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September 2007 • Volume 8 Number 3

IN THIS ISSUE
Efficiency with Growth: The Emerging Face of Indian Microfinance 1 Selected Publications on Microfinance 11
leveraging process capital

Efficiency with Growth: The Emerging Face of Indian Microfinance

The greatest power of microfinance lies in the process through which it is provided. The process... creates the process capital that remains largely untapped... By broadening our current imagining of microfinance, we can harness the process capital more fully and do far more to alleviate poverty.
Fazel Hasan Abed and Imran Matin Building Resources Across Communities (BRAC) Bangladesh

By SanJay Sinha
Managing Director Micro-Credit Ratings International Limited

outreach and ProFile oF indian MicroFinance The outreach of microfinance services has substantially increased in India in recent years partly because of the phenomenal growth of the bank self-help groups (SHG) linkage program and on account of the substantial growth of microfinance institutions (MFIs)—nonbank financial institutions offering small value financial services to low income families. Overall, the author estimates that the SHG bank linkage program and the MFIs together reached some 17 million families by mid-2006. Regionally, microfinance is concentrated in south India, with an estimated two thirds of microfinance clients in the country residing in only three southern states—Andhra Pradesh, Tamil Nadu, and Karnataka.1 Key reasons for the higher microfinance outreach in south India include  The origination of the bank SHG linkage program in Karnataka largely through the initiatives of the nongovernment organization (NGO) MYRADA and the consequent greater participation of Karnataka-based banks, such as the Syndicate and Canara Banks, in the program;  Better governance that has enabled the development of a larger number of good quality NGOs that, in turn, have spawned MFIs;

The quarterly newsletter of the Focal Point for Microfinance at ADB aims to provide information on microfinance. Articles in the newsletter, however, do not necessarily reflect official ADB views. Articles may be reprinted with proper acknowledgement of the source. Please address any inquiries, comments, and suggestions concerning the newsletter or its content to the Focal Point for Microfinance; Office of Director General; East Asia Department. Asian Development Bank, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. Tel +63 2 632 6931 • Fax +63 2 636 2337 • E-mail: nfernando@adb.org. In this publication, $ refers to US dollar.

2/3 FINANCE for the poor

Indian microfinance has seen dramatic improvements in efficiency that have resulted in effective interest rates paid by microfinance borrowers in India declining to among the lowest in the world

 More vibrant local economies in the southern states compared to the less developed states in the north and east; and  Higher literacy and participation rates of women in the local economy making them more suitable clients for MFIs.

clients with around 70% of about 2.5 million borrowers served by MFIs concentrated in the largest 10 organizations.4 M-CRIL’s data on the performance of Indian MFIs show that these have been expanding at about 30–50% per year in terms of clients and 50–60% per year in terms of portfolio.5 As a result, India now has a microfinance outreach that is as high as that in Bangladesh—perhaps over 18 million at the time of writing in July 2007. Contrary to the usual experience of microfinance sectors in other countries, however, this growth has been fuelled neither by large inflows of grants nor by a particularly high level of interest charged to clients. On the contrary, Indian microfinance has seen dramatic improvements in efficiency that have resulted in effective interest rates paid by microfinance borrowers in India declining to among the lowest in the world. This paper aims to discuss the factors that have contributed to the efficiency gains in Indian microfinance in recent years, and to relate these to the substantial growth in outreach that has been achieved. The discussion in the paper is based on data obtained from the ratings by M-CRIL of 79 leading MFIs in India during 2004 and 2005. ModelS oF MicroFinance delivery Microfinance services are provided in India through a variety of delivery methodologies ranging from the very popular SHG methodology traditionally pursued in the country to Grameen joint liability groups and the individual banking arrangements of the savings and credit cooperative societies. Over the years, through ongoing experimentation and innovation undertaken by Indian MFIs, these models have become blurred at the edges, resulting in a spectrum as illustrated in Figure 1. In addition to the microfinance delivery methodologies, the author observed that the performance of MFIs is influenced by its form of registration as an NGO, a not-for-profit or

There is, of course, some overlap between members of MFIs and SHGs in India, and not all members could strictly be classified as below the national poverty line. Substantial competition exists between MFIs in areas such as the Guntur and the coastal Andhra region of Andhra Pradesh and Thiruchirapalli in Tamil Nadu resulting in membership overlap. Further, an extensive impact study undertaken across 20 MFIs operating in different parts of India has found that, typically, only 35% of MFI clients in the country can strictly be classified poor although the rest are still mostly low income clients, largely excluded from the financial system.2 Another study of the bank SHG linkage program indicates a similar poverty profile of SHG members.3 This leads to the outreach of microfinance services to 17 million clients in India being reduced to only 6 million poor clients amounting to no more than 8.5% of the 70 million poor families in the country. Many are concentrated in rural areas where MFIs and SHGs tend to operate, though interest in urban areas has been increasing in recent years. Among the MFIs also, there is a significant concentration of
FiGure 1: MicroFinance ModelS eMPloyed in india SHG village banking Mixed Grameen

