Efficiency & Productivity Indicators
Efficiency and productivity indicators give an indication of how well an institution performs operationally. Productivity indicators reflect the amount of output per unit of input, while efficiency indicators also take into account the cost of the inputs and/or the price of outputs. Since these indicators are not easily manipulated, they are more readily comparable across institutions than profitability indicators such as Return on Equity and Return on Assets, for example. On the other hand, productivity and efficiency measures are less comprehensive indicators of performance than those of profitability.
Microfinance institutions have much lower rates of efficiency than commercial banks because on a dollar per dollar basis, microcredit is highly labor intensive: a hundred-dollar loan in a microfinance institution requires about as much administrative effort as a loan that is a thousand times larger in a commercial bank.
In this blog we will look at Cost per Borrower Ratio and how it can contribute towards defining the overall quality of the portfolio.
Cost per Borrower Ratio
This ratio provides a meaningful measure of efficiency by showing the average cost of maintaining an active microcredit borrower. Since the size of the loans is not part of the denominator, institutions with larger loans do not automatically appear more efficient, as is commonly the case with the Operating Expense Ratio. The Cost per Borrower ratio is, in this sense, a “fairer” indicator than the Operating Expense Ratio.
This ratio complements the Operating Expense Ratio. It is tempting to simply conclude that high operating expenses are a sign of inefficiency, just as it is tempting to believe that low PAR is analogous to excellent portfolio quality. Both could be wrong.
The Operating Expense Ratio and the Cost per Borrower Ratio move in opposite directions. As loan increases, Operating Expense Ratio decreases, while the Cost per Borrow increases.
The banking sector does not use the Cost per Borrower Ratio, possibly, due to the focus on the amount of portfolio that generates profits, more than a focus on the number and cost per borrower.
In the next blog we will look at Personnel Productivity Ratio and how it impacts the overall efficiency and productivity of a MFI.