Chapter 4 - Section 4.3 - SubSection 4.3.1.iOperating Cost3

The operating expense ratio is an important measure of the sector’s cost efficiency, indicating operating expenses relative to the scale of business operations. Tracking this ratio over time helps assess changes in institutional efficiency, cost pressures, and microfinance institutions’ ability to manage expenses amid evolving portfolio and operational conditions. The operating cost ratio remained relatively high during 2017–20, declining from 9.98% in 2017 to 8.83% in 2019 before falling sharply to 6.40% in 2021. It remained broadly stable at around 6.5–7.0% during 2022–24, indicating improved cost efficiency. However, the ratio increased to 7.09% in 2025 and further to 8.47% in 2026, signalling renewed operating cost pressures. The 2026 increase may reflect higher staff intensity, investments in compliance and risk management, portfolio-quality management, and slower portfolio growth, which can raise the cost ratio as operating expenses are spread over a slower-growing business base. This rise occurred in a year of unusually benign national consumer-price inflation, reinforcing that it is a sector-specific, structural cost increase rather than one imported from the wider economy. While the ratio remains below the levels observed in 2017–20, the recent upward movement highlights the importance of cost optimisation and productivity improvements for maintaining operational and financial sustainability.

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Figure 4.3.3: Trends of Operating Cost across MLI Categories4

4.3.1.i Operating Cost3

The operating expense ratio is an important measure of the sector’s cost efficiency, indicating operating expenses relative to the scale of business operations. Tracking this ratio over time helps assess changes in institutional efficiency, cost pressures, and microfinance institutions’ ability to manage expenses amid evolving portfolio and operational conditions. The operating cost ratio remained relatively high during 2017–20, declining from 9.98% in 2017 to 8.83% in 2019 before falling sharply to 6.40% in 2021. It remained broadly stable at around 6.5–7.0% during 2022–24, indicating improved cost efficiency. However, the ratio increased to 7.09% in 2025 and further to 8.47% in 2026, signalling renewed operating cost pressures. The 2026 increase may reflect higher staff intensity, investments in compliance and risk management, portfolio-quality management, and slower portfolio growth, which can raise the cost ratio as operating expenses are spread over a slower-growing business base. This rise occurred in a year of unusually benign national consumer-price inflation, reinforcing that it is a sector-specific, structural cost increase rather than one imported from the wider economy. While the ratio remains below the levels observed in 2017–20, the recent upward movement highlights the importance of cost optimisation and productivity improvements for maintaining operational and financial sustainability.

3 Define as (Personnel Cost including incentive + Travel Cost + Admin Cost + Group Dev. Cost/Training Cost + Depreciation + Any Others)/Average Portfolio Outstanding.
Figure 4.3.3: Trends of Operating Cost across MLI Categories4
4 Based on weighted average for all MLIs.

The cost ratio varies considerably across both legal forms and institutional size. By legal form, NBFCs record the highest ratio at 12.47%, followed by Section 8 companies at 11.70% and Private Limited Companies at 9.55%. NBFC-MFIs record a ratio of 8.35%, while Other institutions have the lowest ratio at 7.89%. The relatively higher ratios among NBFCs and Section 8 companies indicate greater operating cost intensity, while the lower ratios among NBFC-MFIs and other institutions suggest comparatively lower operating costs relative to their operating income.

Across portfolio size, the cost ratio generally increases with institutional size up to the ₹500–2,000 crore category, before declining among larger institutions. Institutions with a portfolio below ₹100 crore record a ratio of 9.95%, which rises to 10.47% for those in the ₹100–500 crore range and peaks at 11.09% among institutions with ₹500–2,000 crore portfolios. The ratio then moderates to 10.81% for institutions in the ₹2,000–5,000 crore category and declines substantially to 7.57% among the largest institutions with portfolios above ₹5,000 crore. The substantially lower ratio among the largest institutions points to the benefits of scale, with operating and administrative costs being spread across a larger portfolio. Overall, the distribution highlights the role of scale and cost optimisation in improving operating efficiency, particularly as institutions expand their portfolio.