## Skinning the APR Cat

How important are compulsory deposits, insurance, etc. to calculating Annual Percentage Rates (APRs)? I played around some more with the MFTransparency dataset on India I wrote my last post on to answer this question, and it seems the answer is, “it depends”.

The Pricing Data Report looks at APR including deposits and APR including insurance, but in addition to this, the web portal offers APR figures that include neither, and that include both. It then becomes a trivial exercise to figure out how much compulsory deposits and insurance contribute to APR.

#### Intuitively Speaking …

The graph below is shows what happens when you calculate APR by including neither of, one of or both of the two constituents – deposits and insurance:

The red and blue columnar bars were presented before; the grey one is kind of a baseline without neither deposits or insurance, and the green one includes both. The error bars are the maximum and minimum.

By seeing how the red and blue bars change compared to the grey, we get an intuitive sense of what is going on. For co-ops, there is a small change of about 1% from the base 23% when you include insurance, but when you include deposits, it shoots up to 35%. On the other hand, for for-profit public MFIs, there is no difference from the base value of ~30% when you include deposits, but on including insurance, this moves up about 3%.

#### More Formally …

Fortunately, the MFT site allows you to download all the data and come up with precise numbers for what the differentials with respect to deposits and insurance. The graph above is built off of columns A, B, C and D from the table below. Columns E and F give us the differentials.

This tells us that:

- Co-ops charge an additional 1000+ basis points on top of interest and fees by taking
**compulsory savings and deposits** - For profit public MFIs charge an additional 250+ basis points on top of interest and fees by charging for
**insurance** - Other types of MFIs charge between ~100 and ~250 additional basis points on top of interest and fees through insurance and deposits

How’s that for “it depends”?

This also goes to show why proper pricing is so important – if one were to look at the top line numbers reported for interest rates, one would very easily conclude that Co-ops were about 10% cheaper than other MFIs as a source of funds.

By the way, the “Unexplained” in the last column is essentially the difference between the kitchen-sink APR as reported by MFT, and the kitchen-sink APR that we get when we reconstruct it from its constituent parts. That all the numbers are less than 1% is a good sign – we’re not missing some big chunk of data when we do the differentials.

#### Market Leveling

While there is a fair degree of divergence on what constitutes APR, it turns out that the averages for each type of organization is within a narrow band of **32.3% and 36.7%**. Not surprising, since the Indian microfinance sector has many players and is increasingly saturated, leading to a leveling of the marketplace when it comes what a financial institution can charge a for a fairly similar service to a fairly similar market segment.

It would be interesting to see how the reported interest rates diverge from this APR, and hopefully that will be the topic of the next post.

#### Skin Your Own Cat

I’ll briefly outline how to get the data I used to pull together the tables and graphs above, since it’s a little involved:

- Go to: http://www.mftransparency.org/data/countries/in/data/
- Under
**Filter Graph Results**on the right, select the kind of**Calculation Method**you want to use (there are four types – stick to one) - Also under Filter Graph Results on the right, select the kind of
**Institution Type**you want to use (there are six types) - Make sure the
**Loan Size**and**Number of Clients**boxes are empty (the site fills them up with some defaults – this may filter your results. Also, do not press “All” button under the graph – it reverts to some kind of default …) - Hit
**Filter Graph** - From the page that comes up, select the table only, and paste it into an Excel worksheet
**As Text** - Go back to step 3, choose another kind of institution and follow steps to #6, pasting in a new worksheet
- Once all institution types are done, go back to step 2, choose another calculation method, then go through #3 to #7
- Once all calculation methods are done, throw in your formulae in Excel

Yes, you will have to pull in 24 feeds from the site to get all the data, so take care as you consolidate data. Wouldn’t it be nice if you could have one extra column for institution type, and then a column each for each of the types of APR calculations.. Probably wouldn’t fit on the website, but that being available even as a CSV would have made life so much easier.

I should also note that the numbers I got from the raw data are slightly different than the average, maximum and minimum values that are in the report, but I couldn’t tell you why.

## India Transparent Pricing Initiative, MFTransparency

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.

#### Transparency Why?

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.

#### But …

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 + FeesAPR (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.