MFI Interest Rate Study 2011

8/6/2019 MFI Interest Rate Study 2011

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2/26

Ofinterestrates,margincaps

&povertylending

HowtheRBIpolicywillaffectaccesstomicrocredit

bylowincomeclients

July2011

EDARuralSystemsPrivateLimited

MicroCreditRatingsInternationalLtd602PacificSquare,32ndMilestoneNH8,Gurgaon122001,INDIA

Tel:+911244050739,4268707,2309497;Fax:+911242309520

email:[email protected] website:www.mcril.com


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ExecutiveSummary

ThecurrentcrisisinIndianmicrofinancehasbroughtdowntheportfoliosofIndianMFIsby

50%fromtheirpeakinOctober2010. Whilesomemayseethisasacauseforcelebration,it

has

caused

collateral

damage

to

the

lives

of

low

income

families,

both

recent

and

potential

customers,whichisafarmoreimportantissue. TheRBIhasattemptedtoresolvetheissue

bydefininglimitsoninterestrates,margins,incomesofmicrocreditborrowers,thesizeof

loanstobeprovidedtosuchborrowersandonvariousotherbusinessconductissuessuch

astenure,repaymentfrequencyandcollateral. Thishasgeneratedhotdebatebutnot

muchreallightintermsofacloseexaminationoftheactualimpactofthemeasures

announcedontheavailabilityofmicrocredittothosewhoneedit. Thepurposeofthis

paperistoundertakesuchanexamination.

ThecontentofthispaperisparticularlyimportantinthecontextofthedraftMicrofinance

Bill(nowinthepublicdomain)thatseekstoformalizesomeofthemeasuresthattheRBI

hasannouncedaspartofitsdefinitionofqualifyingassetsforprioritysectorlendingby

commercialbanks.

Thepaperundertakesatimeseriesanalysisoftheyieldsonloanportfolioofthe16largest

MFIsinIndiathataccountforover80%ofalltheMFIservicesprovidedinthecountry.

HistoricalyielddataiscomparedwiththepricingandmargincapsannouncedbytheRBIto

determinethefeasibilityofMFIoperationswithinthenewregulatoryregime. Italsolooks

attheincomelimitandmaximumloansizecriteriatodeterminetheirrelevanceforthe

availabilityofmicrocredittovariousincomesegmentsofthepopulation.

Onthematterofinterestandmargincaps,thekeyfindingsofthispaperare

1 Thecombinedyieldonloanportfolioofthe16largestMFIshasbeenwellwithintheRBIsspecifiedinterestcapof28%(26%+2%yieldresultingfromthe1%loan

processingfee)forthe6years,200405to200910.

2 Thecombinedperformance ofthelargest16hasbeencomfortablywithinthemargincapof12%+2%for5years(200506to200910)

3 WiththehighestyieldofanyindividualMFIinthisgroupbeinglessthan34%(andthatisoneofthesmallestMFIsinthisgroup)thisdebunkstheallegationsinthemediathat

MFIshavegenerallybeencharginginterestratesof50%andabove.

However,thereremainpartsofthecountrywheremicrocreditisnotadequatelyavailable,

sothereisacasefortheregulatortoallowrelaxationsofthepricingcapsintwosituations

a WhenasmallMFIoperatesininfrastructurechallengedareasandinunderservedpartsofthecountry,and

b WhenanMFIisnewandsmallwithinthreeyearsofstartupandwithlessthan50,000clients.

andtointroduceothermeasuressuchasaweightedcalculationofthecapitaladequacy

ratiothatincentivizesMFIstoworkinunderservedareas.


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Onthepovertylendingissue,

Itiscommonlyacknowledgedthatover60%ofthepopulationisfinanciallyexcluded.

Inevitablythesearefamilieswithrelativelylowincomes. Itisclearlyinappropriatetoregard

alloftheseasbelongingtoasinglecategoryofmicrocredituser. Basedontheavailable

data,thispaperusesfourincomethresholdsbelowthenationalpovertyline(NPL,

equivalentto$0.85perpersonperday)andtheinternationalthresholdsof$1.25per

personperday,$1.50perpersonperdayand$2perpersonperdaytocategorise

microcreditclients. UsingNSSO(200506)data,theproportionofpopulationwithincomes

beloweachthresholdisasfollows

Nationalpovertylineandinternationalincome

thresholdsin$perpersonperday*

Incomethreshold National,

$0.85/day

$1.25/day $1.5/day $2/day

%ofpopulation(20056)withincomelessthan... 18 51 66 84

* TheequivalentsinrupeesoffamilyincomeperannumareprovidedinTable2(page9)ofthemaintext

Variousincomecategorieshavebeenusedbasedontheunderstandingthatforpeoplein

thedifferentcategories,therewillbedifferencesintheappropriateloansizesandlending

conditions(products). Thisanalysismakesapreliminaryattemptataddressingthisissuein

thecontextoftheRBIcircular.

1 Theproportionofpopulationin200910thatqualifieswithinthefamilyincomelimitformicro loanssetbytheRBIamountstoalittleunder50%inruralandurbanareas

respectively. Intheory,thisseemstobealargeenoughsegmentofthepopulationfor

microfinancetobeprovidedviably. Inpracticeitincludesallthoseinurbanareaswith

incomesbelowtheinternational$2adaythresholdbutinruralareasexcludesthose

withincomesabove$1.5aday. Thiscreatesananomalythatneedstobeaddressed.

