mfi interest rate study 2011
TRANSCRIPT
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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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(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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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
Clients: 0.57million;yieldexceedsinterestcap;operatingexpenseexceedsmargincap
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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Clients: 0.26million;yieldwithininterestcap;operatingexpensewellwithinmargincap
Clients: 0.25million;yieldexceedsinterestcap;operatingexpenseexceedsmargincap
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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Clients: 0.22million;yieldwithininterestcap;operatingexpensewellwithinmargincap
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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