Ramesh S Arunachalam
Rural Finance Practitioner
Sometime in October 2010, I heard that APMAS had done a study on effective interest rates in AP. I approached APMAS for a copy of the study report mainly for two reasons: because in my opinion, APMAS had done an objective study on the past Krishna district crisis in AP and further, as an organisation, it carries high credibility. I got this Excel file titled – MFI_Loan_data_consolidation_rev[i] – from them. At the outset, I would like to thank them and also clarify that what is being posted is from the Excel File sent by APMAS and the same is available for verification, if required and after permissions are granted by APMAS[ii]
Having set the above context, let us now move forward to the study on effective interest rates, conducted by APMAS, in 8 clusters in Andhra Pradesh in April 2010 among 53 borrowers with 70 loans (as per details given in the excel sheet). Please recall that I had posted the various details of the study yesterday from the perspective of multiple lending – this post looks at the aspect of effective interest rates, as per the same study.
Let me recap the study details before moving on to the aspect of effective interest rates
A) The study was carried out in 8 Clusters and The Name of Clusters, as Mentioned in the APMAS Sheet were: KamareddyCluster - Kamareddy mandal (DurgaBhavani SHG of Sarampalli Village), Parigi Cluster - Sulthanpur Village, LBNagar, Aluru Cluster - Aluru Mandal, Gunthakal Cluster - Uravakonda Mandal, ODC Cluster - Nallacheruvu Mandal, Piler Cluster - Rompicharla Mandal and Kamareddy Cluster - Domakonda Mandal (Janagama, Muthyampet villages)
B) The total number of members as given in the MAIN MFI Loan Consolidation APMAS Sheet were 53 Members and they had taken 70 loans (1.32 loans per member) in all
C) The total loan amount (as mentioned in the APMAS Sheet) to all 53 members in 70 loans was Rs. 936,000
D) The Effective Interest Rates[iii], as was mentioned in the APMAS sheet, were in the Following Ranges
EIR Range in %
Number of Loans
Less than 25% EIR (Effective Interest Rate)
25 – 30% EIR
30 % - < 35% EIR
35 % - < 40% EIR
40% - < 45% EIR
45 – < 50% EIR
50 - < 55% EIR
55 - < 60% EIR
60 - < 80% EIR
80 - < 85% EIR
All Ranges of EIR
a. What does all of this mean? First, let us be happy that most of the loans are in the 30 – 35% range (41 loans), which even though on the higher side as compared to what we pay as interest, is still perhaps reflective of the higher cost of servicing micro-finance clients at their doorstep. And we hope that, with scale and time, the rates would come down…
b. That said, at the same time, as Mr Nimal Fernando said in a DFN e Group posting, it becomes very important to look at the cost side of the sustainability equation and see how costs can be reduced and the (resulting efficiency) benefit passed on fully to the customer. For too long, we have said that MFIs can charge any sustainable rate, without looking at whether or not inefficiencies are being passed on to the customers and whether or not borrowers can actually afford to absorb these. This is a very crucial aspect that needs to be remembered
c. That there are 13 loans in the 25- 30% EIR bracket is very welcome and means that, some of the MFIs are indeed trying to become more and more competitive, because of their scale and size of operations. They are also trying to pass on the benefits to their customers
d. That there are 14 loans in the 35 – 45% EIR bracket shows that there is significant scope for generating further efficiencies (for the concerned MFIs) but it appears that barring a few exceptions, many of these loans are from MFIs that are still growing and it will be some time before they reach scale and are able to reduce their interest rates
e. A last point requires clarification with added emphasis. There are two outlier[iv] loans – one with EIR between 55 – 60% (58.63%) and another with EIR between 80 – 85% (82.50%). These are alarming no doubt and if the data in the APMAS study (MFI Loan Consolidation Sheet and other records) is a true representation of the (wider) grass-roots reality, then, the situation seems rather serious - especially, coming in the backdrop of statements by many MFIs that they do not charge high Effective Interest rates (EIR).
This needs to be closely looked into by the micro-finance industry and regulators/other stakeholders concerned. Such a study has to be done in a rigorous and objective manner (without any conflict of interest) and also looking at the issue of mark-ups, penalties and/or penal interest being charged on the ground (perhaps in an unauthorised manner). The fact that some MFIs use the decentralised model including agents, it would certainly be worthwhile to see if the rates charged on the ground indeed match[v] with those stated by the MFIs or are there local mark-ups and/or collections towards interest (in an unauthorised manner). Again, not to sound like a broken record, if accurate and widespread, such effective interest rates as seen with the outliers, could INDEED wreak havoc in the lives of the borrowers and also undermine the very purpose of Micro-Finance in India – without question, we as an industry need to prevent it in the future
In summary, the results of the above study, if they are an ACCURATE representation of widespread reality, certainly call for an objective and rigorous ground level study by the RBI directly and it must try to conclusively determine what actual effective rates of interest are (including any local mark-ups, penal interest, penalties etc) being charged by MFIs from their borrowers on the ground… This is an issue that is certainly worthy of immediate analysis and research by the RBI...and its Sub-Committee looking into the micro-finance aspect…
[i] File was named, MFI Loan Consolidation Rev and was apparently created 24th April 2010 and the main sheet is called MFI loan consolidation. There was a 2nd sheet with the name MFI Loan consolidation 2 and that was not used as it appeared to be a copy sheet created and used for various analysis.
[ii] Copy of e mail is available with attachment and can be shared, if required and appropriate, after taking necessary permissions from APMAS. I can forward the same for verification, if APMAS gives permission
[iii] The writer verified the effective interest calculations in the APMAS sheet and the figures match in all except 4 cases, where the APMAS calculation is lower by about 1.5% than the author calculated EIRs. However, the writer uses only the APMAS calculations as he is mainly reporting on the APMAS study and also the differences exist for just 4 loans and they are, at best, called as marginal. It should be noted that the APMAS EIR and author calculated EIR match for 66 loans. I have refrained from posting the individual loan data, for the moment, to protect the privacy of the clients as well as the concerned MFIs. I reserve my right to do so in the future, in case, it can help the clients and/or the micro-finance industry
[iv] I am merely reporting what is there in the APMAS excel file and MFI consolidation sheet. The same can be DIRECTLY forwarded – just as I received it - for verification, if required. Prima facie, the numbers for the outlier loans appear to be internally consistent and there seems no error on the face of the data for these loans from an internal consistency perspective. However, whether they represent wider ground level reality needs to be better understood.
[v] The point that I am making here is that MFIs could be charging appropriate rates but they may not have the requisite systems and controls to ensure that the same is implemented in the field, especially, with burgeoning growth and greater decentralisation…This needs to be looked into…carefully.