Ofinterestrates,margincaps

&povertylending

HowtheRBIpolicywillaffectaccesstomicrocredit
bylowincomeclients

July2011

EDARuralSystemsPrivateLimited

MicroCreditRatingsInternationalLtd
602PacificSquare,32ndMilestoneNH8,Gurgaon122001,INDIA
Tel:+911244050739,4268707,2309497;Fax:+911242309520
email:contact@mcril.comwebsite:www.mcril.com

ExecutiveSummary

ThecurrentcrisisinIndianmicrofinancehasbroughtdowntheportfoliosofIndianMFIsby
50%fromtheirpeakinOctober2010.Whilesomemayseethisasacauseforcelebration,it
hascausedcollateraldamagetothelivesoflowincomefamilies,bothrecentandpotential
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 Thecombinedyieldonloanportfolioofthe16largestMFIshasbeenwellwithinthe
RBIsspecifiedinterestcapof28%(26%+2%yieldresultingfromthe1%loan
processingfee)forthe6years,200405to200910.
2 Thecombinedperformanceofthelargest16hasbeencomfortablywithinthemargin
capof12%+2%for5years(200506to200910)
3 WiththehighestyieldofanyindividualMFIinthisgroupbeinglessthan34%(andthat
isoneofthesmallestMFIsinthisgroup)thisdebunkstheallegationsinthemediathat
MFIshavegenerallybeencharginginterestratesof50%andabove.

However,thereremainpartsofthecountrywheremicrocreditisnotadequatelyavailable,
sothereisacasefortheregulatortoallowrelaxationsofthepricingcapsintwosituations

a WhenasmallMFIoperatesininfrastructurechallengedareasandinunderserved
partsofthecountry,and
b WhenanMFIisnewandsmallwithinthreeyearsofstartupandwithlessthan
50,000clients.

andtointroduceothermeasuressuchasaweightedcalculationofthecapitaladequacy
ratiothatincentivizesMFIstoworkinunderservedareas.

ii|P a g e

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

Incomethreshold
%ofpopulation(20056)with
incomelessthan...

Nationalpovertylineandinternationalincome
thresholdsin$perpersonperday*
National,
$1.25/day
$1.5/day
$2/day
$0.85/day
18

51

66

84

*TheequivalentsinrupeesoffamilyincomeperannumareprovidedinTable2(page9)ofthemaintext

Variousincomecategorieshavebeenusedbasedontheunderstandingthatforpeoplein
thedifferentcategories,therewillbedifferencesintheappropriateloansizesandlending
conditions(products).Thisanalysismakesapreliminaryattemptataddressingthisissuein
thecontextoftheRBIcircular.

1 Theproportionofpopulationin200910thatqualifieswithinthefamilyincomelimit
formicroloanssetbytheRBIamountstoalittleunder50%inruralandurbanareas
respectively.Intheory,thisseemstobealargeenoughsegmentofthepopulationfor
microfinancetobeprovidedviably.Inpracticeitincludesallthoseinurbanareaswith
incomesbelowtheinternational$2adaythresholdbutinruralareasexcludesthose
withincomesabove$1.5aday.Thiscreatesananomalythatneedstobeaddressed.

2 TheloansizelimitofRs35,000inthefirstcycleenableseveryoneinallareaswith
incomeslessthan$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.
iii|P a g e

Introduction

MuchhasbeensaidaboutthecrisisinIndianmicrofinance:thatitwascausedbythe
exponentialgrowthofthelargestMFIsleadingtowidespreadoverindebtednessofclients,
clientcoercionbyMFIswhicheventuallypossiblycontributedtosomeofthesuicides
reportedinthemedia.AnalternativeviewisthatbureaucratsintheAPgovernmentwere
notonlyenviousofthesuccessofMFIsvisvisSHGsandtheVeluguprogrammebutalsoof
thesuccessoftheSKSIPOandreportsoffabulousreturnstopromotersandinvestors.This
ledtothehurrywithwhichtheAPordinancewaspromulgatedwithoutmuchwarningto
theMFIs.Whateverthetruth,thesituationaffectedthebankingsectoracrossthecountry,
andledtotheirunwillingnesstolendtoMFIswiththeresultthateventhoseoperatingin
Bengalandtheeasternstatesnowreportadeclineinportfolioof50%sincethepeakin
earlyOctober2010.

