Sa-Dhan Newsletter Volume 5 Issue 1

Operational Costs of Delivering MicroFinance

free to follow their own practice in this regard. Making no

set of features, which naturally influence the cost structure

provision at all is extremely rare and generally the rate of

of the MFI in question.

provisioning will reflect the portfolio quality of the MFI.The

loan portfolio of an MFI is not as collateralised when

The Self Help Group (SHG) Model is one of the most widely

compared to banks and this is perhaps one reason why

used methodology in India. A homegrown model, this

provisioning norms should be stricter.

involves the formation of groups with anywhere between

15 and 20 members per group who are required to save

on a regular basis with the group. Savings are always a

As a rule, the portfolio quality among MFIs is extremely

pre-cursor to credit, which is extended to members in need,

good with repayment rates often crossing 90%. Portfolio

after a certain minimum period of saving .The group's

quality has proved to be better among the Grameen MFIs

internal funds are generally revolved as credit and this fund

given the tighter credit discipline and intense monitoring

is, at times, supplemented by external sources, which could

of loans. So methodology obviously has an impact. Also,

be either a bank or an MFI.

the loan products offered by various MFIs have their own

inherent risks - crop loans, for instance are accepted as

Lending through SHGs or federations of SHGs has proved

being riskier than other loans.

to be the most popular methodology and has come to be

recognised and acclaimed as perhaps the most effective way

Loan loss Provisioning Expense Ratio (adjusted)2

of reaching the poorest. As a model, it can be cost effective

(by Methodology) MBB # 9, July 2003

for the MFI since the transaction costs of lending to groups

of 15-20 members would be lower than those incurred in

Individual

1.7

individual lending.

Solidarity Groups

1.4

Village Banking

0.7

However, initial group formation costs are usually very high.

These costs will reduce over time as the groups become

(All figures for financially self sufficient MFIs)

more independent. The promoting MFI therefore will often

externalise these costs to the groups or have an NGO acting

Operating Cost: The one other significant element of

as a social intermediary. And apart from the monetary cost,

expenditure for an MFI is its operating cost. This is the

members have to commit a fair amount of their time to

cost of doing business and includes personnel costs,

this entire process of forming and maintaining a group.

administrative costs such as rent and travel. It does not

include financial cost and loan loss provision, and costs

The Grameen Model:

associated with non-financial services. The Operating Cost

Ratio (Operating Cost as a % of Average Gross Portfolio)

Replications of the Grameen Bank are to be found aplenty

thus measures the institutional cost to the MFI for delivering

in our country, with at least 20 MFIs following this

its services. The performance of Indian MFIs seems to be

methodology. A solidarity group of five or so borrowers

fairly good on this front. The M-CRIL database shows that

come together and mutually guarantee each other's loans,

operating efficiency of Indian MFIs is comparable with

deterring default by group members. Seven groups form

international best practice norms, with most rated MFIs

a centre, 10 centres form a cluster and seven clusters form

recording an Operating Expense Ratio of below 30%.

a branch. This lending methodology where group members

guarantee each other's loans, is seen as better suited to

Operating Expense as

low-end clients who have few or no assets to offer as

collateral. It's a regimented form of lending with Savings

Percentage of Loan Portfolio by Region

being a compulsory component with no internal circulation

Asia

16.0

of savings as in the SHGs. The emphasis of the Grameen

Eastern Europe

27.3

model is on women and the peer pressure employed in

this methodology is so effective that repayment rates of

Latin America

20.7

Grameen MFIs often stand closer to 100% and in any case

Africa

27.8

well over 90%.

All figures for financially self sufficient MFIs

The operating costs of Grameen MFIs are relatively higher.

Source: Micro Banking Bulletin (MBB) Issue # 9, July 2003

The cost structure reflects their labour-intensive approach

to lending and the high level of client-staff interaction that

What are the factors that determine operating costs?

this model demands. Delivering very small loans to the very

a)

The Delivery Model:

poor will necessarily entail high costs. Loan officers incur

substantial costs to reach remote villages in order to

The world over, microfinance (MF) has come to be practised

disburse very small loans. Another major component of the

through a variety of methodologies. Microfinance in Asia

Grameen model is the weekly field meeting between loan

is mostly carried out by Grameen MFIs, SHG-MFIs (almost

officers and customers. Customers can only meet during

exclusive to India), rural banks, cooperatives, village credit

a certain period in any given day, as they need to spend

boards and so on. Each of these models has its own distinct

the rest of the day working. And groups residing at great

2

Net Loan Loss Provisioning Expense, adjusted / Average Total Assets

10