2 TheloansizelimitofRs35,000inthefirstcycleenableseveryoneinallareaswithincomeslessthan$2adaytoborrow,however,critically,itleavesallthosewithless

than$1.5perdayopentooverindebtedness(becausetheloansizelimitmaybetoo

high)anditmaynotbehighenoughforthoseclosetothe$2adaythreshold(whocan

repaymoreandprobablyneedmoreforproductiveinvestment). Notcateringtothe

needsoftheupperincomesegmentsamongstmicrocreditclientscreatesanincentive

formultipleborrowing.

Theimplicationsofthesefindingsarethatthecriterianeedtobenuancedusingthe

availabledatafordifferent(nationalandstate)povertylevelsandfordifferentincome

categories. Thereshouldbeconsistencybetweenincomethresholdsandloansizelimits

basedonestimatesofcapacitytorepayloaninstalmentsofareasonablesize.

Theneedfortheregulatortodevelopaspecialistknowledgeofmicrofinanceis

paramount. ItcouldalsousetheservicesofspecialistagenciessuchasMCRILtoboth

monitorandenhanceitsunderstandingoftheimplicationsoftheregulationsproposedand

introduced.


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1 Introduction

MuchhasbeensaidaboutthecrisisinIndianmicrofinance:thatitwascausedbythe

exponentialgrowthofthelargestMFIsleadingtowidespreadoverindebtednessofclients,

clientcoercionbyMFIswhicheventuallypossiblycontributedtosomeofthesuicides

reported

in

the

media.

An

alternative

view

is

that

bureaucrats

in

the

AP

government

were

notonlyenviousofthesuccessofMFIsvisvisSHGsandtheVeluguprogrammebutalsoof

thesuccessoftheSKSIPOandreportsoffabulousreturnstopromotersandinvestors. This

ledtothehurrywithwhichtheAPordinancewaspromulgatedwithoutmuchwarningto

theMFIs. Whateverthetruth,thesituationaffectedthebankingsectoracrossthecountry,

andledtotheirunwillingnesstolendtoMFIswiththeresultthateventhoseoperatingin

Bengalandtheeasternstatesnowreportadeclineinportfolioof50%sincethepeakin

earlyOctober2010.

Inattemptingtoresolvethecrisis,theReserveBankofIndia(RBI)firstappointeda

committeetoreportonandsuggestsolutionstotheproblemsattributedtothesector;

then,usingtherecommendationsoftheMalegamCommitteeandaftersomedeliberation

theRBIannounced,inearlyMay2011,thefollowingmeasuresthattookamoreliberal

approachonmanyofthepricingandmarketconductrulesrecommendedbythecommitee:

Conditions RBIpolicyannouncementfromtheperspective

ofprioritysectorlendingbybankstoMFIs

Incomelimitforeligible

borrowersfromMFIs

Rural:Rs60,000

Urban:Rs1,20,000

Loansize(maximum) Firstcycle:Rs35,000

Subsequently:Rs50,000

Indebtednessofborrower LimitedtoRs50,000

Tenure 24monthsforamountsinexcessofRs15,000

Loanusecriterion Minimum75%ofMFIportfolioforincome

generation

Repaymentfrequency Weekly,fortnightlyormonthlyatthechoiceofthe

borrower

Pricingcap Interestrate,26%

Margin,12%aboveborrowingcost

+

processing

fee,

1%

(not

included

in

interest

cap

or

margincap)

Collateral&groupmechanisms Nocollateral,individualsaswellasSHGsandjoint

liabilitygroups(JLGs)

AsMCRILwrote(atthetime)initscommentontheRBIpolicy,Thecentralbankspolicyis

restrictiveinplacingpricingcapsandacceptingincomecriteriathatmaynotbepractical

toapply,butitisneverthelesswelcomeintheframeworkoftheprevailingpolitical

economyofthecountry. Giventheconcernsofvariousstategovernmentsaboutthe

functioningofthemicrofinancesector,theywouldexpecttheRBItodonoless. Whilethe

roleofacentralbankshouldbetocreateafacilitatingenvironmentforthefinancial

systemandnottomicromanagetheprovisionoffinancialservices,atleasttheRBIsmore


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liberalapproachthantheMalegamCommitteewillfacilitatetheachievementofsustainable

operationsbymany(butnotall)MFIs.

ThepurposeofthispaperistoexaminetheimpactoftheRBIsmicrofinancecriteriaonthe

supplyofmicrocredittolowincomeclientsandtheabilityofMFIstooperateviablywithin

theboundsofthepricingcapsandincomelimitsannounced. Itexaminesthelikelyeffectof

thepricingcapson16ofthelargestMFIsinIndiainthecontextoftheirperformanceover

thepastfewyearswithrespecttoyieldsonloanportfolio(referredtohenceforthas

portfolioyieldswhichrepresentstheactualfinancialcostofborrowingtomicrofinance

clients)andthemarginsearnedafteraccountingforfinancialexpenses. Italsolooksatthe

incomelimitandmaximumloansizecriteriatodeterminetheirreasonablenessforthe

availabilityofmicrocredittovariousincomesegmentsofthepopulation.Thus,theanalysis

isaimedatdeterminingthefeasibilityofmicrocreditavailabilityandofthemicrofinance

sectorvisvisthepolicyalbeitinitiallyonlyforqualifyingmicrofinanceassetsunderthe

prioritysectorguidelinesforcommercialbanks. Thisisimportantinawidercontext;since

thedraftmicrofinancebilldesignatestheRBIastheregulatorofallmicrofinanceinIndiathe

qualifyingassetscriteriasetoutabovearelikelytobecomethecenterpieceoftheformal

regulationtobeintroducedafterthebillisenactedbyParliament.

