THE MICROBANKING BULLETIN No. 20 - Microfinance Information ...

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FEATURE ARTICLESFigure 3: Ratio of Total Income to FinancialExpense6.34MICROBANKING BULLETIN, Issue 20, SEpteMBER 20102. Transaction model: Reducing the time spentin conducting group meetings, increasing thegroup size and maintaining higher borrowerto client ratios contribute to increasing thestaff’s payload3.302.95 2.884.063.413. Urban-Rural composition: Running operationsin urban areas leads to a higher OER, owing tohigher salary and rent costsLeaders20072008Young Turks2009comparable to that of the Leaders in 2007. It is thusexpected that the Young Turks too will follow adeclining trend.Leaders Raise the Bar for OperatingEfficiencyThe Leaders are stable in their Operating Expense Ratio(OER), achieving only minor improvements over threeyears (see Figure 4). However, based on each MFI’soperating model, region of operations and strategythere are variations within the group–Spandana isthe most efficient with an OER of 6%, while BASIX andSKS have very high OERs at 16% and 13% respectively.Factors affecting operating costs of an MFI include:1. Expansion strategy: Aggressively investingin expansion to new geographies versusdeepening engagement with existing clientsand in older geographiesFigure 4: Operating Expense as a % ofAverage GLP63.9%31.8%19.0%10.3%10.7% 10.0% 8.7% 7.8% 11.0%Leaders Moderates Young Turks2007200820094. Investments in infrastructure: higher recurringexpenditure on technology has an impact onthe cost structureThe Young Turks show very high OERs initially owingto heavy investments to fuel their growth, but rapidlyfall as these institutions grow. The Leaders have beenable to reduce their costs by taking advantage ofeconomies of scale. New MFIs typically take 4–5months or longer to operate at capacity.It is also worth noting that reduction in OER isprimarily driven by reductions in non-personnelexpenses. For all NBFCs in the sample, the personnelexpense ratio has increased from 6.1% in 2007 to6.7% in 2009; the non-personnel related operatingexpenses have reduced from 4.7% in 2007 to 3.8%in 2009.Improved Productivity DrivesOperating EfficiencyGreater efficiency also results from improved staffproductivity in terms of both volume and value. TheYoung Turks have shown a marked improvement of115% over two years in their borrowers per personnel(management and field staff ) ratio, which now standsat 246, better than the Moderates at 167 but still lowerthan the Leaders at 304. The loan officer to client ratioin the industry is significantly higher.Equitas, the current market leader in staff productivityhas 484 borrowers per staff member. This is becauseof its innovations in the operating model, basedon standardising and differentiating roles of loandisbursement and loan collection, thus allowingfield staff to handle the higher workload. The Leadersare above the 300 mark with the exception of SKSand BASIX. SKS maintains higher head office staffand technology costs by design to manage theirambitious expansion. BASIX staff members have ahigher workload given their non-traditional modelwhich includes multiple credit plus offerings and doorto door collections.Microfinance Information eXchange, Inc
MICROBANKING BULLETIN, Issue 20, SEptEMBER 2010FEATURE ARTICLESFigure 5: Average Loan OutstandingFigure 6: Return on Assets4,6237,1246,4564,8824,9895,1315,567 6,139-16.3%-10.5%-0.5%Young Turks3,362Moderates2.0%3.1%1.7%Leaders Moderates Young Turks2007 2008 2009200720082009Leaders4.4%2.9%1.7%The portfolio managed per staff also increasedby 93% since 2008 for the Young Turks, reachingINR 15.1 lakhs (USD 32,843) while for the Leaders itis INR 21.6 lakhs (USD 47,006). This improvement isa combined effect of the improvement in personnelproductivity and higher average loan outstandingper borrower, as shown in Figure 5. Moderates toohave shown an improvement, with GLP per staffincreasing by 24% from 2008 to 2009 standing at7.4 lakhs (USD 16,043).The factors contributing to the increase in loan sizesare:Figure 7: Return on Equity28%23% 24%20%14%11%LeadersModerates2007 2008 2009Young Turks-1%-26%-32%1. Graduation of clients in mature markets tohigher loan sizes2. Increased focus of MFIs on urban clients withhigher credit needs than rural clients3. Introduction of individual lending4. Increased ticket size for the first loan to newcustomers by some MFIsIncreasing ProfitabilityAs shown in Figure 6, the Leaders exhibit a consistentlyrising Return on Assets (ROA) - 4.4% in 2009. The YoungTurks on the other hand, while showing explosivegrowth rates, have not all achieved break-even, asthey are heavily investing in their expansion.A similar trend is observed in Return on Equity (RoE)where the Leaders and Young Turks are continuouslyimproving their performance. The Moderateshave shown a decline mainly because many wereundergoing transformation in 2007 and 2008, while in2009, as NBFCs, their equity base is higher than theirprevious donor capital base.The rising profitability of the Leaders is driven bytheir ability to take advantage of economies ofscale, as they are able to better leverage theirinitial investments. These MFIs are also successfullysupplementing their interest income with fee basedrevenue through insurance, managing portfolios,and other product sales. The Young Turks andModerates are expected to follow the same path inthe coming years.Deleveraging Balance SheetsWhile there has been a general fall in debt-equityratios across all MFIs, it has been most pronouncedamong the Moderates because of their transformationfrom unregulated not-for-profit entities to NBFCs withminimum capital adequacy requirements (CAR). TheYoung Turks are the least leveraged MFIs, with Ujjivanand Sahayata at less than 1x. These MFIs have largeequity bases which allow them to be less dependenton commercial debt which is difficult to access forearly stage MFIs. The next step for these MFIs is tostart leveraging their equity, which should not bedifficult given that they now have a proven record andseasoned portfolios.Microfinance Information eXchange, Inc
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