Inattemptingtoresolvethecrisis,theReserveBankofIndia(RBI)firstappointeda
committeetoreportonandsuggestsolutionstotheproblemsattributedtothesector;
then,usingtherecommendationsoftheMalegamCommitteeandaftersomedeliberation
theRBIannounced,inearlyMay2011,thefollowingmeasuresthattookamoreliberal
approachonmanyofthepricingandmarketconductrulesrecommendedbythecommitee:

Conditions
Incomelimitforeligible
borrowersfromMFIs
Loansize(maximum)
Indebtednessofborrower

RBIpolicyannouncementfromtheperspective
ofprioritysectorlendingbybankstoMFIs
Rural:Rs60,000
Urban:Rs1,20,000
Firstcycle:Rs35,000
Subsequently:Rs50,000
LimitedtoRs50,000

Tenure

Loanusecriterion
Repaymentfrequency
Pricingcap

Collateral&groupmechanisms

24monthsforamountsinexcessofRs15,000
Minimum75%ofMFIportfolioforincome
generation
Weekly,fortnightlyormonthlyatthechoiceofthe
borrower
Interestrate,26%
Margin,12%aboveborrowingcost
+processingfee,1%(notincludedininterestcapor
margincap)
Nocollateral,individualsaswellasSHGsandjoint
liabilitygroups(JLGs)

AsMCRILwrote(atthetime)initscommentontheRBIpolicy,Thecentralbankspolicyis
restrictiveinplacingpricingcapsandacceptingincomecriteriathatmaynotbepractical
toapply,butitisneverthelesswelcomeintheframeworkoftheprevailingpolitical
economyofthecountry.Giventheconcernsofvariousstategovernmentsaboutthe
functioningofthemicrofinancesector,theywouldexpecttheRBItodonoless.Whilethe
roleofacentralbankshouldbetocreateafacilitatingenvironmentforthefinancial
systemandnottomicromanagetheprovisionoffinancialservices,atleasttheRBIsmore
1|P a g e

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
thepaperderivesfromthe62ndroundoftheNationalSampleSurvey(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%).

2|P a g e

Table1
3
MFIscoveredbythestudy
The16largestMFIscovered

The16largeMFIscoveredbythisanalysis
MFI
Portfolio,
Active
APR*
arelistedinTable1alongwiththeir
croreRs borrowers
numberofactiveborroweraccountsand
SKS
4,320 5,795,028
32.4%
outstandingportfolioon31March2010.
Spandana
3,540 3,662,846
28.1%
Theseconstituteover81%ofthe26.7
SML
1,693 2,357,456
26.9%
millionactiveborroweraccountsof266
Bandhan
1,495 2,301,433
25.6%
AML
1,418
1,340,288
32.3%
MFIs(accordingtodatacollectedbySa
SKDRDP
615 1,225,570
18.3%#
Dhan)andnearly82%oftheRs20.400
BSFL(BASIX)
776 1,114,468
25.2%
croreportfolioofallIndianMFIsonthat
Equitas
605
888,600
26.7%
date.Thus,comparingthecapsintheRBI
ASAGV
605 772,050
32.3%
circulartoavailableevidenceonyields
Ujjivan
371
566,929
34.6%
obtainedbytheseMFIswouldprovidea
CashporMC
267
417,039
28.0%
goodindicationoftheeffectthecaps
GrameenKoota
330 352,648
30.9%
couldhaveontheoutreachof
FutureFinancial
244 257,991
31.8%
microfinancetolowincomeclientsinthe
BSS
145 250,000
n.a.
country.MCRILsdatashowsthatthese
BWDA
116 220,645
n.a.
MFIsgrewby62%intermsofborrowers
ESAF
155 220,011
31.5%
Total
16,695 21,743,002
and88%intermsofportfolioduringthe
1
*
middleofrangeonprincipalproductasreportedbyMFTransparency
financialyear200910.
#MCRILinformation

