Sa-Dhan Newsletter Volume 5 Issue 1

Operational Costs of Delivering MicroFinance

two indicators are connected since a falling operating

High initial investment in fixed infrastructure and

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computerised MIS increases the operating expense

expense ratio means operating expenses have increased by

ratio initially when the costs are spread over a lower

less than the increase in portfolio. In absolute terms

operating expenses are higher than last year but lower

client base.

compared to the portfolio growth and hence the ratio is

The choice of methodology has implications for the

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falling. An improving operating self-sufficiency ratio (OSS)

cost structure. The Grameen model is extremely

means that a proportionate increase in operating income

human resource intensive. All the processes in this

is higher than the related proportionate increase in operating

methodology right from forming groups to disbursing

expenses. As is evident from Table 2, the yield on portfolio

loans to collecting repayments and maintaining records

came down to 28.7%, which was on account of a reduction

of the clients require high involvement from MFI staff.

in interest rate rather than a decline in the quality of the

This makes this methodology cost intensive and hence

portfolio. However, the proportionate fall in yield is lower

requires a large client base to break even.

than the proportionate fall in expenses hence an improving

operating self-sufficiency ratio.

The generous inflow of grant funds usually inhibits

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cost consciousness among MFI management and

In Year 2003, BUK continued its expansion by adding five

staff.

more branches and venturing into the neighbouring district

of Laxmipur. Experienced staff of older branches and a few

It is important to improve staff productivity in terms

freshly recruited staff manned the branches. Some of the

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of both numbers of clients reached as well as loan

freshly recruited Centre Managers were placed in the older

outstanding serviced. If the staff covers a very high

and established branches in Gopalpur. The total number of

number of clients with low outstanding then the

villages serviced increased but its proportion to total

transaction costs of serving such a client base are

number villages in the district fell due to venturing into a

very high. Similarly, very few clients with high

new district. The concentration within the villages has also

outstanding balance leads to a very high co-variant

come down. BUK recorded growth both in terms of active

risk.  BUK has shown considerable improvement in

borrowers and total loan outstanding portfolio but at a

both the indicators of staff productivity, which has

decreasing rate while maintaining its excellent portfolio

been one of the main reasons for the reduction in

quality. The number of active borrowers recorded a growth

its operating expense ratio.

of 119% over the last year and total portfolio outstanding

recorded an increase by 28% over the last year. This was

Change in product design and introducing a new loan

achieved with 56% increase in staff strength. The growth

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product significantly increased the portfolio outstand-

in terms of absolute numbers has been higher in Year 2003

ing, which could be serviced at almost the same costs.

than in Year 2002.

Table 2 shows that in Year 2003, the operating expense

The strategy of expansion has cost implications. While

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ratio has come down to 25.2%, which is lower than its

increasing outreach it is important to consider whether

yield of 28.8%. This is an important landmark in the

to increase the breadth or depth of outreach or both.

progress of BUK though it is not sufficient for achieving

sustainability (OSS>=100%). For reaching sustainability ­

In spite of considerable progress made by BUK, its

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when operating income covers all the expenses ­ yield on

operational costs are still higher than the leading MFIs

portfolio has to be higher than both operating expenses as

(as the comparison with the M-CRIL Top10 shows)

well as financial costs.  This is not the case for BUK in

and it has still not achieved operational self-suffi-

2003 since the difference between the operating expense

ciency. BUK needs to concentrate on reducing its

ratio and yield is only 3.6% while its financial cost ratio

operational costs further to achieve operational self-

is 9%. The net result is an operating self-sufficiency ratio

sufficiency.

This could perhaps be done by re-

of 82.6% compared to the 109% average OSS of the best

focusing on depth of outreach, which reduced during

performing MFIs in the M-CRIL database (the M-CRIL

Year 2003.

Top10).

About the Author:

In Year 2004 BUK intends to consolidate its operations and

presence in the newly established branches in Laxmipur

Ragini Bajaj Chaudhary is a management graduate from

district. BUK will retain microfinance as its core intervention

Institute of Rural Management Anand (IRMA) and a Man-

with its clients. BUK has achieved significant progress since

agement Accountant from Chartered Institute of

its inception and aims to serve over 1,00,000 clients in next

Manangement Accountants (CIMA), UK. Ragini has worked

five years and become a sustainable and profitable MFI.

in the area of development consulting, capacity building of

NGOs, academics and has coordinated a post disaster

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Conclusions

livelihood restoration project. She is currently working with

The key milestones of BUK's progress have been maintain-

EDA Rural Systems Pvt. Limited as aTraining Co-ordinator.

ing high portfolio quality and consistently reducing oper-

ating expense ratio. The following conclusions emerge from

BUK's experience discussed above

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