SCCS

MACS

Urban Cooperative Banks individual Banking

Joint liability

MACS = mutually aided cooperative societies, SCCS = savings and credit cooperative societies, SHG = self-help group.

taBle 1: Productivity and unit coSt analySiS Staff productivity MFI Model Grameen SHG Mixed Cooperative Sample Top 10 MBB Sample average, 2003 Number of staff 4,357 1,731 1,283 179 7,550 Clients/ Borrowers/ staff member staff member 297 697 211 370 376 308 248 274 110 254 230 239 140 135 Cost/ borrower, $ 11.8 6.4 15.5 6.7 10.5 12.5 152.0 16.1

MBB = Micro Banking Bulletin, MFI = microfinance institution, SHG = self-help group. Source: EDA Rural Systems Private Ltd.

for-profit company or some form of cooperative. The MFI’s management approach is reflected in its form of organization and its operational outlook. This effect becomes apparent in the analysis that follows. coSt coMPonentS The main components of cost of an MFI are:  Operating expenses—(sometimes also referred to as administrative expenses) essentially made up of the cost incurred on personnel, travel, office overhead including stationery and utilities as well as depreciation.  Financial expenses—direct costs incurred on financial liabilities; these are made up of interest expenses on borrowings from banks or other lenders and interest paid to depositors (if any).  Loan loss provision expenses—the amount either set aside by an MFI to cover future loan losses or used to write off loans that management judges to be unrecoverable. StaFF Productivity and eFFiciency Perhaps the most important component of cost incurred by an MFI is personnel expenses. Since staff form the key interface between MFIs and their clients and are the means of disbursement and collection of funds by MFIs, the staff productivity ratio is an important indicator of MFI efficiency. Table 1 presents an analysis of staff productivity of Indian MFIs and the unit costs they incur in providing microfinance services to their clients. The productivity analysis has been undertaken as clients or

borrowers per staff member rather than per loan officer because of the definitional difficulties in identifying who is and is not a loan officer with an MFI. Many MFIs give field officers responsibility for all functions related to microfinance groups. In this situation the definition of who is a loan officer is clear. In other MFIs, however, field officers are responsible for group formation and record keeping but branch-based tellers make disbursements and collect repayments as well as perform other branch office functions. This is only one example where the distinction between loan officers and other staff becomes unclear. A spectrum of divisions of labor, in fact, exists between loan officers originating business and the extent to which they perform the functions required for microfinance transactions. The table suggests that in terms of levels of efficiency, there is not much to choose between microfinance models. The SHG-based MFIs have slightly better staff efficiency than the others and this is explained by their monthly collections systems (as opposed to the weekly collection of the Grameen model). While this should lead to greatly improved efficiency, it is largely neutralized by the extra time required at each group to assist with intra-group transactions and by the higher development input of this model. The mixed model MFIs follow a variety of methods, including individual lending, which

The table suggests that in terms of levels of efficiency, there is not much to choose between microfinance models. The SHG-based MFIs have slightly better staff efficiency than the others

4/5 FINANCE for the poor

leads to much lower efficiency. In terms of cost per borrower, SHG MFIs and cooperatives incur a lower cost than Grameen. This is because of significantly lower wage rates paid to staff, lower travel expenses due to the lower frequency of meetings and due to other expenses, such as group/primary cooperative level stationery and meeting expenses, being incurred by the group rather than the MFI. Since loans generate revenue for financial institutions, the borrower/staff member ratio is crucial; on this basis, the top 10 Indian MFIs are more productive than the country average which is, in any case, far higher than the international average of 140 borrowers per staff member presented in the MicroBanking Bulletin. The 230 borrowers per staff member average for Indian microfinance also represents a substantial improvement from the figure of 135 reported by the 2003 M-CRIL Review and only 84 borrowers per staff member of the equivalent report in 2000. As Figure 2 shows, average staff productivity
FiGure 2: StaFF Productivity trendS in indian MFiS
250 200 150 100 50

