September 2007 • Volume 8 Number 3

IN THIS ISSUE
Efficiency with Growth:
The Emerging Face of
Efficiency with Growth: The Emerging
Face of Indian Microfinance 1

Selected Publications on
Microfinance 11
Indian Microfinance
leveraging process capital

The greatest power of

microfinance lies in the
process through which
it is provided. The By SANJAY SINHA
process... creates the Managing Director
Micro-Credit Ratings International Limited
process capital
that remains largely
outreach and profile of Indian microfinance
untapped... By broad- The outreach of microfinance services has substantially increased in India in recent
ening our current imag- 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 institu-
ining of microfinance, tions (MFIs)—nonbank financial institutions offering small value financial services
to low income families. Overall, the author estimates that the SHG bank linkage
we can harness the program and the MFIs together reached some 17 million families by mid-2006.
process capital more
Regionally, microfinance is concentrated in south India, with an estimated two thirds
fully and do far more of microfinance clients in the country residing in only three southern states—Andhra
to alleviate poverty. Pradesh, Tamil Nadu, and Karnataka.1 Key reasons for the higher microfinance
outreach in south India include
Fazel Hasan Abed
 The origination of the bank SHG linkage program in Karnataka largely through
and Imran Matin
the initiatives of the nongovernment organization (NGO) MYRADA and the
Building Resources Across
consequent greater participation of Karnataka-based banks, such as the Syndicate
Communities (BRAC) and Canara Banks, in the program;
Bangladesh  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 Develop-
ment 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  More vibrant local economies clients with around 70% of about 2.5 million borrowers served
in the southern states com- by MFIs concentrated in the largest 10 organizations.4
microfinance pared to the less developed
states in the north and east; M-CRIL’s data on the performance of Indian MFIs show that
has seen dramatic and these have been expanding at about 30–50% per year in terms
 Higher literacy and partici- of clients and 50–60% per year in terms of portfolio.5 As a
improvements pation rates of women in result, India now has a microfinance outreach that is as high
in efficiency that the local economy making as that in Bangladesh—perhaps over 18 million at the time
them more suitable clients of writing in July 2007. Contrary to the usual experience of
have resulted in for MFIs. microfinance sectors in other countries, however, this growth
has been fuelled neither by large inflows of grants nor by a
effective interest There is, of course, some particularly high level of interest charged to clients. On the
rates paid by overlap between members of contrary, Indian microfinance has seen dramatic improvements
MFIs and SHGs in India, in efficiency that have resulted in effective interest rates paid
microfinance and not all members could by microfinance borrowers in India declining to among the
strictly be classified as below lowest in the world.
borrowers in the national poverty line.
Substantial competition exists This paper aims to discuss the factors that have contributed to
India declining to between MFIs in areas such the efficiency gains in Indian microfinance in recent years, and
among the lowest as the Guntur and the coastal to relate these to the substantial growth in outreach that has
Andhra region of Andhra been achieved. The discussion in the paper is based on data
in the world Pradesh and Thiruchirapalli obtained from the ratings by M-CRIL of 79 leading MFIs in
in Tamil Nadu resulting in India during 2004 and 2005.
membership overlap. Further,
an extensive impact study undertaken across 20 MFIs operating Models of Microfinance Delivery
in different parts of India has found that, typically, only 35% Microfinance services are provided in India through a variety
of MFI clients in the country can strictly be classified poor of delivery methodologies ranging from the very popular SHG
although the rest are still mostly low income clients, largely methodology traditionally pursued in the country to Grameen
excluded from the financial system.2 Another study of the joint liability groups and the individual banking arrangements
bank SHG linkage program indicates a similar poverty profile of the savings and credit cooperative societies. Over the years,
of SHG members.3 This leads to the outreach of microfinance through ongoing experimentation and innovation undertaken by
services to 17 million clients in India being reduced to only 6 Indian MFIs, these models have become blurred at the edges,
million poor clients amounting to no more than 8.5% of the resulting in a spectrum as illustrated in Figure 1.
70 million poor families in the country. Many are concentrated
in rural areas where MFIs and SHGs tend to operate, though In addition to the microfinance delivery methodologies, the
interest in urban areas has been increasing in recent years. author observed that the performance of MFIs is influenced
Among the MFIs also, there is a significant concentration of by its form of registration as an NGO, a not-for-profit or