Dataforthecostandpricingcomparisoninthefirstpartofthispaperhasbeentakenfrom

thedatabaseoftheMIX(theMicrofinanceInformationExchangethemicrofinance

databaseestablishedbyCGAP,theWorldBankaffiliatedtechnicalsupportagencyfor

microfinance). Dataforhouseholdincomelevelsandpovertybandsinthesecondpartof

thepaperderivesfromthe62nd

roundoftheNationalSampleSurvey(200506).

2 Theimpliedcostofthepricingcapsforclients

Asindicatedinthetableabove,thepricingcaps(onaperannumbasis)are

Interestrate,onareducingbalancebasis 26%

Margincap,aboveborrowingcost 12%

Processingfee,notincludedinthemargincaporinterestcap 1%

Theactualcosttoclientsimpliedbythisisdeterminedbytherepaymentfrequency

weekly,fortnightlyormonthly(tobechosenbytheclient)andtheloantenure. However,

byanymethod,foraoneyearloantenure(standardinmicrofinance)theresultingnetcost

totheclientamountstoapproximately28%(26%interestcostplusthe1%loanprocessing

feespreadovertheaverageoutstandingprincipalbroadlyhalftheloanprincipalat

disbursementresultinginanaveragecostof2%).


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3 MFIscoveredbythestudy

The16largeMFIscoveredbythisanalysis

arelistedinTable1alongwiththeir

numberofactiveborroweraccountsand

outstandingportfolioon31March2010.

Theseconstituteover81%ofthe26.7

millionactiveborroweraccountsof266

MFIs(accordingtodatacollectedbySa

Dhan)andnearly82%oftheRs20.400

croreportfolioofallIndianMFIsonthat

date. Thus,comparingthecapsintheRBI

circulartoavailableevidenceonyields

obtainedbytheseMFIswouldprovidea

goodindicationoftheeffectthecaps

couldhaveontheoutreachof

microfinancetolowincomeclientsinthe

country. MCRILsdatashowsthatthese

MFIsgrewby62%intermsofborrowers

and88%intermsofportfolioduringthe

financialyear200910.1

4 PricingcapsnotperhapsasonerousasthesemayappearMicrofinanceinIndiawasa

relativelyslowgrowingactivity

untiltheearlypartofthelast

decade. Itisonlyaround2003

thattheadventofcommercial

izationledtoasignificantgrowth

impetusinthesector. Thisis

apparentfromtheMCRILgrowth

indexforIndianmicrofinance

(CRILEX)showninFigure1.2 As

the

figure

shows,

by

March

2010,

theindustryhadgrowntonearly

75timesthesizeitwasin2003.

Forthisreason,theanalysisin

Figure2,oftheconsolidated

performanceofthe16largeMFIs

startsinMarch2003.

1

M

CRIL,

2010.

M

CRIL

Microfinance

Review

2010:

Microfinance

contributes

to

financial

inclusion.

Gurgaon: MicroCreditRatingsInternationalLimited.2 CRILEXisacompositeindexincorporatingbothgrowthinportfolioandgrowthinnumbersofclients.

Figure1

CRILEX,31March2003=100

100 181444

8761,219

2,370

4,589

7,474

Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10

Table1

The16largestMFIscovered

MFI Portfolio,

croreRs

Active

borrowers

APR*

SKS 4,320 5,795,028 32.4%

Spandana 3,540 3,662,846 28.1%

SML 1,693 2,357,456 26.9%

Bandhan 1,495 2,301,433 25.6%

AML 1,418 1,340,288 32.3%

SKDRDP 615 1,225,570 18.3%#

BSFL(BASIX) 776 1,114,468 25.2%

Equitas 605 888,600 26.7%

ASAGV 605 772,050 32.3%

Ujjivan 371 566,929 34.6%

CashporMC 267 417,039 28.0%

GrameenKoota 330 352,648 30.9%

FutureFinancial 244 257,991 31.8%

BSS 145 250,000 n.a.

BWDA 116 220,645 n.a.

ESAF 155 220,011 31.5%

Total 16,695 21,743,002

*middleofrangeonprincipalproductasreportedbyMFTransparency# MCRILinformation


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Figure2providesatrendanalysisoftheconsolidated(weightedaverage)operatingexpense

ratios(OER)andfinancialcostratios(FCR)incomparisonwiththeportfolioyieldforthe16

MFIsovertheeightyears200203to200910. Forthepurposeofthisanalysisandto

addressclearlytheobjectivesofthispaper,theseindicatorsaredefinedas

a Portfolioyield(orsimplyYield): Incomeonloanportfolioincludingincomefrominterestandalltypesofloanprocessingfeesasaproportionofaverageloan

portfoliooutstandingduringtheyear. Thustheaverageyieldamountstothe

amountpaidbytheaverageclienttoanMFIasthecostofherloan.

b Operatingexpenseratio(OER): Allexpensesincurredinlendingoperationsincludingstaffexpenses,travelandotheradministrativeexpensesincluding

depreciationbutexcludingprovisioningexpensesforbaddebts/loanlosses. Such

expensesalsosometimesincludethecostofprovidingcreditplusservicesorself

helpgrouppromotionwhentheMFItreatssuchactivitiesasalegitimatepartofits

microcreditoperations. TheOERiscalculatedasthetotalofallsuchexpenses

incurredduringtheyearasaproportionoftheaverageloanportfoliooutstanding

duringtheyear.

