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 Personnel Productivity Ratio and how it can contribute towards defining the overall quality of the portfolio.
Personnel Productivity Ratio
This ratio captures the productivity of the institution’s staff – the higher the ratio, the more productive the institution’s staff. Indirectly, the ratio says a fair amount about how well the MFI has adapted its processes and procedures to the administration of its products and services. Low staff productivity does not necessarily mean that personnel are not working hard. It may show that they are tied up in excessive paperwork and procedures.
Traditionally, the microfinance community used the ratio of clients per loan officer (or loans per loan officer, see Loan Officer Productivity Ratio) to measure productivity. While this is a useful indicator, the Personnel Productivity Ratio includes all staff instead of only loan officers in the denominator and thus captures an institution-wide perspective on staff productivity. This is particularly relevant when an MFI has efficient loan officers but cumbersome and bureaucratic back-office procedures (or vice versa). In order for MFIs to succeed they must learn to maximize productivity by using the least amount of resources to process the greatest volume of loans in a way that does not sacrifice portfolio quality or customer service. This critical equilibrium of efficiency and productivity must be paramount at every level of the MFI and a key measure of operational management.
The Personnel Productivity Ratio is more useful and more accurate for smaller financial institutions that have a focus on growing their client base while Revenues per Employee is more suited to larger, more commercialized banking that seek to grow portfolio size.
In the next blog we will look at Loan Officer Productivity Ratio and how it impacts the overall efficiency and productivity of a MFI.