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 Loan Officer Productivity Ratio and how it can contribute towards defining the overall quality of the portfolio.
Loan Officer Productivity Ratio
This ratio captures the productivity of the institution’s loan officers – the higher the ratio, the more productive the institution. It is one of the most recognized performance ratios in the microfinance industry. Like the Personnel Productivity Ratio, the Loan Officer Productivity Ratio says a fair amount about how well the MFI has adapted its processes and procedures to its business mission of extending microcredits.
The Loan Officer Productivity indicator, like the Personnel Productivity Ratio, is easily distorted by including consumer credit or pawn loans, which are vastly different than microcredits. Both consumer and pawn lending rely heavily on collateral and less on repayment capacity. This makes it possible to process a high volume of loans with few staff members. As such, consumer and pawn loans should be excluded in the calculation of this ratio.
Loan officer productivity must also be analyzed with the portfolio quality of the loan officer’s portion of the portfolio. Loan officer incentives for increasing their number of borrowers must be balanced against incentives to maintain portfolio quality, or officers will be encouraged to make risker loans.
The banking sector does not use ratios that are similar to the Loan Officer Productivity Ratio. In the traditional banking sector Loan Officer Productivity is primarily focused on the amount loaned and the quality of that loan.
In the next blog we will look at Financial Management Ratios such as Financial Expense Ratio, Cost of Funds Ratio, Debt to Equity Ratio and how they impact the overall profitability and efficiency of a MFI.