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Financial Resources of the Microfinance Sector: Securitisation Deals - Issues and Challenges

Vol 24, No 1; Article by M Jayadev and Rudra Narasimha Rao; March 2012

Interview with the MFIs Grameen Koota and Equitas

Microfinance institutions (MFIs) cater to the large number of individuals who are denied access to the banking sector. The early stage microfinance institutions (MFIs) were nonprofit institutions. However, to meet the increased asset size, MFIs were projected as a profitable investment opportunity to public and private equity markets. To meet the expectations of equity investors MFIs started charging very high interest rates which left the rural people burdened with debt. An alternate way of raising resources at moderate cost is bilateral assignment and securitisation of microfinance loans.

This paper discusses in detail, the financial sources of MFIs in general and securitisation deals in particular by interviewing the senior executives of two microfinance institutions - Equitas and Grameen Koota. Currently the Indian microfinance sector is in deep crisis with mass defaults and many banks have stopped their financial support to MFIs.

Burdened with defaults many MFIs have closed their operations. We argue that the microfinance sector needs to be revived to meet the broader goal of financial inclusion. Banks and MFIs have to collaborate with each other to meet this objective. Banks have to encourage MFIs to shift over to low cost finance either by giving direct loans or through innovative deals like securitisation. Commercial banks have to leverage MFIs for their origination and recovery capabilities in small loans.