Liquidity crunch may hit business of MFIs

Micro financing which has witnessed high double-digit growth in the past few years will take a hit owing to high cost of funds due to tight liquidity scenario across the world.

“The growth of the sector may slowdown as the cost of funds have gone up....But I see it as a temporary phenomenon,” Access Development Services chairman Brig Moan.

The sector that picked up quite well in the country is providing small loans to low-income individuals or groups who would otherwise have no other means of gaining financial services from banks.

The micro finance institutions (MFIs) have seen a growth of about 60 per cent in the last few years while the number of clients have increased by 40 per cent, he said.

Traditionally, MFIs have been raising funds as well as giving loans at higher interest rate than commercial banks.

In a scenario, where the liquidity situation has tightened, the cost of funds have gone up significantly, said Brig Moan, adding, it would have impact on the lending rate.

“But as the sector is growing fast, maintaining high level of competency is a problem...Legitimacy is also lacking and so there is undue interference of the local bodies,” he pointed out.

At present, there are 50 million individual clients of MFIs. The micro finance institutions have a Rs 50,000 loan cap for each client, which extends to Rs 1,25,000 in case of loans for housing sector.

Access is a national level resource agency that supports the organised growth of the micro finance sector in the country.