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Sa-Dhan Newsletter Volume 5 Issue 1
Operational Costs of Delivering MicroFinance
at the end of eight years. An accumulated loss of Rs 24.7
Underpricing therefore can prove to be severely damaging
lakh is still not covered at the end of this period. The costs
as the MFI would end up unprofitable, struggling to
(with respect to salaries and other operating costs) seem
overcome the effect of accumulated losses, going further
to be significantly underestimated in this model.
away from its aim of sustainability. The sooner the myths
about interest rates are dispelled, the better
The Second Set of data made a simple assumption of:
Ø  Costs allowed by certain donors like NABARD for
Profitability:
group formation
Ø  Average loan size per member
Adjusted
Return  Financial
Ø  Interest Costs
Operating
on Assets Revenue
Ø  Loan Loss
Expense
Ratio
Ratio
Conclusion: In the second case, despite the fact that the
programme was able to break even at the end of the third
Asia Medium
20.3
0.2
28.8
year, accumulated losses were over Rs 100 lakh. The
Asia Small low-end
13.3
-4.9
17.4
interest rate assumption was again 18%. The cost of
Africa
15.8
4.0
23.9
promoting an SHG was assumed to be Rs 6,000 per year
and maintenance costs were taken at Rs 1,000 per year.
Latin America
16.6
4.4
34.7
Many practitioners felt these costs were understated and
Eastern Europe
20.8
8.6
34.9
believed the actual cost of promoting and linking a group
to be a lot higher. But even this level of costing is unviable
The above table indicates that some of the smaller and
given the accumulated losses
medium-sized Asian MFIs are not very profitable when
The Third Set of Data was from the actual audited ratios
compared to other regions and that there is a clear
of three MFIs, indicating their efficiency. The data was taken
relationship between the right kind of pricing and
from the audited statements of three well-known models,
sustainability/profitability. The key element here is the
viz. Grameen, Multiple Model and a Cooperative under the
willingness to charge sustainable interest rates. Most NGO-
AP MACS Act. The figures taken from the three distinct
MFIs in India are still reluctant to adopt a pricing structure
MFIs confirmed the findings in both the above cases.
that fully covers their costs and this can be attributed more
to their mindset than to any external control on pricing
Financial Ratio
Multiple Grameen
MACTS
(given that there is none). This takes us back to the issue
Interest Income
24.3%
21.7%
16.3%
of social control and in the case of most NGO-MFIs this
Less: Interest Cost
6.1%
12.6%
11.9%
is self-imposed. One perception could be that `market'
pricing of this sort would in some way violate the
Gross Operating Income
18.2%
9.1%
4.4%
`developmental' mission of the institution. But this will only
Less: Provision for Bad
lead to poor sustainability and will mean that the outreach
and Doubtful Debts
3.1%
0.0%
2.5%
of the MFI will be restricted and that it cannot perhaps
Net Operating Income
15.2%
9.1%
1.9%
continue its services beyond a certain period. The clients
Personnel Cost
6.5%
10.8%
7.8%
would suffer in the long run because, as we have
emphasised earlier, it is timely and continued service that
Operating Cost
9.8%
10.4%
3.3%
is the priority with them.
Gross Spread
-1.3%
-12.2%
-9.2%
Add: Other Income
3.5%
14.7%
2.7%
What can MFIs do to increase efficiency?
Net Spread
235.0%
2.6%
-6.6%
From the above discussion, it is clear that MFIs will have
Outstanding as
222,778
282,603
1,643
their own distinct cost structures, which shall be determined
on April 1 2002
by a multitude of factors. And these costs will inevitably
Outstanding as
307,956
493,980
1,904
determine the price of their products. The fact is that the
on March 31, 2003
MFI has to constantly look for ways and means to improve
Average Outstanding
265,367
388,292
1,774
its efficiency and reduce costs so that it can continue to
for 2002-03
serve the poor at interest rates that lie within the realm
of acceptance. Passing the burden of costs on to the MFI's
As shown above, personnel and operating costs were
low-income clients would be a major disincentive for the
between 11.1% for the MACTS and 21.2% for the Grameen
client and cannot be the solution, at least not for very long.
model. This also reaffirmed the fact that interest rates will
A review of the efficiency of the MFI has to precede the
have to be between 18% and 30%, depending on the
decision on pricing and the MFI has to do everything in
methodology adopted, in order for the MFI to run a
its power to optimise its costs.
sustainable programme. Also, in the case of the MACTS
a long standing NGO was doing the social intermediation
The MF sector, driven as it is by certain unique forces, has
and absorbed all the costs of the formation of the groups
and the MACTS.
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