Although it may not be credible, some microfinance institutions and credit unions do not carry out studies of the interest rates they charge their users, but only take market rates and add a plus, without any cost analysis. Given this reality, this article aims to sketch how the active interest rate is calculated in practice, which, according to theory, is determined based on five factors: financial costs, risk premium, operating costs, ROE and the market.
The financial costs are calculated based on the interest paid by the deposits and national and international lines with which it could be disposed; the risk premium is made up of the provisions for bad debts for the year; and ROE (Return On Equity - Return on equity or Return on equity), for the profit margin expected by the Credit Institution.
However, the most important value obtained from this calculation is the interest rate at the break-even point, where the Credit Institution does not win or lose and manages to exactly cover its financial costs, credit risk and operating costs. Precisely when adding to this equilibrium rate, the profit margin that is desired to be received, is what determines the active interest rate that is charged to the users.
However, the decision of the ROE to assign will depend on market conditions, more precisely, on the existing market power, both on the part of supply and demand.
Regarding the work methodology, there are several steps to follow. The first step will be to unfold the items of the State of Profits and Losses (EGyP) in National Currency (M / N) and Foreign Currency (M / E); as well as doubling the total placements in the credit products that the Credit Institution has.
A second step will be to assign the different items of the EGyP to the different credit products, based on the type of currency and their participation in the total placed by type of currency, with the exception of interest and provisions, which is by cost.
A third step will be to separate the different items of the EGyP into Fixed Costs and Variable Costs; for each type of product and sub-product.
Immediately afterwards, Fixed Costs and Variable Costs will be subtracted from Financial Income, obtaining Net Profit per product.
As a penultimate step, the percentage share of Financial Income (Interest on loans plus Other Income), Financial Costs, Credit Risk (provisions), Operating Costs and Net Income with respect to the Loan Balance will be determined, by type product; Then, the sum of the percentages of financial costs, credit risk and operating costs will be calculated to calculate the Interest Rate at the Equilibrium Point, that is, the rate necessary to cover said costs and expenses.
The last step will be to add to the Interest Rate at the Balance Point the ROE that the company wants to receive. The sum of both must be between the market ranges, to be competitive in prices.
Needless to say, the important thing is not to have the lowest interest rate, but to offer the best service. If the chosen strategy is a lower price, you must be willing to permanently improve the cost structure.