4
Pricingcapsnotperhapsasonerousasthesemayappear

Figure1
MicrofinanceinIndiawasa
CRILEX,31March2003=100
relativelyslowgrowingactivity
untiltheearlypartofthelast
7,474
decade.Itisonlyaround2003
thattheadventofcommercial
izationledtoasignificantgrowth
impetusinthesector.Thisis
apparentfromtheMCRILgrowth
4,589
indexforIndianmicrofinance
(CRILEX)showninFigure1.2As
thefigureshows,byMarch2010,
theindustryhadgrowntonearly
2,370
75timesthesizeitwasin2003.
Forthisreason,theanalysisin
1,219
876
Figure2,oftheconsolidated
444
181
100
performanceofthe16largeMFIs
startsinMarch2003.
Mar03

Mar04

Mar05

Mar06

Mar07

Mar08

Mar09

Mar10

MCRIL,2010.MCRILMicrofinanceReview2010:Microfinancecontributestofinancialinclusion.
Gurgaon:MicroCreditRatingsInternationalLimited.
2
CRILEXisacompositeindexincorporatingbothgrowthinportfolioandgrowthinnumbersofclients.
3|P a g e

Figure2providesatrendanalysisoftheconsolidated(weightedaverage)operatingexpense
ratios(OER)andfinancialcostratios(FCR)incomparisonwiththeportfolioyieldforthe16
MFIsovertheeightyears200203to200910.Forthepurposeofthisanalysisandto
addressclearlytheobjectivesofthispaper,theseindicatorsaredefinedas

Portfolioyield(orsimplyYield):Incomeonloanportfolioincludingincomefrom
interestandalltypesofloanprocessingfeesasaproportionofaverageloan
portfoliooutstandingduringtheyear.Thustheaverageyieldamountstothe
amountpaidbytheaverageclienttoanMFIasthecostofherloan.

b Operatingexpenseratio(OER):Allexpensesincurredinlendingoperations
includingstaffexpenses,travelandotheradministrativeexpensesincluding
depreciationbutexcludingprovisioningexpensesforbaddebts/loanlosses.Such
expensesalsosometimesincludethecostofprovidingcreditplusservicesorself
helpgrouppromotionwhentheMFItreatssuchactivitiesasalegitimatepartofits
microcreditoperations.TheOERiscalculatedasthetotalofallsuchexpenses
incurredduringtheyearasaproportionoftheaverageloanportfoliooutstanding
duringtheyear.
Figure2
Consolidated16largestMFIs

FCR

35%
31.0%

OER

30.0%

Yield

30%
27.5%

25%

25.3%
22.5%

10.8%

26.1%

26.9%

10.2%
18.7%

20%
9.4%
7.0%

15%

8.6%

10.1%

6.5%

10%

18.3%

9.3%

16.4%
13.8%

5%

11.8%

10.4%

10.7%

2007

2008

10.3%

8.4%

0%
2003

2004

2005

2006

2009

2010

Clients:21.7million;combinedyieldwithintheinterestcap;
combinedoperatingexpensewithinmargincap
redline=28%(interestcap+loanprocessingfee),blackline(discontinuous)=12%(margincap)+2%
yieldresultingfromthe1%loanprocessingfee

4|P a g e

Financialcostratio(FCR):AllfinancialexpensesincurredbytheMFIcalculatedasa
proportionoftheaverageloanportfoliooutstandingduringtheyear.TheFCRis
differentfromtheborrowingcost(referredtointheRBIcircular);thelatteristhe
averagecostoffunds(ortheweightedaveragecostofallloanstakenbytheMFI)
fromwholesalelenderssuchascommercialbanks.Thereasonthetwodifferisthat
theamountborrowed(thedenominatorforborrowingcost)isnotexactlythesame
astheamountlent(thedenominatorforFCR).

d Margin,asreferredtobytheRBIinsettingthemargincap,isthedifference
betweentheyield(theincomeearnedbytheMFI)andtheborrowingcost(the
averagecostofborrowingfunds).SincetheborrowingcostforMFIsingeneralhas
fluctuatedbetween10%and14%overthepastfewyears,forthepurposeofthis
papertheaverageisassumedtobe12%.

