MFTransparency does some awesome work surrounding pricing transparency of micro-loans. One of their latest initiatives involved pricing microfinance loans in India. The report is available here, and you can play around with the data they collected using a pretty nifty dashboard-like tool here.
Transparent pricing is necessary because the terms that come with relatively innocuous looking micro-loans can be quite involved. The Annual Percentage Rate (APR) is considered to be the “true” price of a loan, and is often used to make apples-to-apples comparisons between loan products. If all the loan involves is taking out a principal amount of say 10,000 [insert your favorite currency (YFC) here] at an interest rate of 24%, and is paid down in weekly installments using a declining balance method, its a fairly simple calculation.
However, a range of “features” are often tied to the product and this can make calculating APR a less than trivial task, not least because not all MFIs are equally diligent when it comes to properly disclosing them to their clients. Some examples of such “features” would be:
- Principal and interest payments being paid down on a straight-line schedule
- Paying over 52 weeks but in 50 installments, allowing 2 weeks for national holidays
- Having a compulsory savings amount of 25 YFCs, payable every week
- Having a compulsory insurance premium of 10 YFCs, payable every week
- Having an origination fee equal to 1.5% of initial principal balance of the loan
- First installment being due on the day the loan is disbursed
… and so on and so forth.
MFTransparency takes this smorgasbord of product offerings and harmonizes them into APRs so that we can compare all the MFIs they talked to on. Because the 82 MFIs sampled represent about 80% of both the gross loan outstanding and the number of borrowers, it’s a very nice representative sample of the Indian microfinance market.
The Answer Is …
Anyway, enough background info. The top-line number, the APR for Indian MFIs sampled, is:
32.78% .. or 32.61%
Yes, it’s perfectly fine to round that to 33%, and leave it at that.
If you’re wondering why there are two numbers, it turns out there is a “it depends” surrounding the supposedly-ultimate-harmonizer, APR, also.
According to MFT, there are four possible interpretations:
APR India (Int + Fees + Deposit) : Interest + Fees + Security Deposit APR (excluding insurance) : Interest + Fees APR (Int + Fees + Ins) : Interest + Fees + Insurance APR (including security deposit) : Interest + Fees + Insurance + Security Deposit
Throughout their report, they use the two that are bolded. The one called “APR India” that includes deposits such as compulsory savings but does not include insurance is the one used by India’s Microfinance Institutions Network (MFIN). The one called “APR” is the more “international” one used by MFT generally, and includes insurance but does not include deposits.
It makes a difference on which one you use, as you can see from the graph below:
(The information presented in this graph is pulled from two graphs/tables in the report – figures 17 and 18 on pages 29 and 30 respectively.)
The implication of using one or the other is as follows:
- If you include insurance but not deposits (APR), co-ops have a much lower average interest rate, compared to other types of MFIs.
- If you include deposits but not insurance (APR India), public for-profit MFIs have the lowest average interest rate, but all types are pretty much at par with one another.
This is a result of the fact that co-ops use member savings and other forms of compulsory deposits as a source of funds to a greater degree than their peers.
Sadly, the report does not present APR values when you include all four – interest, fees, insurance and security deposit. It is available on their website though, but one needs to use the filters to pull out numbers for one type of institutions and one type of APR at a time. (Unlike MiX, you can’t get a ginormous Excel dump that includes all the data, as far as I can tell.)
I’ll try to pull all that together soon; in the meantime, the answer is 33%, more or less.