Chapter 4 - Section 4.4 - SubSection 4.4.2Operational Self Sufficiency (OSS1)

Operational Self-Sufficiency is a financial metric for Microlending Institutions (MLIs) that measures their ability to cover total operational, financial, and loan loss costs by the operating revenue from interest, fees, and commissions received by them during a year. Its importance lies in its role as a key indicator of an MLI’s ability to become financially sustainable, grow, expand its outreach, and serve underprivileged populations. However, the dual role of an MLI in furthering affordable credit to low-income households and maintaining a self-sustainable income makes it challenging for the MLIs. The financial year 2024-25, in particular, tested MLIs’ long-term self-sustainability while providing credit at an affordable price. The aggregated OSS for the industry in FY 2024-25 is 104% (mentioned in Figure 4.4.1). This shows that the MLIs barely managed to cover all their expenses from the income received during the year. From Figure 4.4.1, it is evident that this is the lowest OSS over the last 8 years and is almost at the level of FY2020-21, which was the pandemic year. At the individual institution level, six institutions reported an OSS below 100%, indicating that their income was insufficient to cover their total expenses.

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YAverage OSS of MLIs over the years

Average OSS of MLIs - Category Wise

Average OSS of MLIs - Size Wise

OSS based on average loan size

Average OSS of MLIs - Size Wise

4.4.2 Operational Self Sufficiency (OSS1)

Operational Self-Sufficiency is a financial metric for Microlending Institutions (MLIs) that measures their ability to cover total operational, financial, and loan loss costs by the operating revenue from interest, fees, and commissions received by them during a year. Its importance lies in its role as a key indicator of an MLI’s ability to become financially sustainable, grow, expand its outreach, and serve underprivileged populations. However, the dual role of an MLI in furthering affordable credit to low-income households and maintaining a self-sustainable income makes it challenging for the MLIs. The financial year 2024-25, in particular, tested MLIs’ long-term self-sustainability while providing credit at an affordable price. The aggregated OSS for the industry in FY 2024-25 is 104% (mentioned in Figure 4.4.1). This shows that the MLIs barely managed to cover all their expenses from the income received during the year. From Figure 4.4.1, it is evident that this is the lowest OSS over the last 8 years and is almost at the level of FY2020-21, which was the pandemic year. At the individual institution level, six institutions reported an OSS below 100%, indicating that their income was insufficient to cover their total expenses.

Figure 4.4.1: Average OSS of MLIs over the years and its break-up between various categories

There is a direct relation between average loan outstanding per borrower and OSS. It has been observed that higher average loan balances contribute to higher revenue, potentially boosting OSS by increasing operating income. However, this must be balanced against the risk and efficiency implications of lending larger amounts, which could also increase operating costs and negatively impact OSS.

Figure 4.4.2 depicts the change in OSS for various average loan outstanding buckets.

Figure 4.4.2: OSS based on average loan size

Operational Self-Sufficiency (OSS) and yield share a positive relationship only up to a certain threshold; after this threshold, higher yields result in diminishing sustainability. As observed, OSS rises with yields between 15–30%, reflecting increased revenue to cover operating and financial costs. However, when yields exceed 30%, OSS declines. This is because higher interest charges often accompany higher operational complexities, credit risks, and borrower defaults. Excessive repayment burdens can weaken portfolio quality and increase loan losses, eroding financial gains. Additionally, reputational and regulatory pressures associated with high pricing add to costs. Thus, beyond a point, higher yields undermine efficiency and sustainability.

Figure 4.4.3: OSS based on yield category