Intheory,therefore,themargincapof12%meansthatMFIsmustoperatewith

anOER+loanlossprovisioningratioof12%andthemaximumportfolioyield
allowedtotheaverageMFIis,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).Withthehighestyieldofany
individualMFIinthisgroupbeinglessthan34%(andthatisoneofthesmallestonesinthis
group)thisdebunkstheallegationsinthemediathatMFIshavebeencharginginterestrates
of50%andabove.
5|P a g e

Figure3
YieldlevelsoflargeMFIsfrequency
18
16
14

16
14
12
10
8
6
4
2
0

4
4

12

18

NumberofMFIs

10
8

>28%

5
7

<24%

6
4
2

2
6

2006

2007

2428%

7
5

2009

2010

0
2005

2008

Withthemarginallowedbeingeffectively14%,butneedingsomethingoftheorderof12%
forloanlossprovisioning(innormaltimes,ratherthanintheextraordinaryAPcrisis
situationtoday),MFIsmustrestricttheiroperatingexpenses(OER)atleastto12.5%
(assuming1.5%tobetheaverageloanlossprovisionrequired).ThefrequencyoflargeMFIs
operatingwithin
Figure4
theOERlevelof
OERsoflargeMFIsfrequency
12.5%(presented
inFigure4)over
NumberofMFIs
thepastfewyears
showshow
dramatically
4
2
5
4
operatingexpense
6
2
ratioshave
decreasedover
3
>15%
3
3
theyears.Over
12.515%
thesixyearsfrom
3
200405to2009
10
<12.5%
10,thenumberof
11
largeMFIs
9
8
8
operatingbeyond
6
the12.5%levelof
OERhasdecreased
2
from10(outof
2005
6|P a g e

2006

2007

2008

2009

2010

the12forwhichusableinformationisavailableforthatyear)tojust4(of15).Ofthosefour
withhigherexpenses,twohavelessthan15%OER,soshouldbeabletomeetthemargin
capwithease.Onlytwo,BASIXandUjjivan,arebeyondthislevelthelatterbecauseitisa
relativelynewMFIthatisreducingitsOERsignificantlyfromoneyeartothenext(Annex
1.12)andtheformerbecauseitseesitselfasalivelihoodpromotioninstitutionproviding
significantcreditplus
Figure5
services.Itislikely
Marginlevelsfrequency
thatexternalizing
18
BASIXscreditplus
NumberofMFIs
activitiesfromthe
16
calculation(ifthatis
possible!)would
14
2
4
3
5
bringitsOERdownto
12
2
lessthan12.5%.
7
Thus,itisapparent
>14%
3
10
thatthemargincap
714%
7
7
setbytheRBIshould
8
6
07%
4
8
notbeaproblemfor
6
<0%
anyofthelarge
MFIs.
4
8

5
5
5
5
Thisisconfirmedby
2
3
Figure5.Whilea
0
fewyearsagoa
2005
2006
2007
2008
2009
2010
coupleofMFIswould
nothavemetthe
margincap,inthegoldenyearof200910,all15MFIs(forwhichinformationisavailable)
notonlyoperatedwithinthe14%marginnowsetbutnonemadeanoperatinglosseither
(unlikeinearlieryears).Fromtheperspectiveofprovidingmicrocreditservicesto
increasingnumbersofpeoplethroughlargeMFIs,therefore,themargincapdoesnot
seemtopresentasignificantproblem.

Figure6
Trendinloanofficer(LO)caseloadsofIndianMFIs
However,thereareotherissuesbehind
474
thesenumbers
473
500

450
413
405
First,ithasbeenarguedelsewherebyM
400
CRILthatthelargeMFIshavereduced
428
411
338
theiroperatingexpenseratiosoverthe
350
pastfewyearsbyreducingtheir
342
300
329
relationshipwiththeirclients,thereby
alteringthenatureoftherelationship
250
Borrowers/LO,all
fromthatofdevelopmentsupporterto
Top10
200
thatofamoneylender.Figure6shows
theextenttowhichloanofficercaseloads
183
150
haveincreasedovertheperiodofthis
100
analysis.Sincecaseloadsnowaverage
200102 200304 200506 200809 200910
nearly500clientsperMFIloanofficer
7|P a g e

(andriseupto800forsomeMFIs),theynowspendlittletimegettingtoknowtheirclients
andbuildingarapportwiththembyunderstandingtheireconomicsituationsaswellas
discussingsocialanddevelopmentissues.Tothisextentmicrocredithasevolvedfrom
povertybasedlendingtoexclusivelycommerciallending.3Thisneedstoberebalancedto
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 WhenasmallMFIoperatesininfrastructurechallengedareasandinunderserved
partsofthecountry,and
d WhenanMFIisnewandsmallwithinthreeyearsofstartupandwithlessthan
50,000clients.

andtointroduceothermeasuressuchasaweightedcalculationofthecapitaladequacy
ratiothatincentivizesMFIstoworkinunderservedareas.