of Indian MFIs not only improved over the years, but the rate of that improvement also seems to have increased during the recent period. The extent to which there is variation in terms of staff productivity in Indian microfinance, however, becomes clear from Table 2 that shows the regional variation in this indicator. Since microfinance is best developed in south India, the productivity ratios there are the highest, along with the east where microfinance has substantially grown in recent years. In the north and west of the country, on the other hand, staff productivity ratios are very low by comparison. The relative and improving efficiency of Indian MFIs is also indicated by the cost per borrower calculations in Table 1. Cost per borrower consists of the operating cost incurred by an MFI in providing microfinance services to its borrowers. The cost of servicing Indian microfinance borrowers is around $7–13 per annum. There has been a 35% decline in the sample weighted average over the past 2.5 years. In this matter, the cooperatives and the SHG MFIs appear to be the most efficient but, as discussed earlier, this is partly on account of the externalization of group/primary cooperative level costs either to other NGOs (self-help promotion institutions) or to the group/cooperative itself. oPeratinG exPenSeS Apart from personnel expenses, the operating expenses of MFIs are made up of:  Other administrative expenses—including the costs of maintaining a good management information system (MIS) and/or computers, stationery, utilities for the branches and head office, stationery, office rent (where applicable)

Report 2000

Review 2003

Review 2005

Source: EDA Rural Systems Private Ltd.

taBle 2: reGional analySiS oF Productivity Region South Staff, numbers Clients, ‘000 Borrowers, ‘000 Clients/staff Borrowers/staff
Source: EDA Rural Systems Private Ltd.

East/Northeast 966 390 203 403 211

West 132 34 9.3 261 71

North 474 93 70 196 147

Total 7,550 2,837 1,739 376 230

5,978 2,320 1,457 388 244

 Travel expenses—incurred mainly in staff reaching clients when they are located at greater than bicycling distance from the branch, dealings between banks and branches where there is a significant distance between them, and visits of staff/managers to and from the head office  Depreciation on fixed assets—office buildings (if owned), computers and other office equipment, furniture and other fixtures. Table 3 shows the operating expense ratios (simple average)6 or OER for the various microfinance models. The sample average of 16.5% OER for a typical MFI in 2005 is a substantial improvement on the 36.5% recorded for mid-2003 in the 2003 review and a huge improvement from the 60% typical OER

reported in the M-CRIL Report 2000. The weighted average has fallen from 20.5% to 15.6% for the sample as a whole. As many as 30 of the 79 MFIs in the sample now have OERs less than 12%. With experience, Indian MFIs are apparently becoming steadily more efficient and, indeed, are already among the most efficient in the world with the MBB international average at 28.9% and even Bangladesh MFIs with OERs of 21.6% on average (see Figure 3). The decline in the OER of Indian MFIs is a continuing process with a small sample of OERs for 2006 (of 12 leading MFIs), compiled for this study, showing that the ratio has declined further to under 14% over the past year. On this basis, the India sample average can be expected to reduce further over the next few years and perhaps to 12–13% within 2 years.

taBle 3: oPeratinG exPenSeS and diStriBution aMonG coSt coMPonentS Microfinance model Grameen SHG Mixed Cooperative Sample Weighted average Top 10
SHG = self-help group. Source: EDA Rural Systems Private Ltd.

Operating Expense Ratio (%) 20.4 16.6 14.7 8.8 16.5 15.6 10.8

Personnel 59 57 45 49 51 51 57

Distribution of Operating Expenses (%) Travel Depreciation Other 9 10 11 10 9 9 10 3 6 4 5 5 5 3 30 27 39 36 36 35 30

Total 100 100 100 100 100 100 100

FiGure 3: coMPariSon oF the oPeratinG eFFiciency oF indian MFiS with other countrieS/reGionS 36.5% 30.4% 21.6% 16.5% 15.6% 10.8% 22.4% 28.9%

Sample average, 2005

Weighted average

Top 10

Bangladesh

Southeast Asia

Africa

MBB

Sample average, 2003

MBB = Micro Banking Bulletin, MFI = microfinance institution. Source: EDA Rural Systems Private Ltd.

6/7 FINANCE for the poor

Operating efficiency has not only improved dramatically over the years, the improvement accelerated during 2003–2005 before decelerating over the past year. This deceleration is only to be expected.

This progression is depicted in Figure 4. Similar to the staff productivity ratio, operating efficiency has not only improved dramatically over the years, the improvement accelerated during 2003– 2005 before decelerating over the past year. This deceleration is only to be expected, given the relatively low levels that the average OER has now reached.

