Final SIDBI Report

StudyonInterestRatesandCosts ofMicrofinanceInstitutions 2011
ACCESSDevelopmentServices
TABLEOFCONTENTS
1.Context............................................................................................................................................................1 2.Methodology...................................................................................................................................................2 SecondaryResearch........................................................................................................................................2 PrimaryResearch.............................................................................................................................................3 Sampling..........................................................................................................................................................3 APRCalculations..............................................................................................................................................4 Limitations.......................................................................................................................................................5 3.DescriptionofSample ....................................................................................................................................7 . 4.PricingofLoans.............................................................................................................................................11 WhatisAPR?.................................................................................................................................................11 APRsforKeyProducts...................................................................................................................................12 APRsasperthelatestPricingStructures......................................................................................................13 WeightedAverageAPRofInstitutionsacrosstheportfolio..........................................................................14 APRvsYieldonPortfolio...............................................................................................................................22 BroadBreakupofthecomponentsoftheinterestrate..............................................................................23 . APRvisvisvariousCosts............................................................................................................................24 EfficiencyindicatorsvsAPR...........................................................................................................................25 Comparisonwithglobalandregionalbenchmarks.......................................................................................26 APRcomparisonacrossdifferentcountries..................................................................................................27 5.TransactionCosts..........................................................................................................................................29 6.CostofFunds.................................................................................................................................................34 7.Riskcostmanagement..................................................................................................................................38 Internalrisks..................................................................................................................................................38 Externalrisks.................................................................................................................................................39 . 8.Technologyandcostreduction....................................................................................................................41 8.Margin...........................................................................................................................................................43 Profitability....................................................................................................................................................44 Inflationadjustedreturns..............................................................................................................................45 DevelopmentActivitiesbytheMFIs .............................................................................................................48 . 9.Transparency/DisclosureofinformationprovidedandAwarenessofclients...........................................49 10.RecentRBIGuidelinesforNBFCMFIsanddraftMicroFinanceInstitutionsRegulationandDevelopment Bill......................................................................................................................................................................53 11.Recommendations......................................................................................................................................60
LISTOFANNEXURES
Annexure1 :ListofDocumentsRequired Annexure2(A) :InterviewChecklistwithMFIstaff(SeniorandOperation) Annexure2(B) :InterviewChecklistwithMFIstaff(Field/Operations) Annexure3 Annexure4 Annexure5 Annexure6 Annexure7 :ClientQuestionnaire :ToolforFinancialAnalysis :ScheduleofVisitstoMFIsforDatacollection :BasicDetailsofSampleMFIs :AverageAPRsforKeyProducts(asperthepricingstructureapplicabletillDecember31, 2010) Annexure8 Annexure9 Annexure10 Annexure11 :APRsasperthelatestpricingstructure :WeightedAverageAPRacrosstheportfolio :Banksundereachcategoryoffundingsources :BenchmarkingofStudiedMFIswiththatoftheGlobal,SouthAsianandothercomparable markets Annexure12 :DetailsofWAAPR(InterestOnly)acrossMicrofinanceInstitutionsbelowandabove26%
LISTOFTABLES
Table1:DecriptionofCriteriaandSubcategoriesusedforforSamplingandAnalysis.....................................7 Table2:Scaleofoperations................................................................................................................................7 Table3:Geographyofoperations.......................................................................................................................8 Table4:Legalformofinstitutions.......................................................................................................................8 Table5:LendingmodelfollowedbyMFIs...........................................................................................................9 Table6:numberofproductsstudied................................................................................................................12 Table7:GeographicPresenseofMFIs..............................................................................................................20 Table8:InterestrateoffinancialinstitutionsforMFIS....................................................................................36 Table9:RisksbeingfacedbytheMFIs...............................................................................................................38 Table10:informationdisclosureandawarenessofclients..............................................................................49 Table11:MFIdatainRBIstructure(Tierwise).................................................................................................56 Table12:MFIdatainRBIstructure(Legalformwise)......................................................................................57 Table13:MFIdatainRBIstrucure(Modelwise)..............................................................................................57
LISTOFFIGURES
Figure1:Samplinganddatacollectionplan.......................................................................................................4 Figure2:RegionalDistributionofSampledMFIs................................................................................................8 Figure3:LendingModelsofMFIs.......................................................................................................................9 Figure4:NumberofProductsofsampledMFIs................................................................................................10 Figure5:InsurAnceserviceswithloanproducts...............................................................................................10 Figure6:WeightedAverageAPRsofSampledMFIs.........................................................................................15 Figure7:WAAPR(Interest+Fee)acrossdifferenttiersofMFIS.......................................................................17 Figure8:APRsacrossTiers................................................................................................................................17 Figure9:APRsacrossdifferentTiersofMFIs....................................................................................................18 Figure10:APRsacrossdifferentlendingmodelsofMFIs.................................................................................19 Figure11:RegionwiseAPRs...............................................................................................................................21 Figure12:MeanAPRvsMeanyield..................................................................................................................22 Figure13:MedianAPRsvsMedianYield...........................................................................................................22 Figure14:Componentsoftheinterestrates(OverallandacrossTiers)..........................................................23 Figure15:EfficiencyvsAPR...............................................................................................................................25 Figure16:Yieldongrossportfolio(MIXData2009).........................................................................................26 Figure17:APRComparisanacrossCountries....................................................................................................27 Figure18:OperatingexpenseratioacrossTiers...............................................................................................29 Figure19:OperatingexpenseratioinTierI .....................................................................................................30 . Figure20:OperatinGexpenseratioinTierII....................................................................................................30 Figure21:OperatingexpenseratioinTierIII ...................................................................................................31 . Figure22:OERacrossdifferentdelivErymodels..............................................................................................31 Figure23:OERacrossdifferentlegalforms......................................................................................................32 Figure24:OERofdifferentrepaymentfrequencies.........................................................................................32 Figure25:OERsfordifferentrepaymentfrequencies......................................................................................33
Figure26:Costoffundsbasedonthelegalform.............................................................................................34 Figure27:LoanoutstandingvscostoffundsacrossNotforProfits.................................................................35 Figure28:CostoffundsfordifferentTiersofMFIs..........................................................................................35 Figure29:Fundingcost(MixData2009)..........................................................................................................37 Figure30:Yieldvsfinancialexpenses................................................................................................................37 Figure31:MarginacrossdifferenttiersofMFIs...............................................................................................43 Figure32:Profitabilitydata(MIXData2009)...................................................................................................44 Figure33:Cost,YieldandProfits(Mixdata2009)............................................................................................44 Figure34:AdjustedRoAvsAdjustedRoE.........................................................................................................45 Figure35:OERvsFCRvsLoanlossexpvsYield................................................................................................46 Figure36:StaffProductivityTierwise.............................................................................................................46 Figure37:individualvsGrouplendingmodels.................................................................................................47 Figure38:Informationdisclosureandawarenessofclients(Tierwise)...........................................................51 Figure39:Informationdisclosureandawarenessofclients(modelwise).......................................................51 Figure40:Informationdisclosureandawarenessofclients(Legalformwise)................................................52 Figure41:MFIsbelowandabove26%APR......................................................................................................54
LISTOFABBREVIATIONS
APR CEO CFO CGAP CGT CO COO DFI EIR GoAP GRT JLG MCRIL MFI MIX NBFC NGO NGOMFI OER OER(A) OER(P) OMR PKSF RBI SBLP SERP SFMC SHG SIDBI WAAPR XIRR YoP AnnualisedPercentageRate ChiefExecutiveOfficer ChiefFinancialOfficer ConsultativeGrouptoAssistthePoor CompulsoryGroupTraining CreditOfficer ChiefOperatingOfficer DevelopmentFinancialInstitution EffectiveInterestRate GovernmentofAndhraPradesh GroupRecognitionTest JointLiabilityGroup MicroCreditRatingInternationalLimited MicrofinanceInstitution MicrofinanceInformationexchange NonBankingFinanceCompany NonGovernmentalOrganisation NonGovernmentalOrganisationturnedMicrofinanceInstitution OperationalExpenseRatio OperationalExpenseRatioAdministrative OperationalExpenseRatioPersonnel OpticalMarkRecognition PalliKarmaSahayakFoundation ReserveBankofIndia SelfHelpGroupbanklinkage SocietyforEliminationofRuralPoverty SIDBIFoundationforMicroCredit SelfHelpGroup SmallIndustriesDevelopmentBankofIndia WeightedAverageAnnualisedPercentageRate IrregularInternalRateofReturn YieldonPortfolio
EXECUTIVESUMMARY
Institutional credit is considered as a powerful tool for alleviating poverty. Microfinance in India has been throughtwochannelsofcreditdeliverytopoorandlowincomehouseholdsSelfHelpGroupBankLinkage Programme(SBLP)andtheMicrofinanceinstitutionslendingthroughgroupsaswellasdirectlytoindividuals. Boththesemodelswhichevolvedandgrewgraduallyduringthe1990s.MFIshavebeenrelativelyfasterin reachingouttheunderservedpopulationeveninthemostdifficultgeographicalregionsofIndia.TheMFI channelculminatedinlastdecadeintermsofitsoutreach,productdiversityandtechnologicalinnovation. However, as the sector scaled up, absence of a conducive regulatory framework along with few other politicalfactorscausedtheAndhraPradeshcrisisin2010.DuetothecrisistheMFIshavesufferedahuge loss in terms losing their loan portfolios. Moreover, as the Banks stopped lending to MFIs, they have not beennotbeenabletodisbursefreshloantotheirclients.Thishasbeenalsobeenahugesetbacktothelow incomepeopleacrossIndiathatwerebeingbenefittedbytheMicrofinanceservicesfromtheMFIs. Intheaftermathofthecrisis,allstakeholdersofindustryhaveshowntheircommitmenttointrospectand restrengthenthesector.SmallIndustriesDevelopmentBankofIndia(SIDBI)havingplayedakeyroleinthe developmentofmicrofinanceinIndiacommissionedthisstudyforcarryingoutadetailedanalysisofinterest rates, costs and margins and product pricing of SIDBI assisted microfinance institutions. ACCESS DevelopmentServicescarriedoutthestudy. Forthepurposeofthisstudy,30MFIswerevisited.TheseMFIswererepresentativeintermsofgeographies, scale,operatingmodelsandlegalforms.Primarydatawascollectedatdifferentlevelsincludingdiscussions withseniorandmiddlemanagement,branchstaff,clientsoftheMFIs,aswellasotherrelevantstakeholders ofthesector.Differentaspectsofpricing,transactioncosts,costsoffunds,marginswerestudied. Fifty one loan products were studied across these 30 MFIs to analyze the product pricing. APRs were calculated with different components of the loan pricing using the active loan samples collected from the field.Inviewoftheongoingrevisionofpricingacrosstheindustry,thepriceapplicableasonDecember31, 2010 was taken into account to make meaningful conclusions. As inclusion or exclusion of different components of the loan pricing i.e. fees, insurance and security deposit, among others result in different APRs;theAPRcalculationswerecalculatedatthefourdifferentlevelstoenablethecomparisonatdifferent levels so that the incremental effect of Fees, Insurance and Security deposit can be measured. As on December 2010, the microcredit products were available in the range of 18%50% APRs (including only interestandprocessingfees).Comparativeanalysisofpricingwasdoneacrossdifferenttiers,models,legal formsofMFIs.ThemedianweightedaverageAPRsforTierI,IIandIIIwerefoundtobe27.75%,30.07%and 26.51%respectively.TheserelativelyhigherAPRsoftheTierIIMFIscanbeattributedtohighertransaction costsandhigherfinancialcostsincurredbytheseMFIs. MedianAPRofForProfitMFIswasfoundtobealmost500basispointshigherthanthatoftheNotforprofit MFIs(PrimarilyNGOs).Thiswasattributabletomicrofinanceactivities beingoneamongstthemanyother activitiesoftheNGOsresultinginlowerOERstotheNotforProfits(asthetransactioncostsareapportioned todifferentprogrammeactivities).ThesameholdstrueforthelowerAPRsoftheMFIswiththeSHGModel. ThoughtheAPRsoftheSHGbasedMFIs(PrimarilyNGOs)werefoundtobesignificantlowerthanthatofthe MFIswithothermodels,theseMFIshaverelativelysmalleroutreach.TheaverageoutreachoftheMFIswith NonSHGmodelwasalmostfivetimeshigherthanthatoftheSHGbasedMFIs.
In terms of the geographical variations, other that the APR being higher in the northeastern region, not muchvariationwasfoundintheAPRsthatwereprevalentindifferentgeographicalregions. APRSwerealsostudiesinrelationtoyieldonportfoliotogiveamoreholisticpicture.Therevisedpricing(as onApril2011)wasalsostudiedfor18MFIsbasedonthedescriptiveinformationprovidedbythem. Overtheyears,thetransactioncostwasfoundtobeshowingadecliningtrendinTierIMFIs,however,Tier II and TierIII MFIs showed increasing trend in transaction cost. Among the different delivery models, Grameen model exhibited a regular decline in the OER. It was also found that the institutions following weeklyrepaymentfrequencieshasthehigherOERthanthatoftheMFIsfollowingfortnightlyandmonthly repayment frequencies. With the RBI guidelines issued and over emphasis of decreasing costs, there are chances that the institutions following weekly frequencies would change to fortnightly or monthly installmentrepaymentsystem.Thiswouldhaveadirectimpactonthecostsoftheinstitutionssincefield/ creditofficersvisitingandtravellingtotheclientswouldbelimitedtooneandnotfourfivepermonth. SomeMFIsthatinvestedinthetechnologyandsystemswereabletosignificantlyreducetheirOERsoverthe years. Theweightedaveragecostoffundsfromdifferentfinancialinstitutions(asampleof80financialinstitutions) wasfoundtobeintherageof8%to15%.LargerMFIsandmajorityofthenotforprofitMFIswerefoundto have lower cost of funds as compared to the other for profit (primarily the TierII) MFIs. The Tier I institutions due to their widespread geographically diverse operations, superior systems and updated information, skills in negotiation, apart from larger quantum of loan requests are in a better position to bargain with the financial institutions and raise debts at a lower interest rates. There is also a perception among lenders that the larger institutions are not likely to fail; the smaller institutions with concentrated portfolio,raisestheriskperceptionoflenders. Margins show an increasing trend across all levels of MFIs over the years. However, the Tier II MFIs have muchlowermarginsthantheTierIandTierIIIcategoriesduetotheirexpansioncosttoreachtheeconomies ofscale. Tostudytheaboveaspectsintheglobalandregionalcontext,benchmarkingwasdoneusingtheMIXdata (2009)forinstitutionsthathavereportedtheirdatatoMIXwhichincluded22ofthe30MFIssampledMFIs ofthisstudy.Inordertogeneratereasonableconclusions,asmallersubsampleofAsiancountriesincluding Bangladesh, Cambodia, Indonesia and the Philippines were also chosen. Amongst global and Asian microfinance markets, Indian MFIs have developed a number of strong attributes and exemplary performance.APRsofIndianMFIsfallinamidrange(neitherthelowestnorthehighest)oftheAPRswhen compared to eight other countries (for which APR were available). The median APRs (31.24%) including interest,feeandinsuranceofthestudiedIndianMFIswerewellbelowtheaveragemedianAPRsof9other countries1.InabsenceoftheAPRsofsouthAsianMFIs,YieldonPortfoliowasusedforcomparison.Though thesampledMFIsthoughhavearelativelyhigherYieldonPortfoliothanthatofthemedianSouthAsianYoP, itisstilllowerthanthatoftheglobalmedianfigureandconsiderablylowerthanthatofothercomparable markets like Indonesia, Cambodia and Philippines. However, this comparison looks further encouraging in the light of the fact that the institutions operating in India have the highest weighted average costs of borrowings in the world. The financial institutions in India charge the highest rate of interest when comparedwithotherAsiancountrieslikeBangladesh,CambodiaandIndonesia.Evenasoperationalcostsof
1
UsingdataavailableonMFTransparencyswebsite:www.mftransparency.org
IndianMFIscontinuetheirgradualdecline,theyareoffsetbyincreasingfinancialcosts.However,inglobal contextitfoundthatincaseofIndianMFIsasalsoforSouthAsiaandBangladesh,thedifferencebetween the Yield and Financial expenses i.e. the margin above financial expenses is comparatively lower, which indicates the relative efficiency of the MFIs operating in these geographies. In terms of profitability, IndonesianandIndianMFIswereamongstthemostprofitableMFIs.However,whengivenaholisticviewit wasevidentthattheIndonesianMFIincurredhighercostandproductswerepricedevenhighertogenerate higherprofits; In case of Philippines,the extremely highcost resulted inthe lowprofitability;However,in caseofIndianMFIs,thelowcostandamoderatepricingresultedinahighprofitability. Therisksfacingthemicrofinanceindustrywerealsostudied.MFIsthatwerestudiedfaceavarietyofrisks someareinternaltotheirbusinessoperationsandafewareduetoexternalfactors.Amongstthetopfive risksfactorswerecompetition,politicalinterference,lackofclarityonregulationofthesector,liquidityand high cost of funds. The major internal risks are credit risk due to over indebtedness of clients, credit risk bornebytheclientsthoughpeerpayment,etcwhichneedtobemeasuredandmonitored. Onthetechnologicalfront,itwasfoundthattheuseofinformationandcommunicationtechnologyhasthe potentialtomakethemicrofinanceprocessesmoreefficientbyreducingcostsintwoways(1)loweringof operationalcostsbyautomatingcomponentsofthecreditprocessand(2)loweringandcontrollingriskand therebyriskcostbymoreeffectivemonitoringandtracking.AlmostallsampledMFIshadanautomatedMIS thatenablesthemtotrackperformanceeffectively.TheMFIshaveconfirmedthatinvestmentinagoodMIS applicationalongwithhispeedinternetfacilityhelpsintheeffectivemonitoringoftheoperations.However, concrete evidence of reduction in operating costs after setting off the investment and recurring costs of technologicalapplicationswerestillnotavailable. The MFI clients were interviewed in order to understand the transparency / disclosure of information provided by the MFIs to their clients and their level of awareness. The awareness of clients regarding the terms and conditions of the loans is directly proportional to the information shared by the MFIs. A comparativeanalysishasbeencarriedoutacrossdifferenttiers,legalformsandmodelsofMFIs. Thedevelopmentactivitiesconducted(throughgrantsorfromtheirprofitsorbychargingfromtheirclients) helpinbuildingcapacitiesoftheclients/membersaswellasincreasetherapportandloyaltyoftheclients/ memberstowardstherespectiveinstitution.Thishasbeenobservedduringtheinteractionsanddiscussions withclients/membersofBandhan,Equitas,Cashpor,amongothers;theyfeelasenseofownershipwiththe institutionandwouldnotgotoanyotherinstitutionforcredit TherelevanceandpracticabilityofdifferentrecommendationsbytheMalegamcommitteewerediscussed withtheMFIsandthedata/informationcollectedacrossMFIswasanalyzedtounderstandtheconcurrence withtheRBIguidelines.SomefundamentalchangesareneededinthewaymanyoftheMFIsoperateright fromclientacquisitionandrelationshipmanagement,clienteducation,lendingandrecoverypracticesand product development. Based on the overall analysis and discussion with the MFIs, MFI clients and other relevant stakeholders, some key recommendations have been made in the areas of cost reduction are investment in technology, need for a greater emphasis on client interface and responsible finance, rationalizing of salaries of CEOs of MFIs; risk management are changes in systems, policies and growth strategiestocomplywiththerecentRBIguidelines,hiddenriskduetorepaymentbypeers,robustinternal audit and control systems; management of client awareness and literacy by conducting financial literacy programmes, innovative methods for communicating to clients like pictorial aids, compulsory insurance, equityinfusionanddifferentialinterestratesacrossgeographiesandscaleneedtobedeveloped.
1.CONTEXT
MicrofinanceinIndiahasbeenthroughtwochannelsofcreditdeliverytopoorandlowincomehouseholds SelfHelpGroupBankLinkageProgramme(SBLP)andtheMicrofinanceinstitutionslendingthroughgroups as well as directly to individuals. Both these models which evolved and grew gradually during the 1990s, registered a blistering pace of growth in outreach and portfolios in the next decade. However, the MFI segmenthasgrownover20timesinthelast5yearsfromINR8.97billionloansoutstandingin2005,the MFIsreachedthepositionofINR183.44billionloanoutstandingin2010.TheSBLPprogramcomparatively hasgrownat30%yearonyearduringthesameperiod.Inthelast5years,themicrofinanceoperationsthat wereearlierconcentratedinthesouthernandeasternstatesbegantospreadtootherpoorerregionswith thelargeMFIsexpandingtheiroperationstotheseregionsaswellaswiththeemergenceoflocalnewage institutions. Anasapexdevelopmentfinanceinstitution,SmallIndustriesDevelopmentBankofIndia(SIDBI)hasplayeda significant role in the development and growth of microfinance in India through the SIDBI Foundation for MicroCredit(SFMC).SFMCistheapexwholesalerformicrofinanceprovidingacompleterangeoffinancial and support services2enabling the growth of MFIs. These services have enabled the microfinance institutions, especially in their initial stage of development, to invest in systems and institution building, imbibe sound practices. Based on credit history created with SIDBI, the MFIs could access commercial funding;bothdebtandequity,whichinturnfuelledtheportfolioandoutreachgrowth.Thesectorbuilding role played by SFMC has contributed to development of technical service providers for the MFIs, which enabledtheirgrowth. However, the high rate of growth has raised some concerns. The interest rates were expected to decline significantly with increasing scale of operations and efficiencies and only a few MFIs have passed on the benefits by reducing interest rates charged to the borrowers. There have been concerns about lack of transparent pricing information on the interest fee and other fees charged to the client. The quality of governanceofMFIshasalsobeenmatterofconcernsincethemissiondriftwasdiscernableinsomeofthe MFIs.Incertainregions,aggressivecompetition amongMFIshasresulted inexcessivefinancingtoclients, inadequateduediligenceinclientacquisitionandfinancing,loweringofdisciplinarystandardsandcoercive recoverypractices. Thesectorhasreachedastageatwhichthetwochannelsseemtobecompetingwitheachother,doubting theefficacy/ethicsoftheothermodel,creatingpolarization.TherecentdevelopmentsinAndhraPradesh leading to a crisis in the whole sector are a result of lack of an integrated and coordinated response to manage these issues. Accusing the sector of exploiting the poor with high interest rates, and employing coercivemethodswithclientsleadingtotheirdistress,theGovernmentofAndhraPradesh(AP)promulgated asweepingordinancethatseverelyrestrictedtheMFIoperationsinthestate.Repaymentsofloansofboth MFIandSHGchannelsweredrasticallyaffectedinthestate.Sincealargepartoftheportfolioofmostlarge MFIsisinAP,thisaffectedthegrowthofthewholesector.FollowingtheOrdinanceinAP,theReserveBank of India set up a subcommittee of its Central Board of Directors to study issues and concerns in the microfinance sector. The subcommittee released its report in January 2011, recommending a separate
SFMCprovidesloanfunds,grant,equity,LiquidityManagementSupport(shorttermloanscheme),loansyndicationandinstitution andcapacitybuildingsupporttoretailingMFIs.
StudyonInterestRatesandCostsofMicrofinanceInstitutions
categoryofNBFCMFIs,alongwithstipulationsontotalmicrofinanceloantoaborrower,interestratesand fees,loansizes,incomeofclient,marginandloantenure,loancollectionpractices,amongothers. ThisstudywaspartofalargerprojecttitledScalingupSustainableandResponsibleMicrofinanceProject supported by World Bank and implemented by SIDBI through SIDBI Foundation for Microcredit (SFMC), a specializeddepartmentforcarryingoutmicrofinanceactivities.Theprojectaddressesthelackofaccessof the underserved segments of the population to financial services, an important constraint to improved productivity and incomes, and particularly in the aftermath of dual crises that have affected the microfinancesectorinIndia;theglobalfinancialcrisiswhichcontinuestoaffectMFIsandtheirclients,and more importantly the impact of the crisis in Andhra Pradesh, which has caused a precipitous drop in repayment in the affected region of the country, and may significantly undermine the outreach and sustainableofthesectorthroughoutIndia.ThestudyisapartofthecomponentStrengtheningResponsible FinancewhichaddressesmanyoftherootcausesoftheAPcrisis,andprovidessolutionsfortakingonthe responsiblefinanceagendaatsuchacriticaltimeforthefutureofthemicrofinancesector.Inparticular,the ProjectstrengthenstheResponsibleFinanceagendathroughcreationofaLendersForum,developmentofa commoninformationplatformsimilartotheGlobalMixMarketandformalizingofasystemformonitoring ofthemicrofinanceCodeofConduct,amongothers. ThestudywascommissionedbySIDBItoACCESSDevelopmentServicesinFebruary2011,withtheoverall objectiveofconductingadetailedanalysisofinterestrates,costsandmarginsofSIDBIassistedmicrofinance institutions.Aspartofthestudy,ACCESSwastocommentonimpactofcapsoninterestratesandmargins andproviderecommendationsonfurtherreducingcostsofoperationsintheseinstitutions.
2.METHODOLOGY
Thestudywasprimarilybasedonprimarydatacollectedfrom30sampleMFIs,preselectedinconsultation withSFMC.Secondarydatacollectedandutilizedinthestudyislimitedtothepurposeofbenchmarkingthe trendsofthesamplewithregionalandglobaldata.Thedetailsareprovidedbelow:
SECONDARYRESEARCH
Reviewofsecondaryinformationavailablewasundertakentocoverthefollowingaspects: Global and regional benchmarking For the benchmarking of the MFIs visited during the study against the global and south Asian markets, analysis was carried out using the MIX data for institutionsthathavereportedtheirdatatoMIX. Studiesandanalyticalreportsrelatingtointerestrates,yield,returnonassets,marginandcostsin microfinance, relevant to India, other Asian countries and globally, were reviewed to obtain an overview of the trends of these indicators for last three years. These reports include the Microfinance State of the Sector report, MCRIL analytics reports, Sadhan reports on MFIs, CGAP papers,MIXbulletinsandMIXmarketdataanddatafromMicrofinanceTransparency. Reports/case studies on best practices on client education and literacy/communication practices werestudied. Available research reports on interest rates of other sources of credit, banking data were also reviewed.
StudyonInterestRatesandCostsofMicrofinanceInstitutions 2
PRIMARYRESEARCH
O RGANIZATIONAL I NFORMATION ThefollowingdocumentsandinformationwerecollectedfromeachsampleMFI,duringvisitstoHeadOffice andBranchOffices: Lastthreeyearsauditedfinancialstatementsandportfolioreports StaffstructureandremunerationoffieldstaffandCEO Clientloanpassbooksandrepaymentschedules(fordataonproductpricing) Detailsofborrowingssourceandtermsandconditionsofloans Shareholdingpattern Grading/ratingreports Outreachdatafor3years Detailsofloanproductsandotherservices(insurance)
S EMI STRUCTURED I NTERVIEWS

