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Perspective : Some Misconceptions widely Held May endanger ... ` The Expected Impact The impact of the present financial crisis on micro financing is visible in two areas- funding and repayment records of these institutions. It is true that foreign funds availability to these institutions almost tripled during the period starting from 2004 to 2006 as has been brought out in a study made by CGAP. But the same study has revealed that very fast declining trend has already started and now the borrowing cost also has started rising. Beside this it has also been observed that some global banks have started withdrawing funds from these institutions and even local banks have become lukewarm in funding these institutions. Indeed these are ominous signs notifying the emerging slump slowly brewing up in these institutions. One should not however be dismayed as flow of funds from international finance corporation-one of the arm of world bank has been growing each year by no less than 55% each year. But as brought out by Elizabeth Littlefield, some global banks are pulling out and the cost of fund has been constantly rising due to liquidity crisis and constant exchange rate fluctuations. In fact most of the MFIs are finding difficulties in borrowing from their local banks. As one of the recent IFC studies has revealed that there would be potential gap of over $1.8 billion this would obviously reduce the resource raising capacity of MFIs and ultimately affect the growth of these institutions. Impact on growth and health of loans Moreover such constraints would further affect these institutions as these mostly provide short term consumption and business loans and therefore do not generate growth of the economy. It has been rightly observed by Justin Oliver of Centre for Microfinance of Chennai that borrowers are utilizing new loans from one MFI to pay off their debts to other. In a recent study made by IFC that top 150 MFIs have shown that their delinquency rate for 30 days have risen from 1.2% to 3%. This rise is obviously bad sign for future growth of MFIs as these institutions have been enjoying the reputation for a long time of very high level of repayment record-almost 99 per cent. Strategy to encounter the impact It would be necessary for these institutions to develop appropriate strategy to emerge as a growing institution for poverty alleviation and creating economic and social institutions to generate economic activities and social amenities for the poor so that they could have financially and physically healthy life. In this regard the first priority would be to create additional source of funding like taking deposits and equities from people and institutions like banks and insurance companies including private equity funds from

venture capital funding institutions. This strategy itself would compel these institutions to change the pattern of financing short term requirements of borrowers to a comprehensive project financing model. This model would help these institutions to tap large number of funding institutions and also to avail re-financing of their loans from central banks and specialized institutions like NABARD and SIDBI in India. It would obviously bring these institutions under the regulatory institutions of the country and that would help them to develop better management skill and operation policies and processes as these would have the benefit of offsite supervision of regulatory authorities of the country. Conclusion Such transformation and adoption of above strategy need detail preparation and obviously change in the mindset of promoters and executives of these organizations. It has been observed that most people like to jump on immediately accessible opportunity where least efforts and resources are needed. It is therefore not very surprising to observe that most of the micro financing institutions have taken the easy course where least competition exist and perhaps where opportunity exist to exploit, of course much less than money lenders, and charge high rate of interest without creating any resistance from the borrowers. But the objective of micro financing institutions is not exploitation and just to become less repressive than moneylenders and occupy the place so vacated by moneylenders without any revolt or resistance. Its objective is much more than this narrow path often pursued by these institutions. Its origin is with a very noble objective to generate inclusive growth and alleviate the poverty of neglected sector of the society by generating economic and social activities and facilities for them. This could be possible only when strategy of amalgam of public and private institutions is created both for funding, managing and sharing risks. This model is called public private partnership model and worth trying during the present critical period. *********************** About the Author: Dr. Sourendra Nath Ghosal holds a PhD in Finance and holds Master degrees in both commerce and Economics. He has experience taught for 18 years in colleges and university of Jodhpur Rajasthan; Worked as principal cooperative training college for about 2 years at kalyani w. b. He worked with United Bank of India FOR 22 years and retired AS G.M. credit. He has also authored several books and Papers published in several national and International journals & newspaper. You may reached him at

Microfinance Focus [ April 2009 ] 12

Microfinance Focus April issue 2009  
Microfinance Focus April issue 2009  

A Global Magazine on Microfinance and Sustainable Development