(not-for-profit) companies is skewed by one large organization with a policy of paying high salaries as an element of corporate social responsibility but, partly as a result, struggling to achieve sustainability. From the table, institutions that are apparently able to consistently keep control of their costs and strive to achieve efficiency can reach close to a 60% personnel ratio. The reasons for this are discussed below. FactorS aFFectinG oPeratinG eFFiciency One of the reasons for the variations in the OER set out in Table 3 is that MFIs have a range of development agendas including
FiGure 4: trend in the oPeratinG eFFiciency oF indian MFiS (oPeratinG exPenSe ratio) 60%

Overall, Table 3 suggests that Grameen MFIs are significantly less cost-efficient than SHG MFIs and that cooperatives are the most efficient. Table 4 presents the distribution of MFIs with OERs in the ranges indicated. Since nearly 49% of SHG MFIs have less than 12% OER, it is tempting to think that this confirms the picture provided by the averages in the previous table. However, the picture is muddied by two factors: first, the proportions of Grameen and SHG MFIs with less than 15% OER are much closer and, second, two of the four Grameen MFIs with OERs less than 12% are, in fact, two of the largest in the country. So the number of clients that the most efficient Grameen MFIs serve is no less than those served by the SHG MFIs. Further, the issue of the externalization of costs by many SHG MFIs cannot be ignored. Overall, there is no indication that a systematic difference in efficiency exists between MFI models; the performance of MFIs is apparently model-neutral. As shown in Table 3, personnel expenses account for over 50% of the total operating expenses while other expenses are over one third of expenses. Both Grameen MFIs (especially NBFCs) and SHG MFIs have high (>55%) personnel ratios in relation to other costs. Yet Grameen NBFCs are among the most efficient institutions in the country with typical OERs less than 12% and substantial outreach. The figure for Sec25

36.5%

16.5% 13.7%

Report 2000

Review 2003

Review 2005

12 leading MFIs, 2006

MFI = microfinance institution. Source: EDA Rural Systems Private Ltd.

taBle 4: ProPortion oF MFiS with oPeratinG exPenSe ratio Microfinance model Grameen SHG Mixed Cooperative <10% 10.0 36.6 20.0 75.0 <12% 20.0 48.8 20.0 75.0 <15% 45.0 56.1 30.0 75.0 >15% 55.0 43.9 70.0 25.0

MF = microfinance, MFI = microfinance institution, SHG = self-help group. Source: EDA Rural Systems Private Ltd.

literacy, primary health, and women’s empowerment. Other factors that affect the expenses incurred by MFIs are  operations in various regions of the country;  having more experience of MFI operations (termed MFI age in this analysis);  scale or size of the MFI in terms of portfolio value;  the average size of loan disbursed by the MFI; and  clustering in urban areas, being more widespread in mixed localities or in fully rural areas. This analysis does not attempt to separate out the effects of the parameters listed above for each microcredit model. One reason for this is that after disaggregating by model, the sample size for each parameter reduces to very low levels with some categories (like Grameen in north India) being reduced to only one to two MFIs. This is not a sufficient number to provide a valid analysis. Second, this analysis has already established that the performance of MFIs is model-neutral. It is, therefore, more interesting to obtain a numerically valid analysis for the sample as a whole. In large measure, Figures 5a–e confirm some expected correlations between OER and the above parameters. First, the impact of the region is apparent. MFIs in south India are far more efficient than those in other regions and north Indian MFIs are the least efficient. The question here is whether there is something about the physical conditions of north India that are so different from the south or whether other factors are involved. To anyone familiar with the terrain of different parts of the country, it would be apparent that, in this matter, physical conditions are not the issue. If anything, population density and, partly as a consequence, ease of physical access are better in north India. What is different are the institutional conditions of north India including:  the relatively poor quality of education of the staff which lowers staff efficiency, productivity, and discipline and impacts on their motivational levels;  salary expectations of staff at the lower levels of institutions—in the north dictated more by the alternative hope of obtaining a cushy government job, while in the south is a more realistic assessment of the limited likelihood of getting such a job;  the difficulty MFIs face in establishing relationships with the

banking system to ensure a smooth flow of funds—bankers in the north tend to be more skeptical of the motivations of development agencies; and  general moderation in the overall price levels of basic goods and services in south India relative to the north. Much of this also affects the thinking of MFI managements in terms of what is achievable and what levels of expense it is worth striving for in north India relative to the south. Second, the experience of microfinance operations (MFI age in years) clearly does have a significant impact on MFI OERs at least in the early years of operation (Table 5b). As the table
FiGure 5a: iMPact oF reGional location on the oer oF indian MFiS 21.3% 24.0%

19.1% 13.8%

South

East/ Northeast

West

North

MFI = microfinance institution, OER = operating expense ratio. Source: EDA Rural Systems Private Ltd.