(ThetoolsandchecklistsusedinthestudyhasbeenattachedasAnnexures14)
Interviewswereconductedwiththefollowingcategoriesofrespondentsbasedonchecklists. MFISeniormanagement(CEO,CFO,COO)Thesesemistructuredinterviewsfocusedonstrategic issues of drivers of costs, key risks faced, strategies of risk management, role of technology in reducing risks/transaction costs, cost of funds and fund raising, strategy for change in products/pricing (if any), implications of Malegam committee recommendations / RBI guidelines issued. MFIStaff(Operationsmanager,Branch/Areamanager)Interviewsofoperationsstaffweregeared towards understanding the operating procedures, implications on costs, measures for avoiding multiple lending, perceived risks including competition, delinquency management, communication with clients, implications of operational level recommendations such as loan tenure and client income. MFIClientsMFIclientswereinterviewedthroughashortquestionnairefordataonothersources andcostsofcredit,incidenceofpeerrepaymentsandawarenessofclientsregardingMFIsproduct details. Stakeholders Interviews with other stakeholders and sector experts including technology service providers, banks/lenders, investors and financial experts were conducted to obtain their views on waysofcostreductionbyMFIsandimplicationsofRBIguidelinesonthesector.
SAMPLING
SelectionofMFIs:PurposivesamplingmethodwasusedtoselectarepresentativesampleofMFIsbasedon fourcriteria: a) b) c) d) Sizeofoperations/numberofclients(TierI,IIandIII) Lendingmodel(JLG,SHG,Grameen,Individual) LegalFormoftheinstitution(ForProfitNBFCsandNotForProfitSociety,Section25,Trust) Geographiccoverage(Multiregion,North,South,East,West)
S AMPLINGAND D ATA C OLLECTION P LAN

(ThescheduleofvisitstoMFIsfordatacollectionattachedasAnnexure5)
78 branches of Tier I MFIs and 34 branches of Tier II and III MFIs were selected through purposive random MFI 7branchesTierIMFIs sampling to select branches from Head different geographic regions of the 4branchesTierIIMFIs Office MFI. 3branchesTierIIIMFIs In case of MFIs with multi state operations, 50% of the branches Interview 24loan 34client Interview were selected in the parent state of withCEO/ samples interviews with2 operations of the MFIs and the CFO/COO per perbranch branch remaining 50% in their other product staff operationalstates. Twoloansamplesofrecentloans(less FIGURE1:SAMPLINGANDDATACOLLECTIONPLAN than 4 months old) for each loan product after the last interest rate reset by the MFI were selected for collection of loan documents for calculation of APR. This was donerandomlyfromthelistofclientswhoreceivedloansinthelastfourmonths.Randomselection ofclientshelpedtonegateanybiasnesstothesamples. Ineachbranchcovered,34clientinterviewswereconducted.Theseclientswereagainselectedon arandombasisfromthelistofmembersinthatparticularbranch.Thiswasdonepostdiscussions withthebranchstaff.Ifaselectedclientwasunavailablethenanotherclientfromthesamegroup wasselectedbasedonavailability.
30MFIs
APRCALCULATIONS
ThefollowingassumptionsandconsiderationsapplytothecalculationsofAPRsinthestudy: 1. Theproductsthataccountforatleast10%ofthetotaloutstandingloanportfoliooftheMFIwere studied. 2. The loan samples that reflect the loan pricing applicable until December 31, 2010 were used to calculatetheAPRs. 3. TheInsuranceamountusedintheAPRincludesServiceTax. 4. Insurance charges and security deposit associated with the loan results in a cash outflow at the borrowerlevelandaffectthenetoutstandingbalance.Therefore,theAPRswerecalculatedatthe followingfourlevelstoenablethecomparisonfrommultiplecashflowperspective: a. APRforInterestandFees b. APRforInterest,FeesandInsurancecharges c. APRforInterest,Fees,InsurancechargesandSecuritydeposit d. APRforInterest,Fees,andSecuritydeposit(excludingInsurance) 5. To calculate the weighted average APRs of the products studied, outstanding loan portfolio of individualproductswasusedtoassigntheweighttotheaverageAPRsoftheloansamplesforeach product.
TheprocessandmethodologyofAPRcalculationsisoutlinedbelow: 1. Collectionofthedescriptiveinformationoftheproduct The products qualified for the APR calculation were first understood using the descriptive informationprovidedbytheProductManager/SeniorManagersoftheMFIs. 2. Collectionofloansamplesfromthefield Based on the descriptive information it was determined what all the features can affect the APRs andaccordinglythesampleswerecollectedsothatallthevariationscanbecovered. 3. Calculationtechniques Foreachoftheloansamplecashflowswascreatedusingtheexactdatesandamountpaid/received bytheborrowersatthefollowingfourlevels: a. CashflowforInterestandFees b. CashflowforInterest,FeesandInsurancecharges c. CashflowforInterest,Fees,InsurancechargesandSecuritydeposit d. CashflowforInterest,Fees,andSecuritydeposit(excludingInsurance) TheEIRwascalculatedforeachofthecashflowusingtheXIRR.XIRRtakesintoaccounttheexact dates at which the repayment installment were paid and thereby takes into account the correct numberofdays(betweentwoconsecutiveinstallment)forwhichtheoutstandingbalanceremained withtheclient. The EIR (using XIRR) was just as an intermediate step to arrive at the APRs. The EIR includes the compoundingeffectandthereforeitwasconvertedintoAPRusingthefollowingformula. APR=[(1+EIR)^(1/365)1]*365 4. Verificationofthecalculations ThefinalAPRcalculationsweresenttotheMFIsfortheirreviewwithadeadlinetorevertincaseof anydoubts.ThequeriesoftheMFIswhorevertedwithquestions/clarificationswereaddressed.As communicated to the MFIs, the APR calculations of the MFIs who did not revert were considered finalforfurtheranalysis
LIMITATIONS
1. Most of the MFIs visited had reduced the interest rates and processing fees following the AP Ordinance(October/November2010)andveryfewloanshadbeensanctionedaftersuchrevisionin pricingatthetimeofthestudy.Therefore,liveloansamplesofrevisedpricingwerenotavailablein allthebranchesvisitedbytheteam.Insomeinstances,loansdisbursedpostthedateofeffectof pricingrevisionshavebeenaspertheoldtermsandconditionsandhencetheAPRcalculatedfrom suchsamplesdoesnotreflectthemostrecentproductpricing. 2. ThereweresubstantialdelaysinschedulingofvisitstoMFIsduetoStatelevelbandhs(specificallyin EastandNorthEastregion)andnoncooperationofafewMFIsforprovidingdatesforvisits.Many oftheMFIswerebusyduetofinancialyearclosing,financialauditsandboardmeetingsduringthe periodfromMarchtoMay. 3. TheteamcouldnotcollectalltherequireddatabecauseeitherthedataisnottrackedbyMFIsorit wasnotprovidedtotheteamevenafterrepeatedremindersandfollowupsafterconclusionofthe visits(Spandana,Share,andAsmitha).SomeMFIsdidnotagreetodisclosecertaindatarelatedto sharevaluationsandpremiumoffered,expectedreturnonequity,salaryofCEOetc. StudyonInterestRatesandCostsofMicrofinanceInstitutions
4. Few sample institutions such as Uttarayan Financial Services, Annapurna Microfinance, among others are in the process of transitioning their microfinance portfolio from Society to NBFC and hencetheYear1orYear2figuresandratiosareeitherunavailableorskewed.
5. Thesamplesizewithineachofsubcategoryanalyzedinthestudywasnotadequatetocorroborate the findings. e.g. there are not many Not for Profit Institutions (seven Societies, three Trusts and one Section 25) in the study to confirm the findings of the study with respect to the entire population of such Institutions; similar the institutions selected in the western region are not adequatetoconformtheresultsfortheregion. 6. SomeoftheTierIIIinstitutionsareNGOsandcarryoutmicrofinanceasoneoftheirmanyactivities. Staff and infrastructurearesharedamongdifferentprogrammes.Segregationofoperationalcosts for four such institutions based on scientific methods like activity based costing was not possible giventhetimeavailable.Theadjustmentsforfinancialcostsforlowcostlendingresourcesmobilized bytheMFIshoweverhavebeencarriedout. 7. Secondary Data on APR for MFIs across South/Southeast Asia is unavailable for comparison. The APRsareavailableonlyforCambodiaontheMicrofinanceTransparencyswebsite.Thecomparable dataforalltheindicatorsofalargesamplewasavailabletill2009only,inMIXmarket.Itwasfound that22ofthe30MFIsvisitedduringthisstudyreportedtheirdatatoMIXandthesamesampleset hasbeenusedforcomparison.Inordertogeneratereasonableconclusions,smallersubsampleof AsiancountriesincludingBangladesh,Cambodia,IndonesiaandthePhilippineswerechosen.Within thisdataset,afewimportantindicatorsbeenchosentotryandunderstandtheIndianlandscapein the context of microfinance in Asia and the World. Nominal portfolio yield is a reasonable proxy indicator for interest rate pricing, and represents the approximate inclusive cost to the client. Operating expense ratio is the standard measure of efficiency and elaborates the cost side, especiallywhencomparedwithothercomponentsofexpenditure.Thefinancialexpenses/assets ratioisanapproximatelookatthecostoffunds,whichisamajorelementofinterestratepricingin mostmicrofinancemarkets.
3.DESCRIPTIONOFSAMPLE
A total of 30 SIDBI assisted institutions were selected on the basis of 4 criteria (scale of operations, geographyofoperations,legalformsandlendingmodels)toensureadequaterepresentationofMFIsacross allsubcategorieswithinthesecriteria.Thesubcategoriesandtheirdefinitionswithineachcriteriongroup arementionedinTable1:
TABLE1:DECRIPTIONOFCRITERIAANDSUBCATEGORIESUSEDFORFORSAMPLINGANDANALYSIS
DecriptionofCriteriaandSubcategoriesusedforforSamplingandAnalysis Scale TierI TierII TierIII MultiRegion North South East Clientoutreach >250,000 50,000250,000 <50,000 Operationsinmorethan5statesofIndia Operationintheparentnorthstate Operationintheparentsouthstate Operationintheparenteast/northeaststate Operationintheparentweststate AllNBFCs Societies,TrustsandSection25 SHG JLG Grameen Individual Lendingtogroupsof1520members Lendingtogroupsof5members Lendingto58groupsof5(center)memberseach Lendingtoindividualmembers
Geography
West LegalForm Model ForProfit NotforProfit
ThelistandbasicdetailsallsampleMFIsisprovidedinAnnexure6. Thenumberofinstitutions,cumulativeclientoutreachandcumulativeloansoutstandingundereachofthe groupsandcorrespondingcategoriesaredepictedbelow: S CALEOF O PERATIONS : (F IGURESASON M ARCH 31 ST 2010)

TABLE2:SCALEOFOPERATIONS
Category TierI TierII TierIII
No.ofMFIs Nos 12 9 9 % 40 30 30
CumulativeOutreach Nos(thousands) 20,470 876 176 % 95 4 1
CumulativeLoanOutstanding INRmillion 116,234 4,698 2,630 % 94 4 2
Total 30 21,523
123,563
TierIMFIsthatconstitute40%ofthesampleintermsofnumberofMFIscover95%ofthetotalnumberof clientsand94%ofthecumulativeoutstandingportfoliooftheentiresampleMFIs.Theclientoutreachofthe TierIinstitutionsrangefrom80,000to56,00,000clientsandcumulativelytheyconstitute95%ofthetotal clientbaseinthesample. G EOGRAPHYOF O PERATIONS :

