Microfinance Information Exchange (MIX), a nonprofit that seeks to offer objective data and analysis on microfinance players, recently examined historical data from 2003 to the present from 100 MFIs in India to assess the hypothetical impact of capping interest rates at 24 percent and return on assets (ROA) at 3 percent, two limits effectively imposed by the state government on MFIs amidst the ongoing crisis in the microfinance industry in India’s Andhra Pradesh state.

To simulate a cap on interest rates, MIX adjusted historical revenue from loans so that yield levels did not exceed 24 percent per year. To simulate a cap on returns, MIX adjusted historical operating income so that ROA never exceeded 3 percent. In both cases, the amount of the adjustment is subtracted from actual net income and equity levels for the period being analyzed, and that loss is carried forward year-over-year.

MIX found that 10 million loans that exist today would not have been disbursed had the caps been in place since 2003. Many small MFIs would have been forced to shut down. Leverage ratios of the remaining MFIs would be higher, indicating a less stable industry. Returns for MFIs would also be low across the board: half of the remaining organizations would lose money each year.

By John Howard-Smith, Research Associate

About Microfinance Information Exchange (MIX): Established in 2002, Microfinance Information Exchange (MIX) is a nonprofit organization with headquarters in Washington, DC, and regional offices in Peru, Morocco and India. It is a global, web-based, microfinance information platform. MIX provides detailed financial and social performance information from microfinance institutions (MFIs), as well as business information from market facilitators and donor organizations and investors in microfinance. As of 2010, MIX Market, the arm of MIX that reviews and analyzes MFI information, provides data on over 1,800 MFIs, over 100 investors and nearly 200 partners. MIX was founded by CGAP (Consultative Group to Assist the Poor) and is sponsored by Citi Foundation, Deutsche Bank Americas Foundation, International Fund for Agricultural Development (IFAD), the Bill & Melinda Gates Foundation and Omidyar Network.

[1] Microfinance Information Exchange: “India scenario analysis: What if microfinance was less profitable?”, http://www.themix.org/publications/microbanking-bulletin/2010/11/india-scenario-analysis-what-if-microfinance-was-less-pro?page=0,1

MicroCapital.org story, November 16, 2010: “MICROCAPITAL BRIEF: Under Pressure from State Government of Andhra Pradesh, Indian Microfinance Institutions Agree to Cap Interest Rates at 24%”, http://www.microcapital.org/microcapital-brief-under-pressure-from-state-government-of-andhra-pradesh-indian-microfinance-institutions-agree-to-cap-interest-rates-at-24/

MicroCapital.org story, November 15, 2010: “MICROCAPITAL BRIEF: India’s Microfinance Industry on Brink of “Collapse” Due to Credit Freeze in State of Andhra Pradesh”, http://www.microcapital.org/microcapital-brief-indias-microfinance-industry-on-brink-of-collapse-due-to-credit-freeze-in-state-of-andhra-pradesh/

MicroCapital.org story, November 9, 2010: “MICROCAPITAL BRIEF: Payment Strike Hits India’s Andhra Pradesh State As Local Governments Urge Microfinance Borrowers Not to Repay”, http://www.microcapital.org/microcapital-brief-payment-strike-hits-india%E2%80%99s-andhra-pradesh-state-as-local-governments-urge-microfinance-borrowers-not-to-repay/

MicroCapital’s Microfinance Universe profile: Microfinance Information Exchange (MIX), http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microfinance+Information+Exchange+(MIX)

Browse the MicroCapital Universe and add your entry to the wiki at: http://www.microcapital.org/microfinanceuniverse/