FIGURE 1: Microfinance models employed in india

SHG Mixed Grameen SCCS MACS Urban Cooperative Banks

Village banking Joint liability Individual Banking

MACS = mutually aided cooperative societies, SCCS = savings and credit cooperative societies, SHG = self-help group.
 table 1: Productivity and Unit Cost Analysis The table suggests
Staff productivity
Number Clients/ Borrowers/ Cost/
that in terms
MFI Model of staff staff member staff member borrower, $
of levels of
Grameen 4,357 297 248 11.8
SHG 1,731 697 274 6.4 efficiency, there
Mixed 1,283 211 110 15.5
Cooperative 179 370 254 6.7 is not much to
Sample 7,550 376 230 10.5
Top 10 308 239 12.5 choose between
MBB 140 152.0
Sample average, 2003 135 16.1 microfinance
MBB = Micro Banking Bulletin, MFI = microfinance institution, SHG = self-help group.
Source: EDA Rural Systems Private Ltd. models. The
for-profit company or some form of cooperative. The MFI’s borrowers per staff member SHG-based MFIs
management approach is reflected in its form of organization rather than per loan officer
and its operational outlook. This effect becomes apparent in because of the definitional have slightly
the analysis that follows. difficulties in identifying who
is and is not a loan officer
better staff
Cost components with an MFI. Many MFIs give efficiency than
The main components of cost of an MFI are: field officers responsibility
 Operating expenses—(sometimes also referred to as for all functions related to the others
administrative expenses) essentially made up of the cost microfinance groups. In this
incurred on personnel, travel, office overhead including situation the definition of who
stationery and utilities as well as depreciation. is a loan officer is clear. In other MFIs, however, field officers
 Financial expenses—direct costs incurred on financial are responsible for group formation and record keeping but
liabilities; these are made up of interest expenses on bor- branch-based tellers make disbursements and collect repay-
rowings from banks or other lenders and interest paid to ments as well as perform other branch office functions. This is
depositors (if any). only one example where the distinction between loan officers
 Loan loss provision expenses—the amount either set aside and other staff becomes unclear. A spectrum of divisions of
by an MFI to cover future loan losses or used to write off labor, in fact, exists between loan officers originating business
loans that management judges to be unrecoverable. and the extent to which they perform the functions required for
microfinance transactions.
Staff Productivity and Efficiency
Perhaps the most important component of cost incurred by an The table suggests that in terms of levels of efficiency, there
MFI is personnel expenses. Since staff form the key interface is not much to choose between microfinance models. The
between MFIs and their clients and are the means of disburse- SHG-based MFIs have slightly better staff efficiency than
ment and collection of funds by MFIs, the staff productiv- the others and this is explained by their monthly collections
ity ratio is an important indicator of MFI efficiency. Table 1 systems (as opposed to the weekly collection of the Grameen
presents an analysis of staff productivity of Indian MFIs and model). While this should lead to greatly improved efficiency,
the unit costs they incur in providing microfinance services to it is largely neutralized by the extra time required at each
their clients. group to assist with intra-group transactions and by the higher
development input of this model. The mixed model MFIs fol-
The productivity analysis has been undertaken as clients or low a variety of methods, including individual lending, which
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 MicroBank-
ing 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
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 produc-
tivity 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 micro-
finance 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 ef-
ficient 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.

150
Operating Expenses
Apart from personnel expenses, the operating expenses of
100
MFIs are made up of:
50
 Other administrative expenses—including the costs of
maintaining a good management information system (MIS)
Report 2000 Review 2003 Review 2005
and/or computers, stationery, utilities for the branches and
Source: EDA Rural Systems Private Ltd. head office, stationery, office rent (where applicable)

table 2: regional analysis of productivity

Region
South East/Northeast West North Total
Staff, numbers 5,978 966 132 474 7,550
Clients, ‘000 2,320 390 34 93 2,837
Borrowers, ‘000 1,457 203 9.3 70 1,739
Clients/staff 388 403 261 196 376
Borrowers/staff 244 211 71 147 230
Source: EDA Rural Systems Private Ltd.
 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 aver-
age 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 be-
coming 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

Operating Distribution of Operating Expenses (%)
Microfinance model Expense Ratio (%) Personnel Travel Depreciation Other Total
Grameen 20.4 59 9 3 30 100
SHG 16.6 57 10 6 27 100
Mixed 14.7 45 11 4 39 100
Cooperative 8.8 49 10 5 36 100
Sample 16.5 51 9 5 36 100
Weighted average 15.6 51 9 5 35 100
Top 10 10.8 57 10 3 30 100
SHG = self-help group.
Source: EDA Rural Systems Private Ltd.