TABLE3:GEOGRAPHYOFOPERATIONS
Categories
Number MFIs
of Percentage
Multiregion North South East West Total
9 5 7 6 3 30
30% 17% 23% 20% 10% 100%
Cumulative Client Outreach (in Thousands) (as on March31,2010) 18,849 754 1,628 124 165 21,523
Cumulative Loans Outstanding (RsMillion) (asonMarch31,2010) 1,07,678 4,309 9,650 1,850 73 123,563
MFIs working in multiregions/states form maximum (30%) proportion of the sampled MFIs and they constitute 88% of the client base. These institutions have operations in more than 5 states ofIndia.Theothercategorieshavebeendividedas per their operations in one state in that particular region. L EGAL F ORMOF I NSTITUTIONS :
TABLE4:LEGALFORMOFINSTITUTIONS
FIGURE2:REGIONALDISTRIBUTIONOFSAMPLEDMFIS
Categories
Number Percentage ofMFIs
ForProfit NotForProfit Total
19 11 30
63% 37% 100%
Cumulative Client Outreach (in Thousands) (as on March31,2010) 19,719 1,803 21,523
Cumulative Loans Outstanding (in Rs Million) (asonMarch31,2010) 113,658 9,905 123,563
For profit institutions comprise NBFCs, which is maximum percentage (64%) of the institutions sampled in the study. Seven Societies, one Section 25, Not for Profit and three Trusts have been clubbed under Not for Profit institutions for this study. L ENDING M ODELSFOLLOWEDBY I NSTITUTIONS :
TABLE5:LENDINGMODELFOLLOWEDBYMFIS
Categories
Number of Percentage MFIs
SHG JLG Grameen Individual Total
9 7 13 1 30
30% 23% 43% 3% 100%
Cumulative Client Outreach (in Thousands) (as on March31,2010) 1,412 1,432 18,516 161 21,523
Cumulative Loans Outstanding (in Rs Million)(asonMarch31, 2010) 9,213 10,118 104,192 38 123,563
The predominant lending model is the Grameen model (mostly Tier I institutions), implemented by 43% of the institutions across the sample and constitute 86% of the cumulativeclientbase.However,afewoftheinstitutions followed a mix of JLG and Individual model and only one institutionfollowedindividualmodelentirelyforwhichthe findings have not been mentioned since it would not representthemodel.
FIGURE3:LENDINGMODELSOFMFIS
L OAN P RODUCTSPROVIDEDBY I NSTITUTIONS : Withinthenumberofinstitutionsvisited,43%of the MFIs had more than 5 loan products (BSFL had 25 products) and 37% of the MFIS had 24 loan products. However, the maximum concentration of their portfolio was in the IGA loan provided by the institutions. The remaining
productshad510%oftheirportfolioindividually.Only20%oftheMFIsprovidedoneloanproduct. I NSURANCESERVICESPROVIDEDBY I NSTITUTIONS : Insuranceisanotherservicethatisvalued bytheclientsaswellasprovidedbymost of the sampled institutions. Only 10% of the institutions namely, NBJK, Peoples ForumandMASFinancialServices,didnot provide any insurance services to their clients. Predominantly, the insurance services provided are credit linked 77%; but four institutions (13%), viz., NEREFS, SKDRDP, RASS and RORES provide insuranceserviceswhicharenotlinkedto loans.
FIGURE4:NUMBEROFPRODUCTSOFSAMPLEDMFIS
FIGURE5:INSURANCESERVICES WITHLOANPRODUCTS
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4.PRICINGOFLOANS
WHATISAPR?
Thetruepriceofaloanincludesnotonlyinterestbutotherchargesrequiredbythelenderaswellasother techniquesthatinfluencetheamountofmoneytheclientactuallyhasandtheamountoftimetheclienthas useofthatmoney.Becauseofthesemultiplefactors,aswellasdifferencesininterestcalculationmethods, comparingthepricingofdifferentloanproductscanbeverychallenging.TheAnnualPercentageRate(APR) is used to express the true price as a standard measure that allows for the comparison of credit charges amongdifferentloanproducts.ThepurposeoftheAPRistoconvertthearrayofchargesmadeforaloan intoasimple,decliningbalanceinterestratethatwouldhaveanequivalentcost3. InsimplertermstheAPRcanbeobtainedbymultiplyingtheIIR(ofthenetcashflowofloantransactions)for theunitbythenumberofunitperiodsintheentireloantenure.i.e. APR=I*n Wherei=IRRofthenetcashflowoftheloantransactionsfortheunitperiod Andn=numberofunitperiod(repaymentfrequency) The IRR with compounding effect gives us the EIR (Effective Interest Rate) which is the European Union standardandisusedinalargenumberofcountriesaroundtheworld;i.e. EIR=(1+i) 1
n
CalculationmethodforthisStudy Itisacommonaphenomenonthatthemicrofinanceloansmayhaveunequalrepaymentperiodforexample iftheMFIoffers15daysgraceperiodonamonthlyloanthanfirstrepaymentperiodofsuchloanwillbe45 dayshoweverrestoftheinstallmentsmayhaveonly30daysperiod.Incaseofweeklyloanassometimes theclientsarerequiredtoproponeorpostponesomeoftheinstallments.Insuchcasessincethenisnot equal the IRRs may not be 100% accurate as it considers all the period to be equal. However, the organizationsincludedinthisstudyhadavarietyofproducts,itwasimportanttotakeintoaccountthese variationsaccuratelyandstilluseauniformmethodsothattheratesofdifferentproductscanbecompared. ForthispurposeXIRRwasusedforcalculations. .XIRRtakesintoaccounttheexactdatesatwhichtherepaymentinstallmentwerepaidandtherebytakes intoaccountthecorrectnumberofdays(betweentwoconsecutiveinstallment)forwhichtheoutstanding balanceremainedwiththeclient.SinceEIRcanbe directlycalculatedusingXIRR,theEIR(usingXIRR)was usedasanintermediatesteptoarriveattheAPRs.TheEIRincludesthecompoundingeffectandthereforeit wasconvertedintoAPRusingthefollowingformula. APR=[(1+EIR)^(1/365)1]*365
MicroFinanceTransparency.(2010).FormulasandApproachesUsedtoCalculateTruePricing.Retrievedfrom http://www.mftransparency.org/pages/wpcontent/uploads/2011/05/UnderstandingAPRCalculations201105.pdf
3
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APRSFORKEYPRODUCTS
In the sample MFIs of the study, the microfinance products accounting for at least 10% of the total loan portfolio were included for the purpose of APR calculations. Annexure 9 shows the number of products studied. For BSFL and SKDRDP five products were studied. Other MFIs were also found to have different products;however,theseproductshadaverysmallportfolioorwereinthepilotphase.Itcanbesaidthat BSFLandSKSDRDPhavemaximumproductdiversityastheyhavenotonlydevelopeddifferentproductsbut havealsobeensuccessfulinscalingthemup. A total of 51 products were studied across the 30 sample MFIs. The Average APRs of all the samples collectedforeachoftheproductispresentedinAnnexure7.
SnapshotoftheDataset
NumberofMFIsinthesample:30 TotalNumberofProducts:51 MedianAPRofthedataset o Interest+Fee:28.96% o Interest+Fee+Insurance:30.57% o Interest+Fee+Insurance+Deposit:32.33% o Interest+Fee+Deposit:30.44% Costliestloansampleinthedataset o APR(Interest+Fee):60.27% o APR(Interest+Fee+Insurance):60.27% o APR(Interest+Fee+Insurance+Deposit):60.27% o APR(Interest+Fee+Deposit):60.27% CheapestLoansampleinthedataset o APR(Interest+Fee):14.88% o APR(Interest+Fee+Insurance):15.74% o APR(Interest+Fee+Insurance+Deposit):15.74% o APR(Interest+Fee+Deposit):14.88%
N UMBEROF P RODUCTSSTUDIED
TABLE6:NUMBEROFPRODUCTSSTUDIED
NumberofProducts NumberofMFIs Percentage
One 17 57%
Two 9 30%
Three 2 7%
>Three 2 7%
Total 30 100%
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The number of products studied under each MFI for the purpose of APR calculations is presented in Annexure9.
APRSASPERTHELATESTPRICINGSTRUCTURES
Based on the efforts of SFMC, lenders forum, recommendations of the Malegam committee and subsequently the RBI guidelines issued in May 2011, majority of the MFIs have revised the prices of their loanproducts.Theserevisionswereaffectedpriorto,duringandpostthevisitsofstudyteamstotheMFIs. Inordertoincludethemostupdatedpricingdatainthereport,thesampledMFIswererequestedtoshare the latest pricing structure of their loans. Out of the 30 MFIs, 18 MFIs responded with their latest pricing information, based on which the APRs for revised pricing have been calculated. Using the different combinations of the loan products such as loan term, repayment frequency, additional fees, insurance charges,theminimumandmaximumpossibleAPRsforthe31productswascalculatedatthefollowingthree levels(presentedinAnnexure8): i. APR(Interestonly) ii. APR(Interest+Fee) iii. APR(Interest+Fee+Insurance) InconsiderationoftherecommendationsbytheRBI,allthese18MFIshaveexcludedcash/securitydeposit fromtheirproducts.Therefore,theAPRsincludingcash/securitydepositarenotapplicable. Note: These Post December2010 APRs are based completely on the theoretical calculations as per the informationsharedbytheMFIsandarenotverifiedthroughcollectionofactualloansamplesofclients. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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WEIGHTEDAVERAGEAPROFINSTITUTIONSACROSSTHEPORTFOLIO
APRalwaysmeasuresandreferstoindividualproductsandnotdirectlyattheinstitution.AnMFImayhave manyloanproducts,eachproductresultinginadifferentAPR.HencequotinganyfigureastheAPRofthe institutionwillbetechnicallyincorrect. However, for the purpose of comparison of the institutions, a representative figure is required. Using Average of the APRs of the products studied for each MFI would not be useful as different products invariablyhavedifferentproportionsinthetotalportfoliooftheorganization.Thereforeweightedaverage APRswerecalculatedforeachofthe30MFIs.Theoutstandingportfolioofeachproducthasbeenusedto assigntheweightintheaverageAPRsoftherespectiveproducts. Thegraphbelow(Figure6)givesasnapshotoftheweightedaverageAPRs(acrossportfolioofthestudied product)of the 30 institutions at following three levels ofcalculations (based on thepricing applicabletill December31,2010). i. ii. iii. APR(Interest+Fee) APR(Interest+Fee+Insurance) APR(Interest+Fee+Insurance+Deposit)
ThethreebarsarerepresentingtheWAAPRsforeachMFIatdifferentlevel,asmentionedabove.Wherever anytwobarsintheFigure6areequalforanyMFI,itmeansthatnodifferentiatingcomponentisofferedby thatparticularMFI.However,whereverthelengthofanytwobars(foranyMFI)isdifferent,thedifference can be attributed to the incremental effect caused due to the differentiating component of pricing (InsuranceorSecurityDeposit). TheweightedaverageAPRsatallfourlevelsareprovidedinAnnexure9.
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FIGURE6:WEIGHTEDAVERAGEAPRSOFSAMPLEDMFIS
15
ItcanbeobservedinFigure6that i. ii.
Whereversecuritydepositischarged,thereisasignificantincreaseinthecosttotheclient(interms oftheAPRs) ThedifferenceinthesizeoftheWAAPR(Interest+Fee)andWAAPR(Interest+Fee+Insurance) representsincrementaleffectonAPRsduetoinsurancecharges.ItcanbeseenthatsomeMFIssuch asCECOEDECON,Cashpor,HandinHandandEquitasofferacreditinsuranceatconsiderablylower prices, whereas BSFL, SKS, Spandana, Satin, Mimo Finance, are amongst the MFIs who offer more expensivecreditinsurance.
It is therefore clear that some of the MFIs have been charging the client with a considerably costlier insurancepremium.Whileitispossiblethatthebenefitsassociatedwiththesecostlierinsuranceproducts are proportionately higher; nevertheless being a mandatory (or deemed to be) component of the loan product,itsaddstotheeffectivecostbornebytheclient. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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APR SACROSSDIFFERENT T IERS Figure7showsthevariationintheAPRs across differenttiersof MFIs interms of APR spread (difference between maximum and minimum APR) and maximumandmedianAPRs.Itisevident thatTierIandTierIIIMFIsareveryclose to each other in terms of median APRs4 (26.25% and 26.51% respectively). However,APRsofTierIIinstitutionswere found to be higher (31.07%). TierI MFIs leverage the economy of scale and have relatively easier access to capital while TierIII institutions (consisting the smaller, mostly the not for profit MFIs) have access to grants to both cover operating costs and as low cost on lending funds. The WAAPR varies from
FIGURE7:WAAPR(INTEREST+FEE) ACROSSDIFFERENTTIERSOFMFIS
17.85to33.76%incaseofTier1.However,SKDRDPseemstobeanoutlierherewiththelowestAPRinthe category. Without considering the APRs of SKDRDP the APR spread (Maximum Minimum APR) of the category shrinks down from 15.91% to 10.71%. IncaseofTierIII,themedianAPRisskewed toward the lower end of the APR spread. ThisisbecauseoftheunusuallyhighAPRof NEREFS (50.09%). NEREFS caters to the clienteleindifficultgeographies(Northeast and other hilly areas). The high costs of operating in tough geographies coupled with lack of infrastructure (bad roads, lack of power and poor banking services) explains the high APR of NEREFS. Without considering the APRs of NEREFS the APR spread of the category shrinks down from 31% to 20% with maximum APR being 39.2%.
FIGURE8:APRSACROSSTIERS
The Mean WAAPR refers to the average (sum of the values divided by the number of values) of sample WAAPRs under considerationwhereasMedianWAAPRcanbedescribedasthenumericalvalueseparatingthehigherhalfofasampleofWAAPR, from the lower half. The median of a finite list of numbers can be found by arranging all the observations from lowest value to highest value and picking the middle one. If there is an even number of observations, then there is no single middle value; the median is then usually defined to be the mean of the two middle values. Hence the Median WAAPRs have been considered for comparisonacrossallcategories.
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Withoutliersbeingexcluded,wecansaythatnormallydifferenttiersofthese30MFIoffersthemicrocredit creditinthefollowingAPRranges(excludinginsuranceandsecuritydeposit): i. TierI :(23%34%) ii. TierII :(25%40%) iii. TierIII :(19%39%) ThemedianAPRsacrossdifferenttiers,(atallthreelevelsofAPRcalculations)canbeseeninFigure8.Itis evidentthatwhiletheAPRincreasesasthedifferentcomponentsofpricing(Insuranceandsecuritydeposit) are included. However, in case of Tier I the incremental effect due to security deposit is negligible and thereforeitcanbeconcludedthatmostTierIMFIsdonotcollectsecuritydeposit. ThevariationinAPRacrosstierscanbeattributedtothefollowingpoints: APR SACROSSDIFFERENT L EGAL F ORMS Figure9showsthevariationintheAPRsamong the For profit" and Not for Profit MFIs. It is evident that the median APR of for profits is almost500basispointshigherthanthemedian APRoftheNotforprofitsandthemicrofinance loanfromForProfitMFIsisaround20%costlier thanthosefromtheNotforprofits.TheNotfor Profit institutions do not charge fees on the loans provided to their clients whereas the For Profit institutions charge a fee of 12% of the loanamount. ThoughtheFinancialcostratioisnotvarying acrossdifferentlegalforms,NotForProfitMFIs (primarilyNGOs)haveconsiderablylowerOERs FIGURE9:APRSACROSSDIFFERENTTIERSOFMFIS (DiscussedintheTransactionCostsectionofthis report)ascomparedtoForProfitMFIswhichcanbeattributedtothevariationinAPRacrosslegalforms. ThelowOERswereattributabletomicrofinanceactivitiesbeingoneamongstthemanyotheractivitiesof theNGOsresultinginlowerOERstotheNotforProfits(asthetransactioncostsaresharedbydifferent projectactivities) APR SACROSSDIFFERENT L ENDING M ODELS FromFigure10,itcanbeseenthattheSHGmethodologyisalendingmodeltoproviderelativelycheaper credittotheclient.TheAPRsacrossallthreelevelsshowasteepdeclineinAPRsofSHGmodelascompared toJLG/Grameenmethodology. ThisdeclinecanbeexplainedbytherelativelylessercostofclientacquisitioninSHGmodel.Outofthe10 MFIsfollowingSHGmethodology8areNotForProfitMFIs.MajorityoftheSHGstheseMFIslendtoarepre formed (either for the SHG Bank Linkage Programme or formed under the some other core development StudyonInterestRatesandCostsofMicrofinanceInstitutions TierIITransactioncostisveryhigh(around500basispoints)ascomparedtoTierIandTierIII. TierIIFinancialExpenseRatioishigher(around200basispoints)ascomparedtoTierIandTierIII.
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activity of the institution, for which grant support has been available). In such cases, the cost of client acquisitionislower. Also as discussed above, NGOs microcredit transactions share costs with other Programme activities and this result in lower OERs due to the total transaction costs being apportioned amongst different programmes. It was found that the MedianOER(7.9%)ofMFIswithSHGbasedmodels was significantly lower than the median OERs of the MFIs with JLG (16.8%) and Grameen (11.4%). Theselowertransactioncostsarethisdifferencein the OER explains the difference in the APRs of thesedeliverymodels. Though the APRs of the SHG based MFIs were FIGURE10:APRSACROSSDIFFERENTLENDINGMODELSOFMFIS found to be significant lower than that through othermodels,theseMFIshaverelativelysmalleroutreach.TheaverageoutreachoftheMFIswithNonSHG modelwasalmostfivetimeshigherthanthatoftheSHGbasedMFIs.
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APR SACROSSDIFFERENT G EOGRAPHICREGIONS
WhileanalyzingtheAPRsinthegeographiccontextithastobeunderstoodthatsomeMFIoperate in a single state/region whereas some operates in multiple states/regions. Therefore while comparing the APRs across different geographic states/regions, such MFIs operating in multiple states/regionsaretobeincludedinmorethanonecategoryofregions.Basedonthisassumption, theTable7showsthecategorizationofthesampledMFIsforgeographiccomparisonofAPRs.
TABLE7:GEOGRAPHICPRESENSEOFMFIS
MFI Asmitha Bandhan HandinHand BSFL CASHPOR CECODECON Chanura Equitas HopeFoundation Janalakshmi Lupin MAS MimoFinance NBJK NEED NEREFS People'sforum RASS Rores SaharaUttrayan Sahayata Saija Satin Share SKDRDP SKS Smile Sonata Spandana Ujjivan North * Yes Yes Yes Yes Yes Yes Yes * Yes Yes * Yes East * Yes Yes Yes Yes Yes Yes * Yes * Yes
Regions West * Yes Yes Yes Yes Yes Yes Yes * Yes * Yes South Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes NorthEast Yes Yes Yes Yes
*Dataunavailable
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SincedifferentgeographicregionshaveanoverlappingsetofMFIs,thegeographiccomparisonofAPRisnot the comparison among the MFIs but the comparison of different geographic submarkets based on the availablemicrocreditproductsfromdifferentMFIs. Figure11showsthegeographicvariationinAPRs:
FIGURE11:REGIONWISEAPRS
As seen in Figure 11 above North East region has the highest APRs which is attributable to the high transactioncostsforoperatinginthatregion.
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APRVSYIELDONPORTFOLIO
FIGURE13:MEDIANAPRSVSMEDIANYIELD
FIGURE12:MEANAPRVSMEANYIELD
Figures12and13showthevariationinportfolioyieldw.r.t.weightedaverageAPR(Interest+Fee)across differenttiersofMFIs.ItisevidentthatthoughtheportfolioyieldfollowsthesametrendasAPR,itislower thantheAPR.ThesametrendwasindicatedinboththeMeanandMedianFigures. Thissignifiesthattheportfolioyieldisnotaneffectiveproxyforpricing.Itcanbeusedtoseeatrendsimilar topricing.However,thenominalfiguresofPortfolioyieldcannotbeusedasthereplacementoftheexact APRs. ItalsofoundthatthoughtheportfolioyieldisalwaysbelowtheAPR,thegapbetweenportfolioyieldand APR increases inTier III MFIs due to thesteeper decline inthe portfolio yieldcompared to the APR. This increasedgapindicatesthat i. ii. SomeoftheTierIIIMFImayhavelaterecoveryofinterestthatiscausingthesteeperdeclineinthe Portfolioyield. Most of the Tier III MFIs (mostly Not for Profits) are yet to develop a robust cash management system which can minimize the idle cash. Inefficient fund management reduces the turnover of fundsresultinginlowerportfolioyield.
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BROADBREAKUPOFTHECOMPONENTSOFTHEINTERESTRATE
During the study, 51 products were studied in the 30 MFIs visited across the country. Using the pricing components of these 51 products average distribution of the product pricing has been calculated and presentedbelow:
FIGURE14:COMPONENTSOFTHEINTERESTRATES(OVERALLANDACROSSTIERS)
Figure14showsthebroadbreakupofAPRsintermsofthefollowingfourcomponents: i. ii. iii. iv. Interest Fees InsuranceCharges Security/CashDeposit
This breakup is calculated using the average figures of the entire data set in the pie chart. The bar graph however also shows the distribution (incremental effect on APR) of different components across different TiersofMFIs.ItcanbeseenintheFigure14that: InTier1MFIstheaverageincrementaleffectofsecuritydepositonAPRisonly0.76%(76basis points)whichsignifiesthatnotmanyMFIsadoptedthepracticeofcollectingthesecuritydeposit. InTierII,theaverageincrementaleffectoffeesonAPRisrelativelyhigh(5.08%).
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APRVISVISVARIOUSCOSTS Theabovegraphshowsthedifferentcostsi.e.FinancialCost,OperationalCostandLoanLossprovisioningas thecomponentofAPRsforthesampledMFIs.ItcanbeseenthattheAPRs5doesnotfollowthetrendofthe totalcosts.ThiscomparisonwasdonetounderstandthepatternacrossMFIs. TheseMFIsarearrangedtierwiseinthereducingorderofthetotalcosts.Thegraphclearlyshowsthatwhile theTierIIMFIshadhigherAPRs,theyalsoproportionallyincurredhighercosts.TierIIIMFIshadasignificant variationintheAPRandinthetotalcostsaswell.InTierI,thoughtheAPRswererelativelylower,majority oftheMFIsincurredlowercostsaswell. However,eachofthesetwocategorieshadfewMFIsforwhichthegapbetweentheAPRsandthetotalcosts wasconsiderablyhigh.TierI,IIandIIIhad4,2and2MFIsforwhichtheAPRwasisover10%(1000basis points)abovethetotalcosts.TwooftheMFIswerealsofoundtohaveoperatingwiththenegativemargin. SowhilesomeoftheMFIsmaintainedreasonablemargins,someoftheMFIswereinapositiontoreduce theirinterestrates.
5
Sincethesecuritydeposits(beinginterestfreefunds)reducesthecostoffunds,forthepurposeofthiscomparison, APRincludingtheeffectofsecuritydepositi.e.WAAPRs(Interest+Fee+SecurityDeposit)wereused.
24
ItwasfoundthattheaverageFinancialcosts,Operatingcost,andLoanlossprovisionfortheentiresample were9.32%,12.29%and1.11%resultinginatotalcost(excludingmargins)of22.72%.Thisindicatesthatthe RBIrecommendationof26%interestratewith1%processingfee(equivalenttoanAPRof28.07%)isaviable propositionforIndianMFIs.
EFFICIENCYINDICATORSVSAPR
FIGURE15:EFFICIENCYVSAPR
Inordertounderstandthecorelationbetweenefficiencyandinterestratechargedtotheclients,analysis across three efficiency indicators (Operating ExpenseRatioOER, Costper BorrowerandBorrower perCO) withtheWeightedAPRacrossForProfitandNotforProfitinstitutionswasdone.Figure15illustratesthatas thecostsincrease,theAPRoftheinstitutionsincreasesandasthenumberofborrowersperCOincrease,the APRoftheinstitutionsdecrease.TheAPRhasadirectrelationshipwithcostsandinverserelationshipwith borrowerperCO.
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COMPARISONWITHGLOBALANDREGIONALBENCHMARKS
FIGURE16:YIELDONGROSSPORTFOLIO(MIXDATA2009)
SincethecomparableAPRsarenotavailableexceptforCambodiainAsia,Nominalportfolioyieldwasused as a proxy for interest rate pricing as it represents the approximate inclusive cost to the client. Yield on portfolioisusuallylowerthantheAPR,butitisstillausefulindicatorforcomparison. BangladeshandIndiahaveregisteredsignificantgrowthinmicrofinanceportfolioinlast5years.MIXdata, onthetrendinyieldonportfoliooverlast5yearsindicatethat,Bangladeshiinstitutionsarereducingtheir yields while Indian institutions have raised them. MFIs in Bangladesh have a lower cost of capital due to access to subsidized loan funds from PKSF, whereas Indian institutions are much more susceptible to increasingcostoffunds.However,asshowninFigure20,thesampledMFIsthoughhavearelativelyhigher YoPthanthatoftheSouthAsiaitisstilllowerthanthatoftheglobalmedianfigureandconsiderablylower thanthatofothercomparablemarketslikeIndonesia,CambodiaandPhilippines.

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APRCOMPARISONACROSSDIFFERENTCOUNTRIES
Except India and Cambodia, APRs are not available for any other Asian countries. However, Microfinance Transparency has published the APRs for few other countries which have been used for comparison6 in Figure21:
FIGURE17:APRCOMPARISANACROSSCOUNTRIES
ItcanbeseeninFigure21thatwhiletheMedianAPR(Interest+Fee+Insurance)ofthe9countriesshown inthefigurevariesfrom22.32%to61.00%,theaveragemedianAPR(Interest+Fee+Insurance)comesout tobe37.68%.ThemedianAPRsofthestudiedIndianMFIsarewellbelowtheaveragemedianAPRsamong theothercountries.Onlythreecountries(Bolivia,Equador,BosniaandHerzegovina)showlowerAPRsthan thatoftheIndiaMFIs.