FiGure 5B: iMPact oF MFi exPerience on the oer oF indian MFiS

26.4% 19.2% 14.2% <3 3–5 5–7 MFI age, in years
MFI = microfinance institution, OER = operating expense ratio. Source: EDA Rural Systems Private Ltd.

14.2% 7–10

15.5%

>10

8/9 FINANCE for the poor

shows, MFIs with more than 5 years’ operational experience have operating expenses of the order of 14–15% of portfolio and this does not seem to change in any significant way as MFIs get older. However, the 3–5 year category has clearly higher OERs and the 0–3 year category has very high OERs. This indicates that MFIs take around 5 years to find the operational stability and develop the experience necessary to operate in a fully efficient manner. Third, Figure 5c shows that overall portfolio size does not have as large an influence (in itself) on the OER as might be expected. The only category with clearly higher OER than the others is the smallest (<$125,000) portfolio category where the typical level is nearly 23%. For the other categories, the typical level falls rapidly to 12–14% except in the case of a few large and well-known Grameen organizations that have been able to raise substantial grant funds for operations but are still relatively inefficient. Thus, the largest two portfolio categories are skewed away from the 12–14% range by only three wellknown MFIs. One of these operates in difficult conditions but also has a policy of paying high staff salaries while others simply have efficiency constraints on account of the liberal attitude of their managements toward the issue. Fourth, loan size (the size of loan disbursed in Figure 5d) shows a very clear downward trend in OER as the loan size increases. MFIs with the smallest size of loan disbursed (less than Rs3,000 or $75) record typical OERs of 25% whereas larger categories reduce to 15% and even 12% for the largest, above Rs10,000 ($250) category. There is, of course, some correlation with the age of an MFI here since the newer MFIs tend to have smaller loan sizes but an even stronger correlation with the fast-growing institutions that both incur higher costs when they are in their growth phase and have lower loan sizes on account of having large numbers of new clients. As MFIs stabilize in terms of growth and become older institutions, their OER declines as the costs of growth (training staff, opening new branches, reaching new geographical areas) are more limited while their average loan size increases as the number of clients getting the fourth or fifth repeat loan becomes quite high (perhaps 50–60%). Conversely, MFIs operating with larger loan sizes are able to limit their operating expense ratios partly on that account. Similarly, the lending of the commercial banks (with average loan sizes almost four times those of MFIs) even when these

are made to low income families is, inevitably, substantially cheaper to service than that of MFIs and, thus, represents a different asset class altogether. Finally, in the matter of clustering (urban/nonurban operations), shown in Table 5e, the obvious result is that urban MFIs are able
FiGure 5c: iMPact oF PortFolio Size on the oer oF indian MFiS 22.8% 18.2% 16.3% 13.8%
<125 125–625

13.9%
625–1,250 1,250–2,500 2,500–6,250

Portfolio size, in $‘000
MFI = microfinance institution, OER = operating expense ratio. Source: EDA Rural Systems Private Ltd.

FiGure 5d: iMPact oF Size oF loan on the oer oF indian MFiS 25.0%

18.7% 14.7%

14.8% 12.0%

<3,000

3,000–5,000 5,000–7,500 7,500–10,000 >10,000

Loans disbursed, Rs
MFI = microfinance institution, OER = operating expense ratio. Source: EDA Rural Systems Private Ltd.

taBle 5e: eFFect oF rural–urBan oPerationS on the oer oF indian MFiS Clustering Sample* Urban 9.7% Mixed 23.4% Rural 15.5%

* including mixed and cooperative MFIs as well.

to have far more efficient operations since staff productivity is far higher (due to lower travel time and travel costs). Cost savings also result from the better availability of all manner of facilities including utilities like electricity and immediate access to banking facilities. The 9.7% OER for fully urban MFIs in the table makes a stark contrast to the 15.5% weighted average recorded for fully nonurban ones but the typical cost levels show a more moderate difference with the urban OER being 16% and the nonurban one 18.8%. The high OERs seen for mixed locality MFIs is on account of some of these seven MFIs being in the process of shifting from one type of MFI to another and still being in the process of working out their understanding of the activity as a commercial versus a developmental one.7 Equally interesting in this context is the impact of MFI growth rates on the cost efficiency of MFIs. Figure 6 relates MFI growth rates to average OER. While other factors are clearly also at work here, it is interesting to see that MFIs with portfolio growth rates of 50–75% are, in fact, the most efficient while those that grow at much faster rates have to bear additional cost burdens as a result. These burdens include  substantial pressure on infrastructure creation as a result of pushing geographical coverage widely to levels that require better communication and transport facilities as well as reducing the extent to which the sharing of facilities can take
FiGure 6: eFFect oF MFi Growth on oerS 21.7% 18.8% 15.7% 15.5% 12.3%
<25% 25–50% 50–75% 75–100% >100%

