Pratik Biyani
A microfinance institution is an organization that offers financial services, primarily loans, to low income populations. Microfinance is one of the most effective tools to reduce poverty by providing credit to the economically marginalized populations, the poor and unbanked, to enable them to run viable productive income generation enterprises.
The Covid-19 pandemic and subsequent lockdown has had various negative effects such as unemployment, increased poverty, increased inequality, and lower economic growth. Although repercussions of shutdown of many businesses have been harsh, the microfinance sector has been hit particularly badly due to the generally weak income profile of the borrower.
The microfinance industry had previously faced big crises in 2010, when the state government of Andhra Pradesh suspended operations of MFIs in the state and effectively allowed borrowers to stop repaying their loans, and in 2016, when Prime Minister Narendra Modi announced demonitisation. These events led to prolonged reduction in collections and asset quality. To counter these negative impacts this time around and to provide a helping hand to the borrowers, the government announced a moratorium on term loans due between March 1, 2020 to May 31, 2020, which was further extended to August 31, 2020. Although this brought much needed relief to Retail borrowers, it was difficult for the Microfinance institutions to get a moratorium for their own borrowings in phase 1 of the moratorium and a similar uncertainty was faced in phase 2.
MFIs function in a group format whereby groups of individuals are formed, and each individual of the group is held responsible for the timeliness of repayments of all members of the group. Collections are done in joint group meetings, which are important for MFIs to maintain healthy collections. In the absence of such meetings due to the nationwide lockdown, collections had stopped. However, most MFIs are now able to operate a majority of their branches, reach out to customers and explain the costs of availing moratorium, according to Investment Information and Credit Rating Agency of India (ICRA).
Some MFIs have even started disbursements in June 2020 to existing customers and more are expected to do so in July 2020. This further helps in improving collections and asset quality as customers see a benefit in repaying their loans.
As per a recent report from Blue Orchard Impact Investment Managers, a global impact investment fund, the largest proportion of rescheduling requests received to date has come from India, as the implemented measures impact MFIs’ abilities to collect repayments. ICRA further mentions that Balance sheet Liquidity among MFIs is not enough to fulfil repayment obligations and pay for operating expenditure. However, such a cash shortfall risk is expected to be mitigated by presence of undrawn sanctions and ramp-up in collections. Higher rated MFIs have found it easier to raise funds in difficult times compared to lower rated entities. Also, MFIs have been afforded an opportunity to rationalize their cost structures by reducing rent through contract renegotiations, salary cuts, incentive reductions and in some cases, retrenchments.
As per the latest report published by MFIN, NBFC-MFIs have agross Loan Portfolio of INR 74,371 Cr. NBFC-MFIs have a branch network of around 14,275 branches serving 3.22 Crore clients and employing around 1,16,738 employees as of March 2020. These entities disbursed INR 77,072 Cr of loans in FY2020. It is easy to see why good health of these financial institutions is paramount for a country like India. Such institutions can in turn help their customers by initiating hygiene awareness campaigns, providing emergency kits, partnering with specialized organisations to assist clients and providing other services such as financial literacy and business development services.