Medianfiguresoftheentiredatasetfordifferentcountries(availableatMicrofinanceTransparencyswebsite)havebeenusedfor comparison.
6
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Basedontheaboveanalysis,followingarethemajorconclusions:
1. ThereisaneedtoreviewthecompulsoryinsuranceproductsofferedbysomeoftheMFIs,(mostlytheFor ProfitTierIMFIs)whohavebeenchargingrelativelyhighforthecompulsorycreditinsurance.However, with the recent RBI guidelines issued regarding the insurance premium to be directly paid to the insuranceprovider,thiscostofcompulsorycreditinsuranceislikelytoreducesincetheMFIswouldnot beallowedtochargeanyprocessingoradministrationchargesforprovidingsuchaninsuranceproduct. 2. Higher transaction costs and higher financial cost for the Tier II institutions has resulted in relatively higherAPRsinthiscategoryofinstitutions.Moreover,theTierIIinstitutionshaveverylittlemargindue totheirinvestmentsinexpansion.Theseinstitutionsareintheirgrowthphaseandhavealreadyinvested inexpansion.Alittleimpetusprovidedintheformofgrantsforcapacitybuildingandequityorlowcosts fundsforexpansion,totheseinstitutionscanshowresultsinreachingmorenumberofclientsandhigher loansoutstanding. 3. MFIs following the SHG model charge lower APRs; 80% of the MFIs following this model are not for profits.Thereissignificantoperationalcostreductionduetomonthlycollectionprocess,apportionment ofcostsamongstmultipleprogrammeactivitiesaswellaslowerprofitmarginsexpectedbytheseMFIs. 4. TheAPRreducesastheinstitutionachievesscale.ThishasbeenobservedfortheTierIinstitutionswhere theAPRislowestfortheminimumandmaximumAPRacrossproducts.TierIinstitutionshavescopefor offeringlowerAPRstoclients. 5. APRsofIndianMFIsfallinamidrange(neitherthelowestnorthehighest)oftheAPRswhencompared toeightothercountries(forwhichAPRwereavailable).However,theAPRofIndianMFIswaslessthan theaverageAPRsofothercountries.
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5.TRANSACTIONCOSTS
Microfinanceisahumanresourceintensiveservicedeliverymodelandtransactioncoststendtobehigher thanotherfinancialserviceproviderssinceaverageloansizesaresmallandservicesareusuallydeliveredat doorstep. Transaction costs or operating costs in MFIs are typically driven by the lending model (Grameen/JLG/SHG/individual),averageloansizes,theprocessesofclientacquisitionandservicingpractices of the institution. The two major sub components of Operating costs are Personnel or staff costs and administrative expenses (office rent, transport, utility charges, office supplies and depreciation of fixed assets). Around67%(20outofthe30)ofthesampledinstitutionsfolloweitherGrameen(13)orJointLiabilityGroup (7) as the core lending methodology and the remaining institutions follow SHG methodology. Grameen methodologycharacteristicallyhasstandardpracticesinmembermobilization,groupandcenterformation7, inbasiccompulsoryorientationtrainingandrecognitionofgroups,KYCcompletion,standardproceduresof loanapproval,sanctionanddisbursement.Repaymentcollectionsaredoneweeklyatcentremeetings.This standardizationenablestheseMFIstobemoreefficient. Theanalysispresentedbelowisbasedonthedataof28 MFIs.HandinHand(Chennai)andCECCODECON (Jaipur) are not included due to unavailability of disaggregated cost data for microfinance and other developmentactivities. OER IN T IER I, T IER II AND T IER III MFI S Figure 23 shows sharp decline in Operating expense ratio for Tier I MFIs over the last three years in comparison to Tier II and Tier III MFIs. This infers the impact of outreach and high operational efficiency in reducing the OER for Tier I MFIs. Few Tier I MFIs such as Equitas, SahayataandUjjivanhaveinitiatedoperationsin the last three years and have achieved exponential growth in outreach and loan portfoliowithhigheroperationalefficiency.
FIGURE18:OPERATINGEXPENSERATIOACROSSTIERS
EquitasandSahayatahavegrownat2700%and2870%respectivelyintermsofclientoutreachoverthelast three years (March 2008 to March 2010). Moreover, they have invested in technology and systems to increaseefficiencieswhichhaveinturnleadtothedecreaseinOERovertheyears.TheOERofEquitashas reducedfrom41.31%on2008to7.58%in2010;similarly,theOERofSahayatahasreducedfrom107.5%in 2008to15.9%in2010.
7
Groupsconsistof5membersandorganizing810groupsintoacentrewithrespectivegroupleadersandcentreleaders
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Further breakup of OER into personnel and admin costs for Tier I MFIs shows similar declining trend for both the components of operating costs. Equitas and BSFL has sharp decline in personnel and admin expense from year 2007 to 2008. Other Tier I MFIs show a similardecliningtrendbecauseoftheirgradual decline in OER components. The fast growing MFIs such as Sahayata, Equitas and Bandhan have managed to bring down their OER (A) significantly from the year 2007 to 2008. Overall, Tier I MFIs has shown good trend of declining OER in respect to their cumulative loan portfolio from Rs. 28,473 million in 2008 to Rs. 115,796 millionin2010. Tier II MFIs are mostly comprised of MFIs in growth phase and are investing inandimprovingtheiroperatingsystems toincreasetheiroutreach.Thisincluded Sonata, Janalakshmi, Mimoza Enterprise Finance Pvt. Ltd. and Peoples Forum. MostoftheTierIIMFIsareintransition phase from not for profit to for profit entityandhaveconsistentOERof16.1% in 2008 to 15.2% in 2010 (refer Figure 25). Further analysis of OER (Personnel) and OER (Admin) for tier II MFIs indicates increase in personnel expense from6.7%to8.2%infinancialyear2009 to2010.Thisincreaseinsalaryexpense FIGURE20:OPERATINGEXPENSERATIOINTIERII is due to recruitment of additional operationstaffintheyear200910.SonataandSatinCreditCarehavemostsignificantincreaseinpersonnel expensesfrom2009to2010,whileothertierIIMFIshaveshownconsistenttrendforoperationalexpense. Overall, the increase in OER and specifically OER (P) for tier II MFIs is also reflected in the exponential increaseintheirportfoliofromRs.2186milliontoRs.4698million. OutofnineTierIIIMFIsstudied,sevenareNGOMFIswhohavecomparativelylowerOERforallthethree years due to subsidizing the operational costs of their microfinance activities through sharing of staff and infrastructureetc.,amongdifferentprogrammeswhicharegrantfunded.Ithasbeendifficulttoarriveatthe accurate operational expenses for the microfinance activity in absence of segregated financial data/ clear accountingforexpensesinthefinancialstatementsproducedformicrofinanceoperations.Someofthese institutions separate financial statements for micro finance which are not consistent and hence reliable. LupinHumanWelfare&ResearchFoundation,RASShavethelowestOERofabout2%inthiscategorydueto
FIGURE19:OPERATINGEXPENSERATIOINTIERI
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subsidization. Without including these two institutions (Lupin, RASS), the OER of the Tier III institutions is 18.38%. The personnel expense ratio for Tier III MFIs shows increase from 3.4% to 5.5% due to expansion in ChanuraMicrofin,NEED andNorth East Region Financial Services Ltd., while the admin expense ratios havedeclinedfrom3.3%in2008to 2.9% in 2010. Rores functioning in Karnataka has witnessed a triple foldincreaseinoperatingexpenses duetoincreasestaffsalaries. FIGURE21:OPERATINGEXPENSERATIOINTIERIII There is a need to conduct a separate and detailed study on the costs of operations for the institutions cateringtotheclientsinNortheast.Theinstitutionsneedtobeselectedacrossallcategoriesofinstitutions (tierwise,legalformwiseandmodelwise).Duringthestudy,itwasobservedthattheOERoftheinstitutions (NEREFSandChanura)operatinginthenortheastregionarehighduetothecostsofprovidingcreditservices totheirclients.Thecostsarehighduetogeographicalspread(plainsandhills), lackofinfrastructure(bad roads, power deficiency and poor banking services) and associated costs like travelling, fuel for power generation.Hence,thereisaneedtohavedifferentialinterestrateceilingsforinstitutionsworkinginunder servedandtoughareas. OER FORDIFFERENTDELIVERYMODELS The microfinance delivery model influences the operational expenses of MFIs. On the basis of analysis of 28 MFIs from the sample, SHG model has lowest costs of operations due to the operational characteristic of monthly meeting in halfoftheeightMFIsadoptingthismodel,which reduces the costs of field staff visiting the group once in a month as compared to four times in GrameenorJLGmodel.Thistrend alsoconforms to the lowest pricing of loans of MFIs following SHGmodel.Thereisnosignificantvariationinthe OERfor7MFIsfollowingSHGmodeloverthelast three years. Apart from that, these MFIs (Lupin, FIGURE22:OERACROSSDIFFERENTDELIVERYMODELS NBJK and NEREFS) are also receiving grant / soft loansfromSIDBI,NABARDandotherfundingagenciesfortheformationofSHGsandareinvolvedinmultiple activitieswiththeirmicrofinanceclients.JLGmodelisfollowedby7MFIsinthesampleandiscomparatively highOERthanGrameenandSHGmodelduetohighoperationalcost.TheOERratiosfortheseMFIsarealso high since three MFIs in this category are in their expansion phase (Satin Credit Care Network Ltd, StudyonInterestRatesandCostsofMicrofinanceInstitutions
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Janalakshmi Financial ServicesPvt. Ltd& Saija FinancePvt.Ltd.).TheOER forthe MFIsadoptingGrameen modelshowsasharpdeclinefrom16.4%in2008to11.4%in2010.Grameenmodelisconsideredtobethe most efficient model in microfinance and can achieve vast outreach in short span of time due to standardized systems and procedures. The 13 MFIs in the sample adopting Grameen model and mostly comprised of the entire Tier I MFIs. The decline in the OER for Grameen model can be deciphered as efficiencylevelachievedbysomelargeMFIslikeBandhan,Equitas,Sahayata,amongothers. OER ACROSSDIFFERENTLEGALFORMS
FIGURE23:OERACROSSDIFFERENTLEGALFORMS
TheOERofallinstitutionsacrosslegalformsshowsthesametrendintermsofreductionfromYear1toYear 3.Thisisbecauseofthescaleachievedbytheinstitutionsduringthelastthreeyears.Figure28alsoshows thatpersonnelexpenses[OER(P)]in200809ismorethantheothertwoyearsduetotheretentioncosts(in termsofhighersalaries)tocombatcompetitionamongMFIs. OER ACROSSDIFFERENTREPAYMENTFREQUENCIES The operating cost across different repayment frequencies (weekly, fortnightly and monthly) was compared based on the repayment frequencies offered by MFIs. Figure 29 clearly shows that fortnightly repayment frequencies have the lowest operating costs. However, the lower costs of operations for institution offering fortnightly frequencies cannot be attributed to repayment frequency only because Equitas is an
FIGURE24:OEROFDIFFERENTREPAYMENTFREQUENCIES
institution which has invested in technology (OMR based membership form, preprinted payment stickers, real time collection and attendance monitoring, cash handling by external agency, among others) and operational systems StudyonInterestRatesandCostsofMicrofinanceInstitutions
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(loan origination and loan collection done by separate staff, twoyear loan, among others), which has an effectontheoperationalcosts.Theoperatingcostsforinstitutionsofferingmonthlyrepaymentfrequencies hasbeenconsistentovertheyears,whereastheinstitutionsofferingweeklyrepaymentfrequencieshada increaseinYear2duetotheexpansionplansandinvestmentsinHRandbranchcostsduringthisyear.The institutions (10) offering monthly repayments are a mix of all the categories including scale, models, legal form and operational area whereas the institutions (19) offering weekly repayment frequencies were primarily Tier I, Grameen and For Profit Institutions. Only one institution (Equitas) formed part of the institutionofferingfortnightlyfrequencies. FurtheranalysisofbreakupoftheOERintoOER(P)andOER(A)showsthesametrendacrossrepayment frequencies.
FIGURE25:OERSFORDIFFERENTREPAYMENTFREQUENCIES
The analysis across different repayment frequencies clearly shows that the institutions following weekly repaymentfrequencieshasthemaximumOERandinstitutionsfollowingfortnightlyandmonthlyrepayment frequencieshavealowerOER.WiththeRBIguidelinesissuedandoveremphasisofdecreasingcosts,there are chances that the institutions following weekly frequencies would change to fortnightly or monthly installmentrepaymentsystem.Thiswouldhaveadirectimpactonthecostsoftheinstitutionssincefield/ credit officers visiting and travelling to the clients would be limited to one and not fourfive per month. However, a balance need to be created between quality time provided to the clients visvis costs incurred. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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6.COSTOFFUNDS
Costoffundsisasignificantcomponentoftheoverallexpensesofafinancialinstitution.Itdrivesthecostsof providingcreditservicestothepoorandsubsequentlythedeterminationofpricingofloansfortheclients. ThefundingpatterninIndianmicrofinancehasbeendominatedbycommercialdebt(70%oftotalfundsin 2010) over the past few years. Other sources of funds include portfolio securitisation (off balance sheet lending), savings (only one institution in sample), paid in equity and no cost sources such as grants and securitydeposits. BasedondiscussionswiththeMFIsandfewofthefinancialinstitutions,modelsofmicrofinancedeliveryand geographical area of operations had very less influence in their decision of lending since they were more concernedwiththecapacities,systemsandprocessesoftheinstitution.Hencetheanalysisacrossmodelsof deliveryandgeographicalareawasnotdoneforcostoffundsfortheMFIs. ThefollowingsectionpresentsananalysisofthefinancialexpenseratioofsampleMFIs. C OSTOF F UNDSACROSS L EGAL F ORMS Thecostsoffundsforforprofitinstitutions inthisstudywasmoreorlessuniformacross the last three years whereas the cost of funds for the non profit institutions was lower in 200708 due to the availbility of revolving loan funds / cheaper source of credit during the period. Specific exampes include Revolving loan fund of Rs 10 million from SIDBI by NBJK and access to individual donationsandlowinterestfundsbyChanura Microfin and low cost funds mobilised by RASS. From 200809 onwards, financial expenseratiofornonprofitinstitutionsrose higher since the availability of grants and low costs funds has been dwindling, and many MFIs were either commencing FIGURE26:COSTOFFUNDSBASEDONTHELEGALFORM operations (Saija and Sahayata) or transitioning into for profit form, leading to higherriskperceptionoflendersandtherebyhigherpricedonlendingfunds. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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L OANS O UTSTANDINGVERSUS C OSTOFFUNDSACROSS N OTFOR P ROFITS TheincreaseinloansoutstandingfromYear 1 to Year 2 is directly proportional to the costsoffundsinYear1andYear2whereas the costs of funds reduce as the loans outstandingincreases.Thisisduetothefact that as the MFI achieves scale, the MFIs haveseasonedstaffinplace,andhencethe institution is in a better position to bargain withthefinancial institutions forfundsat a lowerrateofinterest. FIGURE27:LOANOUTSTANDINGVSCOSTOFFUNDSACROSSNOTFORPROFITS C OSTOF F UNDSACROSS T IERS Figure 33 shows the comparative trend ofcostoffundsofdifferentTiersofMFIs. As expected, sample Tier III MFIs, majority of which are nonprofit institutions (seven out of nine are non profit),havethelowestcostoffunds,but the cost has steadily increased over the threeyearsduetodecreaseinsoftloans. Additionally,fiveoutofnineTierIIIMFIs are based on SHG model, which attracts availability of loans at lower interest rates from banks and institutional lenderssuchasRashtriyaMahilaKosh(RMK) FIGURE28:COSTOFFUNDSFORDIFFERENTTIERSOFMFIS (lendingtoLupinandCECODECON@8%)and NABARD(lending to NEED@ 6.5%). Tier II MFIs are able to achieve a declinein theircostof funds from 13.6%in2008to11.1%in2010withtheinfusionofequityinthisperiodincludinginJanalakshmi,Mimoza EnterpriseFinancePvt.Ltd.,Sonata,SatinCreditCareandPeoplesForum.TierIMFIsinproportiontotheir portfolio received less equity to influence their cost of funds, significantly. However, the high premium mobilized on shares and the generation of funds and reserves from the operations helped to lower the overallcost.IncreaseinportfoliobuyoutsledtolowercostofcapitalforTierIandTierIIMFIsin2009and 2010.TheadjustedandunadjustedFCRacrossTierIIIinstitutionsarementionedbelow: 200708 200809 200910 UnadjustedFCR 5.7% 7.8% 8.4% AdjustedFCR 9.0% 8.8% 8.5%
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W EIGHTEDAVERAGE I NTEREST R ATES
TABLE8:INTERESTRATEOFFINANCIALINSTITUTIONSFORMFIS
Aspartofthemethodologyofthisstudy, the sanction letters / term sheets of the financial institutions were studied and it has been observed that a cumulative of 80 financial institutions have been supporting 25 microfinance institutions (5 institutions did not share the details). Based on the sanction letters / terms sheets provided by the microfinance institutions, the weighted interest rates werecalculatedacrosseachfinancialand microfinanceinstitution.
TypeofFinancial Institution Nationalized Banks DevelopmentalInstitutions PrivateBanks NBFCs RRBs Total
Numberof institutions 37 16 15 7 5 80
InterestRate (Range) 9.514.5 8.014.5 9.515.0 12.515.0 9.013.5 8.015.0
The various financial institutions providingfundshavebeencategorizedandtherangeofinterestrateschargedbythesefinancialinstitutions ispresentedinTable8. ThelistofthebanksundereachofthecategoryismentionedinAnnexure10.Table8clearlyshowsthatthe interestrateschargedbythefinancialinstitutionsareintherangeof8.015.0%,whichhasadirectimpacton the interest rates charged by the microfinance institutions to their clients. Rashtriya Gramin Vikas Nidhi (RGVN),adevelopmentorientedfinancialinstitutionwhichprovidesloanstomicrofinanceinstitutions(Saija andChanuraMicrofinance)at15%interestrate.Thisrateisconsiderablyhighwhencomparedtothatofthe other development oriented financial institutions. Few NBFCs like MAS Financial Services (to Cashpor and Satin), Reliance Capital (to Equitas, Mimoza, Uttarayan Financial Services, Sahayata, Satin, SMILE and Sonata), Tata Capital (Bandhan and Equitas), MV Microfinance Private Limited (to Sahayata, Satin and SMILE), among others are also involved in institutional lending and provide loans at more than 14% per annum;thisishighascomparedtotheloansavailedfromotherfinancialinstitutions. The weighted average cost of funds for NEREFS is the highest and the operating costs in providing credit servicestotheclientsisalsohighduetotoughterrainandpoorinfrastructureintheiroperationalarea,and hencetheinterestchargedtotheclientsishighestamongthesampleinstitutionsstudied.SKDRDPhasthe lowest costs of funds and the interest rates charged to the clients are the lowest. Similar trend is being observedinLupin,Bandhan,Satin,Saija,SMILE,amongothers.Thisclearlyshowsthatthereisadirectand positive correlation between the cost of funds and the interest rates charged to the clients. Lower the weighted costs of funds across financial institutions, lower is the interest rates charged to the clients and viceversa. In addition to the interest rates, the private banks charge a loan processing fees / upfront fees of 0.01 1.00%oftheloanamountsanctioned.DevelopmentalinstitutionslikeMaanveeyaHoldingscharge1%ofthe sanctionloanamountastheloanprocessingfees.SomenationalizedbankslikeCorporationBank,Bankof India,PunjabandSindBank,AllahabadBank,amongothersalsochargealoanprocessingfeesrangingfrom 0.200.50%ofthesanctionedloanamount. The Tier I institutions due to their widespread geographically diverse operations, superior systems and updated information, skills in negotiation, apart from larger quantum of loan requests are in a better StudyonInterestRatesandCostsofMicrofinanceInstitutions
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positiontobargainwiththefinancialinstitutionsandraisedebtsatalowerinterestratewhereastheTierII andTierIIIinstitutions,duetolowoutreachandloansoutstanding(ascomparedtoTierIinstitutions)apart fromweakersystemsareabletoavailloansatahigherrateofinterest.Thereisalsoaperceptionamong lendersthatthelargerinstitutionsarenotlikelytofail;thesmallerinstitutionswithconcentratedportfolio, raisestheriskperceptionoflenders.
FIGURE29:FUNDINGCOST(MIXDATA2009)
ItcanbeseeninFigure34thattheinstitutionsoperatinginIndiahavethehighestweightedaveragecostsof borrowings in the world. The financial institutions in India charge the highest rate of interest when comparedwithotherAsiancountrieslikeBangladesh,CambodiaandIndonesia. There is a strong correlation between Yield on Portfolio and financial expenses. Even as operational costs continuetheirgradualdecline,theyareoffsetbyincreasingfinancialcosts.However,itcanbeseeninFigure 35 that while for the World and other Asian countries the YoP is following the same trend as financial expenses, in case of Indian MFIs as also for South Asia and Bangladesh, the difference is comparatively lower,whichindicatestherelativeefficiencyoftheMFIsoperatinginthesegeographies.
FIGURE30:YIELDVSFINANCIALEXPENSES
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7.RISKCOSTMANAGEMENT
MFIsthatwerestudiedfaceavarietyofriskssomeareinternaltotheirbusinessoperationsandafeware due to external factors. Some of the larger players SHARE, Spandana, Asmitha have not shared quality informationontheirstrategiesforriskmanagement. The MFIs rated the major risks they were facing. The top 5 risk factors and the number of responses are showninTable9.
TABLE9:RISKSBEINGFACEDBYTHEMFIS
External risk factors are considered as severe by MFIs. Competition from other MFIs is the major risk faced; in Andhra Pradesh, the competition is from the state programme of SERP and in other states, the MFIs compete with each other especiallyinsemiurbanandurbanareas.
Risks Competition Political Regulatory Liquidity/Confidenceoflenders Highcostofloans
Noofresponses 13 10 7 7 5
INTERNALRISKS
C REDIT R ISK The credit risk being a key risk inherent to the lending business has been addressed through a variety of measures. 1. AlmostallMFIsclaimtohavearobustclientacquisitionmechanismandscreeningofclients. 2. ExceptinremoteareassuchasruralareasofRajasthanorhillyregionsofnortheast,inalmostall otherareasMFIshaveexperiencedcompetitionfromotherMFIs.Theissueofmultiplelendingand thusoverindebtednessofclientshavebeenaddressedbyafewoftheMFIsbyensuringthatthey open new branches only in areas where other MFIs are not operational. The others attempt to ensurethattheirclientsareaccessingnotmorethan3MFIloans.Sharinginformationthroughcredit bureaus is a risk mitigation measure to avoid multiple lending that has been initiated by MFI association. 3. TheMFIsadoptingcompanylegalformshaverobusttechnologybasedMIStogetalmostrealtime dataondefaults. 4. OnlysomeoftheMFIshaveinvestedininternalauditandbranchratingtomanagerisks. 5. 70%oftheMFIshaveinsuredthelivesoftheclientstocovertheriskofdefaultthroughdeath. 6. TherearesomegoodpracticessuchasthatofRASS,CECODECON,SKDRDP(mostlyNGOMFIs)who haveinvestedheavilyinclientrelationshipforensuringthatcreditriskislow. 7. TheMFIswithcompanyformhaverobustprovisioningnormsforeventualdefaultriskandloanwrite offswithsomeofthemadoptingmorestringentnormsthanprescribedbyRBI.Outof9MFIswith not for profit legal form, 5 MFIs have inadequate/no loan loss provision or write off policy and practice. 8. Foreseeing client staff nexus/fraud as a key risk area, many of the MFIs have robust staff related policies such as frequent transfer of staff and nonposting of staff in their birth place/residence. However, these lead to higher operational costs since staff compensation/transfer costs are also higher. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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C REDITRISKBORNEBYCLIENTSTHROUGHPEERPRESSURE During field visits, the clients of 31% of MFIs mentioned that they repay on behalf of other defaulting members occasionally in order to keep their credit history with the MFI intact and/or due to the specific proceduresofMFIsforsuchrepayment.ThisrisktransfermechanismofMFIs,thismechanismisboundto failwhenthefrequencyofdefaults/defaultamountsincreaseorwheremultiplelendingisrampant.Thisis ahidden beastwhich isnotsystematicallymeasuredbymostof the MFIs and thus notaddressed. Except Sonata,noneoftheothershaveevenacknowledgedthisrisk. C ASH T RANSIT R ISK Cashtransitriskhasbeenaddressedby48%oftheMFIshavingtakencashintransitinsurance.SomeMFIs such as CASHPOR have changed their processes to transfer this risk to the client groups where the group leadersdepositthecashatthebranch.TheMFIsineastandinnorthreporthigherlevelofriskduetofrauds andlawandordersituation. T ECHNOLOGYANDRISKCOSTS ThoughMFIsunderstudyhaveinvestedintechnologyfor loantrackingaspartofMIS, afewofthem like Equitashaveinvestedinadequatetechnologysolutionstoaddressriskscomprehensively.SomeoftheMFIs such as Cashpor, Janalakshmi are investing in technology for back end operations. As of now, technology adoptionofMFIsappearstobeweak.
EXTERNALRISKS
TheexternaloperatingenvironmentfortheMFIshaschangeddrasticallyinthelastyearaftertheordinance passedbyAndhraPradeshGovernment.Theexternalrisksaretranslatingtosevereoperationalrisksforthe MFIs. The MFIs operating in Andhra Pradesh are facing credit risk and liquidity risk. Liquidity risk has also beencitedbyMFIsinnorthandeastIndia. Following the microfinance crisis, MFIs are also finding it an uphill task to mobilize loans for on lending. Banks had been cautious in lending to MFIs and were awaiting the recommendations of RBI appointed committee.LiquidityriskisforeseenwiththelendershesitanttolendtotheMFIs.A fewofMFIs are also raisinghighercostdebtandarepredictingfurtherincreaseincostofdebt. TheMFIsareadoptingthefollowingriskmanagementmeasurestocopewithexternalrisks: 60% (18 out of 30 MFIs have submitted their revised pricing information) of them have changed theirpricingnorms. AfewofthemlikeEquitasarehavingarelookatthebusinessmodel. MFIsareinvestinginadvocacythroughindustryassociationsaswellasbuildinginhousecapacity. With liquidity being tight and raising loan funds becoming an issue, some of the MFIs are consolidatingtheirportfolioratherthanspreadingthin. MFIs are also considering improvements in information disclosures, transparency in operations, adoptionofclientprotectionprinciples,amongothers.
NoamountofloanlossprovisioningcanhelpMFIstotideovercreditrisktriggeredbypoliticalaction. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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PerceivedRisksandRiskmanagementcosts: SonataMicrofinance In addition to the Operational risks including portfolio/credit risk, fraud and security, Sonatas managementperceiveexternalrisksnamelypoliticalriskandnaturalcalamityassignificantrisksfacedby theirinstitutionsinthecurrentcontext.Sonataalsorecognizesthatthereisapossibilityofpeerrepayment beingahiddenrisk,expectedtobearound1%.Theoperationalrisksvarywithproducts,withindividual loansbeingmoreriskythangrouploans,andalsowithgeography,withunreachedandvirginareasbeing lessriskythanpenetratedmarkets.AsinmostMFIs,Sonatahasapolicyofnonhomepostingforstaffasa measureofriskmanagement,andhasaninternalauditdepartmentthatreportstotheBoard. Inordertomanageexternalrisks,Sonataactivelyparticipatesinactivitiesoftheindustryassociations,and viewsthemembershipfeesandcostsofparticipationintheactivitiesastheassociatedcosts.Inaddition, SonatatakesupaleadershiproleineffortstowardsmanagingexternalriskswiththeStatethroughefforts forsettinguptheStateChapterforMicrofinanceInstitutionsNetwork(MFIN)toformallyundertakelocal and regional policy advocacy and networking. Sonata also has an inhouse team for local/regional networkingandrelationshipmanagementwithgovernment,politicians,religiousleadersetc.aswellasfor reviewinganylegalrisks.
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8.TECHNOLOGYANDCOSTREDUCTION
The use of information and communication technology has the potential to make the microfinance processes more efficient by reducing costs, mainly in two ways (1) lowering of operational costs by automatingcomponentsofthecreditprocessand(2)loweringandcontrollingriskandtherebyriskcostby moreeffectivemonitoringandtracking. Sahayata has adopted a mobile based system to upload the data on repayments through an application calledTruecellwhichisinstalledinthemobilephoneofallFCOs(Loanofficers).Aftercollectingthedue repayments in the field, the FO can make the entry for each repayment collected from mobile and is informationissyncedintheserversoftheHeadoffice.Ifmobilenetworkisnotavailableonsite,thenFOcan use the same application to enter the data in offline mode, which gets transferred to Head Office servers automaticallywhentheFOinwithinnetworkcoveragearea.Thisapplicationnotonlyhelpsinreducingcosts butalsohelpstotrackandmonitordelinquentloans.Thedurationofgettinginformationandupdatinginthe softwarereducesdrasticallywhichhasadirecteffectonthecostsandrisks.Thebranchandheadofficestaff cantakedecisionsandactassoonastheloansaredelinquenttherebyreducingchancesofdefault.Cashpor isalsointheprocessofadoptingthesimilarapplicationtoimprovetheefficiency. Almost all sampled MFIs, except for NBJK, Hope Foundation and Lupin Human Welfare & Research Foundation,haveanautomatedMISthatenablesthemtotrackperformanceeffectively.Manyinstitutions likeSahayata,Equitas,Ujjivan,Sonatahaveonlinedataupdation,whichensuresendofdayreconciliationof datafrombranchestotheHeadoffice.TheMFIshaveconfirmedthatinvestmentinagoodMISapplication alongwithhispeedinternetfacilityhashelpedinthefollowingways: MonitoravailabilityoffundsinbranchesandHeadoffice,therebyminimizingidlefundsandleading tooptimaluseoffunds Monitordisbursements,repaymentsandoverdue,reducingriskofdefault,fraudetc. DecreaseinnumberofHRrequiredforMISandmonitoringinfield
In addition to the basic MIS, some MFIs such as Equitas, Sahayata, Janalakshmi, Cashpor, BSFL, SKS, Spandana,Share,Asmitha,UjjivanFinancialServices,andMASFinancialServiceshaveadoptedtechnology solutions to further reduce delays in data transfer and resulting inefficiencies and risks and to digitize transactionsonfield. Janalakshmi Financial Services (JFS) has made significant investments in maintaining and updating its technologyinfrastructure,systemsapplicationsandbusinesssolutions.Earlyon,JFSmadeaninvestmentto defineanddocumenttheprocessesofthecorebusinesslifecycle.Beginningwiththecustomeracquisition phase,loandisbursement,collectionphase,andfinallytheclosurephase,themappingofprocessesidentified the vital role of technology in driving business processes. JFLs technology infrastructure is defined by a threetier framework. At the foundation lies the IT architecturecomprising of the technology services and infrastructure. The architecture enables growth and ensures scalability of the business. Next, the core banking system (CBS) complemented by the Customer Relationship Management (CRM) application drives thebusinessprocessesofJFS.Finally,deliverymechanismssuchastheSmartCardseamlesslyinterfacewith CBSandCRMtocatertotheincreasingefficiencyoftheorganization.
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MFIssuchasSonata,SMILEandfewothersareindiscussionwithserviceprovidersforintegrationofmobile basedandothertechnologicalapplicationsforimprovingefficiencyandreducingcosts.SMILEhasrecently conductedacomprehensiveITreviewthroughaconsultingagencytoidentifythebestoptions. However, concreteevidenceof reduction in operating costs after settingofftheinvestment and recurring costsoftechnologicalapplicationsisstillnotavailable.Inaddition,theessenceofthemicrofinancemodel that lies on high client interface may potentially get diluted through integration of technology, leading to possibilitiesofresurfacingofcreditrisksassociatedwithdefault,lackofcommunicationtoclientsetc. TechnologicalInnovations:EquitasMicrofinanceIndiaPrivateLimited Among other sampled institutions, Equitas is one institution which has undertaken several technological innovations.EquitashasacorebankingsolutioncalledTEMENOST24inplace.Thisproductisanextensionof T24Bankingsoftware,developedspecificallyforMicrofinanceandCommunityBankingsector. SomeofthetechnicalinnovationsundertakenbyEquitasareasfollows: 6. Automated Form processing 80% of the information in the membership form is Optical Mark Recognition (OMR) based and can be entered into the system just by scanning; remaining 20% of the informationisenteredbystaff. 7. Realtimecollectionandattendancemonitoringattheheadofficeandstepstakenthereof(immediately). A central server obtains SMSbased information on the proceeds of every collection meeting within fifteen minutes of its completion. An internetbased application helps Branch & Area Managers detect anyirregularityintheircollectionsimmediately;andfacilitatesquickresolutionofsuchanirregularity. 8. Preprinted payment stickers prepayment printed stickers are sent by the head office to the branch officesonedaypriortothecollectiondayandallunstuckstickersneedtobereturnedwithinthreedays. Thisisasurrogatetotheprintedreceiptsandariskcopingmechanism.Thissystemhasreducedtheneed formanuallywritingthereceiptsthussavingcostsandtimeinmaintainingrecords. 9. Cashhandlingbyanexternalagencywhichcollectsallthecashfrombranchofficesintheeveningand providescashinthemorningfordisbursements,basedontherequirementsofeachbranch.Thoughthis may be marginally costlier than staff handling cash, the incidence of frauds are reduced and the cash managementissuperior. TheinvestmentintechnologyandsystemshasenabledEquitastoscaleupefficientlyandtheorganisationis operationalselfsufficientwithin2years.
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8.MARGIN
NetMarginindicateswhetheraninstitutioniscoveringitscostsandrevenueoutofitsoperations.Thenet margin is all sources of revenue less the cost of funds and operating expenses. Net margin provides a broaderpicturethannetinterestmargin,whichmeasuresallinterestearnedandcollectedfromloansand investmentslessthecostoffundsforthetotalfunddeployedintheoperations. Figure36showstheanalysis ofmargincalculatedasnet revenue generated by the MFI to the total average gross loan portfolio. The analysis of margins for 27 MFI8 in different tiers of MFIsclearlyshowsthattierI MFIs are able to generate sufficientrevenuewiththeir economy of scale and providing basket of financial services efficiently to their clients. The average margin continuously increased from 4.4% in 200708 to 7.3% in 2010 due to exponential FIGURE31:MARGINACROSSDIFFERENTTIERSOFMFIS growth in the portfolio size fromRs.28,473millionin2008toRs.115,796millionin2010.TheTierIIMFIshavemuchlowermargins thantheTierIandTierIIIcategoriesduetotheirexpansioncosttoreachtheeconomyofscaleandshows positivetrendonlyinlastyear.ThepositivetrendofTierIandTierIIMFIscanalsobeattributedtoequity investmentatsubstantialpremiumascheapersourcesoffunding.Nodividendhasbeendeclaredsofarby theseinstitutions.
FewMFIslikeUjjivanFinancialServicesLimitedandEquitasMicrofinanceLimitedarenotincludedfor200708andSahayata MicrofinancePvtLimitedfor200809sincetheyhadhighnegativevalueduetotheirstartupcost.
8
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PROFITABILITY
FIGURE32:PROFITABILITYDATA(MIXDATA2009)
Figure37showsthattheIndonesianandIndianMFIsareamongstthemostprofitableMFIs.However,this hastobeseenholistically.FromFigure38shownbelowitisevidentthattheIndonesianMFIincurredhigher costandproductswerepricedevenhighertogeneratehigherprofits.IncaseofPhilippines,theextremely high cost resulted in the low profitability. However, in case of Indian MFIs, the low cost and a moderate pricing has resulted in a high profitability. There is a significant scope of transferring the benefits to the clientsintermsofreductionininterestratesespeciallybytier1MFIs.Ifthecostoffunds,whichhasseenan increasingtrendinthepastinIndia,canbebroughtdown,thecosttotheclientcanbereducedacrossthe industrywithoutaffectingitssustainability.
FIGURE33:COST,YIELDANDPROFITS(MIXDATA2009)
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INFLATIONADJUSTEDRETURNS
Inflation adjustments has been carried out for return on assets and return on equity for the year ending 2010,tounderstandwhethertheMFIproducesenoughsurplusinrealtermsandisabletokeepitsassets intactinrealterms.Forequityinvestor,thenetreturnshouldbepositiveandequaltoormorethanwhat they would earn from the next best investment9. Financial investments in the long run are not based on yeartoyearfluctuationsofinflation;butwhetheroveraperiod,therealreturnsarepositiveandacceptable. Numberof Inflationadjustedreturnonequity Inflationadjustedreturnonassets Institutions Positive Negative Positive Negative Total 26 2 8 20 AcrossTiers Tier1 11 0 6 5 Tier2 8 1 1 8 Tier3 7 1 1 6 AcrossLegalForms Profit 17 2 7 12 Notforprofit 9 0 1 8 Theabovetableshowsthataround71%ofMFIspostednegativeReturnonAssetsinrealtermsand7%of MFIsgavenegativeReturnonEquity.Thepositionwouldbemorecriticalin201011inviewoftheinflation rate increasing to 9.6%. With interest rates already high, the scope for pricing loans to neutralize the inflationisverylimited.Figure39providesdetailsoftheROAandROEacrossTiersandLegalForms:
FIGURE34:ADJUSTEDROAVSADJUSTEDROE
9
Butpracticallythecomparisonofacceptableratesofreturncanbemadeonunadjustedratescompareareturnonequityof13% withreturnof 10on fixed deposits withorwithout adjustments,investment inequityisbetter.Ifrateofinflationis 15%,both investmentsgiveanegativereturninrealterms,stilltheequityinvestmentisbetter.
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K EY F INANCIAL R ATIOSACROSS T IERS Figure 40 shows the Operational Expense Ratio, Financial Cost Ratio, Loan Loss Provision Ratio when compared with Yield across tiers. We can observe that the Tier III institutions have the lowest difference between the Yield10 and the three ratios (combined). This can be attributed to the OER of two institutions (Chanura Microfin and NEREFS) operating the North east which was part of the Tier III. The Tier I institutions have the maximum difference between the Yield and three ratios (combined) due to more client outreach andhighloansoutstanding.
FIGURE35:OERVSFCRVSLOAN LOSSEXPVSYIELD
TheTierIIinstitutionshaveverylittledifferenceduetotheirinvestmentsinexpansion.Theseinstitutionsare intheirgrowthphaseandhavealreadyinvestedinexpansion.Alittleimpetusprovidedtotheseinstitutions canshowresultsinreachingmorenumberofclientsandhigherloansoutstanding. The staff productivity has been calculated by dividing the total number of borrowers with the total number of field staff (credit officers). This comparison across Tiers clearly shows that Tier I institutions have the most productive staff since most of these institutions follow Grameen model which has standard systems and processes which help in replication and expansion at a faster pace. The Tier II and Tier III institutions have almost similar staff productivity because the Tier II institutions have invested on hiring more staff for expansion which in turn has a negative effect on thestaffproductivity. The maximum staff productivity has been shown by Equitas due to their operational model. The client acquisitionandloanoriginationisdonebyseparatestaffwhereastheloanrepaymentcollectionisdoneby differentstaff.Thisreducesthechancesoffavoritismforprovidingloansandincreaseefficiencyofthestaff.
YieldneednotbecomparedwithAPRsinceAPRisofproductsandYieldisoftheentireinstitution.Adetailedcomparisonbetween YieldandAPRhasbeenmentionedintheAPRsectionabove.
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FIGURE36:STAFFPRODUCTIVITYTIERWISE
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C OMPARISONOF I NDIVIDUALAND G ROUP L ENDING M ODELS A comparison was done across individual and group lending models. The group lending models included institutionsformingSelfHelpGroups,Joint Liability Groups and Grameen groups. Figure 42 clearly depicts that the difference inWAAPR(Interest+Fee) and a combination of three ratios (OER, FCR and Loan Loss Provisioning) is similar acrossboththemodels.However,thestaff productivity is significantly varying across these two models of lending (individual 95 and group 512 borrowers per field officer). The results are based on 29 institutions in group lending model and oneinstitutioninindividuallendingmodel
FIGURE37:INDIVIDUALVSGROUPLENDINGMODELS
MASFinancialServices(MAS).
MAS Financial Services as an institution is differentfromotherMFIsduetothefollowingreasons: 1. Caters to nonpoor clientele, one category above the poor clientele as served by the microfinance institutions. 2.HighloansizeintherangeofRs50,00010,00,000 3.Operationalareaisprimarilyurbanandfewpocketsofsemiurban 4.Lendingagainstcollateral(PostDatedChequesandProperty,insomecases). StudyonInterestRatesandCostsofMicrofinanceInstitutions
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DEVELOPMENTACTIVITIESBYTHEMFIS
Themarginsgeneratedbytheinstitutionsarenotonlyutilisedforexpansionandincreasingclientoutreach butalsotoprovidevariousactivitiestotheirclients. Some institutions like Equitas and Bandhan earmark 5% of their surplus to undertake developmental activitieslikeeyecamps,skillbuildingprograms,healthawarenessprograms,amongothersfortheirclients. In addition, Equitas provide Rs2,000 per month per branch and salary of one CSR representative (per 10 branches)forconductinghealthcampsfortheirclients. Institutions like Cashpor and Ujjivan provide scholarships / grants to students / staff from the surplus generatedandconductseveraldevelopmentprogramslikewomenandchildcare,communityhealthleaders trainingprogram,amongotherswiththehelpofgrantsfromfundinginstitutions. Ujjivan also forms village development committees which consist of their staff and mature members. This committee decides on the community development programs / projects to be undertaken in a particular village,inconsultationwiththeentirevillage.Oncetheprogram/projectisfinalised,thecostsofthesameis providedbyUjjivan.UjjvanearmarksRs25,000perbranchtowardsthissupportandactivitieslikeeducation materials,watercontainers,toystochildren;carpets&chairstoAganwadiSchools;buildingpulleysin the communitywell;amongothers. Adhocreliefactivitiesarealsoundertakenbyfewinstitutionsfortheirclientsfromthesurplusgenerated (Asmitha, Chanura Microfin, Mimoza, Uttarayan Financial Services, SHARE, Spandana) and grants from funding agencies (NEED, Hand in Hand, SKDRDP, NBJK, Mimoza, Peoples Forum, Hope Foundation, RASS, UjjivanFinancialServices).InstitutionslikeSKS,Bandhan,UttarayanFinancialServices,JanalakshmiFinancial Services, Peoples Forum, SMILE, who have transitioned their microfinance portfolio from a Not for Profit institution to For Profit institution conduct the developmental activities through this institutional form as procuringgrantsiseasier. InstitutionslikeCECODECON(0.33%oftheloanamount),Bandhan(1%oftheloanamount),BSFL(specified feesforaparticularactivity)andotherschargesomeamountfromtheirclientstoprovidecapacitybuilding andadditionalservicestotheirclients. Thedevelopmentactivitiesconducted(throughgrantsorfromtheirprofitsorbycharging fromtheirclients) helpinbuildingcapacitiesoftheclients/membersaswellasincreasetherapportandloyaltyoftheclients/ memberstowardstherespectiveinstitution.Thishas beenobservedduringtheinteractionsanddiscussions withclients/membersofBandhan, Cashpor,Equitas,Ujjivan,amongothers;theyfeelasenseofownership withtheinstitutionandwouldnotgotoanyotherinstitutionforcredit.
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9.TRANSPARENCY/DISCLOSUREOFINFORMATIONPROVIDEDANDAWARENESSOFCLIENTS
The MFI clients were interviewed in order to understand the transparency / disclosure of information providedbytheMFIstotheirclientsandtheirlevelofawareness.Thedetailsfromanalysisofinformation providedandlevelofclientawarenessareprovidedinTable10.
TABLE10:INFORMATIONDISCLOSUREANDAWARENESSOFCLIENTS
NameofMFI Asmitha Bandhan Basix Cashpor Cecodecon Chanura Equitas HIH HopeFoundation Janalakshmi Lupin MAS Mimo NBJK Need NEREFS PeoplesForum RASS RORES Sahayata Saija Satin Share SKDRDP SKS Smile Sonata Spandana Ujjivan Uttrayan
Numberofclients interviewed 10 29 27 26 6 10 29 27 16 8 11 14 16 12 12 29 11 13 12 31 12 16 34 26 24 16 18 16 28 11
Transparencyofinformation provided(%) 100 90 90 100 90 100 100 90 70 100 100 70 80 80 90 100 100 100 50 90 100 100 90 90 100 70 90 80 100 100
Awarenessof Clients(%) 73.00 78.26 72.07 86.17 74.00 70.25 84.64 78.00 86.12 58.33 82.71 92.50 83.75 79.98 70.79 83.90 92.68 96.15 53.32 86.31 83.32 82.14 68.75 95.20 86.35 75.69 70.79 68.44 87.66 84.44
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Average 550 90
79.52
The transparency / disclosure of loan information to the clients and the awareness level of clients were measuredacrossthefollowingparameters: 1. 2. 3. 4. 5. Purposeoftheloan Dateoftheloanavailed Amountoftheloan Tenureoftheloan Pricinginformationoftheloan a. Interestrate, b. Loanprocessingfees, c. Insurancecharges, d. Securityamount. 6. Repaymentamountandfrequency 7. Prepaymenttermsandconditions
Thepercentagesoftransparency/disclosureofloaninformationacrossMFIswerecalculatedbasedonthe informationsharedbytheMFItotheclients(ontheaboveparameters)whileprovidingtheloansandthe percentages of awareness level of clients were calculated based on the clients who were aware of the information shared by the MFI. For example, Ujjivan shares 100% of the loan information whereas only 87.66%ofthetotalclientsinterviewed(28)wereawareoftheloaninformationshared. Table 10 clearly shows that the awareness of clients regarding the terms and conditions of the loans is directly proportional to the information shared by the MFIs. However, there are some variations like Janalakshmi,Share,SonataandSpandanawheretheawarenessoftheclientsofMFIsisnotproportionaland the clients of these MFIs were unaware of the terms and conditions of the loan commensurate to the informationsharedbytheseMFIs. RASSdisclosesallinformationoftheloanintheirpassbooksandtheirclientswereawareregardingthesame astheyhavethemaximumawarenesslevelsregardingthetermsandconditionsoftheloan.Theminimum information of the loans was disclosed by RORES and their clients were least aware of even the minimum informationdisclosed. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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T RANSPARENCYBY MFI SANDAWARENESSOFCLIENTSACROSS T IERS
FIGURE38:INFORMATIONDISCLOSUREANDAWARENESSOFCLIENTS(TIERWISE)
Thedifferenceinawarenessoftheclientsvisavistheinformationdisclosed/sharedwiththeclientsislow inthecaseofTierIIMFIswhereasthedifferenceishighinTierIandTierIIIMFIs;thisclearlyshowsthatthe Tier I and Tier III MFIs disclose the parameters of the terms and conditions of the loan only during the disbursement / mention in their passbooks without communicating the details to them and hence the awarenesslevelsoftheclientsiscorrespondinglylow. T RANSPARENCYBY MFI SANDAWARENESSOFCLIENTSACROSSMODELS The information disclosed by MFIs working inGrameen model is thehighest followed by SHG and JLG. However, the awareness levels of clients are lowest in JLGmodelfollowedbySHGandGrameen. This differenceis duetothepurpose and objective offormation ofthe groups,i.e., GrameenandJLGisformedtoavailloans fromtheMFIswithanaffinitytowardsits members whereas in the case of SHGs, the members not only come together to avail loans from the MFIs but also save among themselves; moreover their systemsfollowedhelptorecallandhence FIGURE39:INFORMATIONDISCLOSUREANDAWARENESSOFCLIENTS(MODELWISE) are more aware regarding the terms and conditionsoftheloanstheyavailfromtheMFIs. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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InFigure44,clientavailingloansfromMFIfollowingtheindividualmodelhasthehighestawarenesslevels. This is a biased figure since MAS Financial Services was the only institution following absolute individual modelandtherebyisnotarepresentativesample. T RANSPARENCYBY MFI SANDAWARENESSOFCLIENTSACROSSLEGALFORMS
The For Profit institutions are more transparent than the Not for Profit institutionswhereastheawarenessof their clients are similar. This is due to fact that For Profit institutions are mandatedbytheapexbankandother networks / associations to be transparent.
FIGURE 40: INFORMATION DISCLOSURE AND AWARENESS OF CLIENTS (LEGALFORMWISE)
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10.RECENTRBIGUIDELINESFORNBFCMFISANDDRAFTMICROFINANCE INSTITUTIONSREGULATIONANDDEVELOPMENTBILL
AfterthecommencementofthestudytherehavebeentwoimportantpolicydevelopmentsinMay2011 theReserveBankofIndiadecidedtoacceptthebroadframeworkoftherecommendationsoftheMalegam CommitteeforthemicrofinanceindustrywithsomemodificationsinitsMonetaryPolicyfor20112012(the detailedguidelinesareyettobeissued)andtheseconddevelopmentinJuly2011thedraftMicrofinance (DevelopmentandRegulation)BillwascirculatedforpublicopinionbyGovernmentofIndia. ThestudyfocusedonsomeoftheMalegamcommitteerecommendations.Thefieldstudyhadnearlybeen completed when the two important policy developments took place and hence how these policy developmentswouldaffectthesectorandtheMFIsislargelyinferredfromthestudyresults. RBI while accepting the broad framework of regulations recommended by the Malegam Committee has indicated that bank loans to all MFIs, including NBFCs working as MFIs on or after April 1, 2011, will be eligibleforclassificationasprioritysectorloansonlyiftheprescribedpercentageoftheirtotalassetsarein thenatureof"qualifyingassets"andtheyadheretothe"pricingofinterest"guidelinestobeissued;thata "qualifyingasset''isrequiredtosatisfythecriteriaof loan disbursed by an MFI to a borrower with a rural household annual income not exceeding Rs60,000orurbanandsemiurbanhouseholdincomenotexceedingRs1,20,000; loanamountnottoexceedRs35,000inthefirstcycleandRs50,000insubsequentcycles; totalindebtednessoftheborrowernottoexceedRs50,000; tenure of loan not to be less than 24 months for loan amount in excess of Rs15,000 without prepaymentpenalty; loantobeextendedwithoutcollateral; aggregateamountofloan,givenforincomegeneration,nottobelessthan75percentofthetotal loansgivenbytheMFIs;and loantoberepayablebyweekly,fortnightlyormonthlyinstallmentsatthechoiceoftheborrower; thatbanksshouldensureamargincapof12percentand interest rate cap of 26 per cent for their lending to be eligible to be classified as prioritysectorloans;
Inthefollowingparagraphs,thereadinessoftheMFIsandtheeffectoftheabovestipulationsontheMFIs arediscussed. I NTEREST R ATE C AP In 2010, the cost of funds is low for Tier I institutions and has the lowest operating cost. So, for Tier I institutions,itmaynotbedifficulttoadheretotheinterestratecapsuggestedbyRBI.ForTierIIinstitutions, bothoperationscostandcostoffundsishigherthanTierIinstitutions,sotheymightfacelittledifficultyin adheringtothe interestratecap. Tier III institutionswouldbe most affected andadhering to the interest rate cap, would be a tough task since it has the highest cost of operations. A few of the institutions are alreadywithintheinterestcaplimitsprescribedbyRBI.However,severalofthemlikeAsmitha,Share,SKS, Sahayata, Sonata, Mimoza, Satin, Janalakshmi,Hand inHand, Chanura,NEREFS and RORESwouldneed to reducetheirinterestratesandothercharges. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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Onthebasisoftheyieldonportfoliodataoffinancialyear201011,theForProfitinstitutionscanadhereto theinterestcapduetothehighestyield.Infact,someofthemarewellpositionedtoofferfurtherreduction ininterestratestoclients.AsfarasNotForProfitinstitutionsareconcerned,theycaneasilyadheretothe RBI guidelines since the costs of funds are low and operation cost are in comparable with the For Profit institutions.AsfarastheNotforProfitinstitutionsareconcernedtheywillneedtomakefewadjustmentsto theinterestratesinordertoremainprofitableifthecostoffundsandtransactioncostsincrease. ThecostofoperationsishigherininstitutionsfollowingtheJLGmodelfollowedbyGrameenandSHGmodel thathastheleastcostofoperations.ThisisbecausetheinstitutionsfollowingtheSHGmodelhavereceived grants for SHG promotion which reduces the cost of initial client acquisition. Moreover, the SHG lending usually involves monthly meetings and monthly repayments thus reducing the operational cost further. InstitutionsthatarefollowingSHGmodelcanadheretotheinterestcapbutinstitutionsfollowingtheJLG modelmayfinditdifficultandtheyhavetoinvestincreditprocess/productreengineering. Basedontheloansamplescollectedfrom the MFIs till December 2010, 21 of the MFIs were below the 26% interest rate stipulatedbytheRBIguidelinesand9MFIs were above 26%. The Weighted Average APRoftheinterestrateschargedbyMFIs acrossproductsofaninstitutionwasused forthisanalysis.Detailsoftheinstitutions along with their respective interest rates arementionedinAnnexure12. The above observations can be corroborated with the discussions held with each of the MFIs regarding their terms and conditions of the loanproductsoffered.MostoftheinstitutionshaveeitherreducedtheirinterestratepostthecrisisandRBI guidelinesissued.PleaseseethesectiononAPRforfurtherdetails. AreductionininterestratesfortheTierIIandTierIIIinstitutionswouldaffectprofitabilityandtheirabilityto raiseequityforexpansion.Theseinstitutionswillneedequityinfusionfromreliabledomesticsourcessuch asSIDBI.
FIGURE41:MFISBELOWANDABOVE26%APR
HH INCOMEOF R S 60,000 INRURALAREASAND R S 120,000 INURBANAREAS The maximum client household income of Rs60,000 in rural areas and Rs120,000 in urban areas is within limitsformostofinstitutionsincludingChanuraMicrofinance,NBJK,SaijaMicrofinance,UttarayanFinancial Services,Bandhan,amongothers,basedonthemeetingsandinteractionswithclients.However,household incomeisdifficulttobemeasuredandtrackedonanongoingbasis.MFIswillneedtofindoutreliableways totrack/verifythesameandgetacertificationfromtheclients.Moreover,nowon,theinstitutionsmight focusmoreintheurbanareassincethehouseholdincomeinurbanareasiseasiertomeasureascompared tothehouseholdincomeinruralareasandalsohigherdensityofclientsleadingtooperationalefficiencies. Inanycase,theneedforverificationandregulatorycompliancewouldincreasethecostofoperations.For thisclause,absolutecompliancebyMFIsisdifficult.
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M AINTAINING 75% OFLOANSFORINCOMEGENERATION ThisguidelineisfollowedbyalltheinstitutionsvisitedsincemostofinstitutionsfocusonloansforIncome Generating Activity, which will ensure smooth repayment of their loans. Moreover, loan utilization checks are also conducted by many of the MFIs to track the loan usage. A rigorous check is possible in case of capitalInvestments;howeverloansforworkingcapitalfortradingandpettybusinessinwhichmanyofthe clientsofMFIareengagedisdifficulttobecheckedandcertified.Verystrictutilizationchecksathousehold level will again increase cost of operations for MFIs. While certification by household and superficial checkingbyMFIispossible,absolutecomplianceisnotpossible. W ITHIN T WENTYFOURMONTHSINEXCESSOFAMOUNTOF R S 15,000 At present, the first loans provided to the clients by the institutions range from Rs500 to Rs10,100 for a periodofoneyear.OnlythesecondorsubsequentloansizesaremorethanorequaltoRs15,000.However, thetenureoftheseloansisforoneyear.ExceptforEquitas,allotherinstitutionshavelargelyoneyearloan. SKDRDPhavelongerloantenureswillneedtofinetunetheirlendingproceduresandMIStoensurecredit risksareminimized.ThereisahighriskperceptionamongMFIsforofferingloanslongerthanayearwhich has to be overcome by investment in appropriate credit processes. Though this is essentially a customer protection measure to ensure that the product suits client cash flows, in the longer term this will ensure better risk management at MFIs since client drop out/defaults will be reduced due to appropriate loan terms.Moreover,theinstitutionsmightreducetheirloansizesinordertocopewiththisclause.Reductionin loansizewouldensurethattherepaymentperiodiswithin12months.Thiscanleadtoclientdissatisfaction anddropoutwhichcanincreaseoperationalcosts. T OTALINDEBTEDNESSOFCLIENTSANDAWARENESSOF MFI SABOUTOTHERLOANSOURCESOFCLIENTS Presently, only a few of the MFIs have adopted policies and systems to ensure that clients are not over indebted. Remote and sparsely populated areas with inadequate infrastructure have utmost a single MFI whichisoperational.Urban,semiurbanandeasytoreachruralareaswithadequatelawandordersituation haveseveralMFIs.The institutionsthatareworkingin a limitedgeography/clientbasearemoreawareof otherloansavailedbytheirclients.However,quantificationoftheseloanstoascertaintotalindebtednessof theclientsfrominstitutionalsourcesneedsaconcertedactionbythesector. The MFIs will need to prepare themselves for sharing information to credit information bureau. This will need additional systems (scientific verification of Know Your Customer norms, computerization of data to supplyinformationtocreditinformationbureau)inafewMFIs.Thechargesleviedbythecreditinformation bureauwilladdtocostofoperationsbutthecostandburdenonstaffforverificationofindebtednesswillbe reduced. Overall risk cost will also be reduced since this process will enable MFIs to identify quality customers. L OANSWITHOUTCOLLATERAL TheMFIswillfacenoproblemsincomplyingwiththisaspectsincealltheMFIsareprovidingloanstotheir clientswithoutanycollateral.Theonlycollateralutilizedisthesocialcollateralamongthemembersofthe groupsbymostoftheMFIs.SecuritydepositsarecollectedbyonlyfewoftheMFIswhoarenotforprofits. ThusNBFCMFIswillbelargelyinapositiontocomplywiththisrequirement.
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D ATACOLLECTEDINCONJUNCTIONWITHTHE RBI GUIDELINESISSUED Thedata/informationcollectedduringthestudyhasbeenutilizedtounderstandtheconcurrencewiththe RBIguidelinesandtheanalysisacrossMFITiers,LegalformsandModelsispresentedbelow:

TABLE11:MFIDATAINRBISTRUCTURE(TIERWISE)
TierI TierII TierIII No.ofborrowers 18,53,469 97,368 22,078 AverageLoansize 5,680 5,466 14,894 OutstandingLoanPortfolio 10,52,69,58,902 53,21,93,214 32,88,38,406 InterestRate(asperRBIguidelines) 26% 26% 26% CostingoftheLoan 20.61% 28.14% 24.63% OperatingCostsOperatingExpenseRatio 9.77% 15.00% 18.38%* CostofCapital(debt)FinancialExpenseRatio 8.84% 11.14% 9.11% LoanLossProvisioningRatio Profit/Margin 2.00% 5.39% 2.00% 2.14% 2.00% 3.49%
*InstitutionslikeCECODECON,LupinandRASShasnotbeenincludedintheaverageOERofTierIIIinstitutionssincemostofthecosts arebeenbornebytheirparentinstitutions.
TheTierIIandIIIinstitutionsshowanegativemarginduetohighoperatingcostsandhighcostsoffunds. Thereasonsarementionedbelow: OperatingcostsofTierIIandmanyoftheTierIIIMFIsarehighsincetheseMFIsareinthegrowth phase(Sonata,Mimo,Janalakshmi,People'sForum,UttarayanFinancialServices,amongothers)and haveinvestedintheexpansion. The operating costs of Tier III MFIs is high since we have two MFIs (Chanura Microfinance and NEREFS)inthisTierwhoareworkingintheNortheastwherethecostsarehighduetogeographical spread(plainsandhills),lackofinfrastructure(badroads,lackofpowerandpoorbankingservices) andotherassociatedcostsliketravelling,fuelforpowergeneration. Costs of Funds of Tier II MFIs are high since these MFIs are in the process of transition from Society/Trust/Section 25 to NBFC (Uttarayan Financial Services, People's Forum, SMILE) and some havecommencedtheiroperationsinthelast12years(Janalakshmi,Saija,Satin)andyettoachieve scale. Cost of funds for Tier III MFIs are less as compared to Tier II MFIs since these MFIs have availed grants and low cost funds, for expansion (Chanura, NBJK, RASS).However, the costs have been adjustedagainstthemarketrateofinterest. Theanalysisacrosstiersofinstitutions,financialinstitutionsmayinvest(throughequityanddebt)inTierII institutionsandfewofTierIIIinstitutionswhoareinthegrowthphaseandareintheprocessoftransition andhencehighOER.Theseinstitutionscangrowatarapidpaceifproperandadequatesupportisprovided intermsoffundsforonlendingandgrantsforexpansion. StudyonInterestRatesandCostsofMicrofinanceInstitutions
56

