Sa-Dhan Newsletter Volume 5 Issue 1

Operational Costs of Delivering MicroFinance

the price-makers. The situation has changed dramatically

found the task extremely challenging. And if the costs of

today with a spate of competitors challenging this mo-

running such a programme are found to be high, then as

nopoly, especially in the South. Other MFIs apart, the

an alternative to externalising these costs to the clients

commercial banking sector has joined the fray, with MF

(always a disincentive) the MFI has to be able to constantly

suddenly seeming an excellent way of lending at low risk

upgrade and improve its own systems as a means to

and the success of group lending (mainly through SHGs)

improving efficiency, and this is possible provided the MFI

further fuelling this attention.

is committed and is willing to be innovative and open to

change.

This form of competition can serve to make the entire field

more conscious of their performance levels and can drive

Technology

them to find ways and means of streamlining and reducing

costs, thus being able to indulge in competitive pricing.

MFIs could also make use of more advanced technology

to reduce their transaction costs and to improve efficiency

Conclusion

and customer satisfaction. Some MFIs in India have been

exploring the use of new technologies, such as Palm Pilots

As we have seen above, Asian and especially Indian MFIs

and smart cards to lower transactions costs and increase

are efficient in terms of costs. However, they are not as

outreach.

profitable as their counterparts in other regions, as their

pricing does not fully reflect or cover their costs. We have

Credit Rating:

seen how cost structures of MFIs vary across regions and

also depend on factors such as methodology, target

MFIs should choose to opt for a credit rating every year

clientele and the rate of growth. Microfinance has certain

from one, if not two, rating institutions. The rating will give

unique features that sets it apart from mainstream finance

the management an accurate picture of its governance,

and these are to be understood and appreciated. A wide

operational efficiency, financial performance and creditwor-

variety of delivery channels, the use of peer pressure in

thiness and will serve to highlight the issues that the

place of traditional collateral and high transaction costs are

organisation needs to work on, in order to improve its

some of these features, all of which have varying degrees

performance. The Credit Rating, being the professional

of impact on the ultimate sustainability of the MFI. A deeper

opinion of highly respected rating institutions, would hold

awareness of this has to be encouraged and has to

a lot of weight, determining the MFI's profile and `attrac-

eventually replace the conventional mode of thinking with

tiveness' as far as potential lenders and investors are

a mindset that is more in line with the specific needs of

concerned. This can lead to lower cost of borrowing and

MF operations. MFIs in India have some distance to go

larger lines of credit from banks and financial institutions

before they get there. Despite the lack of a regulatory ceiling

to the MFI.

on interest rates, MFIs in India seem to be unwilling to

price their loans to be fully sustainable. This could, in some

Credit Bureaus

sense, be attributed to the stage of evolution of the MF

industry - still in its early stages of mainstreaming. A more

The idea behind developing a credit information system is

professional approach to the mission of reaching the poor

to allow MFIs to share information on clients. The gradual

and a commitment to long-term sustainability must surely

mainstreaming of microfinance will lead to increased com-

follow in the years to come.

petition and while this will result in more competitive

products and better outreach, it could also lead to excessive

About the Author:

indebtedness of the client, with all of these institutions

providing more debt to the client than he can perhaps

S Viswanatha Prasad, is the Chief Executive Officer of

handle. Information sharing through credit bureaus, such

Bhartiya Samruddhi Finance Limited, a part of the BASIX

as the ones prevalent in Latin America, can help MFIs save

Group of Companies which is one of the pioneers in the

considerable time in appraising a client's creditworthiness.

field of Micro Finance located at Hyderabad. BSFL is the

MFIs can thus make better lending decisions and reduce

financial services entity within the Group currently operating

both client and institutional risk. Credit Information systems

in over 4000 villages in five States across India. Prasad,

are still a new concept in most developing nations and their

37, has a Management Degree from BITS, Pilani. For over

efficiency may not have been fully proved even in developing

a decade, he has worked in the corporate sector and in

countries. The idea nevertheless could be worth pursuing.

consultancy firms of repute. His vast experience in main-

stream finance coupled with his knowledge of the devel-

Competition:

opment sector led to his joining BASIX, in 1999 as Vice

President-Strategic Initiatives and he is now the CEO of

A few years ago, MFIs operating in any given region had

BSFL.

an almost monopolistic hold over that region. There was

generally no impetus for improving efficiency. They were

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