Suchexceptionsshouldnaturallybetimebound;theregulatorsdiscretionhereisimportant
andhavingtheinformationandunderstandingofmicrofinancenecessarytotakesuch
decisionsisessential.ThisisoneofthereasonswhytheRBIshouldideallyestablisha
divisionthatspecializesinmicrofinance.

Itiseasytoforgetthatinthelate1990sneoclassicalmicrofinanceexpertsactuallyaccusedIndianMFIsof
indulginginwastefulpovertylending.
4
MCRIL,2010.MCRILsSupplementaryontheMalegamCommitteeReport.Gurgaon,10February
(www.mcril.com)
8|P a g e

Theincomeandloansizecriteria

Itiscommonlyacknowledgedthatover60%ofthepopulationisfinanciallyexcluded.
Inevitablythesearefamilieswithrelativelylowincomes.Itisclearlyinappropriatetoregard
alloftheseasbelongingtoasinglecategoryofmicrocredituser.Basedontheavailable
data,thispaperusesfourincomethresholdsbelowthenationalpovertyline(NPL,
equivalentto$0.85perpersonperday)andtheinternationalthresholdsof$1.25per
personperday,$1.50perpersonperdayand$2perpersonperdaytocategorise
microcreditclients.Thisisbasedontheunderstandingthatforpeopleindifferentincome
categories,therewillbedifferencesintheappropriateloansizesandlendingconditions
(products).Thisanalysismakesapreliminaryattemptataddressingthisissueinthecontext
oftheRBIcircular.

TheincomeandloansizecriteriaincorporatedintheRBIscircularof3May2011,defining
thequalifyingMFIassetsforprioritylendingbycommercialbanksare

Incomelimitforeligible
borrowersfromMFIs
Loansize(maximum)

Rural:Rs60,000
Urban:Rs1,20,000
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

Region
State
%ofpopulation(20056)
withincomelessthan...
Rural
Columns
India
Urban

%withincomelessthan...
India

Income/household` peryear
atvariousthresholdlevels
National* $1.25/day $1.5/day $2/day
18
(1)

51
(2)

38,311 57,513
15

20

54,786 60,499

66
84
Borrowingcapacity
(3)
(4)

Maximumborrowingcapacity,`peryear
National $1.25/day $1.5/day
18
10%
(5)

51
20%
(6)

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

9|P a g e

84
50%
(8)

69,027 92,026 3,831 11,503 17,257 46,013

30
49
15
20
30
49

72,599 96,799 5,479 12,100 18,150 48,400

66
25%
(7)

$2/day

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
keepupwiththepaymentofregularinstalmentsontheirloans.Itisimportant,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.

Thoughdisaggregatedatthestatelevel,theproportionrangesfrom33%inRajasthanto74%inChattisgarh
seeAnnexTable2.
10|P a g e

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.

ThePPIforIndiawillbeupdatedthisyearfromthelatestNSSOdatathatisnowbecomingavailable

11|P a g e

Alldataforfinancialyearendingon31Marchoftheyearshown

Annex1.1
SKSMicrofinanceLtd
40%
35%
30%
28.2%
25%

FCR
OER

20%

Yield
15%

8.66%

10%
5%

10.2%

0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:5.8million;yieldexceedsinterestcap;operatingexpense=margincap

Annex1.2
ShareMicrofinLtd
40%
35%
32.2%
30%

OER

25%

Yield

20%
15%

12.2%

10%
5%

8.2%

0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:2.8million;yieldexceedsinterestcap;operatingexpensewithinmargincap

12|P a g e

FCR

Annex1.3
SpandanaSpoorthyFinancialLtd
35%
30%
26.7%

25%
20%

FCR
OER

15%

Yield
10%

8.1%

5%
5.4%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:3.7million;yieldequalsinterestcap;operatingexpensewellwithinmargincap

Annex1.4
BandhanFinancialServicesPvtLtd
35%
30%
25%
22.7%
20%

FCR
OER

15%

Yield
10%

8.9%

5%
5.5%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:2.3million;yieldwithininterestcap;operatingexpensewellwithinmargincap