TABLE12:MFIDATAINRBISTRUCTURE(LEGALFORMWISE)
ForProfit NotforProfit No.ofborrowers 10,37,862 1,91,300 AverageLoansize 5,768 5,499 OutstandingLoanPortfolio 5,98,68,26,816 1,05,19,20,510 InterestRate(asperRBIguidelines) 26% 26% CostingoftheLoan 25.78% 20.80% OperatingCostsOperatingExpenseRatio 14.12% 14.89% CostofCapital(debt)FinancialExpenseRatio 9.66% 9.65% LoanLossProvisioningRatio 2.00% 2.00% Profit/Margin 0.22% 0.54% The For Profit institutions have a marginal high profit margin when compared with the Not For Profit institutions(excludinginstitutionslikeLupin,SKDRDP,RASS).Thereasonsareasfollows: Operating costs of For Profit institutions are high since most of the MFIs (Sonata, Mimo, Janalakshmi, Uttarayan Financial Services, among others) in this category are in the growth phase andhenceinvestedinexpansion.Moreover,NEREFS,beinganNBFCisalsoincludedinthiscategory andtheircostsofoperationsarehighduetooperationsintheNortheastwhichisatougharea. OperatingcostsofNotforProfitinstitutionsisalsohighwhentheexceptionalinstitutionslikeLupin, RASS,SKDRDPhavebeenexcluded(whichhavelowOERduetothecostsbeensubsidizedbygrants).
TABLE13:MFIDATAINRBISTRUCURE(MODELWISE)
Grameen SHG JLG/Individual No.ofborrowers 14,24,347 1,90,083 1,99,250 AverageLoansize 5,627 6,595 6,430 OutstandingLoanPortfolio 8,01,47,97,223 1,25,36,80,882 1,28,11,08,002 InterestRate(asperRBIguidelines) 26% 26% 26% CostingoftheLoan 22.56% 18.89% 31.43% OperatingCostsOperatingExpenseRatio 11.36% 7.65% 19.38% CostofCapital(debt)FinancialExpenseRatio LoanLossProvisioningRatio Profit/Margin The institutions following theSHGmodel hasthe highestmargin duetotheoperatingcostsbeingthe lowestandviceversafortheinstitutionsfollowingtheJLG/Individualmodel.Thereasonsforthesame areasfollows: The operating costs of institutions following the SHG model is low since the SHG promotion expenses are borne by grants. Grants have a direct effect in reducing the OER since the SHG promotion costs likeexpenses of fieldofficers,capacitybuildingandtraining costs ofthestaff andmembers,groupmanagementcosts,amongothersarebornebythesegrantsintheinitial years. However, assigning these costs and then calculating the OER would be difficult since many a times the amount of grants availed by an institution cannot be directly attributed to StudyonInterestRatesandCostsofMicrofinanceInstitutions 9.20% 2.00% 3.44% 9.24% 2.00% 7.11% 10.05% 2.00% 5.43%
57
groupdevelopmentcosts.Example,grantsforhealthprogrammearemobilizedbytheNGOand thestaffinvolvedinhealthprogrammealsocarryoutgrouppromotion.Halfoftheinstitutions followingtheSHGmodelhaveamonthlycollectionsystemwhichfurtherreducescosts. The operating costs of institutions following the Grameen model are lower than institutions followingtheJLG/Individualmodelduetoeconomiesofscale.Theseareinstitutionswhicharein theTierIandhencehavethemaximumoutreachandloansoutstanding. Operating costs of institutions following the JLG / Individual model is high since these institutionsareinthetransitionphase(Janalakshmi)orhavecommencedtheiroperationsinthe lasttwoyears(Saija).
However, there are practical difficulties in measurement and maintenance of profit margins as these tendtofluctuateovertimewithchangesincostoffundsandchangesinthenumberandmaturityofMFI branches. The analysis across different lending models clearly shows that Grameen model potentially has a higher margin and need to be supported due to the unique feature of standardization which propels growth and expansion. However, SHG model has its own significance in terms of womens empowerment by building leadershipqualitiesandincreasingdecisionmakingpowerinthehousehold,amongothers. A SSUMPTIONS All figures have been taken as average across the sample and as per the audited statement of accountsofFY200910. As a prudent measure, Loan Loss Provisioning Ratio has been taken as 2% across all categories. Moreover,someoftheMFIsdonotmakesuchprovisions. M ICROFINANCE I NSTITUTIONS D EVELOPMENTAND R EGULATION B ILL Asperthedraftbill,RBIisproposedtobegivenwidepowerstoregulatethesectorbyprescribinganumber ofguidelinesonvariousoperationalaspectsofMFIsincludingmargincapandprudentialnorms.Whilethere arereservationsexpressedaboutthepowergiventotheregulatorresultinginmicromanagingthesector, the micro finance development council can play a very crucial role in tempering the micro management. ThusSIDBIandotherindustryrepresentativeshaveacrucialroletoplayinensuringorderlygrowthofthe MFIs. Moreover,thepresentRBIguidelinesissuedforNBFCswillbenowmadeapplicableforotherlegalformsas well with suitable modifications. Thus the non NBFC MFIs also have to prepare themselves for similar regulation. The bill has specifically recognized that further development and geographical spread of the microfinance sectorrequiresoperationsoftheMFIsarenotequatedwithmoneylending.Manyofthepresentexternal risks faced by the MFIs have been due to a lack of comprehensive regulation and also multiplicity of acts/authorities in regulating MFIs. However, a comprehensive regulation of the sector by RBI will reduce StudyonInterestRatesandCostsofMicrofinanceInstitutions
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the influence of the state Government through some of the state acts. This should enable the MFIs, who perceivepoliticalinterferenceasahighrisk,tooperateinamoreenablinglegalenvironment. TheBillhasbroadenedthescopeofservicesprovidedbymicrofinancesectorasitdefinesmicrofinanceto include microcredit, savings products, remittances, pensions, insurance and others. The conditions under whichsavingsproductsmaybeofferedhavenotbeendelineated.Currently,onlyMFIsthatareincorporated as cooperatives or local area banks can offer such products. It is, hence, important that operational guidelines for savings products be provided, with sufficient safeguards. Systematic studies will need to be carried out in understanding the costs involved in mobilizing low ticket savings and designing appropriate products. Due diligence norms need to be evolved for deposit taking MFIs. SIDBI can help the MFIs to develop the skills and systems to mobilize savings; policy advocacy measures will be needed to promote depositinsurancecoverageforthedepositsmobilizedbyMFIs. The microfinancedevelopmentcouncil(MDC)canhelpbuild amorecomprehensive databaseconcerning variousaspectsofmicrofinance.Analyticallyrigorouspolicyorientedresearchwillneedtobeencouraged. The costs and benefits of administering and complying with the provisions of the microfinance Bill and of deliveringmicrofinanceservicesneedtobeanalyzedandresultsincorporatedinregulatoryandoperational practices.SIDBIcanplayasectorbuildingrolebeenablingsuchpolicystudiestobecarriedoutperiodically. SIDBI being a member of MDCs can advice on policies and measures relating to use of technology, establishingofcreditbureausandfinancialliteracyandfinancialeducationofmicrofinancemembers. SinceRBIcandirectMFIstobecomemembersofcreditbureaus,theMFIstoneedtopreparethemselvesfor joiningthecreditinformationbureausforwhichSIDBIcanplayafacilitatingrole.
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11.RECOMMENDATIONS
Basedonthestudy,followingaretherecommendations: 1. Costreduction 1.1 Technology:Thepoolofknowledge,onavailabletechnologies forfrontand backendtechnologiesfor microfinanceoperationsislimited.Moreover,theimpactofinvestingonsuchtechnologicalapplications on reduction in costs and increase in efficiency has not been well established. Experience of Equitas showsthattechnologycanhelpscaleupandachieveefficienciesofscaleveryquickly;SIDBIcanconsider undertaking a separate study on technologybased solutions available and adopted by MFIs, the costs visavisbenefitstoMFIs.BasedonthestudyatechnologyfundmaybesetupenablingTierIIandTierIII institutionstoscaleupoperationseffectively.Thenatureoffundingcanbesoftloansorpuregrants. 1.2 Clientinterface:WiththerecentRBIregulationsoninterestcap,thereisariskofexcessiveemphasison reductionoftransactioncostsleadingtodilutionoftherigorofclientacquisition,clienttraining,centre meetingsandrelationshipbuilding,whichformthefundamentalpillarsofmicrofinanceservicedelivery. Though after the recent crisis there is greater emphasis on relationship building and Responsible Finance,MFIswillneedtechnicalassistancetoundertakeanassessmentoftheirprocessesandarriveat a balance between cost reduction and client servicing. SIDBI and other development financing institutions can part finance the costs of such technical assistance especially for Tier II and Tier III institutions. 1.3 Salarynorms:Since salariesconstitute themajoroperating cost ofthemicrofinanceoperations, MFIs need to adhere to salary norms for CEO and senior officials since these are skewed and there is increasing discomfort of the high salary levels. However, there are also good practices Equitas CEO draws40timesthesalaryofthefieldofficeranddownsizedhispaypackettoadheretothesenormsset in the mainstream industry. Similar norms need to be developed through consensus building for adoption in the MF sector. Initiatives can be taken by industry associations as well as by lenders includingSIDBI. 2. Riskmanagement 2.1 Systems and Processes: In view of the recent RBI guidelines on stipulation on loans outstanding with borrowers, most MFIs will need to change their systems and processes as well as growth strategy in ordertocomply,sincethisissuewillnowmanifestasdualriskofnoncomplianceaswellasportfoliorisk due to multiple lending and over indebtedness of clients. Adopting responsible finance principles and client centric business growth would only help MFIs face the external risks. Multipronged risk management strategy has to be followed by the MFIs. The consortium of lenders and adoption of a commongovernancepolicyacrossallMFIscanplayasignificantroleinassessingthecomplianceofMFIs totheguidelinethroughportfolioauditsandcomplianceassessments. 2.2 ReportingtotheCreditBureaus:RBIguidelinesissuedhavemademandatoryforallMFIstosubmitdata to the credit information bureaus. Currently, two Credit Information Bureaus (CIBs), Equifax and High Mark are operational and have gathered data from few Tier I institutions. However, to make the CIBs comprehensive,the integrationof TierIII and some ofTier II institutions in the current CIBswouldbe StudyonInterestRatesandCostsofMicrofinanceInstitutions
60
importantandthiswouldbeamajorchallenge.Thereisaneedtoprovidetechnicalsupportintheform of handholding and capacity building to these institutions. The Lenders Forum and other DFIs can provide supporttosuchinstitutionsintheformof grantstobuildtheir systems andsubsidytoaccess Credit Information Reports from the CIBs. Technical Service Providers and other Capacity Building Institutionswouldhelpinprovidingsuchhandholdingandcapacitybuildingsupporttosuchinstitutions.
2.3 Portfolioriskofhiddendefaults:Theportfolioriskofhiddendefaultduetopeerrepaymentsshouldbe recognizedasariskthatneedstobemeasuredandmonitoredthroughdatacollectionandreportingas partofriskmanagementofMFIs.Portfolioauditsshouldcovertheseaspects. 2.4 AuditandControlsystems:InternalauditandbranchratingsystemsareinpracticeinTierIandTierII MFIs. However, most Tier III institutions and some Tier II institutions still do not have robust internal audit and control systems. Such organizations will continue to require support from development institutionstosetupandoperationalizetheseprocesses.Technicalassistancefromserviceproviderswill havetobesubsidizedbydevelopmentfinancialinstitutions. 3. ClientawarenessandLiteracy 3.1 Financial Literacy: Only three institutions (CECODECON, Sahayata and Ujjivan) have undertaken some generic client literacy (generic financial literacy for clients apart from their products and services) initiatives.Whiletheseinitiativeshavebeenundertakenthroughgrantsfromfundingagencies,thereisa need to undertake more such activities for their clients. The institutions are more focused towards providingcreditservicestotheirclients.ItisnotpracticalforMFIstoundertaketheseactivitieswithin the present stipulations on interest rates and fees. These initiatives either need to be taken up with Governmentorthroughdonorsupport.Onetimeindepthtrainingonfinancialliteracythroughexternal agencies need to be arranged by MFIs and the staff can provide any incremental training regarding ongoingdevelopments.SIDBIbeingpartofMicrofinancedevelopmentcouncilcaninfluencetheRBIto setupdedicatedfundingforsuchinitiatives. 3.2 Transparency and Awareness of clients: The institutions visited were transparent with respect to providing information to their clients on their pricing details by mentioning it in the passbooks, educating them during Compulsory Group Training (CGT) and Group Recognition Test (GRT), among others. However, there is a need to undertake more innovative methods of communicating this informationsuchaspictorialaidsetc.,inordertoimproveretentionlevelofclients. 3.3 CompulsoryInsurance:WhilecompulsoryinsuranceprovidescushionforMFIsagainstriskofdefaultin case of death of clients, clients require more comprehensive insurance on voluntary basis. The best practicesinprovidingvoluntaryinsuranceservicesbyMFIsneedtobestudiedandscaledupwithacross other MFIs. Need based policy advocacy with IRDA/RBI will be necessary to enable NBFC MFIs to distributetheseproducts. 3.4 Profitabilityandequityinfusion:Withinterestratecap,theprofitabilityofMFIswillnotbeasrobustas inthepastwhichwillaffecttheirabilitytoattractequity.Theconsortiumoflendersandotherfinancial institutionshastoplayanenablingroleinensuringdomesticequityfundsareavailableespeciallytothe TierIIandTierIIIMFIsbyaugmentingitsequityfunds. StudyonInterestRatesandCostsofMicrofinanceInstitutions
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4. DifferentialInterestRates: Thefindingsofthestudyclearlyshowthatauniforminterestratecapof26%maynotholdgoodforall institutions across India. There is a need to devise differential rate of interest for remote areas like Northeast and other hilly region, sparsely populated areas as western Rajasthan where the sparse population, infrastructure (roads, power, banking services) and geography (hills and plains) makes service delivery expensive. The study clearly depicts that the costs (costs of funds and operating) of providing credit services in such areas is more and hence the interest rates charged to clients is also high, which is necessary for sustainable growth of such institutions. Hence, we suggest that there is a needtohavedifferentialrateofinterestforsuchinstitutions. 5. ViabilityGapFunding: Thestartupswillneedtobesupportedtilltheyachieveviablelevelofoperations.Interestratecapis likely to lengthen the period for achieving operational selfsufficiency. Viability gap funding may be providedbyDFIsbasedonbusinessplansandmilestonestobeachieved.
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Annexure1:ListofDocumentsRequired
1. 2. 3. 4. 5. 6. 7. Abriefnoteonthehistoryandorganogram/organizationalstructureoftheorganization. AnnualReportsforthelastthreeyears. FinancialStatements(withschedules)forthelastthreeyears,ifunavailableintheAnnualreport Rating/GradingorAssessmentreports(CreditandSocial),ifany. AnyotherreportsavailableincludingImpactAssessment,MarketResearch,amongothers. Detailsoftheproductsandservicesoffered(loans,savingsandinsurance)asonMarch31,2010andDecember31,2010andmodifications,ifany. DistributionofloansoutstandingacrossloanproductsandservicesofferedbytheMFI Nameofthe loanproduct 8. 9. 10. Last3yearsPortfolioreports(monthly/quarterly) Operationalmanualforthemicrofinanceoperationsoftheorganization. Microfinanceoperationalinformationoftheorganizationforlastthreeyears(numberofgroups,numberofmembers,numberofactiveborrowers,number offieldstaff,numberofvillages/districtscovered,loansoutstanding,portfolioatrisk,amongothers)accordingtothefollowingtable: KeyIndicators NumberofGroups TotalnumberofClients TotalnumberofActiveClients(loanee) StudyonInterestRatesandCostsofMicrofinanceInstitutions 200708 200809 20092010 Dec31,2010 Loansoutstanding (31March2010) %ofshareintotal portfolio Loans outstanding (31Dec2010) %ofsharein totalportfolio
TotalSavingsmobilized(ofSHGs)(Rs.inLakhs) ShareCapital(Rs.InLakhs) AverageSavingsmobilizedpermemberpermonth AverageSavingsperSHG(inRupees) TotalLoanoutstanding(Rs.InLakhs) AverageLoanOutstanding(inRupees) TotalExternalLoanoutstanding(Rs.inLakhs) RateofInterestcharged(bytheNGO/MFI) RateofInterest(otherMFI,FI) RepaymentRate(Internal) RepaymentRate(External) NoofVillages NoofDistricts NoofStates No.ofBranches No.ofFieldoffices No.ofFieldstaff/creditofficers PortfolioatRisk(>30days,>60Days) 11. Number,quantum/amountandproductwiseloandisbursedbytheorganizationasonMarch31,2010andDecember31,2010accordingtothefollowing table: LoanProducts Total 12. Copiesofagreement/contract/termsheetswithfinancialinstitutionsforloansandgrants. II NumberofLoans Amount/QuantumofLoans
13. Detailsofallloans/grantsreceivedbytheorganizationfromfinancialinstitutions(FIs)andothers(dateofreceivingofloan,cumulativeamountofloan received,repaymenttermsandperiodofloan,principaloutstandingasonMarch312010andDecember312010andinterestratecharged)accordingtothe followingtable: AmountofLoansreceived NameofFI AmountofGrantsreceived NameofFI 14. SalariesandotherperksincludingESOPS CEO Middlelevelmanager Branchmanager Salary Otherperks ESOPS ReceiptDate Purposeofgrant Amount(inRupees) Purpose,ifany Receipt Date Amount (inRupees) Period (inyears) Interest rate Repayment terms Outstanding asonMarch 31,2010 asonDec31, 2010
III
Fieldofficer 15. Insurancedetails: Parameters Insurance Premium Collected from thefield Actual Insurance Premium paid to theProvider NumberofInsuredpersons NumberofClaimsprocessed AmountofClaimsprocessed NumberofClaimsSettled AmountofClaimsSettled 200708 200809 200910 AsonDec2010
IV
Annexure2(A):InterviewChecklistwithMFIstaff(SeniorandOperation)
NameofMFI Form :____________________________________________________ :(Forprofitcompany/section25co/society/Trust/other(specify) :____________________________________________________ :____________________________________________________ :____________________________________________________
Nameofthepersonsinterviewed Designations
YearsofexperienceoftheMFI 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Termsandconditionsofthecreditproducts(asperthechecklistofAPR) CostsandMargin Detailsandclarificationsonbreakupandtrendsofcosts(basedon3yearsfinancialstatements) Detailsandclarificationsonbreakupandtrendsofincome Trendsofincomeversustrendsincosts(analyzebeforehandandthendiscussdotheymoveinthesamedirectionorindifferentdirectionsifthe latter,thenobtaindetailedinformationonthereasons) BroadProcessesfollowedinabranchinclientacquisition,clienteducation,loanorigination,appraisal,disbursementandrecovery(Alsotheviewsofthe MFIonwhetheranypartoftheirprocessconsidereduniqueandifsowhatarethecostimplications) Aspectsoftransactioncostsforprovidingservicestothemembers/clientswhichprocessesaredrivingcosts?Howcantheybereduced? Whatarethevariouscostsofloanfundsinadditiontointerest?HowdothesecostscompareamongdifferentkindsoflendersSIDBI,privatebanks,public banks,otherinstitutions.Whatisthetrend? Whatarethedifferentrisks(perceivedandactual)toprovideservicestothemembers/clientsandthecostsassociatedwithit? Howdoesrisk/riskcostvarywith(1)products,(2)region,(3)anyotherparameters? Howarethemarginstargeted?Foreachproduct?Fortheinstitutionasawhole? V
Interestratesandcharges 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. HastheMFIchangedtheinterestrateofthemajorproduct/sinthelast3years?Detailsofwhenandhowmuch? Whatwerethereasonsbasedonwhichthischangewasmade? HastheMFIchangedtheothercharges(processingfees,insurancecharges,prepaymentfeesetc.)forthemajorproduct/sinthelast3years? Whatwerethereasonsforthesechanges? WhatwillbetheeffectonMFIiftheMalegamcommitteerecommendationsoninterestrateandotherchargesareacceptedbyRBI? Whataboutloansizecapandpurposerestriction?Howwillthisaffectinterestrates? WhoarethecompetitorstotheMFI?Whataretheirchargesinterestandothers? Whataretherateschargedbymainstreambanksforsimilarloans?Isitcosteffectivefortheclientstoborrowfrombanks/cooperatives? Equitycosts Whatistheshareholdingpattern? Whatisthesharepremiumfixedindifferentroundsofraisingequity? HowdoestheMFIensureadequatereturnonshares(andpremium)?Whatisadequatereturn? IfMalegamcommitteerecommendations,areacceptedbyRBIwhethertheMFIwillbeabletoattractequityandwhetheritwillbeabletoprovide adequatereturnsonequity? HowcantheMFIretaintheequityinvestmentsinthebusiness? Technology Whatkindoftechnologicalinterventionshavebeendoneinoperations? Whatisthelevelofscale(numberofclients/numberofbranches)atwhichtheseinterventionshavebeencarriedout? Havetheseinterventionsledtoreductionincostofoperationsinthesebranches?Ifyes,inwhatways(whichcosts)andbyhowmuch? Whataretheinvestmentcostsforthetechnologicalapplication?
VI
28. 29. 30. 31. Developmentalactivities 32. 33. DoestheMFIundertakedevelopmentalactivitiesforitsclients? Directlyorthroughanothersisterestablishment? Howarethecostsoftheseactivitiescoveredfromseparategrants,incomefromMFoperations,both? Isthemanagementlookingtoscaleituptootherbranches?Whatisthetimeframe?Whataretheconsiderationsdrivingthisdecision? WhatistheMISapplicationusedbytheorganization? Howhastheapplicationimpactedoperationsandmonitoring? Hasitledtoreducedcosts(riskcosts,costsofsupervision)?
VII
Annexure2(B):InterviewChecklistwithMFIstaff(Field/Operations)
1. BroadProcessesfollowedinabranchinclientacquisition,clienteducation,loanorigination,appraisal,disbursementandrecovery 2. Howcanefficiencybeimprovedandcostsbereduced? 3. Productdetails 4. WhoarethecompetitorstotheMFI?Whataretheirchargesinterestandothers?HowdoestheMFIcomparewithothers? 5. Whatarethedifferentrisks(perceivedandactual)toprovideservicestothemembers/clientsandthecostsassociatedwithit? 6. Howistheloandefaultriskmanagedbythebranch? 7. Whatarethematerialsandprocessesusedbystaffforcommunicationtoclientsonproducts,interestratesandothercosts? 8. Socialandcommunityrelatedactivitiesconductedbytheorganization(checkmaterialsandreport,isavailable) 9. TrainingandCBactivitiesconductedbytheinstitution(checkmaterials) 10. TheMalegamcommitteehassaidthatloansofRs15,000andaboveshouldcarryatermoftwoyearswhataretheimplicationsofthistotheMFI?
VIII
Annexure3:ClientQuestionnaire
MFIname :____________________________ VillageName Dateofvisit :____________________________ :____________________________ :____________________________ Branchname :____________________________ Districtname :____________________________ 1. Clientdetails Name Clientof MFIsince Gender Caste SC/ST/Minority/ OBC/others Education Occupation/Sourcesofincomeforfamily
InterviewerName
1) 2) 3)
2. DetailsofthecurrentloansoutstandingwithMFI(asascertainedfromclientrecord/passbook)(Mark) Loan product/ purpose Loanamount disbursedbyMFI totheclient Loan processin gfee Insurance Charges/ fee/ premium
Score
Date
Termof loan
Interest rate
Security Repaymen deposit tschedule
Anyother charges
Yes
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No NA
*NA=notapplicable 3. InformationsharedbyMFIstotheclientontheloansandproceduresonascaleof1to10onthe10parametersinquestion2above.(CountYESandNAfor scoring)Score__________ 4. Awareness level of the clients on the current outstanding loan from the MFI. (in discussion with the clients and in comparison with the client record/passbook) Loan product/ purpose Loanamount disbursedby MFItothe client Loan processin gfee Late payment/ prepayme ntcharges
Score
Date/ month
Term Interest ofloan rate
Insurance
Security Repaymen deposit tschedule
Responseof theclient Aware Unaware
5. Awarenessoftheclientsontheloansandproceduresonascaleof1to10onthe10parametersinquestion4above.(countAwareandUnawareforscoring) Score__________ 6. Detailsoftheotherloans(availedinlast12months)fromothersourcesforthehousehold(MFI,Banks,FinanceCos.,CommissionAgents,Traders,Relatives, Moneylendersetc.):(asascertainedfromthehouseholdrecord)
Sourceof loan 7. CostandTimetakenforavailingtheloans(MFI,Banks,FinanceCos.,CommissionAgents,Traders,Relatives,Moneylendersetc.):(Maintainthesameorderas question6) Directexpensetoavailthatloan Sourceofloan Averagetimebetween loanapplicationand loandisbursement Numberofvisitsto bemadebyclient togettheloan (Photocopy,photographs, revenuestamps,travelcost, amongothers) Indirectexpenseforavailingloan (Bribes,commission,lossof wages,amongothers) Loanproduct/ purpose Loan Collateral/deposit processingfee
Date/month
Loanamount
Termofloan
Interestrate
8. Participationinsocialandcommunityrelatedactivitiesorganizedbytheinstitution
XI
Whetherthisactivity donebyMFIorsister organizationorin collaborationwitha socialinstitution?
Activity
Doesmember knowaboutthe socialactivity? (Y/N)
Doesmember attendedthese activity (Y/N)
Payment/chargesto availthebenefits (Y/N/DK)
WhetheronlyMFIclients canavailtheseservices? (Y/N)
9. ManagingdefaultmembersintheSHG/centers/JLG Haveyoueverpaidforthedefault memberinyourgroup?(Y/N) Didyouneedtoborrowmoney forthat?(Y/N) Inhowmanydaysthe moneyhasbeenrepaid backtoyou?
Howmanytimes?
XII
Annexure4:ToolforFinancialAnalysis
NameofMFI Addressandothercontactdetails AgeofMFoperations Legalstatus FinancialProductsofferedbytheMFItoclients a)savings Numberofproducts b)loans Numberofproducts c)insurance Numberofproducts d)remittance e)pension f)other Otherservicesprovided a) b) c)
31Mar08 31Mar09 31Mar10
StudyonInterestRatesandCostsofMicrofinanceInstitutions XIII
Growthinthelastthreeyears Annualized+/ 31Mar10 inpercentage
Basicdetails Numberofclients Numberofactiveborrowers Numberofactiveloanaccounts Numberofactivesavers womenclientstototalclients clientdropout Numberofbranches Outofwhichinruralareas Numberoftotalstaff Numberofcreditofficers Totalstaff Staffturnover Loanoutstanding Savingsoutstanding Totalassets Averagesavingsoutstandingperclient AverageLoansoutstandingperclient Specifyhowclientsaredefined CheckhowtheMFIdefineactiveborrower GNIpercapita StudyonInterestRatesandCostsofMicrofinanceInstitutions
Number Number Number Number percentage percentage Number number Number number percentage amount amount amount amount amount
31Mar08
31Mar09
XIV
AverageoutstandingloanstoGNIpercapita Nonfinancial NumberofclientsinEnterprisepromotioncourses %ofclientsinenterprisepromotioncourses percentage Numberofclientsinclienteducationcourses Number Percentageofclientsinclienteducationcourses percentage Numberofclientscoveredinwomenempowermentinitiatives Number Percentageofclientscoveredinwomenempowermentinitiatives percentage UnadjustedFinancialstatements 1 2 3 4 5 6 7 IncomeStatement OperatingIncome Interestonloanportfolio Feesandcommissiononloan portfolio Incomefromotherfinancerelated services Incomefrominvestment OtherIncome TotalOperatingIncome FinancialExpenses Interest&feeexpenseson borrowings 31Mar 08 31Mar 09 31Mar 10 Adjustments(+or) 31Mar 31Mar 31Mar 08 09 10 Adjustedfinancialstatements 31Mar 31Mar 31Mar 08 09 10
amount Number
0%
0%
XV
8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 25 26 27 28 29 30 31 Interestondeposits otherfinancialexpense Totalfinancialexpense Grossfinancialmargin LoanLossExpenses Loanlossprovisionexpenses Loanwrittenoff Valueofloansrecovered Totalloanlossexpense Netfinancialmargin OperatingExpenses Personnelexpenses Administrativeexpenses Depreciation Otheradministrativeexpenses OtherOperatingExpenses TotalOperatingexpenses NetOperatingProfit/(Loss) Pro.ForCapitalReserves NetProfit Nonoperationalrevenue Nonoperationalexpenses NetIncome(beforetaxes) Taxes NetIncomeaftertaxes CashDonation Donationsforloancapital
XVI
32 33 Unadjustedbalancesheet Assets CashandDuefromBanks Fixeddepositsinbanks Shortterminvestmentinmarket instruments Totalloanportfolio (Loanlossreserve) OtherReserves Othershorttermassets Longterminvestments Netfixedassets 31Mar 08 31Mar 09 31Mar 10 Assets CashandDuefrom Banks Fixeddepositsinbanks Shortterminvestment inmarketinstruments Totalloanportfolio (Loanlossreserve) adjustmentstoloan lossprovision Othershortterm assets Longterminvestments Netfixedassets adjustmentsto depreciation Totalassets Liabilities SavingsAccounts :forced SavingsAccounts :voluntary AdjustedBalanceSheet 31Mar 31Mar 31Mar 08 09 10 0.00 0.00 0.00 0.00 0.00 0.00 Donationsforoperatingexpenses TotalConsolidatedProfit/(Loss)
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00
TotalAssets Liabilities SavingsAccounts:forced SavingsAccounts:voluntary
0.00
0.00 0.00
XVII
Timedeposits Loans:CommercialBanks Loans: Loans:subsidized Othershorttermliabilities otherlongtermliabilities Totalliabilities Paidinequityfromshareholders Donatedequityprioryear cumulative Donatedequitycurrentyear Prioryearsretainedearningswith donation/losses Currentyearsretainedearnings/ losses Othercapitalaccounts/reserves NetProfit TotalEquity Timedeposits Loans:Commercial Banks Loans: Loans:subsidized Othershortterm liabilities otherlongterm liabilities Totalliabilities Equity Paidinequityfrom shareholders Donatedequityprior yearcumulative Donatedequity currentyear Prioryearsretained earningswithdonation /losses Currentyearsretained earnings/losses Othercapital accounts/reserves Netprofit TotalEquity Subsidiesincostof funds,operating expensesetc., 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Equity
0.00
0.00
0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
XVIII
Totalliabilitiesand equity
Totalliabilitiesandequity Averageloanportfolio Averagegrossloanportfolio (atleastquarterlyaverages preferable,ifnot,takeaverageofyear endbalances) Averageassets Averageassets(avgofyearend balances) Averageequity Averageequity(avgofyearend balances) Averagedebt Ratioanalysis Profitability/Sustainability AdjustedReturnonAssets(AROA) AdjustedReturnonEquity(AROE) OperationalSelfSufficiency(OSS)
0.00
0.00
0.00
(NetOperatingIncome,lessTaxes)/AverageAssets (NetOperatingIncome,lessTaxes)/AverageEquity FinancialRevenue(Total)/(FinancialExpense+Loan LossProvisionExpense+OperatingExpense)
31Mar08
31Mar09
31Mar10
XIX
Efficiency/Productivity/Risk OperatingExpense/averageLoan Portfolio AdjustedCostperBorrower(rupees) Borrowerspercreditofficer PortfolioAtRisk>30days (tobeobtainedfromportfolioreport) Revenues yieldonportfolio totalYield AdjustedProfitMargin Margin Expenses AdjustedTotalExpenseRatio AdjustedFinancialExpenseRatio AdjustedLoanLossProvisionExpense Ratio AdjustedOperatingExpenseRatio adjustedsalariesratio adjustedadministrativeexpensesratio
OperatingExpense/PeriodAverageGrossLoan Portfolio OperatingExpense/AverageNumberofActive Borrowers NumberofActiveBorrowers/Numberofcredit officer PortfolioatRisk>30days/GrossLoanPortfolio Financialincomefromportfolio/averageloan portfolio FinancialRevenue/AverageLoanportfolio NetOperatingIncome/FinancialRevenue(Total) netoperatingincome/averagegrossloanportfolio (FinancialExpense+LoanLossProvisionExpense+ OperatingExpense)/Averagegrossloanportfolio FinancialExpense/Averagegrossloanportfolio LoanLossProvisionExpense/Averagegrossloan portfolio OperatingExpense/Averagegrossloanportfolio salariestoaveragegrossloanportfolio administrativeexpensestoaveragegrossloan portfolio
XX
FinancialManagement GrossLoanPortfolio/TotalAssets Debtequity Otherkeyindicators Salaryandcompensationpackagein MFI salaryofManager salaryofFieldstaff RatioofSalaryandperksofCEOtofield staff GrossLoanPortfolio/TotalAssets averagedebt/averageequity
31Mar10

