Download sector_report1.pdf - Microfinance and Development ...

MFIs: Learning from the
AP Crisis
8 As in Bolivia, on the basis of which Rhyne (2002) goes so far as to claim that competition between
MFIs is inherently unstable.
9 The average size of loans outstanding for all members was Rs 4,233 in March 2006.
10 For instance a DRDA official in Krishna district showed the author as evidence of bad faith a loan
agreement document signed by ICICI bank with individual borrowers which mentioned 8.5 per cent as
the interest rate. The official did not understand that under the partnership system this is only the loan
cost component of the composite interest rate which includes the MFIs servicing charges and which is
entered in the pass book.
11 Such as "Blood Money!"
12 Ironically, Spandana was widely lauded by the MFI community for being a highly profitable MFI, and
for having unusually high efficiency with extremely low operational costs. It was not clear to most
observers at the time that these were being minimised at the expense of repercussions on client
satisfaction. On the other hand Spandana's profitability had attracted adverse political attention well
before the crisis, in response to which Spandana had indeed started reducing interest rates.
13 See M-CRIL flyer "M-CRIL is offering a Social Rating product: A new service to help meet the double
bottom line in microfinance". It conducted 7 social ratings in India and Bangladesh during 2005-06.
14 Reportedly an attempt to revive it failed to reach the President's assent, a necessary step also for state
acts. As reported above, action is under way to revive it again.
15 Spandana had reduced the amount of the deposit from 10 to 5 per cent of the loan amount, or Rs
500, whichever was higher, in 2005-06, and SHARE introduced a security deposit of 5 per cent for the
first time in 2005-06 after it discontinued and refunded savings mobilised through a parallel cooperative
structure of its members. Since such deposits are refundable, although without interest, they raise the
effective rate of interest not by the full amount of the deduction, as would be the case of an advance
repayment instalment, but on the interest forgone on the deposit.
16 As Roth et al point out, because the scheme was generating too much surplus Spandana added (i) hut
insurance up to Rs 1,000 (ii) coverage of spouses (without the age limit of 55 that applied to women
borrowers, which led to adverse selection and a high spouse claims rate) and (iii) a rather expensiveto-
administer scholarship scheme. The alternative would have been to (i) reduce the premium (even
with the additional benefits it yielded a net income of 20 per cent of premiums) or (ii) use the surplus
as a reserve - which would have been prudent in the absence of re-insurance (this was an in-house
scheme, from being a partnership with LIC earlier). One of the benefits of switching to an in-house
scheme was a massive in improvement in settling claims (73 per cent within 7 days).
17 Not even MFI field workers know what the EIR is, let alone the mathematical formula according to
which it is calculated. However it serves the essential purpose of comparability.
18 The code of conduct contains a table which explains how the rate of 21-24 per cent is derived. Ten
percentage points are accounted for by what is claimed to be the post office money order delivery
charge. The charge is actually 5 per cent. Rather than use the money order charge as a proxy, the
sector in its public education programme should use the result of well-publicised studies on actual
transactions costs as a function of scale.
73