Sa-Dhan Newsletter Volume 5 Issue 1

Operational Costs of Delivering MicroFinance

aside, if the MFI has to continue delivering on its mission

Efficiency

and expanding its services over a period of time, it has

no option but to charge an interest that will adequately

Name of the MFI

Op. expenses (% of Avg.

cover the cost of its loans.

Gross Portfolio)

FIE (Bolivia)

11.3%

EDA Rural Systems recently conducted a study of a sample

Los Andes (Bolivia)

12.5%

of the Regional Rural Banks (RRBs) in India. The study3 ,

which covered a sample of five RRBs, reports that all of

Fondesa (Dominican Rep)

13.4%

them were making losses on their SHG products, irrespec-

WWB Cali (Colombia)

13.6%

tive of the SHG promotion mechanisms adopted. The cost

and yield analysis indicated that it was not practical to

WWB Popayan (Colombia)

13.7%

expect the RRBs to cut down on delivery and management

costs on SHG loans beyond a point. Total operating costs

Interest Rates ­ Myths and Reality

of a relatively efficient bank branch were around 19% on

SHG lending, underlining the high costs of promoting

Pricing of an MFI's products has to take into account the

SHGs, relative to the 12.5 to 13% interest the banks felt

environment in which the MFI operates as well as its cost

able to charge. This did not allow the banks to earn a spread

structure. In India, the interest rate for MFIs ranges between

even with the most efficient operating system. This will,

24 and 36%. MFIs charging rates lower than this generally

in the long run, only discourage any higher commitment

suffer the consequences in the form of poor sustainability.

to this product, which even at present comprises only a

small part of their portfolio.

Interest rates set by MFIs are based on the premise that

the MFI has to be able to provide viable long-term financial

According to the study, it is apparent that pricing of SHG

services on a large scale. Providing credit access to the

loans in accordance with their overall cost will alone result

poor and attempting to reduce their dependence on the

in substantial and sustainable outreach to low-income

moneylender (often their only other option) would call for

clients through the SHG mechanism in the long run. The

a certain amount of leeway as far as pricing is concerned.

study also indicated, from the experience of the sample

MFI interest rates have to cover all administrative costs, the

banks, that the minimum interest rate on SHG loans needs

cost of capital including loan losses. Only then can the MFI

to be around 20-22%; a finding that is consistent with some

be truly viable. Interest rates that do not allow an MFI to

of the leading MFIs in the country that have also found

recover its costs are impractical and severely damaging to

it unsustainable to lend to SHGs at lower rates.

the MFI's performance.

Model Cost Structure for MFIs

In fact, it has been said that one of the contributions of

MF has been to put an end to the interest rate debate. It

In the backdrop of the Usury Interest regulation, which was

is an accepted fact that it is access to credit that the poor

recently adopted as law by the state of Tamil Nadu and

lack and crave. The poor are actually able and willing to

a few other states, BASIX was asked by Sa-Dhan to prepare

pay interest rates that reflect the real cost of the loans and

a model cost structure for MFIs -- a model that could

put it to good use, increasing both their productivity and

subsequently be used to justify pricing. The Usury regu-

profits. The relatively low importance of cost for the poor

lation was enacted to protect illiterate citizens from high

when compared to timely access to credit has to be

interest rates charged by moneylenders. As an unintended

emphasised and understood.

consequence, this regulation has also affected some MFIs

who are not subject to regulation by the Reserve Bank of

As far as NGO-MFIs are concerned, subsidised interest rates

India. As part of preparing this model cost structure, three

are not the best way to make use of donor funds. They

sets of data were prepared:

generally benefit only a small number of borrowers and

cannot last beyond a certain period. Apart from distorting

The First Set of data presented was for an SHG programme,

the market and restricting the growth of the MFI, they can

with certain assumptions made about

lead to excessive dependence, which will most certainly keep

Ø  Number of groups managed by an animator/field

the MFI from achieving its goal of financial sustainability.

worker

In terms of being able to charge interest rates that lead

Ø  Certain salary levels for animators, field officers,

to sustainability, MFIs in India are generally not subject to

accountants and managers

an interest rate cap. But while there is no regulatory control

Ø  Overhead Costs

on interest rates of MFIs, there seems to be a certain amount

Ø  Average loan size per member

of social control

Ø  Interest Costs

Ø  Loan Loss

The willingness to charge more is determined by factors

such as competition and how low the MFI thinks it can

Conclusion: In the first case, at an interest rate of 18%,

go before compromising on sustainability. Social perception

the programme is not able to achieve `break-even', even

3.

Report on "The Outreach/Viability Conundrum - Can India's Regional Rural Banks really serve low-income clients?

Page No. 42-46, M-CRIL February 2003.

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