13|P a g e

Annex1.5
BhartiyaSamruddhiFinanceLtd[BASIX]
35%
31.3%

30%
25%

11.1%

20%

FCR
OER

15%

Yield
10%
15.9%
5%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:1.1million;yieldexceedsinterestcap;operatingexpensemuchhigherthanmargincap

Annex1.6
AsmithaMicrofinanceLtd
45%
FCR

40%

OER
35%

Yield

30%
26.6%

25%
20%
15%

11.2%

10%
5%

6.4%

0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:1.3million;yieldequalsinterestcap;operatingexpensewellwithinmargincap

14|P a g e

Annex1.7
SKDRDP
20%
18%
16%
14%

13.8%

12%
FCR

10%
7.24%

8%

OER
Yield

6%
4%
4.8%

2%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:1.2million;yieldwellwithininterestcap;operatingexpensewellwithinmargincap

Annex1.8
GramaVidiyalMicrofinanceLtd
40%

FCR
OER

35%

Yield
30%

29.2%

25%
20%
10.5%
15%
10%
12.1%

5%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.77million;yieldexceedsinterestcap;operatingexpenseexceedsmargincap
15|P a g e

Annex1.9
CashporMicroCredit
45%
40%
35%
30%
25.1%

25%

FCR
OER

20%
9.4%

15%

Yield

10%
11.4%

5%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.42million;yieldwithininterestcap;operatingexpenseexceedsmargincap

Annex1.10
EquitasMicrofinanceIndia
35%
30%
25.8%

25%
20%

FCR
OER

15%
8.7%
10%
5%

8.1%

0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.89million;yieldwithininterestcap;operatingexpensewithinmargincap
16|P a g e

Yield

Annex1.11
GrameenKoota/GrameenFinancialServicesLtd
90%
80%
70%
60%
50%

FCR
OER

40%

Yield
30%
20%

18.7%
8.9%

10%

9.6%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.35million;yieldwellwithininterestcap;operatingexpensewithinmargincap

Annex1.12
UjjivanFinancialServicesLtd
70%
60%

FCR
OER

50%

Yield

40%
30.8%

30%

6.9%

20%
10%

19.2%

0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.57million;yieldexceedsinterestcap;operatingexpenseexceedsmargincap
17|P a g e

Annex1.13
AMMACTS/FutureFinancialServicesLtd
35%
30%
25%

25.0%

20%

FCR
OER

15%

Yield
10.3%

10%
5%

5.0%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.26million;yieldwithininterestcap;operatingexpensewellwithinmargincap

Annex1.14
BharatiSwamuktiSamsthe/BSSMicrofinancePvtLtd
50%
45%
40%
35%

33.9%

30%
FCR

25%

OER
20%
10.9%

15%

Yield

10%
11.5%

5%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.25million;yieldexceedsinterestcap;operatingexpenseexceedsmargincap
18|P a g e

Annex1.15
BWDAFinanceLtd
20%
18%
17.1%
16%
14%
12%
11.5%
10%
FCR

8%

OER
6%

Yield

4%
5.4%

2%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.22million;yieldwithininterestcap;operatingexpensewellwithinmargincap

Annex1.16
ESAFMicrofinance&InvestmentsPvtLtd
40%
FCR
35%

OER
Yield

30%
25%

25.1%

20%
9.9%
15%
10%
13.9%
5%
0%
2003

2004

2005

2006

2007

2008

2009

2010

Clients:0.22million;yieldwithininterestcap;operatingexpenseexceedsmargincap
19|P a g e

AnnexTable2

Calculationofborrowingcapacityatvariousincomelevels
offinanciallyexcludedhouseholds(statewise)

Region
State
%ofpopulationwith
lowerincome(20056)
Rural
Columns
India
South
AndhraPr

Karnataka

Kerala

TamilNadu
West
Gujarat

Maharashtra
Central/
Chhattisgarh
North
MadhyaPr

UttarPr

Rajasthan

Delhi
East
Bihar

Orissa

WestBengal
NE
Assam

Manipur
Urban

%withlowerincome
India

South
AndhraPr

Karnataka

Kerala

TamilNadu
West
Gujarat

Maharashtra
Central/
Chhattisgarh
North
MadhyaPr

UttarPr

Rajasthan

Delhi
East
Bihar

Orissa

WestBengal
NE
Assam

Manipur
20|P a g e

Income/householdperyear
atvariouspovertylevels
National* $1.25/day $1.5/day

Maximumborrowingcapacity,`peryear
$2/day

18

51

(1)
38,311
31,118
34,452
45,720
37,385
37,601
38,496
34,267
34,822
38,867
39,793
43,621
37,663
34,606
40,688
41,182
41,182

