MICROBANKING BULLETIN - Microfinance Information Exchange

CASE STUDIESThe large concentration of the portfolio inagricultural loans significantly affected theorganization’s income. Portfolio yield declined from30 percent in 1998-99 to 24 percent in 1999-00partly because portfolio at risk over 90 days climbedfrom 0.6 percent to 6.5 percent during the sameperiod. Rebates for on-time repayments intendedto improve portfolio quality further reduced the yield.BASIX attributes its portfolio quality problems to thefollowing: (i) prolonged drought affecting repaymenton farm loans; (ii) reduced efforts to recover loansdue to expansion and development of humanresources in new areas; and (iii) lateimplementation of a good MIS system to track loandelinquencies. Furthermore, the Government ofIndia required all financial institutions to reduce theircollection efforts until the drought was over.Interest Rate PolicyTo increase portfolio yield, BASIX has now revisedits interest rate policy. Nominal interest rates perannum range from 15 to 24 percent according tocost of funds, operating costs, risks andcompetition. For example, the rate for self-helpgroups was reduced from 20 to 15 percent since aline of credit was negotiated in 1998 with theNational Bank for Agriculture and RuralDevelopment, at 10.5 percent. In addition,competition from the formal sector for self-helpgroups with a cheaper rate compelled BASIX toreduce its margin. On the other hand, BASIX wasable to raise rates for other products from 21 to 24percent to cover costs.To reduce the long gestation period in realizingincome from farm loans, BASIX now requires thatthey be repaid in two installments. Indeed, manyagricultural clients have non-farm incomegeneratingactivities that allow them to pay farmloans in installments. If this change had not beenimplemented, the portfolio at risk in March 2000would have been much higher.EfficiencyThe complexity of the organization’s product menunecessitated a higher salary structure. BASIXrecruited several high-cost employees to support itsnew product development. As BASIX translates itsinitial learning into standard procedures, itestimates that loan officer productivity will increasefrom 250 to 400 clients.BASIX has kept its administrative expense ratio lowdespite high expansion costs and an increase instaff salaries, by maintaining large loan balancesand by enhancing staff productivity (Figure 4).Loan officers now carry a portable loan file thatcontains a short summary on each of their clientsthat is updated weekly for quick tracking andprocessing of loans. Computerization of borrowerrecords at the branch level is expected to furtherimprove efficiency.Figure 4: Efficiency of BASIXAdministrative expenses /Average loan portfolio (%)1997 1998 199914 19 16Depth (%) 109 42 56Staff productivity (no.) 31 123 160Average Salary(multiple of GNP/ capita)1.0 2.7 4.5Cost per borrower (US$) 27 34 30ChallengesThus far, the organization has attracted adequatefunds to finance its growth and experimentation.With external funding becoming tighter and costlier,however, BASIX may resort to alternative sourcesof funding such as deposit mobilization from thepublic. This may further increase the challenges fora young MFI.While cross-subsidization may be possible,increased competition and interest rate restrictionson farm loans may reduce margins and compelBASIX to withdraw some products. By usingintermediaries to deliver some loans, BASIX maybe missing opportunities to build long-termrelationships with clients. There is also a challengein selecting and training self-help groups to becomeefficient conduits. Increasingly, commercial banks,subsidized NGOs, and government programs areattracting self-help groups by providing loans atcheaper rates. Competition may challenge theretention and cohesion of BASIX groups.The organization regularly assesses customersatisfaction, which has shown that “ease of access”is its strength. As it grows, BASIX can achieveviability only by building on its strengths, learningfrom past experiments with products and deliverychannels, and continuing to attract commercialsources of funds.Geetha Nagarajan is a member of Bulletin Editorial Staff.This article is based on her due diligence visit in March2000 and information submitted to the Bulletin by BASIX.The MicroBanking Bulletin thanks BASIX for grantingpermission to publish its financial results.28 MICROBANKING BULLETIN, SEPTEMBER 2000