Microfinance institutions on a knife-edge with collections taking a big hit

With collections taking a big hit, microfinance institutions will be put through the wringer, reports Raghu Mohan

“The key point is how banks will continue to support us with ample liquidity after the lockdown is over and relative normalcy returns in the rebuilding process,” says Manoj Nambiar, managing director (MD) of Arohan Financial Services, and chairman of the Microfinance Institutions Network (MFIN). He has good reason to be pensive.

In phase-1 of the Covid-19 lockdown, nearly 70 per cent of microfinance institution (MFI) borrowers had not opted for a three-month moratorium on their loans. But the pendulum has moved to the other side now. The universe of the affected, a tad under six million borrowers (mostly women), are the primary earners for 300 million individuals in households. At the end of February 2020, the industry had a loan portfolio outstanding of Rs 2.26 trillion. The full extent of the stress will be known as the lockdown is lifted gradually, and collection figures roll in. But going by MFIs request to North Block, it is evident they fear the worst.

The moratorium on term-loans is up to three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. The recognition of non-performing assets on such loans would happen in 180 days. “Since operations will gradually limp back to normal, reaching out to borrowers for collections will remain a challenge. An additional 90 days beyond the moratorium period should be provided for NPA recognition,” says an industry veteran.

Reading the numbers

“After demonetisation, most MFIs had reported 98-99 per cent collection efficiency for incremental disbursements done since April 2017. Yet, their loan book of November 2016 saw credit losses ranging between 3 per cent and 13 per cent with strong correlation to geography and socio-political influence,” notes Krishnan Sitaraman, senior director at CRISIL Ratings.

The difference is that in the run-up to the Covid crisis, MFI delinquencies in Q3FY20 had started to show an uptick from the previous quarter. According to CRIF High Mark Credit Information Services (CRIF), during this period, the portfolio-at-risk (31-180 days) had moved up to 1.5 per cent from 1.1 per cent. Are we to brace for a huge rise in delinquencies?

Says Udaya Kumar, MD and chief executive officer (CEO) of CreditAccess Grameen: “There is no denying the fact that collections have been affected. But the resilience of the borrowers is remarkable. Remember, even after demonetisation, there was no moratorium on loans.” 

India Ratings, in its report, appears to second Kumar when it says: “Any reasonable data-based estimates on credit cost would require collection of data over the next four months (two months of moratorium period and two months of normal repayment environment).” So, what explains the rise in delinquencies in CRIF’s 'Micro-lend’ report for Q3FY20?

 

 “You had the MFI crisis in Assam and it was again due to a specific set of reasons. It does not hold true for the rest of the country,” notes Kumar. Nambiar says: “One reason for the resilience in the sector is the fact that a vast majority of borrowers are in the essential services supply chain with tiny and micro businesses which will spring back to action in a matter of days.” Of course, this is not to suggest that everything will be fine.

 

Handholding will be needed

On Monday, at MFIs’ meeting with Reserve Bank of India (RBI) governor Shaktikanta Das, it was reiterated that they will need support, going ahead. And, MFIs should get clubbed along with micro, small and medium enterprises when a relief package is announced. The migrants issue also comes into play. What if many decide not to go back to the cities? “I think there is a case for a relook at the cap of Rs 1.25 lakh per individual. Post-lockdown, many borrowers may need additional financial support to get their livelihoods on track,” says Nambiar. Then, a few faultlines may deepen as well.

When the three-month moratorium on term-loans was announced on March 27, banks continued to demand their servicing by non-banking financial companies (NBFCs) and standalone MFIs. It took a statement by Das in late April to set matters straight – that NBFCs and MFIs were eligible for it; and there was nothing in the central bank’s circular which prevented this from being offered.

And late 2019 had also seen banks and MFIs split over the “Code for Responsible Lending” (CRL). The market share of MFIs (standalone) is 30 per cent, banks at 40 per cent, small finance banks (SFBs) at nearly 20 with “others” making up for the rest. And private and SFBs, in particular, have been trying to increase their share in this space, especially with avenues for growth coming down. In October 2019, the central bank upped the cap for MFIs to Rs 1.25 lakh per borrower from Rs 1 lakh. While it capped the exposure by saying not more than two MFIs can lend to a borrower, it was silent on the number of banks in the relationship. Will these issues rise all over again? Remember, banks bankroll MFIs and compete with them.

For MFIs, red may be a colour they will have to keep an eye on.