Figure2

Consolidated16largestMFIs

Clients:21.7million;combinedyieldwithintheinterestcap;combinedoperatingexpensewithinmargincap

redline=28%(interestcap+loanprocessingfee),blackline(discontinuous)=12%(margincap)+2%

yieldresultingfromthe1%loanprocessingfee

18.3%16.4%

13.8%

11.8% 10.4% 10.7% 10.3%8.4%

10.8%

10.2%

9.4%

7.0%

6.5%8.6% 10.1%

9.3%

31.0%30.0%

27.5% 25.3%

18.7%

22.5% 26.1%26.9%

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield


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c Financialcostratio(FCR): AllfinancialexpensesincurredbytheMFIcalculatedasaproportionoftheaverageloanportfoliooutstandingduringtheyear. TheFCRis

differentfromtheborrowingcost(referredtointheRBIcircular);thelatteristhe

averagecostoffunds(ortheweightedaveragecostofallloanstakenbytheMFI)

fromwholesalelenderssuchascommercialbanks. Thereasonthetwodifferisthat

theamountborrowed(thedenominatorforborrowingcost)isnotexactlythesame

astheamountlent(thedenominatorforFCR).

d Margin,asreferredtobytheRBIinsettingthemargincap,isthedifferencebetweentheyield(theincomeearnedbytheMFI)andtheborrowingcost(the

averagecostofborrowingfunds). SincetheborrowingcostforMFIsingeneralhas

fluctuatedbetween10%and14%overthepastfewyears,forthepurposeofthis

papertheaverageisassumedtobe12%.

Intheory,therefore,themargincapof12%meansthatMFIsmustoperatewith

anOER+loanlossprovisioningratioof12%andthemaximumportfolioyieldallowedtotheaverageMFIis,therefore,12%(borrowingcost)+12%margin+2%

yieldontheloanprocessingfeeleadingtoatotalportfolioyieldof26%.

ItisonlyifanMFIisrequiredbybankstopayahigherborrowingcostoriftheeconomyasa

wholemovestoahighinterestrateregimewherebythecostofborrowingforMFIsrisesto

around14%thatthe28%limitonportfolioyieldwillbecomerestrictive.

Astheconsolidatedperformanceofthe16largestMFIsinFigure2shows,theircombined

yieldhasbeenwellwithintheRBIsspecifiedinterestcapof28%(26%+2%)overthe6

years,200405to200910.

Similarly,thecombinedperformanceofthelargest16hasbeencomfortablywithinthe

margincapof12%+2%(yieldresultingfromthe1%loanprocessingfee)for5years(2005

06to200910). Thiswouldallowthemtocovertheiroperatingexpensesandprovidea

reasonable2%foraloanlossprovisionaswell. Whatitwouldnotprovideforisaprofit

marginnecessarytobuilduptheircapitalbasetoenablegrowth. However,witha

combinedOERofjustover10%overtheperiod200607to200809asmallprofitmarginof

around1.5%(ofportfolio)wouldstillhavebeenavailable(withthecurrentmargincap). In

200910,clearlyagoldenyearoffinancialperformanceforIndianMFIs,theprofitmargin

possibleevenwiththemargincapwouldhavebeenmuchlarger,oftheorderof3.5%.

Sinceaggregatefiguresoftenmaskissuesfacedbyindividualorganizations,Figure3shows

thefrequencyoforganizationswhosehistoricalperformancemeetsthenewyieldcriteria.

Itisapparentthatsince20056,twothirdsoftheseMFIshavebeenwithinthecriteria,with

aroundonethird(5oftheselargeMFIs)haveobtainedhigheryieldsontheirportfoliosthan

willnowbepermittedwiththepricingcaps. Theannextablesprovideapresentationofthe

performanceofindividualMFIs(basedonMixMarketdata). WiththehighestyieldofanyindividualMFIinthisgroupbeinglessthan34%(andthatisoneofthesmallestonesinthisgroup)thisdebunkstheallegationsinthemediathatMFIshavebeencharginginterestratesof50%andabove.


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Withthemarginallowedbeingeffectively14%,butneedingsomethingoftheorderof12%

for

loan

loss

provisioning

(in

normal

times,

rather

than

in

the

extraordinary

AP

crisis

situationtoday),MFIsmustrestricttheiroperatingexpenses(OER)atleastto12.5%

(assuming1.5%tobetheaverageloanlossprovisionrequired). ThefrequencyoflargeMFIs

operatingwithin

theOERlevelof

12.5%(presented

inFigure4)over

thepastfewyears

showshow

dramatically

operating

expense

ratioshave

decreasedover

theyears. Over

thesixyearsfrom

200405to2009

10,thenumberof

largeMFIs

operatingbeyond

the12.5%levelof

OER

has

decreased

from10(outof

Figure3

YieldlevelsoflargeMFIsfrequency

3

6 67

5 5

2

45

5

56

7

54

4

65

0

2

4

6

8

10

12

14

16

18

2005 2006 2007 2008 2009 2010

NumberofMFIs

>28%

2428%

15%

12.515%


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the12forwhichusableinformationisavailableforthatyear)tojust4(of15). Ofthosefour

withhigherexpenses,twohavelessthan15%OER,soshouldbeabletomeetthemargin

capwithease. Onlytwo,BASIXandUjjivan,arebeyondthislevelthelatterbecauseitisa

relativelynewMFIthatisreducingitsOERsignificantlyfromoneyeartothenext(Annex

1.12)andtheformerbecauseitseesitselfasalivelihoodpromotioninstitutionproviding

significantcreditplus

services. Itislikely

thatexternalizing

BASIXscreditplus

activitiesfromthe

calculation(ifthatis

possible!)would

bringitsOERdownto

lessthan12.5%.

