Promo%ng

 Transparent  Pricing  in  the  Microfinance  Industry  

Session  I:  
Interpre-ng  
India  Data  in  
the  Context  of  
the  Global  
Market  
Pune  |  February  2011  
Session  1:  The  Global  Prac-ce  of  
Micro-­‐credit  Pricing    
—  The Price Curve
—  The Cost Curve
—  Review of global pricing data
—  What factors cause prices to decrease?
—  Overview of India pricing data
—  Comparison of India data to other
countries
 A  Fundamental  Issue:  
 
There  is  no  one  price  for  all  loans:  
Prices  vary  according  to  loan  size,  changing  
drama-cally  as  loan  size  decreases  
 
A  Fundamental  Issue:  
 
Costs  are  rela-vely  flat…  
Whereas  
Income  is  directly  propor-onal  
 
Costs  are  rela4vely  flat  rela4ve  to  loan  size.    It  
costs  nearly  as  much  to  make  a  $100  loan  as  a  
$1000  loan.  
Income  is  generated  as  a  percentage  
of  the  loan  amount  and  therefore  
highly  correlated  to  loan  size.  
For  a  given  interest  rate,  there  is  a  point  where  income  from  a  
single  loan  will  be  equal  to  the  costs  of  that  loan.    This  is  the  
“breakeven  point”.  
If  an  ins4tu4on  wants  to  deliver  smaller  loans  at  the  
same  interest  rate,  they  will  lose  money.    What  must  
they  do  if  they  want  to  make  these  smaller  loans  
financially  sustainable?  
They  need  to  raise  the  
interest  rate,  say  from  30%  
to  40%.  
As  the  loan  size  decreases,  
the  interest  rate  must  
con4nue  to  increase  in  order  
to  have  a  viable  loan  product.  
 We  can  create  a  graph  correla4ng  loan  size  to  
financially  sustainable  interest  rates  and  it  
forms  a  dis4nct  curve.  
 
(Note  that  figures  and  interest  rates  in  this  curve  serve  only  as  
examples  and  are  not  figures  specific  to  the  microfinance  industry.)  

Higher  costs  for  smaller  loan  amounts  require  significantly  

higher  interest  rates  for  sustainability  
Cost  Components  that  Affect  
Pricing  
Component  
Financial  Costs   10%  
Loan  Loss   2%  
Opera4ng  Costs   20%  
Profit   3%  
Total  Price   35%  
In  the  Philippines,  we  find  a  curve  very  close  to  
our  theore4cal  curve.    And  no4ce  the  Opera4ng  
Cost  Ra4o  range.  
 
 Common  industry  benchmark  of  15-­‐20%  
OpCost  Ra4o  is  appropriate  for  larger  loans  
But  smaller  loans  generate  an  Op  Cost  
Ra4o  well  in  excess  of  20%  
Pricing  for  Different  Products  
Component   $100  Loan   $1000  Loan  
Financial  Costs   10%   10%  
Loan  Loss   2%   2%  
Opera4ng  Costs   50%   15%  
Profit   10%   10%  
Total  Price   72%   37%  
Exercise  in  Opera-ng  Costs  
 What  causes  microloan  prices  to    
decline  over  -me?  
—  Compe44on?  
—  Increased  Scale?  
—  Improved  systems  and  technology?  
—  Or…  
—  How  much  of  it  is  related  to  changes  in  loan  
size?  
 2003   Average  Global  Balance:  165  USD  
Weighted  Average  Yield:  32.82  %  

Loan  Size  and  Yield,  2003  

(5  MFIs  in  Morocco)  
70%  
60%  
Yield  on  GLP  (real)  

50%  
40%  
30%  
20%  
10%  
0%  
0   100   200   300   400   500   600   700   800  
Average  Loan  Balance  per  Borrower  (USD)  
 2004   Average  Global  Balance:  187  USD    
Weighted  Average  Yield:  31.14  %  

