# **Banadesa’s Output Index**

Given the data limitations in defining specific lines of business and in adequately allocating related costs and subsidies, the study measures the extent to which Banadesa meets broader social objectives, such as lending more to the poor rather than lending to specific subsectors of agriculture (for example, livestock) that do not necessarily correlate with low (or high) income borrowers groups. According to data provided for _Fondos Propios_ in 2003, loan size is taken as a proxy for the borrowers’ income. Thus, assuming that loan size and borrower’s income are highly correlated smaller loans are being extended to poorer clients.

**_Assigning weights according to income group categories._** The underlying assumption is that the government’s social objective function is to maximize lending to lower-income groups. Therefore, the government implicitly sets priorities and assigns a relatively larger weight to a lempira that is extended to lower-income groups than to a lempira that is lent to higherincome groups. This larger weight results in a higher social return on the nominal subsidy granted.

Income groups should be defined in order to differentiate between poorer and richer borrowers. As a first approximation, thresholds were set on the basis of monthly average amounts lent, which were loosely based on the poverty line for Honduras to define the lowest-income group.<sup>24</sup> The resulting three income groups are (a) the low-income group for loans below L2.5 million (US$125,000), (b) the medium-income group for loans between L2.5 million to L100 million (from US$125,000 to about US$5 million), and (c) the highincome group for loans above L100 millions (US$5 million). Since the government assigns greater weights to lending to lower-income groups than to higher-income ones, the weights that follow are set accordingly, with the highest weight (0.5) for the lowest-income group.<sup>25</sup> Those that pay the subsidy bill should explicitly determine priorities and should assign the corresponding weights to compose the OI. This decision should be taken by government officials, donors, chief executive officers, and DFIs’ boards of directors (See table 3).

**Table 3. The Monthly Average Amount Lent (Flows) during 2003**

|**In L(000)**|**Number of**<br>**loans**|**Amount**<br>**in L millions**|**Income group**|**Total amount per**<br>**income group**|**Weights**|
|---|---|---|---|---|---|
|<2.5|826|1|Low|1|0.5|
|2.5–10|2,606|16||||
|10–50|4,277|104|Medium|200|0.3|
|50–100|1,087|80||||

24 The income of the lowest group is roughly equivalent to that of individuals who are below the poverty line. However, this approximation faces several weaknesses, including the lack of information related to demographic data (it was assumed that loans were extended to households; therefore, the process of defining the income groups was adjusted to reflect the loan size that corresponded to the poverty line per individual borrower).

25 These weights are arbitrary. Weights may vary, but higher weights should be assigned to the lower-income groups, thereby reflecting a higher social desirability to financially serve lower-income groups rather than higher-income groups.

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