Thus,itisapparent

thatthemargincap

setbytheRBIshould

notbeaproblemfor

anyofthelarge

MFIs.

Thisisconfirmedby

Figure5. Whilea

fewyearsagoa

coupleofMFIswould

nothavemetthe

margincap,inthegoldenyearof200910,all15MFIs(forwhichinformationisavailable)

notonlyoperatedwithinthe14%marginnowsetbutnonemadeanoperatinglosseither

(unlikeinearlieryears). Fromtheperspectiveofprovidingmicrocreditservicesto

increasingnumbersofpeoplethroughlargeMFIs,therefore,themargincapdoesnot

seemtopresentasignificantproblem.

However,thereareotherissuesbehind

thesenumbers

First,

it

has

been

argued

elsewhere

by

M

CRILthatthelargeMFIshavereduced

theiroperatingexpenseratiosoverthe

pastfewyearsbyreducingtheir

relationshipwiththeirclients,thereby

alteringthenatureoftherelationship

fromthatofdevelopmentsupporterto

thatofamoneylender. Figure6shows

theextenttowhichloanofficercaseloads

haveincreasedovertheperiodofthis

analysis.

Since

caseloads

now

average

nearly500clientsperMFIloanofficer

Figure6

Trendinloanofficer(LO)caseloadsofIndianMFIs

183

329342

411428

338

405413

473 474

100

150

200

250

300

350

400

450

500

200102 200304 200506 200809 200910

Borrowers/LO,all

Top10

Figure5

Marginlevelsfrequency

5 5 5 5

3

4

67 7

8

8

3

2

34

5

7

2

0

2

4

6

8

10

12

14

16

18

2005 2006 2007 2008 2009 2010

NumberofMFIs

>14%

714%

07%


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8|P a g e

(andriseupto800forsomeMFIs),theynowspendlittletimegettingtoknowtheirclients

andbuildingarapportwiththembyunderstandingtheireconomicsituationsaswellas

discussingsocialanddevelopmentissues. Tothisextentmicrocredithasevolvedfrom

povertybasedlendingtoexclusivelycommerciallending.3 Thisneedstoberebalancedto

enableMFIstounderstandtheirclientsbetterandtofocusonservingclientneeds(with

moreappropriateproducts)ratherthanmerelyrevolvingmoneytogenerateanincome

withoutcaringaboutthoseneeds.

Second,whilelargenumbersofpeopleintheheartlandofthecountryespeciallythe

betterdevelopedstatescanbeservedwithinthiscappingregime,itisnotclearthatthe

sameappliestothosebasedintribalareas,thehillanddesertareasandother

infrastructurechallengedareassuchasthenortheast.

Third,despitetheoverchargedenvironmentofmicrolendingprevailinginsomeclustersof

thecountrymuchofthesouthandeast,forinstancethereremainsomeareasofUP,

Bihar,Gujaratandelsewherethatareunderservedbymicrofinance,indeed,lackingany

inclusivefinanceservices. IncentivisingMFIstooperateintheseareasratherthaninthe

overservedclustersshouldbeanimportantpartofthepolicy. MCRILhasalready

suggestedaformulawherebythecoverageoffinanciallyexcludedfamiliesinagivenarea

canbeusedtoobtainaweightforcalculatingtheprudentialminimumofcapitalrequired

(relativetotheMFIsriskweightedassetstooperateinthatarea)seereference.4

Clearlythereisacasefortheregulatortoallowrelaxationsofthepricingcapsintwo

situations

c WhenasmallMFIoperatesininfrastructurechallengedareasandinunderservedpartsofthecountry,and

d WhenanMFIisnewandsmallwithinthreeyearsofstartupandwithlessthan50,000clients.

andtointroduceothermeasuressuchasaweightedcalculationofthecapitaladequacy

ratiothatincentivizesMFIstoworkinunderservedareas.

Suchexceptionsshouldnaturallybetimebound;theregulatorsdiscretionhereisimportant

andhavingtheinformationandunderstandingofmicrofinancenecessarytotakesuch

decisionsisessential. ThisisoneofthereasonswhytheRBIshouldideallyestablisha

division

that

specializes

in

microfinance.

3 Itiseasytoforgetthatinthelate1990sneoclassicalmicrofinanceexpertsactuallyaccusedIndianMFIsof

indulging

in

wasteful

poverty

lending.

4 MCRIL,2010. MCRILsSupplementaryontheMalegamCommitteeReport.Gurgaon,10February

(www.mcril.com)


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9|P a g e

5 Theincomeandloansizecriteria

Itiscommonlyacknowledgedthatover60%ofthepopulationisfinanciallyexcluded.

