extent that loan losses, transaction costs, or both are above the “good” standards that characterize lending to the specific target clientele, and to computing the effect of potential change in the cost or revenue of conspicuous components that determine the SDI.

The SDI can be computed for any period—a month or a decade (to overcome business cycle issues). However, practical experience shows that an annual analysis that conforms to the periods for which the budget and the audited financial statements are prepared is an instrumental practice. Consistency in the underlying assumptions from period to period is more important than the absolute accuracy of the figures included in the SDI computation. The SDI is a ratio that measures the percentage of increase in the average lending interest rate required to compensate a DFI for the elimination of subsidies in a given year, while keeping its ROE equal to the approximate nonconcessionary borrowing cost.

The SDI by itself does not clarify how the subsidy was used or whether most benefits were accrued to the target clientele or consumed by an inefficient bureaucracy. The advantage of the SDI is its simplicity as it focuses exclusively on the intake of the subsidy. The SDI should be seen in some instances as a lower limit because full financing of DFI activities is likely to be difficult at current market borrowing rates, especially if their financial performance is dismal. However, calculating this lower limit is vital for ascertaining either the DFI’s progress toward self-sustainability or the social desirability of its continued subsidy dependence.

The analysis that starts with the computation of the SDI should not be pressured to raise lending rates just because the SDI computation indicates a technically needed change in the lending rate that will fully eliminate the subsidy dependence. On the contrary, there should be a focus on cost saving and adequate loan collection, and comparisons with related data of world performance leading DFIs that serve similar clientele should be included in the analysis.

The quality of the accounting data clearly affects the capacity to generate an accurate SDI. However, even when the accounting data are not fully reliable, computing the lower bound of the SDI is always possible by applying simple, straightforward working assumptions. When consistently applied, the SDI computation could be instrumental in evaluating the performance of the DFI, as well as in focusing on the need to further improve the accounting system and procedures to comply with GAAP and international auditing standards.

In particular, the issue of the adequacy of the provisions and reserves for loan losses requires special attention, and the scope of internal and external auditing should aim at coping with that challenge. Sensitivity analyses related to estimating increase in annual provisioning for loan losses could be instrumental when doubts arise about the working assumptions that determine the adequacy of such provisioning.

Although removal of subsidies received by a DFI is not always politically feasible or economically desirable, measurement of any subsidy is always warranted, economically and politically, because it could lead to a better resource allocation. Computing the subsidy dependence of DFIs would contribute to essential disclosure of basic data that are imperative to enlighten the public debate about use of scarce public funds. Without an SDI indicator, the public would continued to be fed with information that is confined to partial DFI 12