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Progress Under the
MFI Model
on little product diversity. With growth likely to slow down at least in the short term (see
Chapter 4), greater use of individual lending, and progress on product diversity, efficiency
performance may go down.
Profitability depends however also on non-operational or financial costs, as well as financial
income. Another unique feature of the Indian MFI sector is that its financial expense ratio as
shown in Table 3.4 is also the highest in the world. At 8.5 percent it is almost three times as
high as in neighbouring Bangladesh. This is a function of India's low capital asset ratio noted
above (or what comes to the same thing high debt equity ratio, of 122 percent, also the
highest in the world) and the high proportion of commercial borrowings in India's debt.
Bangladesh as we have seen can rely on lower cost compulsory savings, and a large share of the
borrowings of Bangladeshi MFIs are at concessional rates from PKSF. As a result, as Table 3.4
shows, India's total expense ratio at 22 percent, while still significantly lower than that in
most other regions of the world, but is 6 percentage points higher than Bangladesh's.
Since interest rates (the financial revenue ratio in Table 3.4) in India are only 20.7 percent,
they are insufficient to cover the total expense ratio. As result the MFIs in the MIX sample have
on average negative profitability as measured by return on assets (-1.5 percent), return on
equity (-10.2 percent), and operational sustainability marginally below the break-even level
of 100 percent. 21 In contrast, in Bangladesh the average return on assets is 3.5 percent. The
most profitable MFI in the Indian sample, Spandana, has 6 Bangladeshi MFIs and 1 Sri Lankan
MFI above it in the list of the ten most profitable MFIs in South Asia. 22 As noted earlier, while
Indian MFIs have interest rates slightly higher than the South Asian average, these are lower
than in any of the other regions of the world.
Finally, as also found by SBS, India's MFIs have good portfolio quality, with outstanding balance
due for more than 30 days slightly below levels in other parts of the world. Moreover, the risk
coverage ratio is also high, higher than in all except one region of the world. However, as a
reminder of the importance of improving accounting and reporting standards, and transparency
generally, it should be borne in mind that a large number of medium and small MFIs do not age
overdues so as to be able to report PAR (portfolio at risk) in accordance with internationally
accepted reporting standards, and performance on this measure, as possibly on some others,
may be overstated. As pointed out in Chapter 1, Sa-Dhan is working with the ICAI on formulating
and implementing reporting and disclosure standards more appropriate to microfinance.
It needs to be
borne in mind
though, that
India's
performance on
efficiency is
partly the
product of
aggressive
growth, based
almost entirely
on group
mechanisms,
and on little
product
diversity. With
growth likely to
slow down at
least in the
short term,
greater use of
individual
lending, and
with progress
on product
diversity,
efficiency
performance
may
go down
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