Inevitablythesearefamilieswithrelativelylowincomes. Itisclearlyinappropriatetoregard

alloftheseasbelongingtoasinglecategoryofmicrocredituser. Basedontheavailable

data,

this

paper

uses

four

income

thresholds

below

the

national

poverty

line

(NPL,

equivalentto$0.85perpersonperday)andtheinternationalthresholdsof$1.25per

personperday,$1.50perpersonperdayand$2perpersonperdaytocategorise

microcreditclients. Thisisbasedontheunderstandingthatforpeopleindifferentincome

categories,therewillbedifferencesintheappropriateloansizesandlendingconditions

(products). Thisanalysismakesapreliminaryattemptataddressingthisissueinthecontext

oftheRBIcircular.

TheincomeandloansizecriteriaincorporatedintheRBIscircularof3May2011,defining

thequalifyingMFIassetsforprioritylendingbycommercialbanksare

Incomelimitforeligible

borrowersfromMFIs

Rural:Rs60,000

Urban:Rs1,20,000

Loansize(maximum) Firstcycle:Rs35,000

Subsequently:Rs50,000

UsingNSSORound62(200506)dataanddrawingontheworkofMarkSchreinersupported

bytheGrameenFoundation,todevelopapovertyscorecardforIndia,5EDARuralSystems

(MCRILsparentcompany)hasworkedouttheequivalenthouseholdpovertyratesand

annualhouseholdincomelevels(at200910prices)forthenationalpovertylineandfor

variousinternationallyrecognizedpovertythresholds. Thesearepresentedincolumns(1)

to(4)ofTable2,below. Itshowsthat,usingtheRs60,000incomecriterionforruralareas

makesanyfamilywithincomeabovethe$1.25perdaythresholdineligiblefora

microfinanceloan. Thisisconfirmedbythestatelevelinformationpresentedseparatelyfor

themajorstatesinAnnexTable2.

Table2

Calculationofborrowingcapacityatvariousincomelevels

offinanciallyexcludedhouseholds

Income/household` peryearatvariousthresholdlevels

Maximumborrowingcapacity,`peryear

Region State National* $1.25/day $1.5/day $2/day National $1.25/day $1.5/day $2/day%ofpopulation(20056)

withincomelessthan... 18 51 66 84 18 51 66 84

Rural Borrowingcapacity 10% 20% 25% 50%

Columns (1) (2) (3) (4) (5) (6) (7) (8)

India 38,311 57,513 69,027 92,026 3,831 11,503 17,257 46,013

Urban

%withincomelessthan... 15 20 30 49 15 20 30 49

India 54,786 60,499 72,599 96,799 5,479 12,100 18,150 48,400

5 Schreiner,Mark,ASimplePovertyScoreCardforIndia,2008. www.progressoutofpoverty.org


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Inthecaseofurbanareas,everyhouseholdwithincomebelowthe$2adaythresholdis

eligible. Using200506dataforhouseholdpovertyrate,thissuggeststhat,asaresult,51%

ofhouseholdsinruralareasand49%ofhouseholdsinurbanareaswouldqualifyformicro

creditwhiletheremaining~30%ofthepopulationabovethe$1.50perdaylevelinrural

areas(butbelow$2perdayand,crucially,stillmostlyfinanciallyexcluded)wouldnotbe

eligible.

Assumingsomereductioninthehouseholdpovertyratesince200506(sayattherateof1%

perannum),theproportionofpopulationthatqualifiesformicrofinanceloansin200910

amountsto47%and45%inruralandurbanareasrespectively. Intheory,thisseemstobea

largeenoughsegmentofthepopulationformicrofinancetobeprovidedviably.6

Inpractice,themaximumloansizecriterionalsoaffectsthisassessment. Oneofthe

argumentsofthecriticsofmicrofinancehasbeenthatMFIshaveoverburdenedlow

incomeborrowerswithloansandthishasledtohardshipthroughforegonemeals,saleof

assets,borrowingfrommoneylendersandotherformsofdistressforfamiliesstrugglingto

keep

up

with

the

payment

of

regular

instalments

on

their

loans.

It

is

important,

therefore,

toestimateamaximumreasonableamountofloanrepaymentthatafamilycanmakefrom

itsannualincome. Thecalculationsincolumns(5)to(8)ofTable2arebasedonthe

assumptionssummarizedinTable3.

Table3

Assumptionsonabilitytosetasideincomesforloanpayments

Thresholdincome Proportionofincomethatcanbe

reasonablysetasideforloan

payments*

Nationalpovertyline 10%

$1.25aday 20%

$1.5aday 25%

$2aday 50%*aftermeetingthebasicneedsofthefamily

Thefigurespresentedincolumns(5)to(8)ofTable2showthemaximumborrowing

capacityoffamiliesinvariousincomecategoriesusingtheseassumptions. Thissuggests

thattheRs35,000incomecriterionforafirstcycleloaniswellbeyondtheborrowing

capacityofallfamiliesbelowthe$1.50perdaythresholdbutisappropriateforasignificant

proportion(theupper50%)ofthoseabovethisthresholdbutwithlessthan$2aday. Those

withincomescloseto$2adaywouldeasilybeabletocopewithpaymentsonafirstcycle

loanonthisbasisandalsowithasecondcycleloan(ofuptoRs50,000).However,such

peoplewouldnotsatisfytheincomecriteria(discussedabove)intheruralareaswhilethey

wouldsatisfytheincomecriteriaintheurbanareas. ThisanalysisissummarizedinTable4

below.