place between branches; this has the advantage of spreading geographical coverage of microfinance more widely but increases the average operating cost of the MFI.  staff recruitment and formal training beyond a level that is organically manageable; ideally experienced staff with the MFI should train newly joining staff as a routine part of their work but very fastgrowing institutions have to undertake extraordinary efforts at formal training and incur additional costs as a result.  a much higher level of staff supervision and internal control than is required in a more organically growing institution.

Urban MFIs are able to have far more efficient operations since staff productivity is far higher (due to lower travel time and travel costs). Cost savings also result from the better availability of all manner of facilities.

Indeed, this finding is supported by another study of the direct and indirect transaction costs that MFIs incurred. Based on case studies of three leading MFIs, the author concluded that “The key drivers of indirect transaction cost for an MFI are number of layers of fixed cost in the MFI system, geographical location of the MFI, and proportion of mature branches. The proportion of mature branches in the MFI portfolio are a function of the age of the MFI and its expansion policy.” Essentially, mature branches serve larger numbers of clients at the same cost and, of course, faster growing institutions have a lower proportion of mature branches. Similarly, rural versus urban location has a key impact on the costs incurred by an MFI. These issues are illustrated by the examples discussed in the accompanying box. Thus, it is apparent that as MFI coverage in the country as a whole improves and MFI growth rates slow down, the average OER of MFIs will be reduced since more institutions will

Portfolio growth rate
MFI = microfinance institution, OER = operating expense ratio. Source: EDA Rural Systems Private Ltd.

10/11 FINANCE for the poor

declining operating expense ratios: Some illustrations
The decline in the operating expense ratio (OER) with increasing age, portfolio size, and loan size apparent from the above discussion can be better understood by examining the individual experience of specific (and wellknown MFIs). Figure B1 below illustrates the experience of two MFIs in the first 5-year period after start-up. MFI1 started in 2003 and by 2005, when it had already achieved some scale (average portfolio size for the year, $4.7 million), its OER had already declined below 15%. MFI2 went from its third to its fifth year with a decline in OER from 56% to 27%. Recent discussion with the management of MFI2 indicates that they have only recently started looking seriously at specific means of reducing the OER so further reductions can be expected as portfolio size increases from the $1.5 million level of 2005. Essentially, the economies achieved so far by MFI2 have been largely on account of scale but now the learning curve of the MFI is likely to take over and enable further cost reductions. MFI3 and MFI4 (Figure B2) below are both wellestablished MFIs with 7–10 years’ operational experience in south India. Both are simultaneously large and fast growing MFIs. Yet, MFI3 has significantly higher costs than MFI4. The difference between the two is that MFI3 undertakes predominantly rural operations whereas MFI4 operates predominantly in urban areas. The difference this makes to cost parameters is apparent from the figure. Yet, despite being well established and fast growing, both are continuing to reduce their OERs—although at this (relatively low) level—at a slower rate than MFI1 and MFI2. 2002 2003 2004 2005 10.1% 6.7% 6.4% 5.7% 24.3% 35.8% 18.1% 17.8% FiGure B1: trend in oerS MFI3 MFI4 2003 2004 26.5% 14.8% 2005 56.7% 35.8% 27.4% 94.6% FiGure B1: trend in oerS MFI1 MFI2

have achieved sustainable levels of operation and will have slowed their growth to more manageable levels. Meanwhile, smaller, slower-growing (and less efficient) institutions that are not able to achieve sustainability at present will have either merged with other MFIs or will have stopped the microfinance activity altogether.

concluSion The conclusion based on the analysis in this paper is that the most efficient MFIs in India are likely to be those that are  for-profit nonbank finance companies or some form of cooperative,  operate in an urban area,

 in south India,  have had microfinance operations for more than 5 years,  with portfolio size greater than only $125,000 (with average outstandings of $50–60 per borrower, this would result in MFI outreach of the order of 2,500 borrowers),  portfolio growing at 50–60% a year, and  the average size of loans disbursed in excess of $125. While such MFIs may not reach large proportions of the absolute poor—those below the national poverty line—they certainly reach substantial numbers of low income families at levels of efficiency that are better than those achieved by similar institutions almost anywhere else in the world. Together with the efficiency gains that have been recorded by Indian MFIs in recent years, substantial growth rates have also been achieved. Increasing efficiency gains combined with these high growth rates and the willingness of Indian commercial banks to make bulk loans to MFIs could, in the near future, see the Indian microfinance sector become the largest and most efficient in the world. 