Figure 3: Comparison of the Operating Efficiency of Indian MFIs with Other Countries/Regions

36.5%

30.4% 28.9%

21.6% 22.4%

16.5% 15.6%
10.8%

Sample Weighted Top 10 Bangladesh Southeast Africa MBB Sample

average, average Asia average,
2005 2003
MBB = Micro Banking Bulletin, MFI = microfinance institution.
Source: EDA Rural Systems Private Ltd.
6/7
FINANCE for the poor

Operating This progression is depicted (not-for-profit) companies is skewed by one large organization
in Figure 4. Similar to the with a policy of paying high salaries as an element of corporate
efficiency staff productivity ratio, oper- social responsibility but, partly as a result, struggling to achieve
ating efficiency has not only sustainability. From the table, institutions that are apparently
has not only improved dramatically over able to consistently keep control of their costs and strive to
the years, the improvement achieve efficiency can reach close to a 60% personnel ratio.
improved accelerated during 2003– The reasons for this are discussed below.
dramatically 2005 before decelerating over
the past year. This decelera- Factors Affecting Operating Efficiency
over the years, tion is only to be expected, One of the reasons for the variations in the OER set out in Table
given the relatively low levels 3 is that MFIs have a range of development agendas including
the improvement that the average OER has now
accelerated during reached. Figure 4: Trend in the Operating Efficiency of
Indian MFIs (Operating Expense Ratio)
2003–2005 before Overall, Table 3 suggests that
60%
Grameen MFIs are signifi-
decelerating over cantly less cost-efficient than
SHG MFIs and that coopera-
the past year. tives are the most efficient.
This deceleration Table 4 presents the distribu-
36.5%
tion of MFIs with OERs in the
is only to be ranges indicated. Since nearly
49% of SHG MFIs have less
expected. than 12% OER, it is tempting
to think that this confirms the 16.5%
picture provided by the averages in the previous table. How- 13.7%
ever, 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 Report Review Review 12 leading
2000 2003 2005 MFIs, 2006
serve is no less than those served by the SHG MFIs. Further,
the issue of the externalization of costs by many SHG MFIs MFI = microfinance institution.
cannot be ignored. Overall, there is no indication that a sys- Source: EDA Rural Systems Private Ltd.
tematic difference in efficiency exists between MFI models;
the performance of MFIs is apparently model-neutral. Table 4: Proportion of MFIs with Operating
Expense Ratio
As shown in Table 3, personnel expenses account for over Microfinance
50% of the total operating expenses while other expenses are model <10% <12% <15% >15%
over one third of expenses. Both Grameen MFIs (especially Grameen 10.0 20.0 45.0 55.0
NBFCs) and SHG MFIs have high (>55%) personnel ratios SHG 36.6 48.8 56.1 43.9
in relation to other costs. Yet Grameen NBFCs are among the Mixed 20.0 20.0 30.0 70.0
most efficient institutions in the country with typical OERs Cooperative 75.0 75.0 75.0 25.0
MF = microfinance, MFI = microfinance institution, SHG = self-help group.
less than 12% and substantial outreach. The figure for Sec25 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.
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.

This analysis does not attempt to separate out the effects of Second, the experience of microfinance operations (MFI age
the parameters listed above for each microcredit model. One in years) clearly does have a significant impact on MFI OERs
reason for this is that after disaggregating by model, the sample at least in the early years of operation (Table 5b). As the table
size for each parameter reduces to very low levels with some
categories (like Grameen in north India) being reduced to only FIGURe 5a: Impact of Regional Location on
one to two MFIs. This is not a sufficient number to provide a the OER of Indian MFIs
valid analysis. Second, this analysis has already established 24.0%
that the performance of MFIs is model-neutral. It is, therefore, 21.3%
19.1%
more interesting to obtain a numerically valid analysis for the
sample as a whole. 13.8%

In large measure, Figures 5a–e confirm some expected correla-

tions between OER and the above parameters. First, the impact
of the region is apparent. MFIs in south India are far more ef-
ficient than those in other regions and north Indian MFIs are the South East/ West North
least efficient. The question here is whether there is something Northeast
about the physical conditions of north India that are so different MFI = microfinance institution, OER = operating expense ratio.
from the south or whether other factors are involved. Source: EDA Rural Systems Private Ltd.