6 Thoughdisaggregatedatthestatelevel,theproportionrangesfrom33%inRajasthanto74%inChattisgarh

seeAnnexTable2.


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Table4

Summaryoffindingsonincomeandloansizecriteria

Categoriesofincomebelowvariousthresholdlevels

Rural National* $1.25/day $1.5/day $2/day

Incomecriterion OK OK No No

Loansizelimit Toohigh OKformost,

firstcyclelimitmay

belowforothers

Urban

Incomecriterion OK OK OK OK

Loansizelimit Toohigh OKformost,first

cyclelimitmaybe

lowforothers

Essentially,theRBIsseparateurbanincomecriterionenablesallthoseinurbanhouseholds

withincomelessthan$2perpersonperdaytousemicrocreditservicesbutnotallthosein

ruralareas. Thismeansthatwhilearound60%ofthepopulationoverallisgenerally

estimatedtobefinanciallyexcluded,onlyabout47%cangetaccesstomicrocreditservices.

TheloansizelimitofRs35,000inthefirstcycleenableseveryoneinallareaswithincomes

lessthan$2adaytoborrow,however,critically,itleavesallthosewithlessthan$1.5per

dayopentooverindebtednessanditmaynotbehighenoughforthoseclosetothe$2a

daythreshold. Theimplicationofthisfindingisthatthecriterianeedtobenuancedusing

theavailabledataonbothnationalandstatepovertylevelsandfordifferentincome

categories. Thereneedstobeconsistencybetweenincomethresholdsandloansizelimits

basedonestimatesofcapacitytorepayloaninstalmentsofareasonablesize.

TheProgressoutofPovertyIndex(PPI)isapracticaltooltobenchmarkpovertylevels.

WhereithasbeenappliedbyMFIs(aspartoftheirownoutreachtrackingsystem,oraspart

ofasocialrating/audit)theresultsshowthatthemarketservedbymicrofinanceisvery

diverse. MFIclientsthoseexcludedfromformalfinancialservicesarelowincomeand

poor,atdifferentincomelevels,includingthosebelowthenationalpovertyline. The

challengeistorecognizethesedifferentmarketsegments,toprovideappropriateloansof

differentsizesandtohaveamethodthathelpstoidentifythesesegments.7

Againtheneedfortheregulatortodevelopaspecialistknowledgeofmicrofinanceis

paramount. ItcouldalsousetheservicesofspecialistagenciessuchasMCRILtoboth

monitorandenhanceitsunderstandingoftheimplicationsoftheregulationsproposedand

introduced.

7 ThePPIforIndiawillbeupdatedthisyearfromthelatestNSSOdatathatisnowbecomingavailable


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Alldataforfinancialyearendingon31Marchoftheyearshown

Clients:5.8million;yieldexceedsinterestcap;operatingexpense=margincap

Clients: 2.8million;yieldexceedsinterestcap;operatingexpensewithinmargincap

Annex1.1

SKSMicrofinanceLtd

10.2%

8.66%

28.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.2

Share

Microfin

Ltd

8.2%

12.2%

32.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield


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Clients: 3.7million;yieldequalsinterestcap;operatingexpensewellwithinmargincap

Clients: 2.3million;yieldwithininterestcap;operatingexpensewellwithinmargincap

Annex1.3

SpandanaSpoorthyFinancialLtd

5.4%

8.1%

26.7%

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.4BandhanFinancialServicesPvtLtd

5.5%

8.9%

22.7%

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OERYield


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Clients: 1.1million;yieldexceedsinterestcap;operatingexpensemuchhigherthanmargincap

Clients: 1.3million;yieldequalsinterestcap;operatingexpensewellwithinmargincap

Annex1.5

BhartiyaSamruddhiFinanceLtd[BASIX]

15.9%

11.1%

31.3%

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.6

AsmithaMicrofinanceLtd

6.4%

11.2%

26.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield


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Clients: 1.2million;yieldwellwithininterestcap;operatingexpensewellwithinmargincap

Clients: 0.77million;yieldexceedsinterestcap;operatingexpenseexceedsmargincap

Annex1.7

SKDRDP

4.8%

7.24%

13.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.8

GramaVidiyalMicrofinanceLtd

12.1%

10.5%

29.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield


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Clients: 0.42million;yieldwithininterestcap;operatingexpenseexceedsmargincap

0

Clients: 0.89million;yieldwithininterestcap;operatingexpensewithinmargincap

Annex1.9

CashporMicroCredit

11.4%

9.4%

25.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.10

EquitasMicrofinanceIndia

8.1%

8.7%

25.8%

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 2009 2010

FCROER

Yield


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Clients: 0.35million;yieldwellwithininterestcap;operatingexpensewithinmargincap


Annex1.11

GrameenKoota/GrameenFinancialServicesLtd

9.6%

8.9%

18.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.12

UjjivanFinancialServicesLtd

19.2%

6.9%

30.8%

0%

10%

20%

30%

40%

50%

60%

70%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield


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Annex1.13

AMMACTS/FutureFinancialServicesLtd

5.0%

10.3%

25.0%

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.14

BharatiSwamuktiSamsthe/BSSMicrofinancePvtLtd

11.5%

10.9%

33.9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield


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19|P a g e


Clients: 0.22million;yieldwithininterestcap;operatingexpenseexceedsmargincap

Annex1.15

BWDAFinanceLtd

5.4%

11.5%

17.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield

Annex1.16

ESAFMicrofinance&InvestmentsPvtLtd

13.9%

9.9%

25.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2003 2004 2005 2006 2007 2008 2009 2010