Selected PuBlicationS on MicroFinance
BooKS
Berger, Margeruite et. al. (eds.) 2006. An Inside View of Latin American Microfinance. Washington DC: Inter-American Development Bank. Dichter, Thomas and Malcolm Harper (eds.) 2007. What’s Wrong with Microfinance? Warwickshire, UK: Practical Action Publishing. Ferrari, Aurora, Guillemette Jaffrin, and Sabin Raj Shrestra. 2007. Access to Financial Services in Nepal. Washington DC: World Bank. Honohan, Patrick, and Thorsten Beck. 2007. Making Finance Work for Africa. Washington DC: World Bank. Vij, Jyoti, Ralf Radermacher, and David M. Dror. 2006. Developing Pro-Poor Health Insurance in India. New Delhi: Federation of Indian Chambers of Commerce and Industry.

Journal articleS
Andranovich, Greg, Ali Modarres, and Gerry Riposa. 2007. Community Banking and Economic Development: Lessons from Los Angeles. Community Development Journal 42(2): 194–205. Davidson, Clive. 2007. Micro Scope Widens. Risk 20(5): 48–50. Epstein, Keith, Geri Smith, and Nandini Lakshman. 2007. Microfinance Draws Mega Players. Business Week 40(42): 96–97. Flynn, Patrice. 2007. Microfinance: The Newest Financial Technology of the Washington Consensus. Challenge 50(2): 110–121. Hartarska, Valentina, and Denis Nadolnyak. 2007. Do Regulated Microfinance Institutions Achieve Better Sustainability and Outreach? Cross-Country Evidence. Applied Economics 39(10): 1207–1222. Hartungi, Rusdy. 2007. Understanding the Success Factors of MicroFinance Institution in a Developing Country. International Journal of Social Economics 34(6): 388–401. Hishigsuren, Gaamaa. 2007. Evaluating Mission Drift in Microfinance. Evaluation Review 31(3): 203–260. Jalili, H. Michael. 2007. Microfinance for Profit Gets a U.S. Test. American Banker 172(71): 1–6. Jha, S., and K.S. Bawa. 2007. The Economic and Environmental Outcomes of Microfinance Projects: An Indian Case Study. Environment, Development and Sustainability 9(3): 229–239. Magee, J. R. 2007. Emerging Forces in the Capital Markets. Securities Industry News 19(22): 1–22.

endnoteS
1. Author’s own estimate based on figures available from a large apex organization (SIDBI) and the M-CRIL database. 2. EDA. 2004. The Maturing of Indian Microfinance: An impact assessment of 20 Indian MFIs. Sponsored by SIDBI. Gurgaon, India: EDA Rural Systems Private Limited. 3. EDA. 2006. Self Help Groups. Gurgaon, India: EDA Rural Systems Private Limited. 4. M-CRIL database. 5. M-CRIL. 2006. Technical Note 4: Financing Microfinance in India. Gurgaon: Micro-Credit Ratings International Limited. 6. As opposed to the weighted average. The simple average indicates the performance of a typical MFI picked at random without reference to its size. 7. One MFI was still in its start-up phase and has since become much more efficient while others are also reducing their operating expenses significantly. As in the other cases above, sample averages do not fully correspond to SHG/Grameen averages since mixed/cooperative MFIs are included in the former. The difference is greater in the case of rural–urban clustering since most cooperative MFIs are urban operations and are the most cost-efficient MFIs as a group. 8. Shankar, Savita. 2006. Transaction Costs in Group Micro Credit in India: Case Studies of Three Micro Finance Institutions. Chennai: Centre for Micro Finance Working Paper Series.

