Rising fee income strengthens MFIs’ loan book

MUMBAI: Microfinance institutions (MFIs) can function better as loan facilitators rather than being loan providers, according to a study by Crisil.

In a study by Crisil covering 15 small, medium and large MFIs in the country, from ’02-03 to ’04-05, their income from fee-based services outperformed fund-based income in terms of the growth rate. In ’02-03, when loan disbursement rose 110%, fee-based income increased 121%, twice the 61% growth that fund-based income posted in the same period. In ’04-05, it increased 331% compared with a 74% increase in fund-based income.

MFIs in India operate in areas characterised by widely dispersed customers and a small average loan size. This leads to their low operational self-Sufficiency (OSS), the ratio of an MFI’s total income to its total expenses. This source of income, which is critical to MFI growth, has contributed up to 43% of MFIs’ OSS in ’04-05 with a median contribution level of 21%, the study says.

In the MFI sector, fee-based income is generated primarily by providing technical support and advisory services, carrying out market development, and facilitating capacity building and linking of self help groups. According to Krishnan Sitaraman, Crisil’s head of financial sector ratings, the study also shows that despite a sharp increase in fee-based income, there is no corresponding increase in operating expenses and total expenses.

This implies that fee-based services can be offered using existing resources, rather than deploying additional ones. Even when loans disbursed by an MFI do not grow, the contribution of fee-based income in overall OSS could increase, resulting in improved performance of the MFI.

A Crisil study covering 15 small, medium and large Indian MFIs, shows that fee-based income is a critical factor for the better performance of MFIs.