FCR

OER

Yield


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AnnexTable2

Calculationofborrowingcapacityatvariousincomelevels

offinanciallyexcludedhouseholds(statewise)

Income/householdperyear

atvariouspovertylevels

Maximumborrowingcapacity,`peryear

Region State National* $1.25/day $1.5/day $2/day National $1.25/day $1.5/day $2/day

%ofpopulationwith

lowerincome(20056) 18 51 66 84 18 51 66 84

Rural Borrowingcapacity 10% 20% 25% 50%

Columns (1) (2) (3) (4) (5) (6) (7) (8)

India 38,311 57,513 69,027 92,026 3,831 11,503 17,257 46,013

South AndhraPr 31,118 56,988 68,379 91,193 3,112 11,398 17,095 45,596

Karnataka 34,452 59,396 71,281 95,021 3,445 11,879 17,820 47,510

Kerala 45,720 68,842 82,611 110,117 4,572 13,768 20,653 55,058

TamilNadu 37,385 61,958 74,337 99,127 3,738 12,392 18,584 49,563

West Gujarat 37,601 62,082 74,492 99,312 3,760 12,416 18,623 49,656

Maharashtra 38,496 58,902 70,664 94,218 3,850 11,780 17,666 47,109

Central/ Chhattisgarh 34,267 58,284 69,923 93,230 3,427 11,657 17,481 46,615

North MadhyaPr 34,822 53,191 63,810 85,111 3,482 10,638 15,953 42,556

UttarPr 38,867 51,616 61,958 82,611 3,887 10,323 15,490 41,305

Rajasthan 39,793 59,612 71,528 95,391 3,979 11,922 17,882 47,696

Delhi 43,621 57,204 68,657 91,532 4,362 11,441 17,164 45,766

East Bihar 37,663 54,642 65,570 87,427 3,766 10,928 16,392 43,713

Orissa 34,606 55,321 66,373 88,507 3,461 11,064 16,593 44,254

WestBengal 40,688 56,494 67,793 90,359 4,069 11,299 16,948 45,180

NE Assam 41,182 62,575 75,078 100,115 4,118 12,515 18,770 50,057

Manipur 41,182 62,575 75,078 100,115 4,118 12,515 18,770 50,057

Urban

%withlowerincome 15 20 30 49 15 20 30 49

India 54,786 60,499 72,599 96,799 5,479 12,100 18,150 48,400

South AndhraPr 54,904 58,654 70,373 93,840 5,490 11,731 17,593 46,920

Karnataka 60,646 62,140 74,562 99,407 6,065 12,428 18,641 49,703

Kerala 56,574 65,128 78,166 104,211 5,657 13,026 19,541 52,106

TamilNadu 55,343 62,785 75,353 100,461 5,534 12,557 18,838 50,231

West Gujarat 54,728 64,455 77,375 103,157 5,473 12,891 19,344 51,578Maharashtra 67,326 65,802 78,957 105,266 6,733 13,160 19,739 52,633

Central/ Chhattisgarh 56,632 58,419 70,080 93,459 5,663 11,684 17,520 46,730

North MadhyaPr 57,658 55,636 66,769 89,035 5,766 11,127 16,692 44,518

UttarPr 48,868 56,603 67,912 90,559 4,887 11,321 16,978 45,279

Rajasthan 56,603 59,474 71,369 95,188 5,660 11,895 17,842 47,594

Delhi 61,994 68,849 82,619 110,159 6,199 13,770 20,655 55,079

East Bihar 43,976 54,874 65,832 87,775 4,398 10,975 16,458 43,888

Orissa 53,439 53,175 63,810 85,080 5,344 10,635 15,953 42,540

WestBengal 45,441 59,064 70,871 94,514 4,544 11,813 17,718 47,257

NE Assam 38,321 64,777 77,726 103,625 3,832 12,955 19,432 51,813

Manipur 38,321 64,777 77,726 103,625 3,832 12,955 19,432 51,813


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AnnexTable3

Proportionofpopulationwithincomebelowvariousthresholds/povertylines(200506)

Rural Urban

National $1.25/day $1.5/day $2/day National $1.25/day $1.5/day $2/day

AllIndia 18 51 66 84 15 20 30 49

South AndhraPradesh 9 46 66 85 16 21 29 48

Karnataka 14 65 75 89 21 22 32 51

Kerala 7 28 40 62 11 15 28 46

TamilNadu 14 49 62 83 12 18 32 52

West Gujarat 10 47 58 82 9 14 27 53

Maharashtra 12 41 55 79 19 18 26 41

Central/

North Chhattisgarh 33 80 91 98 19 20 30 50

MadhyaPradesh 24 64 79 90 26 24 36 59

UttarPradesh 20 45 66 85 20 28 39 57

Rajasthan 11 39 61 83 17 23 35 55

Delhi 0 2 11 53 3 6 19 33

East Bihar 28 69 82 95 26 44 57 72

Orissa 35 73 81 91 29 29 36 53

WestBengal 19 54 69 87 11 19 29 47

NE Assam 14 55 72 90 2 9 18 37

Manipur 1 36 71 94 0 32 66 81


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Documents

MFI Interest Rate Study 2011