To anyone familiar with the terrain of different parts of the Figure 5b: Impact of MFI Experience on the OER
country, it would be apparent that, in this matter, physical con- of Indian MFIs
ditions 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 26.4%
of north India including:
 the relatively poor quality of education of the staff which 19.2%
lowers staff efficiency, productivity, and discipline and 15.5%
impacts on their motivational levels; 14.2% 14.2%
 salary expectations of staff at the lower levels of institu-
tions—in the north dictated more by the alternative hope of <3 3–5 5–7 7–10 >10
obtaining a cushy government job, while in the south is a MFI age, in years
more realistic assessment of the limited likelihood of get-
ting such a job; MFI = microfinance institution, OER = operating expense ratio.
Source: EDA Rural Systems Private Ltd.
 the difficulty MFIs face in establishing relationships with the
8/9
FINANCE for the poor

shows, MFIs with more than 5 years’ operational experience are made to low income families is, inevitably, substantially
have operating expenses of the order of 14–15% of portfolio cheaper to service than that of MFIs and, thus, represents a
and this does not seem to change in any significant way as MFIs different asset class altogether.
get older. However, the 3–5 year category has clearly higher
OERs and the 0–3 year category has very high OERs. This Finally, in the matter of clustering (urban/nonurban operations),
indicates that MFIs take around 5 years to find the operational shown in Table 5e, the obvious result is that urban MFIs are able
stability and develop the experience necessary to operate in a
fully efficient manner. Figure 5c: Impact of Portfolio Size on the OER
of Indian MFIs
Third, Figure 5c shows that overall portfolio size does not
have as large an influence (in itself) on the OER as might be
22.8%
expected. The only category with clearly higher OER than the
others is the smallest (<$125,000) portfolio category where 18.2%
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 16.3%
large and well-known Grameen organizations that have been 13.8% 13.9%
able to raise substantial grant funds for operations but are still
relatively inefficient. Thus, the largest two portfolio categories <125 125–625 625–1,250 1,250–2,500 2,500–6,250
are skewed away from the 12–14% range by only three well- Portfolio size, in $‘000
known MFIs. One of these operates in difficult conditions but
also has a policy of paying high staff salaries while others MFI = microfinance institution, OER = operating expense ratio.
Source: EDA Rural Systems Private Ltd.
simply have efficiency constraints on account of the liberal
attitude of their managements toward the issue.
Figure 5d: Impact of size of loan on the OER
Fourth, loan size (the size of loan disbursed in Figure 5d) shows of Indian MFIs
a very clear downward trend in OER as the loan size increases.
MFIs with the smallest size of loan disbursed (less than Rs3,000
25.0%
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
18.7% 14.8%
age of an MFI here since the newer MFIs tend to have smaller
loan sizes but an even stronger correlation with the fast-growing 14.7%
12.0%
institutions that both incur higher costs when they are in their
growth phase and have lower loan sizes on account of having <3,000 3,000–5,000 5,000–7,500 7,500–10,000 >10,000
large numbers of new clients. As MFIs stabilize in terms of Loans disbursed, Rs
growth and become older institutions, their OER declines as the
costs of growth (training staff, opening new branches, reaching MFI = microfinance institution, OER = operating expense ratio.
Source: EDA Rural Systems Private Ltd.
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%). Table 5e: Effect of Rural–Urban Operations
Conversely, MFIs operating with larger loan sizes are able on the OER of Indian MFIs
to limit their operating expense ratios partly on that account. Clustering Urban Mixed Rural
Similarly, the lending of the commercial banks (with average Sample* 9.7% 23.4% 15.5%
loan sizes almost four times those of MFIs) even when these * including mixed and cooperative MFIs as well.
to have far more efficient operations since staff productivity place between branches; Urban MFIs are
is far higher (due to lower travel time and travel costs). Cost this has the advantage of
savings also result from the better availability of all manner spreading geographical able to have far
of facilities including utilities like electricity and immediate coverage of microfinance
access to banking facilities. The 9.7% OER for fully urban more widely but increases more efficient
MFIs in the table makes a stark contrast to the 15.5% weighted the average operating cost
average recorded for fully nonurban ones but the typical cost of the MFI.
operations since
levels show a more moderate difference with the urban OER  staff recruitment and for- staff productivity
being 16% and the nonurban one 18.8%. The high OERs seen mal training beyond a
for mixed locality MFIs is on account of some of these seven level that is organically is far higher
MFIs being in the process of shifting from one type of MFI manageable; ideally expe-
to another and still being in the process of working out their rienced staff with the MFI
(due to lower
understanding of the activity as a commercial versus a devel- should train newly joining travel time and
opmental one.7 staff as a routine part of
their work but very fast- travel costs).
Equally interesting in this context is the impact of MFI growth growing institutions have
rates on the cost efficiency of MFIs. Figure 6 relates MFI to undertake extraordinary Cost savings also
growth rates to average OER. While other factors are clearly efforts at formal training
also at work here, it is interesting to see that MFIs with portfolio and incur additional costs
result from the
growth rates of 50–75% are, in fact, the most efficient while as a result. better availability
those that grow at much faster rates have to bear additional  a much higher level of staff
cost burdens as a result. These burdens include supervision and internal of all manner of
 substantial pressure on infrastructure creation as a result of control than is required in
pushing geographical coverage widely to levels that require a more organically grow-
facilities.
better communication and transport facilities as well as re- ing institution.
ducing the extent to which the sharing of facilities can take
Indeed, this finding is supported by another study of the direct
Figure 6: Effect of MFI Growth on OERs
and indirect transaction costs that MFIs incurred. Based on case
studies of three leading MFIs, the author concluded that
21.7%
“The key drivers of indirect transaction cost for an MFI are
number of layers of fixed cost in the MFI system, geographi-
18.8% cal location of the MFI, and proportion of mature branches.
The proportion of mature branches in the MFI portfolio are a
15.7% function of the age of the MFI and its expansion policy.” Es-
sentially, mature branches serve larger numbers of clients at
15.5% the same cost and, of course, faster growing institutions have
a lower proportion of mature branches. Similarly, rural versus
12.3% urban location has a key impact on the costs incurred by an
MFI. These issues are illustrated by the examples discussed in
<25% 25–50% 50–75% 75–100% >100% the accompanying box.
Portfolio growth rate
Thus, it is apparent that as MFI coverage in the country as a
MFI = microfinance institution, OER = operating expense ratio. whole improves and MFI growth rates slow down, the aver-
Source: EDA Rural Systems Private Ltd.
age OER of MFIs will be reduced since more institutions will
10/11
FINANCE for the poor

