and provides guidelines for handling and controlling their accumulation and consumption. Managing Committee a) The Managing Committee is the apex body in respect of operations and functioning of the IVCS and has the authority to execute any policies it deems to be in the best interest of the IVCS within the parameters of the Society’s Bye- laws. b) The Managing Committee has the primary objective and responsibility for the administration and establishing policies as to the mix and quality of the investment and the benchmarks thereof, or engaging experts to advice on the same. Finance Sub-Committee a) The Finance Sub-Committee has the authority to design the Society’s Accounting system and make spending decisions within the parameters of the approved budget. Make decisions regarding the disposition of investment within the parameters of investment policy and decisions regarding the purchase of fixed assets as well as make decisions regarding the allocation of expenses. b) The Committee has the authority to supervise the financial operations of the Society and perform regular in-depths review of the Society’s Financial activity and oversee the development of the annual budget. The Secretary a) The Secretary of the IVCS will be the main person who will run and manage the dayto-day activities, transactions and affairs of the IVCS. b) The powers and responsibilities are spelt out in the Bye Laws of the IVCS. 4. SEGREGATION OF DUTIES No one person should initiate a transaction from the beginning to the end. Ideally, there must be segregation of duties as much as possible between initiation, authorization, execution, custody and recording of financial transactions. The Secretary will have the primary responsibility of maintaining the accounting system as designed and ensuring all policies are complied with in all operations and transactions.

5. MANAGEMENT REPORTS a) Timely and accurate financial information must be provided to the decision makers as and when required or according to timelines set from time to time by the Managing Committee. b) Detailed financial reports are made available on a monthly basis for discussion by the Managing Committee during the monthly meetings. c) Monthly management reports will be provided by The Secretary to the SubCommittee on Finance. Reporting Frequency Sl Nature of Report No. 01. The trial balance 02. Cash flow Statement 03. A report on status of Loan accounts including recoveries. 04. Income and Expenditure Account 05. Performance / Progress Report 06. Balance Sheet The financial period for the society shall be 1st April to 31st March.

Frequency Monthly Monthly Monthly Monthly Monthly Annually

6. BUDGETARY CONTROL Budget Preparation Drafts are prepared by the Secretary, reviewed by the Finance Sub-Committee and presented to the Managing Committee for approval. After approval by the Managing Committee the Chairman tables the budget in the AGM for members to approve. Budgetary Control The Secretary will be required to prepare Performance Reports of the IVCS which would help the Managing Committee effectively monitor the progress/ performance of the IVCS vis a vis the approved Budget. This Report may be prepared on Monthly basis and will be put up to the Managing Committee for review. 7. ASSETS 7.1 Safeguarding Assets a) All excess cash will be kept in interest bearing accounts. b) Bank statements are promptly reconciled on a monthly basis. c) Documents on all securities and fixed assets will be kept in a locked fire-proof safe. Inventory records will contain description, serial numbers, dates of purchase or receipt, valuation, and date of valuation. d) Appropriate insurance for all assets shall be maintained. 7.2 Fixed Assets 7.2.1 Policy and Administration The IVCS’s objectives in relation to fixed assets are to: a) Place the responsibility to safeguard each asset to a specific member of staff; b) Ensure that assets are properly protected against damage; c) Maintain proper description and classification to facilitate proper charge for depreciation;

d) Maintain adequate and accurate records of an assets repair and maintenance costs to provide the Managing Committee with the information for decision making regarding its usage. The criteria to be used in determining whether an item should be treated as fixed asset or not includes the following: a) The estimated useful life of the asset should span over one year. b) Usage of the asset should be seen to contribute to the operational capability of the IVCS c) The Secretary will organize a physical verification of the fixed assets. 7.2.2 Purchase of Fixed Assets Purchase of fixed assets must be planned for in advance through capital budgets. The Managing Committee selects the supplier with the best offer. The IVCS will maintain a fixed assets register. After acquiring the asset, The Secretary will enter the following information in the fixed asset register: a) Type of the asset. b) Date of purchase. c) Location. d) Cost of item. e) Depreciation Rate/Useful life. f) Date of sale if applicable. 7.2.3 Depreciation The Secretary will add up depreciation charge for assets in the same category and pass the following journal entry : Dr. Depreciation costs xx Cr. Accumulated depreciation xx After posting the depreciation journal entry, the Secretary prepares the fixed asset movement schedule using the fixed assets accounts and their respective provision for depreciation accounts. 7.2.4 Depreciation Policy Depreciation is computed on the reducing balance basis at the following rates: a) Office Equipment (12.5%) b) Furniture and fittings (12.5%) c) Computer equipment (30%) d) Land and Buildings (5%)