(2)
57,513
56,988
59,396
68,842
61,958
62,082
58,902
58,284
53,191
51,616
59,612
57,204
54,642
55,321
56,494
62,575
62,575

66
84
Borrowingcapacity
(3)
(4)
69,027 92,026
68,379 91,193
71,281 95,021
82,611 110,117
74,337 99,127
74,492 99,312
70,664 94,218
69,923 93,230
63,810 85,111
61,958 82,611
71,528 95,391
68,657 91,532
65,570 87,427
66,373 88,507
67,793 90,359
75,078 100,115
75,078 100,115

15
54,786
54,904
60,646
56,574
55,343
54,728
67,326
56,632
57,658
48,868
56,603
61,994
43,976
53,439
45,441
38,321
38,321

20
60,499
58,654
62,140
65,128
62,785
64,455
65,802
58,419
55,636
56,603
59,474
68,849
54,874
53,175
59,064
64,777
64,777

30
72,599
70,373
74,562
78,166
75,353
77,375
78,957
70,080
66,769
67,912
71,369
82,619
65,832
63,810
70,871
77,726
77,726

49
96,799
93,840
99,407
104,211
100,461
103,157
105,266
93,459
89,035
90,559
95,188
110,159
87,775
85,080
94,514
103,625
103,625

National $1.25/day $1.5/day

$2/day

18
10%
(5)
3,831
3,112
3,445
4,572
3,738
3,760
3,850
3,427
3,482
3,887
3,979
4,362
3,766
3,461
4,069
4,118
4,118

51
20%
(6)
11,503
11,398
11,879
13,768
12,392
12,416
11,780
11,657
10,638
10,323
11,922
11,441
10,928
11,064
11,299
12,515
12,515

66
25%
(7)
17,257
17,095
17,820
20,653
18,584
18,623
17,666
17,481
15,953
15,490
17,882
17,164
16,392
16,593
16,948
18,770
18,770

15
5,479
5,490
6,065
5,657
5,534
5,473
6,733
5,663
5,766
4,887
5,660
6,199
4,398
5,344
4,544
3,832
3,832

20
12,100
11,731
12,428
13,026
12,557
12,891
13,160
11,684
11,127
11,321
11,895
13,770
10,975
10,635
11,813
12,955
12,955

30
18,150
17,593
18,641
19,541
18,838
19,344
19,739
17,520
16,692
16,978
17,842
20,655
16,458
15,953
17,718
19,432
19,432

84
50%
(8)
46,013
45,596
47,510
55,058
49,563
49,656
47,109
46,615
42,556
41,305
47,696
45,766
43,713
44,254
45,180
50,057
50,057

49
48,400
46,920
49,703
52,106
50,231
51,578
52,633
46,730
44,518
45,279
47,594
55,079
43,888
42,540
47,257
51,813
51,813


AnnexTable3
Proportionofpopulationwithincomebelowvariousthresholds/povertylines(200506)

Rural

Urban

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

18
51
66
84
15
20
30
49

AllIndia

South

West

Central/
North

East

NE

AndhraPradesh
Karnataka
Kerala
TamilNadu
Gujarat
Maharashtra

9
14
7
14
10
12

46
65
28
49
47
41

66
75
40
62
58
55

85
89
62
83
82
79

16
21
11
12
9
19

21
22
15
18
14
18

29
32
28
32
27
26

48
51
46
52
53
41

Chhattisgarh
MadhyaPradesh
UttarPradesh
Rajasthan
Delhi
Bihar
Orissa
WestBengal
Assam
Manipur

33
24
20
11
0
28
35
19
14
1

80
64
45
39
2
69
73
54
55
36

91
79
66
61
11
82
81
69
72
71

98
90
85
83
53
95
91
87
90
94

19
26
20
17
3
26
29
11
2
0

20
24
28
23
6
44
29
19
9
32

30
36
39
35
19
57
36
29
18
66

50
59
57
55
33
72
53
47
37
81

21|P a g e