Declining Operating Expense Ratios: Some Illustrations

The decline in the operating expense ratio (OER) with
Figure B1: Trend in OERs
increasing age, portfolio size, and loan size apparent
from the above discussion can be better understood by MFI1
examining the individual experience of specific (and well- MFI2
known MFIs). Figure B1 below illustrates the experience 94.6%

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%. 56.7% 35.8%
MFI2 went from its third to its fifth year with a decline 27.4%
in OER from 56% to 27%. Recent discussion with the 26.5%
management of MFI2 indicates that they have only 14.8%
recently started looking seriously at specific means of
2003 2004 2005
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
Figure B1: Trend in OERs
curve of the MFI is likely to take over and enable further
cost reductions. MFI3
MFI4
24.3%
MFI3 and MFI4 (Figure B2) below are both well- 35.8%
established MFIs with 7–10 years’ operational experience
in south India. Both are simultaneously large and fast 18.1%
17.8%
growing MFIs. Yet, MFI3 has significantly higher costs
than MFI4. The difference between the two is that MFI3
undertakes predominantly rural operations whereas MFI4 10.1%

operates predominantly in urban areas. The difference 6.7% 6.4% 5.7%

this makes to cost parameters is apparent from the figure.
Yet, despite being well established and fast growing, both
2002 2003 2004 2005
are continuing to reduce their OERs—although at this
(relatively low) level—at a slower rate than MFI1 and MFI2.

have achieved sustainable levels of operation and will have Conclusion

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.
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. 
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.
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 Micro-
Finance 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.
FINANCE for the poor

