Posted by Michael Chasnow at 1:55pm on Sunday, October 12, 2008, available at: http://www.indiadevelopmentblog.com/
The following is an anecdote detailing the effect of the financial crisis on the business operations of one Indian microfinance institution (MFI). Michael Chasnow does not provide any identifying information on the MFI, but the story is an interesting counter-balance to the claims of Yunus and Clinton on the balmy, if not ameliorative, effect of the credit crisis on microfinance. For more information, please see Microcapitol’s recent coverage of the crisis’ effect on microfinance and Jerry Peloquin’s recent guest editorial on the credit crunch and socially responsible investment.
“In the field, CMF research associates see how microfinance institutions work on the day-to-day. Often, operations are not as perfect as microfinance proponents profess them to be. For instance, one of my colleagues noticed the following . . . .
In the face of the global financial crisis, the verdict is still out as to how this will affect microfinance industry: Yunus and Clinton are promoting microfinance in these turbulent times as a “viable investment,” while SKS strikes a note of caution.
The story at one medium-sized well established microfinance institution in India is slowly beginning to emerge: Twice in 2008 – once in March, and once again in July – the institution has raised their interest rates from a 10 percent flat fee to 12.5 percent and then again to 15 percent. The CEO of the MFI has repeatedly said that the interest rate hikes are a direct result of their own higher borrowing costs from mainstream banks.
How has this affected the institution’s operations? To assure that clients applying for new loans would pay the new, higher, interest rates, the MFI suspended new loan disbursals for a month and a half before each interest rate hike. During this disbursal moratorium, the MFI scrutinised and vetted loan applications, rejecting a far higher number of applicants than before, for reasons such as spotty repayment records during previous loan tenures. Some clients were understandably upset about both a hike in interest rates and a delay in loan disbursal; on a recent field visit, a CMF RA and surveyors were confronted by angry clients refusing to be surveyed until the MFI’s loan officer came to process their loan application that had been delayed for two months. Another effect of the loan processing delays was that clients turned to the MFI’s competitors for loans to avoid the higher interest rates and slow loan processing times.”
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