XXI
Annexure5:ScheduleofVisitstoMFIsforDatacollection
Sl.No. 1 2 3 4 5 6 7 8 1 2 3 4 5 1 2 3 4 5 6 NameoftheMFI EastZone NavBhartiJagritiKendra SajjaFinancePvt.Ltd. NorthEastRegionFinancialServicesLtd., ChanuraMicrofin BandhanFinancialServices SaharaUttarayan PeoplesForum AsmithaMicrofinLtd NorthZone CashporMicroCredit SonataFinancePvt.Ltd. NEED MimozaEnterpriseFinancePvt.Ltd. SatinCreditCareNetworkLtd. SouthZone EquitasMicrofinanceLtd. BharatiyaSamrudhiFinanceLtd. SKDRDP ShareMicrofinLtd. SKSMicrofinanceLtd. SpandanaSphoortyFinancialLtd. DatesofVisit DatesofVisit (ParentState) (OtherStates) Mar1113,2011 Mar810,2011 Mar31Apr5,2011 Mar2830,2011 Mar1417,2011 Apr2,2011 Mar1012,2011 Mar79,2011 May2, 2011 May2021,2011 Mar2830,2011 May910,2011 Mar1012,2011 Apr30,2011 Mar1820,2011 May911,2011 May1213,2011 May18,2011 Mar35,2011 May35,2011 Mar1012,2011 May4,2011 Mar1921,2011 May2,2011 May1920,2011 Mar3031,2011 Apr2526,2011; May19,2011 Mar2224,2011 Apr2627,2011;
XXII
May19,2011 Mar2528,2011 Apr1113,2011 Apr1415,2011 Apr79,2011 Apr22,2011 Apr1820,2011 Mar1618,2011 Apr2830,2011 Mar12,2011 Apr67,2011 Mar2123,2011 May35,2011 May24,2011
7 8 9 10 11 12 13 1 2 3 4
RashtriyaSevaSamiti JanalakshmiFinancialServicesPvt.Ltd. RORESMEDTrust UjjivanFinancialServicesPvt.Ltd HopeFoundation HandinHand SMILE WestZone CECODECON LupinHumanWelfare&Research Foundation SahayataMicrofinancePvt.Ltd. MASFinancialServicesLtd.