FINANCE for the poor

Selected PuBlicationS on MicroFinance
Osmani, Lutfun N. Khan. 2007. A Breakthrough in Women’s Bargaining Power: The Impact of Microcredit. Journal of International Development 19(5): 695–716. Rosengard, Jay K., Richard H. Patten, Don E. Johnston, and Widjojo Koesoemo. 2007. The Promise and the Peril of Microfinance Institutions in Indonesia. Bulletin of Indonesian Economic Studies 43(1): 87–112. Sievers, Meten and Paul Vendenberg. 2007. Synergies through Linkages: Who benefits from Linking Microfinance and Business Development Services? World Development 35(8): 1341–1358. Sinha, Tara, M. K. Ranson and Anne J. Mills. 2007. Protecting the Poor? The Distributional Impact of a Bundled Insurance Scheme. World Development 35(8): 1404–1421. Isern, Jennifer et. al. 2007. Sustainability of Self-Help Groups in India: Two Analyses. Occasional Paper No. 12. Washington, DC: CGAP. Kapoor, Mudit et. al. 2007. From Microfinance to m-Finance Innovations Case Discussion: M-PESA. Innovations 2(1–2): 82–90. Kenyon, Thomas. 2007. A Framework for Thinking about Enterprises Formalization Policies in Developing Countries. World Bank Research Working Paper No. 4235. Washington DC: World Bank. Kumar, T.S. Anand, and Jeyanth K. Newport. 2007. Micro Finance and Rural Housing. Mumbai, India: Indian Association for Savings and Credit. Martowijoyo, Sumantoro. 2007. Indonesian Microfinance at the Crossroads: Caught between Popular and Populist. Essays on Regulation and Supervision No. 23. Washington DC: CGAP. Novogratz, Jacqueline. 2007. Meeting Urgent Needs with Patient Capital. Innovations 2(1–2): 19–30. Pakistan Microfinance Network. 2007. Quarterly Update on Microfinance Outreach in Pakistan. MicroWatch 3(1): 1–16. Rhyne, Elisabeth and Maria Otero. Microfinance Matures: Opportunities, Risks, and Obstacles for an Emerging Global Industry. Innovations 2(1–2): 91–114. Rosenberg, Richard. 2007. CGAP Reflections on the Compartamos Initial Public Offering: A Case Study on Microfinance Interest Rates and Profits. Focus Note No. 42. Washington, DC: CGAP. Standard and Poor’s Microfinance Rating Working Group. 2007. Microfinance Taking Root in the Global Capital Markets: Microfinance Rating Working Group. Washington DC: Accion International. Stieber, Sharon. 2007. Is Securitization Right for Microfinance? Innovations 2 (1–2): 202–213. Stuart, Guy. 2007. Regulatory Innovation in Microfinance: The MACS Act in Andhra Pradesh. Innovations 2(1–2): 181–201. Wanchoo, Rajat. 2007. Micro-finance in the India: The Changing Face of Micro-credit Schemes. MPRA Paper No. 3675. India: Indian Statistical Institute. Wenner, Mark, Sergio Navajas, Alvaro Tarazona Soria, and Carolina Trivelli. 2007. Managing Credit Risk in Rural Financial Institutions in Latin America. Washington DC: Inter-American Development Bank. Woodruff, Christopher, David Mckenzie, and Suresh de Mel. 2007. Measuring Microenterprise Profits: Don’t Ask How the Sausage is Made. Policy Research Working Paper No. 4229. Washington DC: World Bank.

other PuBlicationS
Abed, Fazle Hasan and Imran Matin. Beyond Lending: How Microfinance Creates New Forms of Capital to Fight Poverty. Innovations 2(1-2): 3–17. Brown, Matthew, Julie Abrams, and Jennifer Isern. 2007. Appraisal Guide for Microfinance Institutions. World Bank Working Paper No. 39509. Washington DC: World Bank. Burki, Hussan Bano and Mehr Shah. 2007. The Dynamics of Microfinance Expansion in Lahore. Pakistan: Pakistan Microfinance Network and Shorebank International Ltd. Chu, Michael. Commercial Returns at the Base of the Pyramid. Innovations 2(1–2): 115–146. Flannery, Matt. 2007. Kiva and the Birth of Person-to-Person Microfinance. Innovations 2(1–2): 31–56. Gonzalez, Adrian. 2007. Resilience of Microfinance Institutions to National Macroeconomic Events: An Econometric Analysis of MFI Asset Quality. Mix Discussion Paper No. 1. Washington DC: Microfinance Information Exchange, Inc. Hashemi, Syed, and Laura Foose. 2007. Beyond Good Intentions: Measuring the Social Performance of Microfinance Institutions. Focus Note No. 41. Washington DC: Consultative Group to Assist the Poor (CGAP). Hughes, Nick and Susie Lonie. 2007. M-PESA: Mobile Money for the “Unbanked” Turning Cellphones into 24-Hour Tellers in Kenya. Innovations 2(1–2): 63–81.

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