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BUK Analysis. As Table 1 shows, in Year 2001, BUK had a presence in 38.9% of villages in the district but was reaching only 9% of households in the villages served.
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BUK Analysis • As Table 1 shows, in Year 2001, BUK had a presence in 38.9% of villages in the district but was reaching only 9% of households in the villages served. • This was reflected in its Year 2001 performance (Table 2) with the operating expense ratio (as a proportion of average portfolio) being as high as 115.1%. Thus, to service an outstanding of one rupee, BUK was spending Rs. 1.15. • Not surprisingly, the operating self-sufficiency ratio of BUK was only 26.5%.
BUK Analysis • In Year 2002, BUK focused on consolidating its new branches. It did not increase the number of villages served but increased the number of households served in each of its villages. (Increasing outreach by depth rather than breadth strategy) • The proportion of households served to the total number of households in the villages serviced increased to 32% (Table 1) along with a 400% increase in clients. • This increase in the client base was achieved by only a 13% increase in staff strength. The investment in thorough induction of new staff paid off and productivity increased from 40 clients per member of staff to 180.
BUK Analysis • During the Year 2002, BUK reduced interest rates on its loans from 20% flat to 15% flat. • BUK also introduced a new Mid Term Loan product that enabled borrowers who had earlier received IGL and repaid regularly for 25 weeks to take another loan. • This helped to increase the total portfolio and consequently portfolio per staff member. The portfolio serviced by each staff member thus increased by over 500% from Rs 1.2 lakh to Rs 7.8 lakh.
BUK Analysis • In spite of increasing its portfolio, BUK managed to maintain zero portfolio at risk, due to its successful induction of staff combined with intensive training of its group members. • In addition, the information systems in place adequately supported the staff to meet the demands of managing a substantial portfolio. • It is apparent from Table 2 that BUK showed a marked improvement in both the operating expense ratio (OER), which came down to 37.3%, and the operating self-sufficiency ratio, which increased to 64.6% in 2002.
BUK Analysis • In Year 2003, BUK continued its expansion by adding five more branches and venturing into the neighbouring district of Laxmipur. • The total number of villages serviced increased but its proportion to total number villages in the district fell due to venturing into a new district. The concentration within the villages has also come down.
BUK Analysis • BUK recorded growth both in terms of active borrowers and total loan outstanding portfolio but at a decreasing rate while maintaining its excellent portfolio quality. • The number of active borrowers recorded a growth of 119% over the last year and total portfolio outstanding recorded an increase by 28% over the last year. • This was achieved with 56% increase in staff strength. The growth in terms of absolute numbers has been higher in Year 2003 than in Year 2002.
BUK Analysis • Table 2 shows that in Year 2003, the operating expense ratio has come down to 25.2%, which is lower than its yield of 28.8%. This is an important landmark in the progress of BUK though it is not sufficient for achieving sustainability (OSS>=100%). • For reaching sustainability – when operating income covers all the expenses – yield on portfolio has to be higher than both operating expenses as well as financial costs. • This is not the case for BUK in 2003 since the difference between the operating expense ratio and yield is only 3.6% while its financial cost ratio is 9%. The net result is an operating self-sufficiency ratio of 82.6%.
Conclusion • High initial investment in fixed infrastructure and computerized MIS increases the operating expense ratio initially when the costs are spread over a lower client base. • The choice of methodology has implications for the cost structure. The Grameen model is extremely human resource intensive. This makes this methodology cost intensive and hence requires a large client base to break even.
Conclusion • It is important to improve staff productivity in terms of both numbers of clients reached as well as loan outstanding serviced. • If the staff covers a very high number of clients with low outstanding then the transaction costs of serving such a client base are very high. • Similarly, very few clients with high outstanding balance lead to a very high co-variant risk. • BUK has shown considerable improvement in both the indicators of staff productivity, which has been one of the main reasons for the reduction in its operating expense ratio.
Conclusion • Change in product design and introducing a new loan product significantly increased the portfolio outstanding, which could be serviced at almost the same costs. • The strategy of expansion has cost implications. While increasing outreach it is important to consider whether to increase the breadth or depth of outreach or both.
Conclusion • In spite of considerable progress made by BUK, its operational costs are still high and it has still not achieved operational self-sufficiency. • BUK needs to concentrate on reducing its operational costs further to achieve operational self-sufficiency. • This could perhaps be done by refocusing on depth of outreach, which reduced during Year 2003.
