This is the first of a series of posts that will take a look at the numbers behind MFI operations. I find it to be quite an instructive exercise to wade through MFI data in the rare instances where they are available in any level of detail beyond mere institution-level aggregation, as presented in annual reports and the like.
We’ll first look at delinquencies and write-offs, and use the Indian MFI SKS as a case study of sorts. This is partly because the Red Herring released prior to its IPO provides a wealth of information that allows for more meaningful and in-depth analysis, and in general, affords a rare look at the inner workings of an institution enjoying prodigious growth while carving out a place in a rapidly evolving market. SKS is also the largest MFI in India, followed by Spandana and SHARE, and according to 2009 MixMarket data, serves about a fifth of the Indian MFI market. What we might glean from this is therefore relevant to a large chunk of the Indian microfinance market too.
PAR and Write-off as Measures of Delinquency
Well-run MFIs fastidiously maintain high portfolio quality. Many MFIs have primarily lent to women, who traditionally have excellent repayment rates. Many adhere to the Grameen group-lending model because they rely on peer support and pressure to enforce regular repayment habits. Very low delinquency and default rates have made this sector a favourite for investors, domestic and international.
Portfolio-at-Risk (PAR) is one of the standards of measuring delinquency for microfinance loan portfolios. It is defined as the total outstanding principal balance of loans with any amount of arrears due. Thus, if a $100 loan still has $45 in outstanding principal, and the $2 of that was due last week is not paid up, the PAR amount is noted as $45. In a way, PAR is the most conservative measure of how much loss the portfolio would suffer, since this is the maximum value that the MFI would lose from this loan if nothing more was ever paid back.
PAR is usually associated with a number of days count, where PAR30 would mean the total outstanding principal balance with any amount of arrears due for over 30 days, PAR60 for 60 days, and so on. Many MFIs will typically provision against 100% of the PAR120 amount, thus assuming that none of it can be recovered.
Once a loan is written off, it is no longer on the books of the MFI.
SKS Delinquency Profile
The unweighted averages for PAR30 and write-offs were 1.84% and 0.52% respectively for Indian MFIs with more than USD 10m in gross loan portfolio. When one considers the weighted averages, the corresponding figures are 0.59% and 0.54%. (The weight applied is principal outstanding.) We are interested in looking at the weighted average, by the way, because it gives us a sense of how every dollar (or rupee) in the portfolio is doing, on average, as opposed to every loan, which would be the case for the unweighted measure. Comparing the two PAR30s tells us that larger portfolios have much lower PAR amounts on average – this is quite interesting, and we’ll come back to why a little later.
This provides some context to PAR and write-off data for SKS for the last 5 years:
(Screenshot Source: MixMarket. Note that FY2010 denotes fiscal year ended Mar 31, 2010.)
Two things of interest jump out at me from this data:
- Write-offs levels went up from 0.29% in FY2008 to 0.60% in FY2009, and then up again to 0.86% in FY2010.
- The recent PAR30 and PAR90 rates are much less than the write-off rates.
Rising write-offs are an obvious issue. The PAR numbers also follow a similar trend. We’ll take a closer look at this in my next post.
Do you think it’s normal that the PAR numbers are less than write-offs, by the way? It’s quite an interesting phenomena, and we’ll focus on it on the third post of this series.