Loan  Size  and  Yield,  2004  

(6  MFIs  in  Morocco)  
70%  
60%  
Yield  on  GLP  (real)  

50%  
40%  
30%  
20%  
10%  
0%  
0   100   200   300   400   500   600   700   800  
Average  Loan  Balance  per  Borrower  (USD)  
 2005   Average  Global  Balance:  222  USD    
Weighted  Average  Yield:  29.85  %  

Loan  Size  and  Yield,  2005  

(7  MFIs  in  Morocco)  
70%  
60%  
Yield  on  GLP  (real)  

50%  
40%  
30%  
20%  
10%  
0%  
0   100   200   300   400   500   600   700   800  
Average  Loan  Balance  per  Borrower  (USD)  
 2006   Average  Global  Balance:  291  USD    
Weighted  Average  Yield:  25.17  %  

Loan  Size  and  Yield,  2006  

(9  MFIs  in  Morocco)  
70%  
60%  
Yield  on  GLP  (real)  

50%  
40%  
30%  
20%  
10%  
0%  
0   100   200   300   400   500   600   700   800  
Average  Loan  Balance  per  Borrower  (USD)  
 2007   Average  Global  Balance:  428  USD    
Weighted  Average  Yield:  22.61  %  

Loan  Size  and  Yield,  2007  

(9  MFIs  in  Morocco)  
70%  
60%  
Yield  on  GLP  (real)  

50%  
40%  
30%  
20%  
10%  
0%  
0   100   200   300   400   500   600   700   800  
Average  Loan  Balance  per  Borrower  (USD)  
 2008   Average  Global  Balance:  570  USD  
Weighted  Average  Yield:  23.86  %  

Loan  Size  and  Yield,  2008  

(9  MFIs  in  Morocco)  
70%  
60%  
Yield  on  GLP  (real)  

50%  
40%  
30%  
20%  
10%  
0%  
0   100   200   300   400   500   600   700   800  
Average  Loan  Balance  per  Borrower  (USD)  
 Time  Series:  2003-­‐2008  
Morocco  
Country  Average  Loan  Balance  and  Weighted  Average  
Weighted  Average  Poreolio  Yield  

Poreolio  Yield  
2003-­‐2008  
35%  
(nominal)  

30%  
25%  
20%  
15%  
10%  
5%  
0%  
0   100   200   300   400   500   600  
Average  Loan  Balance  (USD)  
 Time  Series:  2003-­‐2008  
Morocco  
Country  Average  Loan  Balance  and  Weighted  Average  

Weighted  Average  Poreolio  Yield  

Poreolio  Yield  
2003-­‐2008  
Average  Loan  Balance  (USD)  

600  

(nominal)  
30%  
400  
20%  
200   10%  

0   0%  
2003   2004   2005   2006   2007   2008  
Year  

Average  Loan  Balance  (USD)   Weighted  Average  Porcolio  Yield  (nominal)  

 CMAC  Sullana  (Peru)  
Operating  
Yield  on  gross  
Year expense/  loan   ROA
portfolio  (real)
portfolio
2003 35.52% 17.01% 4.36%
2004 31.90% 13.99% 5.02%
2005 32.65% 12.85% 5.88%
2006 28.54% 12.58% 5.16%
2007 26.84% 10.85% 5.50%
2008 26.48% 10.97% 4.02%

Price  reduc-ons  due  to  improved  efficiencies?    

Economies  of  scale?    Increased  compe--on?    

33
 CMAC  Sullana  (Peru)  
Operating   Average  loan  
Yield  on  gross  
Year expense/  loan   ROA balance  per  
portfolio  (real)
portfolio borrower
2003 35.52% 17.01% 4.36% 614
2004 31.90% 13.99% 5.02% 1,082
2005 32.65% 12.85% 5.88% 1,340
2006 28.54% 12.58% 5.16% 1,646
2007 26.84% 10.85% 5.50% 1,942
2008 26.48% 10.97% 4.02% 2,557

As  we  deliberate  on  what  is  “responsible  pricing”,  we  must  

look  at  other  factors,  including  loan  size,  loan  purpose,  
loan  term,  and  na-onal  market  condi-ons.  

