CAUSES ANDIMPACTS OFNONPERFORMINGLOANSONTHEOPERATIONSOF MICROFINANCE INSTITUTIONS

Abstract

The study was conducted to examine both the Causesand impacts of nonperforming loanson the operations of MFIs particularly focusing on Specialized Financial and Promotional Institution. Loan portfolio is the major assets of any financial institution to sustain in the industry, but once some portion of this asset is unexpectedly stop producing interest incomes, the quality of loan portfolio also negatively affected. This research study adopted descriptive and explanatory researchdesign on the causes of nonperforming loans of Specialized Financialand Promotional Institution, and datahas been collected mainly through primary source using questionnairefrom SFPI staffs. A case study approach was also used to collect secondary data by reviewing the annual reports and income statement to identify the extents of NPLs impacts on the operation activities of SFPI. So, 65 staffs were taken as samples based on stratified random sampling method of sample selection by using mathematical formula. For data analysis, descriptive statistics including mean, frequency, percentages, graph, pie chart and simple excel were used. Regression analysis used through SPSS software version 20. This researchstudy found out the major causes of NPLs which significantly affecting the portfolio quality of the institution. Therefore, At 5% level of significance and 95% level of confidence, inadequatemonitoring and follow up, wrong timing of credit delivery, inefficient management information system, ineffective credit approval, and credit appraisalvariables were causing nonperforming loans of SFPI. The study also found out that nonperforming loans contribute mostly to interest incomes that generatedfrom the total loan portfolio was eaten for the provision of bad dept in five years analysis. Also the study indicates a net operating profit of the institution was eroded due to provisioning payments for nonperforming loans (bad debts) and available funds for loans are significantly declined as nonperforming loans increase. Furtherstudy revealed that agricultural loan sector, petty trade loan sector and WEDP loan sector has the highest share of NPLs and followed by others sectors such as, micro energy loan sector, individual loan sector and service sector. To mitigate the problems of nonperforming loans some strategic issues and mechanisms were recommended to the management of SFPI.These measuresare:appropriatecredit approval, adequatemonitoring and follow up before and after loans grantedto the customers, Continuous branch supervision to ensure timely credit delivery, credit diversification strategies, implement effective and efficient Management information systems and mechanisms to control the health of loanportfolio