What lies ahead for microfinance institutions after pandemic disruption?

Small business owners and people who don’t have the access to banking usually turn to microfinance institutions for capital. But with their businesses hit, a lot of them defaulted on loan EMIs. This in turn hit the lenders badly and most of them suffered losses. But now, these microfinance institutions are witnessing some green shoots of recovery.

While the adverse effects continue to linger, the second quarter starting July marked a turnaround for the microfinance institutions. The festive season saw a gradual rise in repayments and loan disbursals. The combined micro-loan portfolio of lenders had shrunk by 14 per cent to Rs 2.14 trillion in June 2021 over Rs 2.49 trillion in March 2021. The quarterly decline in Gross Loan Portfolio (GLP) was seen across all lender types including commercial banks, finance companies.

Following recovery in the economy in the second quarter, the loan portfolio rose to Rs 2.52 trillion at the end of August 2021. Keeping with the upturn, the volume of loans disbursed also went up from just over Rs 26,700 crore in April-June period to 7.4 million accounts to Rs 36,575 crore in July-September 2021 to around 10 million accounts.

According to data from Sa-Dhan, a microfinance industry lobby group, putting strain on asset quality, the 30-days past dues, or 30+ DPD for short, jumped to 16.56 per cent by June from 9.06 per cent in March 2021. The 30+ DPD level in the June 2020 quarter, which coincided with the first wave of the pandemic, was 1.89 per cent. The situation has improved with a dip in 30+DPD to 11.85 by the end of August 2021.

The delinquency in the 90-day plus dues, or 90+ DPD, bucket actually declined from 4.12 per cent in March 2021 to 3.01 per cent in June 2021. However, 90+ DPD moved up to 4.07 per cent on August 31st, 2021, reflecting the existence of stress in households at the bottom of the pyramid

Meanwhile, as the microfinance institutions are recovering from losses, the Reserve Bank of India had a word of advice for the lenders. RBI deputy governor M Rajeshwar Rao said last month that while the central bank will foster growth in the microfinance sector, the lenders should not throw caution to the wind to achieve returns. He said that the balance sheet growth should not be built by compromising on prudent conduct.