SELECTED PUBLICATIONS ON MICROFINANCE

Osmani, Lutfun N. Khan. 2007. A Breakthrough in Women’s Isern, Jennifer et. al. 2007. Sustainability of Self-Help Groups in India:
Bargaining Power: The Impact of Microcredit. Journal of International Two Analyses. Occasional Paper No. 12. Washington, DC: CGAP.
Development 19(5): 695–716.
Kapoor, Mudit et. al. 2007. From Microfinance to m-Finance
Rosengard, Jay K., Richard H. Patten, Don E. Johnston, and Widjojo Innovations Case Discussion: M-PESA. Innovations 2(1–2): 82–90.
Koesoemo. 2007. The Promise and the Peril of Microfinance
Kenyon, Thomas. 2007. A Framework for Thinking about Enterprises
Institutions in Indonesia. Bulletin of Indonesian Economic Studies
Formalization Policies in Developing Countries. World Bank Research
43(1): 87–112.
Working Paper No. 4235. Washington DC: World Bank.
Sievers, Meten and Paul Vendenberg. 2007. Synergies through
Kumar, T.S. Anand, and Jeyanth K. Newport. 2007. Micro Finance
Linkages: Who benefits from Linking Microfinance and Business
and Rural Housing. Mumbai, India: Indian Association for Savings
Development Services? World Development 35(8): 1341–1358.
and Credit.
Sinha, Tara, M. K. Ranson and Anne J. Mills. 2007. Protecting the
Martowijoyo, Sumantoro. 2007. Indonesian Microfinance at the
Poor? The Distributional Impact of a Bundled Insurance Scheme.
Crossroads: Caught between Popular and Populist. Essays on
World Development 35(8): 1404–1421.
Regulation and Supervision No. 23. Washington DC: CGAP.

Novogratz, Jacqueline. 2007. Meeting Urgent Needs with Patient

OTHER PUBLICATIONS
Capital. Innovations 2(1–2): 19–30.
Abed, Fazle Hasan and Imran Matin. Beyond Lending: How Micro­
Pakistan Microfinance Network. 2007. Quarterly Update on
finance Creates New Forms of Capital to Fight Poverty. Innovations
Microfinance Outreach in Pakistan. MicroWatch 3(1): 1–16.
2(1-2): 3–17.
Rhyne, Elisabeth and Maria Otero. Microfinance Matures: Opportunities,
Brown, Matthew, Julie Abrams, and Jennifer Isern. 2007. Appraisal
Risks, and Obstacles for an Emerging Global Industry. Innovations
Guide for Microfinance Institutions. World Bank Working Paper No.
2(1–2): 91–114.
39509. Washington DC: World Bank.
Rosenberg, Richard. 2007. CGAP Reflections on the Compartamos
Burki, Hussan Bano and Mehr Shah. 2007. The Dynamics of
Initial Public Offering: A Case Study on Microfinance Interest Rates
Microfinance Expansion in Lahore. Pakistan: Pakistan Microfinance
and Profits. Focus Note No. 42. Washington, DC: CGAP.
Network and Shorebank International Ltd.
Standard and Poor’s Microfinance Rating Working Group. 2007.
Chu, Michael. Commercial Returns at the Base of the Pyramid.
Microfinance Taking Root in the Global Capital Markets: Microfinance
Innovations 2(1–2): 115–146.
Rating Working Group. Washington DC: Accion International.
Flannery, Matt. 2007. Kiva and the Birth of Person-to-Person
Stieber, Sharon. 2007. Is Securitization Right for Microfinance?
Microfinance. Innovations 2(1–2): 31–56.
Innovations 2 (1–2): 202–213.
Gonzalez, Adrian. 2007. Resilience of Microfinance Institutions to
Stuart, Guy. 2007. Regulatory Innovation in Microfinance: The MACS
National Macroeconomic Events: An Econometric Analysis of MFI
Act in Andhra Pradesh. Innovations 2(1–2): 181–201.
Asset Quality. Mix Discussion Paper No. 1. Washington DC:
Microfinance Information Exchange, Inc. Wanchoo, Rajat. 2007. Micro-finance in the India: The Changing
Face of Micro-credit Schemes. MPRA Paper No. 3675. India: Indian
Hashemi, Syed, and Laura Foose. 2007. Beyond Good Intentions:
Statistical Institute.
Measuring the Social Performance of Microfinance Institutions. Focus
Note No. 41. Washington DC: Consultative Group to Assist the Poor Wenner, Mark, Sergio Navajas, Alvaro Tarazona Soria, and Carolina
(CGAP). Trivelli. 2007. Managing Credit Risk in Rural Financial Institutions in
Latin America. Washington DC: Inter-American Development Bank.
Hughes, Nick and Susie Lonie. 2007. M-PESA: Mobile Money for
the “Unbanked” Turning Cellphones into 24-Hour Tellers in Kenya. Woodruff, Christopher, David Mckenzie, and Suresh de Mel. 2007.
Innovations 2(1–2): 63–81. Measuring Microenterprise Profits: Don’t Ask How the Sausage is
Made. Policy Research Working Paper No. 4229. Washington DC:
World Bank.