MFIs' qualifying asset threshold has to be lowered, says Alok Misra

'MFIN has been pushing its members to do daily reporting to credit bureaus', said Misra

Micro-finance institutions (MFIs) have battled the economic fallout of the pandemic and are on a major rebound. Delinquencies and collections are back to their pre-Covid levels, and data from most states are indicative of the same. Edited excerpts from an e-mail interview with Alok Misra, chief executive officer and director of the Microfinance Institutions Network with Raghu Mohan:

Why do you think the 85 per cent qualifying assets norm for micro-finance institutions (MFIs) needs to be revisited?

We have to look at this norm from two angles: historical and the current situation. This definition came in the wake of the Y H Malegam Committee’s recommendations in 2011, and it fitted almost the entire microfinance lending, and this was required to retain focus. But over a decade, things have changed and it is hoped that regulation will also recognise it, as always.

For example, in 2015, the Reserve Bank of India (RBI) specified that loans given for income generation should constitute at least 50 per cent of an MFI’s loans and the rest can be for other purposes — such as housing repairs, education, medical and other emergencies (this “other purposes” was 30 per cent earlier). Mature microfinance clients require larger loans and for varied purposes to diversify, or strengthen their livelihoods, but the 85 per cent norm acts as a restricting force.

How does the current qualifying asset norm hamper you from a risk perspective?

It’s always advisable to diversify without losing the focus on core microfinance clients. On a technical note, with the adoption of IndAS by major MFIs, the extant 15 per cent flexibility has further reduced. This is because, under IndAS , the balance of the unamortised processing fees income, interest accrued on portfolio and expected-loss provision are required to be netted off against the portfolio.

In our feedback to the RBI’s consultative document on harmonised regulations, we have suggested lowering this threshold to 70 per cent from 85 per cent, in line with housing finance companies. I am hopeful that this will be considered.

What has been the impact of the pandemic on credit quality and collections?

In the first six months of the pandemic, repayments came to a halt due to a moratorium announced by the RBI, but it picked up slowly from September’20 onwards till January’21. The second wave brought the repayment issues back. While the industry entered FY21 with a reasonably good portfolio with the portfolio-at-risk more than 30-days at 1.79 per cent at end-FY20, it increased significantly to 8.66 per cent in FY21 and to 15.46 per cent in H1FY22. 

Since then, the catch-up game is on and the resilience of microfinance has been demonstrated with current recovery at pan-India level at over 90 per cent. Sceptics may consider it to be below par, but I find it remarkable that despite the severe stress, microfinance continues to shine, riding on the resilience of our clients. To give you a concrete data point, CreditAccess — the largest and listed MFI — reported a collection efficiency of 95.6 per cent in January this year!

Can you give us a geographical sense of the delinquencies?

The east, especially Assam and Bengal, are performing below the national average, while most other states are close to the national average. To give a data-point, among the top ten states in terms of portfolio, Uttar Pradesh has the best portfolio quality, with portfolio-at-risk greater than 30 days of 6.2 per cent at end-December’21, while for Bengal, it is 19.11 per cent. Assam, as you are aware, is a special case and is slowly recovering as the Assam Microfinance Incentive and Relief Scheme gathers speed.

There is another key metric in microfinance, and that is client activation. Simply put, it measures clients who are attending group meetings and paying something, if not the full overdue — signalling their intent to be regular. This percentage has almost come to the pre-Covid level and that is what gives me immense satisfaction. It is unrealistic to expect clients to clear all dues in one go; and we need to be empathetic, and this is what I keep repeating to lenders and the rating agencies. With the Omicron threat waning, I expect microfinance operations to be normal in Q2FY23 and then grow.

But do we have a correct picture on delinquencies, given the asymmetry in reporting to credit bureaus by regulated entities?

MFIN has been pushing its members to do daily reporting to credit bureaus. The regulatory norm is at least once every month. As of date, 35 of our members are doing daily reporting and it includes almost all bigger MFIs. We have requested RBI that such reporting by all regulated entities should be at least on a weekly basis, to begin with, and move to a daily basis in a defined time frame.

But even if it happens, another gap that needs to be plugged relates to non-reporting of loans extended under the self-help group (SHG) programme. Considering its scale and the fact that clients overlap, it needs to be done on an urgent basis. Though RBI had mandated so in 2016, there has not been significant progress in SHG data reporting.