8. CURRENT ASSETS: 8.1 Policy and Administration The IVCS’s objectives in relation to current assets are to: a) Place the responsibility to safeguard each asset to a specific member of staff; b) Maintain proper description and classification. c) Maintain adequate and accurate records. 8.2 Loans To Members : 8.2.1 Internal Controls on Loans: a) All loan forms shall be received by being stamped and initialled by the person receiving them and recorded in the loans register. b) Each loan type will be recorded in a separate register. c) On receipt, the person receiving the loan application shall ensure completeness of the loan application and the supporting documentation.

d) The functions of loan processing shall be performed by the Secretary before approval by the Finance Sub-Committee. The Secretary/ official in charge of loan processing shall generate an appraisal report for each loan. e) The loan officer, if in place, otherwise the Secretary, shall review the appraisal process for accuracy and completeness. f) The loans officer, if in place, otherwise the Secretary, shall forward the loan applications to the Finance Sub- Committee for approval. g) All approved loan applications must be signed by a minimum of two members of the Finance Sub-Committee. h) List of loan applications sanctioned to members shall be submitted to the Managing Committee for control on weekly basis. 8.2.2 Loan repayments: a) All loans sanctioned and disbursed, except for Cash Credit/ Overdraft accounts, will be prescribed a loan repayment period. b) The Secretary shall monitor the loan accounts on a regular basis and ensure that the loans outstanding/ EMIs are repaid in time. c) A Monthly Loan Recovery Report will be prepared by the Secretary and put up to the Managing Committee for information and review. 8.3.1 Cheque Payments and maintenance: a) All unused cheque books shall be kept in the safe, under the custody of the Secretary or Accountant, if in place. b) Only one cheque book for each account will be in use at any one time. It shall be kept in the safe when not in use. c) There shall be kept a cheque register for all unused cheques. d) Once a cheque book has been used, the stubs will be presented before another is issued. e) All cheques must be signed by the Secretary and the Chairman. f) All payments request for services or goods supplied must be accompanied by supporting documentation. g) All payment vouchers must be pre-printed and pre-numbered. h) All supporting documents against which payments have been made must be stamped PAID and bear the Secretary’s stamp. i) The Secretary or Accountant ensures that the loans disbursed and payments made to members are posted to members’ accounts immediately and before close of business day. j) The Secretary or Accountant will update the Cashbook for all the cheques written before they are released. k) All voided cheques must be defaced and retained either on the cheque stub or with cancelled cheques. l) Blank cheques may never be signed in advance.

8.3.2 Bank Reconciliation a) The Secretary/ Accountant shall maintain a record of all bank transactions, listing all cheques disbursed and all receipts deposited on a daily basis. The cashbook shall show the current bank balances for all bank accounts. b) On a monthly basis, the Secretary or Accountant will reconcile the bank statement to the cashbook, and notify The Chairman of any discrepancies. The Secretary or Accountant will resolve all discrepancies with the assistance of the bank, if necessary. The Secretary or Accountant will report the resolution of the discrepancies to the Chairman. c) The Secretary or Accountant will adjust the Cashbook as and when needed and reconcile the Cashbook to the General Ledger on a monthly basis.

d) The Chairman will review the reconciliation statement and initials the statement to confirm this. e) All bank statements are retained in a file for future reference. Copies of all deposit slips are also retained in the same file. f) All deposits received in the day shall be banked/ accounted for in the same day. Any deposit received after banking hours shall be banked / accounted for the next day. g) All un-banked/unattended cheques shall be kept in the safe overnight

