CRISIL: Fee-based income is key to MFIs' sustainability

Microfinance institutions (MFIs) in India operate in an area that is 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). A CRISIL study, however, demonstrates that, despite these drawbacks, MFIs can indeed perform well and have self-sufficient operations.

The 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. This source of income has contributed up to 43 per cent of MFIs' OSS in 2004-05 (refers to financial year April 1, 2004 to March 31, 2005) with a median contribution level of 21 per cent.

According to Krishnan Sitaraman, head, financial sector ratings, CRISIL Ltd., "Seeing the superior performance of MFIs focusing on fee-based services, other MFIs are expected emulate this in future. This can lead to improved business profiles and performance of MFIs, along with better customer satisfaction, in the MFI sector." In the MFI primarily providing technical support generates sector fee-based income and advisory services, carrying out market development, and facilitating capacity building and linking of self-help groups.

CRISIL's study reveals that in case of the 15 MFIs covered in the study, from 2002-03 to 2004-05, the income of the MFIs from fee-based services outperformed fund-based income in terms of the growth rate. In 2002-03, when loan disbursement increased 110 per cent, fee-based income increased 121 per cent; this is twice the 61-per cent growth that fund-based income registered in the same period. The trend of fee-based income outstripping fund-based income continued in 2004-05; fee-based income increased 331 per cent, compared with a 74 per cent increase in fund-based income.

Adds Sitaraman: "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." One of the findings of the CRISIL study is that, 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.

CRISIL believes that offering fee-based services leads to better utilisation of the human resources base, improved operational efficiency, and better financial performance, of an MFI. For a customer, an MFI with fee-based services acts as a cost-effective, single point contact for a number of loan-related needs.