34
Rela-on  of  Scale  and  Efficiency  
Rela-on  of  Scale  and  Efficiency  
Rela-on  of  Scale  and  Efficiency  
Rela-on  of  Scale  and  Efficiency  
Transparent Pricing Data

39
Cambodia  Data  
Bosnia  Data  
Ecuador  Data  
Bolivia  Data  
Kenya  Data  
India Pricing Data

45
 Pricing  Defini-ons  
—  Text   Security  
    Interest   Fees   Insurance  
Deposit  
APR  India  (Interest  +  
X   X     X  
Fees  +  Deposit)  
APR  (Interest  +  Fees  +  
X   X   X    
Insurance)  
APR  (Including  Security  
X   X   X   X  
Deposit)  
Malegam  
Recommenda-on  for   X   X*   X    
Interest  Rate  Calcula-on  
Type  of  Ins-tu-on  
Price  Range  by  Organiza-on  Type  
APR  India  prices  
 Average  APR  India  
by  Ins-tu-on  Type  
Min  of     Max  of     Average  of    
APR  India     APR  India     APR  India    
Type  of  Ins-tu-on  
(Interest  +  Fees  +   (Interest  +  Fees   (Interest  +  Fees  
Deposit)   +  Deposit)   +  Deposit)  

Co-­‐op   11.75%   45.90%   31.26%  

NGO   17.11%   51.34%   33.95%  
Other   25.83%   41.28%   33.57%  
Privately-­‐owned  For-­‐
20.11%   52.69%   32.22%  
Profit  
Publicly-­‐traded  For-­‐
25.43%   38.39%   29.99%  
Profit  
AGGREGATE   11.75%   52.69%   32.61%  
 Interest  and  Fees  
—  Interest  
◦ 42%  of  products  are  declining  balance  
◦ 58%  of  products  are  flat  interest  
 
—  Fees  
◦ 92%  of  products  have  fees  and/or  insurance  
◦ 99%  of  the  fees  are  “upfront”  fees  
◦ 46%  of  the  fees  are  disclosed  on  repayment  
schedules  
 Security  Deposits  
Required  for  all  loans     43   26%  
Required  for  some  loans   3   2%  
Never  required   120   72%  

Total   166   100%  

Security Deposits are reported on 65% of

repayment schedules
Product  Purpose  
 Transparent  Pricing  Index  
—  Defini4on:  Compare  APR  with  nominal  annual  
interest  rate  
◦  A  score  of  100  means  the  APR  is  exactly  equal  to  the  
quoted  interest  rate  
—  Will  look  at  three  examples:  
◦  100:    Ins4tu4on  charges  declining  balance,  no  fees,  deposit  
◦  54:    Ins4tu4on  charges  flat  interest  and  fees  
◦  44:    Ins4tu4on  charges  flat,  fees,  and  security  deposit  
◦  All  three  products  have  similar  APRs  but  look  very  different  
on  marketed  price  
 
 6,000 Title  
Loan  Balance  and  Pricing

5,000

4,000
Pricing
Amount  (Rupee)

3,000 26%  declining  interest

0%  Fees
2,000 0%  Security  Deposit
26.00% Interest
1,000

0 26.00% +  Fees
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
Net  Loan  B alance Interest  R ate  B alance Security  D eposit
26.00% +  Insurance
Total  Financial  Cost  to  the  Client 100 Transparency  Index
26.00% +  Taxes
Total  Cost  (less  Sec.Dep.  int): R1,378 in  50  2-­‐wk  periods,  or  ….. R717 in  1  year
Avg  net  loan  balance: R2,756 which  is  55%  of  original  loan  amount +  Security  
26.00%
Client  Breakeven  Point: 3.85 Years  until  total  loan  cost  equals  the  avg  loan  balance Deposit
Negative  Net  Balance  for: 0 2-­‐wk  periods,  which  i s…. 0% %  of  loan  term
 6,000 Title  
Loan  Balance  and  Pricing