8.3.3 Internal Controls on Petty Cash: a) A petty cash float shall be maintained for all payments of Rs.1,000 or below. b) The amount of the petty cash float shall be determined depending on the needs of the society subject to the approval of the Managing Committee. c) The petty cash float shall be maintained on an imprest system d) All disbursements from the petty cash float shall be signed for against a petty cash voucher. e) Supporting documentation must be obtained for each payment. f) All payments from petty cash shall be recorded in a petty cash book maintained by the Secretary or Accountant. g) The Secretary or Accountant shall review the petty cash payments before presenting them for payment. h) The petty cash fund will be reconciled before the fund is replenished. i) The Secretary or Accountant will act as the bookkeeper and custodian of the petty cash fund. j) There shall be no advances to employees from petty cash. k) All petty cash vouchers must list the amount received, the purpose for which the cash is needed, and the date of the transaction. l) All petty cash vouchers used must be attached to the reimbursement request as supporting documentation. m) All reimbursement cheques for petty cash fund must be made to the custodian of the fund. n) Periodically The Secretary will make surprise counts of the petty cash fund. o) The petty cash float will be kept in a fire proof safe. 9. LIABILITIES 9.1 Current Liabilities: 9.1.1 Interest on members’ deposits and Dividends Payable: Monthly provisions shall be made for dividends and interest payable on members’ deposits. The rate applicable shall be the rate last approved by the AGM. Payment: a) Dividends shall be paid at a rate approved by the Managing Committee to all active members whose names appear on the members register at the close of the financial year to which the dividend relates. b) Dividends will not be paid to dormant members. A dormant member is a member who has contributed less than three months contribution (equal or less than to thousand) for the financial year in which dividend is been paid. c) A schedule of dividends payable including details of the member, deductions and the net payable amount shall be prepared by the accountant. d) Withholding tax on dividends and interest must be paid by 20th of the month following the in which dividends are paid. In order to meet the amounts required for dividend payment, the society shall set aside funds in interest bearing accounts.

9.1.2 Internal Controls on Refunds: Share Withdrawals: a) Payments to members withdrawing from the society shall be made 60 days after the receipt of a written notice of withdrawal from the member and guarantor replacements in case the member had guaranteed other loanees. b) Payments will be made net of any obligations to the society. c) The member’s file after clearance by the Finance Sub-Committee will be handed over to the Secretary, which shall process the payment. d) All files of withdrawn members will be cancelled and archived. Deceased Members payments: a) Payment of the dues of deceased members without loans will be made after the receipt of an original death certificate, or a copy certified by a lawyer. b) Payments of the dues of deceased members to such members will be made after payment of the claim from the insurance company. c) The member’s file after clearance by the Finance Sub-Committee will be handed over to the Secretary, which shall process the payment. d) All files of deceased members will be cancelled and archived. 10. EQUITY 10.1 Risk Fund: a) The Risk fund shall be used to meet future obligations on outstanding loans. 10.2 Entrance Fee: a) Membership fees shall be recognized as entrance fees. This account shall comprise the capital of the society. 10.3 Share Capital: a) Share capital shall represent members equity in the form of issued and paid up shares. 10.4 Statutory Reserve Fund: a) The Statutory Reserve Fund represents the IVCS’s net institutional capital which is established and owned by the society and is not distributable. An annual appropriation will be made from the Society’s profit and transferred to this fund. This transfer should be compliant with the Co-operative Societies legislation requirements and IVCS By-laws. 11. INCOMES Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of the society when those inflows result in increases in equity, other than increases relating to contributions from shareholders. The main sources of income of the IVCS shall comprise: a) Interest from loans granted to Members. b) Interest from Bank Deposits. c) Other income: such as dividends from investments, profit from other business activities. 11.1 Interest from members loans: Interest from members’ loans shall be recognized as income when received. 11.2 Interest from Bank deposits: Interest earned from fixed and call deposits shall be recognized when received.

11.3 Dividends from investments: Dividends shall be recognized when declared and notification received as to the amount payable. 12. EXPENDITURES All expenditure requests will be initiated in writing and approved within the specified authority. Only the Managing Committee can bind the society in agreements with third parties and suppliers. All agreements must be in writing and duly signed. The Secretary or Accountant obtains approval to make payments for all invoices from the Chairman. 12.1 Salaries and Wages: Salaries paid to the staff members concerned should be credited to their accounts and not paid to third parties, unless specially requested in writing by the staff member.

12.2 Committee expenses: 12.2.1 Committee Honorarium a) Committee Honorarium will be paid to Members of the Managing Committee and the members of the Finance Sub-Committee relating to the meetings attended by the Members.

NAME SIGNATURE DATE Chairperson .............................. ............................... Secretary ......................….. ...............................