Microfinance Private Equity

MFI Pricing and Valuation – An analysis of key drivers

A public discussion on MFI Pricing and Valuation – an analysis of key drivers – Suyash & Nitin of IFMR Trust and IFMR Holdings

The views presented in this discussion note are solely those of the authors and do not in any way reflect the views of IFMR Trust and/or its Affiliates.

The objective of this paper is to:

Analyze a stylized model of MFIs, with the key operating assumptions underlying their business model, and try to build a relationship between operating costs and various parameters of growth and efficiency.

Present a framework for pricing the micro loans for MFIs, which allows us to understand the various components of the pricing, test different scenarios, and arrive at a range for interest rates for micro loans under these scenarios.

Discuss the possible reasons behind the differences between the prevailing interest rates and those predicted in this note. The discussion, though situated in the context of India, is global in scope.

CONTENTS

Micro finance interest rates …………………………………………………3

The model of loan pricing for an MFI …………………………………….4

MFI operating assumptions…………………………………………………5

Analysis…………………………………………………………………………..8

Sensitivity analysis ……………………………………………………………8

Profitability analysis ………………………………………………………..11

Why are the prevailing interest rates higher than implied by our model?..14

Summary and conclusion………………………………………………….15


Tables

1 Conversion factor: Flat interest rates to YTM ……………………………..4

2 MFI Head office costs (% of outstanding) at different growth stages ..7

3 TBU cost components as % of loan outstanding …………………………..8

4 Transaction cost sensitivity to Field Officer productivity………………8

5 Growth Scenarios considered for finding the impact of growth on cost..9

6 Transaction cost sensitivity to FO productivity and MFI growth ………10

7 Loan Size scenarios considered for finding the impact on costs ……….10

8 Transaction cost sensitivity to Loan cycle amounts, for given FO productivity….11

9 Cash flows to equity holders and their IRR …………………………………..12

10 IRR sensitivity to upfront fee and interest rates charged for the best case scenario.13

11 IRR sensitivity to upfront fee and interest rates charged for the pessimistic

case scenario ………….14

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IFMRTrustDiscussionNote-MFIPricingandValuation– 265KB – 24Pages

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