5,000

4,000
Pricing
Amount  (Rupee)

3,000 15%  Flat  Interest

2%  Fees
2,000 0%  Security  Deposit
26.08% Interest
1,000

0 27.83% +  Fees
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
Net  Loan  B alance Interest  R ate  B alance Security  D eposit
27.83% +  Insurance
Total  Financial  Cost  to  the  Client 54 Transparency  Index
27.83% +  Taxes
Total  Cost  (less  Sec.Dep.  int): R1,522 in  50  2-­‐wk  periods,  or  ….. R792 in  1  year
Avg  net  loan  balance: R2,590 which  is  52%  of  original  loan  amount +  Security  
27.83%
Client  Breakeven  Point: 3.27 Years  until  total  loan  cost  equals  the  avg  loan  balance Deposit
Negative  Net  Balance  for: 0 2-­‐wk  periods,  which  i s…. 0% %  of  loan  term
 6,000 Title  
Loan  Balance  and  Pricing

5,000

4,000
Pricing
3,000
Amount  (Rupee)

12.5%  Flat  Interest

2,000 2%  Fees
1,000 10%  Security  Deposit
22.12% Interest
0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
-­‐1,000 23.85% +  Fees

Net  Loan  B alance Interest  R ate  B alance Security  D eposit

23.85% +  Insurance
Total  Financial  Cost  to  the  Client 44 Transparency  Index
23.85% +  Taxes
Total  Cost  (less  Sec.Dep.  int): R1,282 in  50  2-­‐wk  periods,  or  ….. R667 in  1  year
Avg  net  loan  balance: R2,070 which  is  41%  of  original  loan  amount +  Security  
28.60%
Client  Breakeven  Point: 3.10 Years  until  total  loan  cost  equals  the  avg  loan  balance Deposit
Negative  Net  Balance  for: 6 2-­‐wk  periods,  which  i s…. 12% %  of  loan  term
 Transparency  Index  >  90  
Transparency
MFI   Product  
Index  

Ujjivan Financial Services

Private Limited  
Emergency Loan   122.2  
Equitas   Gurukul Loan   101.1  
Society for Promotion of Youth
& Masses  
Income Generation Loan   99.8  
Equitas   Shiksha Loan   97.9  
Equitas   Primary Loans   96.7  
Equitas   Vidya Loan   96.7  
Equitas   Additional Micro-Credit   96.5  
Equitas   Second Cycle Loan   96.1  
Disha Microfin Pvt Ltd   PRAGATI   92.8  
Disha Microfin Pvt Ltd   GATI   92.0  
Spandana Sphoorty Financial
Limited  
Dharani   91.9  

Sonata Finance Private Limited   Individual Loan   90.4  

L & T Finance Ltd   Gram Bandhu   90.0  
India Pricing and
Efficiency Data
--
Global Comparison

59
Efficiency  –  India  /  Bolivia  
Prices  –  India  /  Bolivia  
Efficiency  –  India  /  Philippines  
Prices  –  India  /  Philippines  
Efficiency  –  India  /  Cambodia  
Prices  –  India  /  Cambodia  
Efficiency  –  India  /  Bangladesh  
Prices  –  India  /  Bangladesh  
 Conclusions  
Transparent  pricing  is  a  prerequisite  for  responsible  pricing  

•  We  need  beler  knowledge  and  understanding  of  pricing,  

and  beler  data  to  analyze  

Poreolio  yield  is  far  from  adequate  

•  Individual  product  pricing  is  essen4al,  and  it  is  alainable  if  
we  work  together  

Transparent  pricing  leads  to  more  compe--on  and  beper  

decisions  by  all  stakeholders  
•  More  compe44on  and  beler  decisions  lead  to  more  
responsible  pricing  
  
 
 
Promo-ng  Transparent  Pricing    
in  the  Microfinance  Industry