Bumps on MFI road: Microfinance biz turns cautious as delinquencies rise

Business correspondents have helped deepen banking penetration in the nearly two decades they have been around. Can they play a role on the field for MFIs?

The credit bureau CRIF High Mark’s latest report on microfinance, ‘Microlend’ has it that at end-June 2024, the systemic book at Rs 4.32 trillion, marked a quarter-on-quarter decline of 2.3 per cent even though on a year-on-year basis, it is up 20.3 per cent. A closer look at the numbers also shows a rise in delinquencies across all time-bands (or days-past-due as it is called in the trade). Microfinance institutions (MFIs) are applying the brakes. 

 

How did we get here? Is it rampant over-leveraging — of the kind seen in retail lending?

 

“It’s not so. As per bureau data only around 1.5 per cent of the borrowers have loan outstanding in excess of Rs 2 lakh with 15 per cent having exposures to more than two lenders,” says Alok Misra, chief executive officer (CEO) and director, Microfinance Institutions Network (MFIN). And the regulatory norm that annual loan repayments are not to exceed 50 per cent of households’ annual income is a robust check against overleveraging.

 

That said, “non-reporting of EMIs in retail loans and non-EMI based products like gold loans could lead to underwriting issues”.

 

 

MFIN (a self-regulatory organisation or SRO for microlending) thought this was serious enough and issued guidelines on October 7 specifying ways to consider missing EMIs in underwriting. Interestingly, this came a week before the Reserve Bank of India’s (RBI’s) diktat: Asirvad Micro Finance and Arohan Financial Services had to cease and desist from sanction and disbursal of loans, effective October 21. A couple more — DMI Finance, and Navi Finserv – also met the same fate, but they were non-MFIs.

 

What we are seeing in the MFI space was forewarned.

 

The Report on Trend and Progress of Banking in India for FY23 was explicit: MFIs cater to a marginalised clientele, and the repayment capacity of borrowers needs to be considered. With the deregulation of interest rates, certain NBFCs-MFIs appear to be enjoying relatively higher net-interest margins. 

 

MFIs, therefore, need to ensure that the flexibility provided to them is used judiciously through transparent interest-rate setting processes. You also have to pencil in another detail highlighted in the RBI’s September 2023 bulletin: net-financial savings were down at 5.1 per cent of GDP in FY23 from 7.2 per cent in the previous financial year. Financial liabilities of households were up sharply by 5.8 per cent (compared with 3.8 per cent), suggesting a larger-than-usual recourse to debt-driven consumption. 

 

And the non-financial in the plot

 

A study by Manoranjan Ghosh (Assistant Professor, Symbiosis School for Liberal Arts, Pune) in June this year had it that 49.27 per cent of street vendors in New Delhi experienced loss of income due to extreme climatic conditions; 50.86 per cent faced the burden of increased financial expenditure or strain due to additional household expenses. There is nothing to suggest that the learnings from the study ‘Heat havoc: Investigating the impact on street vendors’ does not hold true for the marginalised in the hinterland.

 

As Jiji Mammen, executive director and CEO, Sa-Dhan sees it, the uptick in delinquencies is also due to a few other factors: the general elections which caused some disruptions; and, the higher supply of credit leading to some over leverage and lack of income sources to match repayments.

 

“The average loan-ticket size is around Rs 48,000, which is around 5 per cent more than the previous year. This cannot be seen as overleveraging. It should help in meeting credit needs of the borrowers better. This is mainly on account of borrowing from several borrowers including the ones outside credit bureau radar. Thankfully, around 84 per cent of the borrowers have two or less loans; only a small fraction has more than four loans,” Mammen explains.

 

Lack of visibility on borrowers is another blind-spot as MFIs go about their business; and was evident when Mint Road issued a key notification on September 20 last year which went below the radar: ‘Data quality index (DQI) for commercial and microfinance segments by credit information companies (CICs)’. They were to provide the DQI to credit institutions (CIs), latest by March 31, 2024 which was to include numeric scores on a monthly basis. And CIs were asked to undertake a half-yearly review of the DQI for all segments to improve the quality of the data submitted to CICs. Simply put, the quality of microfinance loans had come under closer watch.

 

Anand Bajaj, founder-MD & CEO, PayNearby has a different take. “Efficiency has to increase by way of the consumption cycle in rural areas. The nearly Rs 2 trillion in PMJDY accounts is an artificial blockage of consumption cycle which leads to increased cost to citizens without commensurate access to subsidy in their accounts.”

 

PayNearby partners with Kiranas to provide assisted financial and digital commerce services to local communities. Another perspective is of Malvika Bhotika, director, CRISIL Ratings who cites four factors: Lending to over-leveraged borrowers; debt-waiver campaigns; continued high attrition of field-staff; and ground-level operational challenges given elections and intense heat wave.

 

According to her, “The blended impact of these factors resulted in average monthly collection efficiency dropping to 96 per cent during the first quarter (of this fiscal) and to 94 per cent so far in the second quarter, from an average of 98 per cent last fiscal.” 

 

Karan Gupta, director-financial institutions, India Ratings Research feels, “Improving collection efficiency will be the result of multiple efforts including reinstatement of the JLG (joint liability group) discipline, continuous follow-ups with overdue customers and improving the assessment of the repayment capacity of the borrower at the time of disbursement.”

 

It takes us to business correspondents (BCs). They have helped deepen banking penetration in the nearly two decades they have been around. Can they play a role on the field for MFIs?

 

“It is a matter of policy to be decided whether BCs can be engaged by MFIs to help recover dues or collect instalments. As such BCs may not be engaged by MFIs as they are agents of banks and there may be conflict of interest and change of stated objectives,” notes D Tripathy, CEO, Business Correspondent Resource Council.

 

It is pointed out that some BCs may have an MFI footprint (in a different entity); and have better experience to connect with the rural clientele to improve collections. Tripathy says, “It may be weighed if the bigger BCs with good net-worth, good risk and compliance practices can be engaged for small loan dispensation with the support of banks.”

 

Whichever way you look at it, there are bumps on the MFI road.