XXIII
Annexure6:BasicDetailsofSampleMFIs
S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NameoftheMFI NavBhartiJagritiKendra SaijaFinancePvt.Ltd. NorthEastRegionFinancialServicesLtd. ChanuraMicrofin BandhanFinancialServices SaharaUttarayan PeoplesForum AsmithaMicrofinLtd CashporMicroCredit SonataFinancePvt.Ltd. NEED MimozaEnterpriseFinancePvt.Ltd. SatinCreditCareNetworkLtd. EquitasMicrofinanceLtd. BharatiyaSamrudhiFinanceLtd. SKDRDP ShareMicrofinLtd. SKSMicrofinanceLtd. SpandanaSphoortyFinancialLtd. RashtriyaSevaSamiti JanalakshmiFinancialServicesPvt.Ltd. Tier TierIII TierIII TierIII TierIII TierI TierII TierII TierI TierI TierII TierIII TierII TierII TierI TierI TierI TierI TierI TierI TierIII TierII Model SHG JLG SHG JLG Grameen Grameen SHG Grameen Grameen Grameen JLG Grameen JLG Grameen JLG SHG Grameen Grameen Grameen SHG JLG Legalform NotforProfit ForProfit ForProfit NotforProfit ForProfit ForProfit ForProfit ForProfit NotforProfit ForProfit NotforProfit ForProfit ForProfit ForProfit ForProfit NotforProfit ForProfit ForProfit ForProfit NotforProfit ForProfit Operational Area East East East East MultiRegion East East MultiRegion North North North North North MultiRegion MultiRegion South MultiRegion MultiRegion MultiRegion South South Client Outreach 200910 9,908 7,960 43,130 5,125 25,24,935 11,988 46,865 13,40,288 4,17,039 85,897 32,718 52,345 1,66,102 8,88,600 11,14,468 11,21,690 28,10,000 57,95,028 36,70,000 47,265 79,808 Loans Outstanding 200910 5,74,47,377 4,57,29,000 1,43,76,75,000 2,72,63,490 11,96,56,45,597 6,24,65,788 22,02,80,000 10,82,89,18,639 1,96,89,33,227 49,89,96,233 20,13,60,981 36,71,62,254 1,27,30,88,686 4,78,55,47,820 7,74,87,08,000 6,14,86,88,114 16,93,54,04,333 29,36,72,04,521 21,30,08,27,762 67,51,26,686 67,04,58,804
XXIV
22 23 24 25 26 27 28 29 30 RORESMEDTrust UjjivanFinancialServicesPvt.Ltd HopeFoundation HandinHand SMILE CECODECON Lupin Human Welfare & Research Foundation SahayataMicrofinancePvt.Ltd. MASFinancialServicesLtd. TierIII TierI TierII TierI TierII TierIII TierIII TierI TierII JLG Grameen SHG SHG Grameen SHG SHG Grameen Individual NotforProfit South ForProfit MultiRegion NotforProfit South NotforProfit South ForProfit South NotforProfit West NotforProfit ForProfit ForProfit West MultiRegion West 26,238 5,66,929 57,445 82,118 2,14,280 5,323 4,276 1,39,179 1,61,580 15,19,15,717 3,70,77,37,907 20,23,60,000 43,78,42,256 1,36,45,87,822 6,84,45,000 3,41,89,000 1,03,89,32,000 3,88,47,340
XXV
Annexure7:AverageAPRsforKeyProducts(asperthepricingstructureapplicabletillDecember31,2010)
S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 MFI Asmitha Asmitha Bandhan BASIX BASIX BASIX BASIX BASIX CASHPOR HandinHand HandinHand HandinHand Sahayata Sahayata Sahayata Share SKDRDP SKDRDP SKDRDP SKDRDP SKDRDP Product GeneralLoan SpecialLoan SuchanaLoan SamruddhiAgriAlliedLoan SamruddhiAgriAlliedNonDairy SamruddhiCropLoan Samruddhi Livelihood Support to women JLGLoan SamruddhiMicroenterprise(NFS)Loan IGL EducationLoans GrameenLoan SanitationLoan FreshLoan MidTermLoan ReLoan GeneralLoan FirstLoan HousingLoan InfrastructureLoan LivelihoodLoan RevolvingLoan APR (Interest +Fee) 30.46% 29.68% 23.05% 30.50% 29.12% 27.49% 31.29% 29.87% 25.77% 15.00% 24.98% 15.54% 34.60% 32.28% 31.01% 30.87% 18.02% 17.82% 17.71% 17.23% 17.99% APR(Interest +Fee+ Insurance) 32.24% 31.45% 23.05% 36.36% 35.04% 32.60% 39.03% 35.29% 26.81% 16.09% 26.08% 17.22% 35.83% 33.05% 31.52% 32.19% 18.02% 17.82% 17.71% 17.23% 17.99% APR(Interest+ Fee+Insurance +Deposit) 32.24% 31.45% 28.24% 36.36% 35.04% 32.60% 39.03% 35.29% 26.81% 16.09% 26.08% 17.22% 35.83% 33.05% 31.52% 32.19% 20.39% 18.82% 18.25% 17.79% 18.88% APR(Interest +Fee+ Deposit) 30.46% 29.68% 28.24% 30.50% 29.12% 28.38% 31.29% 29.87% 25.77% 15.00% 24.98% 15.54% 34.60% 32.28% 31.01% 30.87% 20.39% 18.82% 18.25% 17.79% 18.88%
XXVI
22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 SKS SKS Spandana Ujjivan Ujjivan Equitas Equitas HopeFoundation Janalakshmi MAS MimoFinance MimoFinance People'sForum SaharaUttarayan Satin Smile Sonata Sonata CECOEDECON Chanura Lupin NBJK NBJK NEED NEREFS RASS Rores Rores Saija IncomeGenerationLoan MidTermLoan AbhilashaLoan BusinessLoan FamilyLoan MFLoanI MFLoanII GroupLoan SmallGroupLoan MSMELoan JLGLoan MesoLoan SHGLoan SmallLoan JLGLoan MicroCredit GeneralLoan IndividualLoan SHGLoan SSSLoan MicrofinanceLoan JLGLoan SHGLoan JLGLoan MicrofinanceLoan SHGLoan IndividualLoanWeekly GroupLoan SaijaMahilaRIN 26.71% 26.71% 28.79% 24.45% 26.22% 25.81% 25.62% 30.35% 32.80% 27.45% 36.46% 30.21% 25.12% 29.81% 37.91% 39.44% 31.07% 32.97% 19.60% 36.99% 19.79% 23.39% 25.86% 26.51% 50.09% 19.08% 28.07% 31.16% 38.08% 31.08% 31.08% 31.19% 26.08% 27.93% 26.64% 26.48% 32.60% 34.19% 27.45% 39.91% 33.39% 25.12% 31.18% 41.47% 39.44% 33.58% 34.09% 20.67% 39.20% 19.79% 23.39% 25.86% 28.62% 50.09% 19.08% 29.62% 33.10% 40.60% 31.08% 31.08% 31.19% 31.31% 33.52% 26.64% 26.48% 39.94% 40.72% 27.45% 39.91% 33.39% 25.12% 38.28% 41.47% 39.44% 33.58% 34.09% 23.85% 39.20% 19.79% 28.04% 25.86% 34.71% 50.09% 19.08% 33.22% 38.83% 40.60% 26.71% 26.71% 28.79% 29.52% 30.36% 25.81% 25.62% 37.16% 39.03% 27.45% 36.46% 30.21% 25.12% 36.59% 37.91% 39.44% 31.07% 32.97% 22.53% 36.99% 19.79% 28.04% 25.86% 32.12% 50.09% 19.05% 31.46% 36.52% 38.08% XXVII
51 Saija SaijaKaribariRin Average 42.52% 28.19% 45.31% 29.99% 55.71% 31.48% 52.26% 29.61%
Annexure8:APRsasperthelatestpricingstructure
Note:theseAPRsarebasedcompletelyonthetheoreticalcalculationsaspertheinformationsharedbytheMFIsandarenotverifiedinthefield. S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Asmitha Asmitha BASIX BASIX BASIX MFI GeneralLoan SpecialLoan SamruddhiAgriAlliedLoan SamruddhiAgriAlliedNonDairy SamruddhiCropLoan SamruddhiLivelihoodSupporttowomen JLGLoan SamruddhiMicroenterprise(NFS)Loan IGL MidTermLoan ReLoan GeneralLoan AbhilashaLoan PragathiLoan BusinessLoan FamilyLoan MFLoanI MFLoanII GroupLoan Product APR(Interest) Min 19.60% 22.35% 24.00% 24.00% 24.00% 24.00% 24.00% 23.94% 26.00% 26.00% 26.00% 19.78% 24.00% 26.00% 26.00% 25.00% 25.00% Max 24.55% 24.91% 24.00% 24.00% 24.00% 24.00% 24.00% 23.94% 26.00% 26.00% 26.00% 24.63% 26.00% 26.00% 26.00% 25.00% 25.00% APR(Interest+ Fee) Min 19.60% 26.28% 26.71% 26.71% 25.80% 27.07% 26.71% 26.08% 28.24% 27.56% 27.56% 19.78% 24.00% 27.46% 28.05% 26.15% 26.15% Max 29.97% 64.90% 27.96% 27.96% 27.39% APR(Interest+Fee +Insurance) Min 20.40% 26.55% 28.18% 28.18% 28.57% Max 31.12% 82.32% 31.57% 31.57% 32.54% APR(Interest+ Fee+Insurance+ Deposit) Min NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Max NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA APR(Interest+ Fee+Deposit) Min NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Max NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA
BASIX BASIX CASHPOR Sahayata Sahayata Share Spandana Spandana Ujjivan Ujjivan Equitas Equitas Hope 18 Foundation
27.96% 29.09% 31.57% 27.96% 28.18% 31.57% 26.08% 27.17% 27.17% 28.24% Detailsnotavailable 28.24% Detailsnotavailable 27.56% Detailsnotavailable 26.86% 21.97% 29.11% 31.05% 29.03% 36.18% 28.32% 28.05% 33.06% 28.32% 28.88% 33.06% 26.17% 26.73% 26.77% 26.17% 26.73% 26.77%
22.71% 22.71% 24.77% 24.77% Detailsnotavailable
XXVIII
19 Janalakshmi Mimo 20 Finance Mimo 21 Finance Sahara 22 Uttarayan 23 Satin 24 Sonata 25 Sonata 26 Lupin 27 Saija 28 Saija 29 Bandhan 30 Chanura 31 NEED SmallGroupLoan JLGLoan MesoLoan SmallLoan JLGLoan GeneralLoan IndividualLoan MicrofinanceLoan SaijaMahilaRIN SaijaKaribariRin SuchanaLoan SSSLoan JLGLoan 26.00% 26.00% 27.16% 28.05% 26.00% 26.00% 28.12% 28.12% 24.91% 24.91% 28.44% 33.00% 20.44% 23.67% 25.84% 27.98% 25.90% 26.00% 25.96% 26.00% 20.50% 20.50% 26.00% 26.00% 26.00% 26.00% UnderRevision NoChange NoChange 21.44% 28.37% 26.78% 26.59% 21.15% 28.21% 28.21% 25.98% 30.53% 27.94% 26.95% 26.44% 28.41% 28.41% 27.30% 28.68% 30.13% 22.05% 31.83% 27.94% 27.50% NA 29.70% 29.70% 29.09% 28.68% 34.55% 27.39% 34.02% 30.10% 27.78% NA 30.85% 30.85% NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

XXIX
Annexure9:WeightedAverageAPRacrosstheportfolio
S. No MFI Tier Legal Form Model Number WAAPR WAAPR WAAPR WAAPR of (Interest+ (Interest+ (Interest+ (Interest+ Products Fee) Fee+ Fee+ Fee+ Studied Insurance) Insurance+ Deposit Deposit) 2 1 5 3 1 1 1 2 1 1 1 1 1 2 2 1 1 30.46% 23.05% 29.91% 24.73% 25.77% 19.60% 36.99% 25.79% 30.35% 32.80% 19.79% 27.45% 36.07% 25.06% 26.51% 50.09% 25.12% 32.24% 23.05% 35.55% 25.83% 26.81% 20.67% 39.20% 26.62% 32.60% 34.19% 19.79% 27.45% 39.50% 25.06% 28.62% 50.09% 25.12% 32.24% 28.24% 35.55% 25.83% 26.81% 23.85% 39.20% 26.62% 39.94% 40.72% 19.79% 27.45% 39.50% 26.56% 34.71% 50.09% 25.12% 30.46% 28.24% 29.96% 24.73% 25.77% 22.53% 36.99% 25.79% 37.16% 39.03% 19.79% 27.45% 36.07% 26.56% 32.12% 50.09% 25.12%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Asmitha Bandhan BSFL Belstar/Hand inHand CASHPOR CECODECON Chanura Equitas Hope Foundation Janalakshmi Lupin MAS Mimo Finance NBJK NEED NEREFS People's forum
TierI TierI TierI TierI TierI TierIII TierIII TierI TierII TierII TierIII TierII TierII TierIII TierIII TierIII TierII
NBFC NBFC NBFC Society Section25 Society Society NBFC Trust NBFC Society NBFC NBFC Society Society NBFC NBFC
Grameen Grameen JLG SHG Grameen SHG JLG Grameen SHG JLG SHG Individual Grameen SHG JLG SHG SHG
XXX
18 RASS 19 Rores 20 Sahara Uttrayan 21 Sahayata 22 Saija 23 Satin 24 Share 25 SKDRDP 26 SKS 27 Smile 28 Sonata 29 Spandana 30 Ujjivan TierIII TierIII TierII TierI TierIII TierII TierI TierI TierI TierII TierII TierI TierI Society Trust NBFC NBFC NBFC NBFC NBFC Trust NBFC NBFC NBFC NBFC NBFC SHG SHG ASA Grameen JLG JLG Grameen SHG Grameen JLG Grameen Grameen Grameen 1 2 1 3 2 1 1 5 2 1 2 1 2 19.08% 30.84% 29.81% 33.76% 39.20% 37.91% 30.87% 17.85% 26.71% 39.44% 31.07% 28.79% 24.84% 19.08% 32.74% 31.18% 34.82% 41.79% 41.47% 32.19% 17.85% 31.08% 39.44% 33.58% 31.19% 26.49% 19.08% 38.26% 38.28% 34.82% 44.42% 41.47% 32.19% 18.79% 31.08% 39.44% 33.58% 31.19% 31.80% 19.05% 36.00% 36.59% 33.76% 41.66% 37.91% 30.87% 18.79% 26.71% 39.44% 31.07% 28.79% 29.71%
XXXI
Annexure10:Banksundereachcategoryoffundingsources
NationalizedBanks
AllahabadBank AndhraBank AxisBank BankofBaroda BankofIndia BankofMaharashtra BankofRajasthan CanaraBank CentralBankofIndia CenturionBankofPunjab CityUnionBankLimited CorporationBank DenaBank DhanalakshmiBank HDFCBank IDBIBank Indianbank IndusIndBank INGVysyaBank IndianOverseasBank JammuandKashmirBank KarnatakaBank KarurVysyaBank LakshmiVilasBank OrientalBankofCommerce PunjabNationalBank PunjabandSindBank StateBankofHyderabad StateBankofIndia StateBankofPatiala StateBankofTranvancore StateBankofMauritius SouthIndianBank SyndicateBank UnionBankofIndia UnitedBankofIndia VijayaBank
Developmental Institutions
Ananya Basix BellweatherFund FWWB(I) IFMRCapital KeralaFinancialCorporation KFSC/NCD Manveeya NABARD NationalHousingBank OpportunityInternational RaboIndia RashtriyaGraminVikasNidhi RashtriyaMahilaKosh SIDBI UttaranchalGovernment
PrivateBanks
BankofBahrainandKuwait BarclaysBank BNPParibas CatholicSyrianBank CitiBank DevelopmentCreditBank DeutscheBank FederalBank HSBC ICICIBank KotakMahindraBank RoyalBankofScotland StandardCharteredBank SocieteGenerale YesBank
NBFCs
AdityaBirla HLFPvt.Ltd., MahindraFinance MASFinancialServices MVMicrofinancePvt.Ltd., RelianceCapital TataCapital
RRBs
AravratGraminBank KarnatakaVikasGraminBank MewarAnchalikGraminBank PragathiGrameenBank SouthMalabarGraminBank

StudyonInterestRatesandCostsofMicrofinanceInstitutions I
Annexure11:BenchmarkingofStudiedMFIswiththatoftheGlobal,SouthAsianandothercomparable markets
*Datasource:MIXData2009 World South Asia Bangladesh Indonesia Cambodia Philippines Sampled MFIsIndia
Costs Administrative expense/ assets 6.05% Operating expense/ loan portfolio 18.45% Personnel expense/ loan portfolio 10.15% Funding Interest Rate on Term Loans,weightedaverage Financialexpense/assets Debttoequityratio Profitability Profitmargin Returnonassets Returnonequity
4.13% 14.19% 8.63%
2.78% 14.55% 10.94%
5.85% 17.43% 11.77%
5.12% 14.40% 9.43%
7.84% 23.40% 12.27%
3.67% 11.32% 6.42%
NA 4.80% 2.85
11.25% 6.25% 5.55
9.43% 3.77% 6.64
9.48% 8.06% 4.22
8.83% 7.30% 3.37
9.25% 3.73% 4.53
11.94% 7.99% 5.31
8.43% 1.50% 7.27%
14.60% 3.03% 16.40%
12.79% 2.43% 15.47%
25.92% 5.44% 30.68%
17.02% 2.55% 10.66%
10.86% 2.17% 13.11%
21.76% 4.15% 22.43%
Pricing Yield on gross portfolio (nominal) 28.00%
23.17%
22.29%
36.87%
31.46%
29.83%
26.58%
II
Efficiency Averageloanbalanceper borrower 530 Averageloanbalanceper borrower / GNI per capita 0.2799 Borrowers per loan officer 235 Gross loan portfolio to totalassets 76.47% Loanlossrate 0.38% StudyonInterestRatesandCostsofMicrofinanceInstitutions
145
116
505
568
276
146
0.15655 301 76.85% 0.01%
0.2066 240 76.93% 0.00%
0.22715 252 76.80% 0.56%
0.727 165 83.45% 0.27%
0.16035 238 67.85% 0.38%
0.14175 453 81.12% 0.41%
III
Annexure12:DetailsofWAAPR(InterestOnly)acrossMicrofinanceInstitutionsbelowandabove26%
MicrofinanceInstitutions HandinHand SKDRDP CECODECON RASS Lupin Bandhan Ujjivan People'sforum NBJK BSFL NEED HopeFoundation Smile Share SKS Spandana MAS Asmitha SaharaUttrayan CASHPOR Equitas WAAPR(InterestOnly)below26% 16.93% 17.11% 17.48% 17.73% 18.83% 20.81% 22.24% 22.37% 23.60% 23.66% 23.75% 23.79% 24.51% 24.56% 24.56% 24.56% 24.59% 24.60% 25.55% 25.77% 25.79% MicrofinanceInstitutions Sahayata Sonata Janalakshmi Rores MimoFinance Saija Satin Chanura NEREFS WAAPR(InterestOnly)above26% 28.83% 28.84% 29.05% 29.10% 29.42% 32.65% 33.18% 34.81% 48.37%
IV

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StudyonInterestRatesandCosts ofMicrofinanceInstitutions 2011

S EMI STRUCTURED I NTERVIEWS

S AMPLINGAND D ATA C OLLECTION P LAN

West LegalForm Model ForProfit NotforProfit

ThelistandbasicdetailsallsampleMFIsisprovidedinAnnexure6. Thenumberofinstitutions,cumulativeclientoutreachandcumulativeloansoutstandingundereachofthe groupsandcorrespondingcategoriesaredepictedbelow: S CALEOF O PERATIONS : (F IGURESASON M ARCH 31 ST 2010)

Category TierI TierII TierIII

CumulativeOutreach Nos(thousands) 20,470 876 176 % 95 4 1

CumulativeLoanOutstanding INRmillion 116,234 4,698 2,630 % 94 4 2

Multiregion North South East West Total

30% 17% 23% 20% 10% 100%

Number Percentage ofMFIs

ForProfit NotForProfit Total

63% 37% 100%

Cumulative Loans Outstanding (in Rs Million) (asonMarch31,2010) 113,658 9,905 123,563

Number of Percentage MFIs

SHG JLG Grameen Individual Total

30% 23% 43% 3% 100%

NumberofProducts NumberofMFIs Percentage

APR SACROSSDIFFERENT G EOGRAPHICREGIONS

Figure14showsthebroadbreakupofAPRsintermsofthefollowingfourcomponents: i. ii. iii. iv. Interest Fees InsuranceCharges Security/CashDeposit

W EIGHTEDAVERAGE I NTEREST R ATES

TypeofFinancial Institution Nationalized Banks DevelopmentalInstitutions PrivateBanks NBFCs RRBs Total

InterestRate (Range) 9.514.5 8.014.5 9.515.0 12.515.0 9.013.5 8.015.0

Risks Competition Political Regulatory Liquidity/Confidenceoflenders Highcostofloans

T RANSPARENCYBY MFI SANDAWARENESSOFCLIENTSACROSS T IERS

FIGURE 40: INFORMATION DISCLOSURE AND AWARENESS OF CLIENTS (LEGALFORMWISE)

D ATACOLLECTEDINCONJUNCTIONWITHTHE RBI GUIDELINESISSUED Thedata/informationcollectedduringthestudyhasbeenutilizedtounderstandtheconcurrencewiththe RBIguidelinesandtheanalysisacrossMFITiers,LegalformsandModelsispresentedbelow:

Security Repaymen deposit tschedule

Term Interest ofloan rate

Security Repaymen deposit tschedule

Responseof theclient Aware Unaware

Whetherthisactivity donebyMFIorsister organizationorin collaborationwitha socialinstitution?

Doesmember knowaboutthe socialactivity? (Y/N)

Doesmember attendedthese activity (Y/N)

Payment/chargesto availthebenefits (Y/N/DK)

WhetheronlyMFIclients canavailtheseservices? (Y/N)

9. ManagingdefaultmembersintheSHG/centers/JLG Haveyoueverpaidforthedefault memberinyourgroup?(Y/N) Didyouneedtoborrowmoney forthat?(Y/N) Inhowmanydaysthe moneyhasbeenrepaid backtoyou?

31Mar08 31Mar09 31Mar10

Growthinthelastthreeyears Annualized+/ 31Mar10 inpercentage

0.00 0.00 0.00 0.00 0.00 0.00 0.00

TotalAssets Liabilities SavingsAccounts:forced SavingsAccounts:voluntary

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

(NetOperatingIncome,lessTaxes)/AverageAssets (NetOperatingIncome,lessTaxes)/AverageEquity FinancialRevenue(Total)/(FinancialExpense+Loan LossProvisionExpense+OperatingExpense)

22.71% 22.71% 24.77% 24.77% Detailsnotavailable

4.13% 14.19% 8.63%

2.78% 14.55% 10.94%

5.85% 17.43% 11.77%

5.12% 14.40% 9.43%

7.84% 23.40% 12.27%

3.67% 11.32% 6.42%

11.25% 6.25% 5.55

9.43% 3.77% 6.64

9.48% 8.06% 4.22

8.83% 7.30% 3.37

9.25% 3.73% 4.53

11.94% 7.99% 5.31

8.43% 1.50% 7.27%

14.60% 3.03% 16.40%

12.79% 2.43% 15.47%

25.92% 5.44% 30.68%

17.02% 2.55% 10.66%

10.86% 2.17% 13.11%