Microfinance institutions (MFIs) have been relatively less hurt by the second wave of the coronavirus disease (Covid-19) outbreak, but haven’t been spared entirely either.
Stress continues to be felt on the financials of MFIs, which offer small loans to typically low-income borrowers who don’t have access to commercial banking, because their loan recollections are lower than normal.
Worried MFIs have requested the banking regulator for a short-term payment holiday, but are yet to receive a response.
To be sure, MFI loan collections in June and July improved from May, when the second wave of the pandemic peaked, industry officials said. The overall impact on the microfinance industry is unlikely to be as severe as last year because lockdowns are more localized and progress in the vaccination drive will reduce the risk of infection, they said.
MFIs borrow money from banks and on-lend to small borrowers – grocers and vegetable sellers, pushcart vendors, small farmers. These companies operate either as non-banking finance companies, trusts or non-profit groups.
“When the second wave hit us, we were all a little apprehensive to what will happen to collections and borrowers,” said P Satish, executive director at Sa-Dhan, a leading industry body of microfinance institutions. “But the impact has been limited compared with last year. A large proportion of the borrowers and staff have come back to normal operations. Borrowers have returned to their livelihood activities.”
The second wave of Covid-19 has forced many states to order lockdowns, either fully or in part, affecting the livelihoods of many borrowers. According to Satish, loan recollections by MFIs fell to as low as 30% in some areas in May but bounced back to 75-80% in June-July. Precise numbers are yet to be published.
According to Sa-Dhan data, the collection efficiency of MFIs reached 95-98% by March, before the renewed onslaught of viral disease took its toll starting in the second week of April.
The microfinance market is dominated by banks followed by non-banking financial companies (NBFCs) and MFIs. As of March 31, the combined micro credit portfolio of all lenders was to the tune of Rs2,47,839 crore, of which banks had a share of 44%, or Rs 1,10,122 crore, followed by NBFC-MFIs with a 32%t share or Rs79,115 crore.
Microlenders were subjected to tighter regulations in the aftermath of the 2010 Andhra Pradesh microfinance crisis, triggered by local regulation introduced to curb illegal lending activities by microlenders who were accused of adopting coercive loan collection practices and driving overextended borrowers to suicide. The RBI subsequently formed an NBFC-MFI model for bigger microlenders.
RBI measures fall short
Measures announced by the Reserve Bank of India to help MFIs and small companies during the pandemic’s second wave are welcome, but don’t go far enough, MFIs said. The RBI recently announced a second round of loan restructuring for smaller companies to help them counter the impact of Covid-19.
Also, the RBI said small finance banks (SFBs) will be permitted to tag fresh lending to MFIs with asset sizes of up to Rs500 crore for on-lending to individual borrowers as priority sector lending. This facility will be available up to 31 March, 2022, the RBI said. Priority sector lending refers to mandatory lending by banks to economically weaker sections. Lending by SFBs to MFIs has hitherto not counted as priority sector credit.
“In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to Rs500 crore) for on-lending to individual borrowers as priority sector lending,” the RBI Governor said.
The RBI also announced special liquidity assistance to MFIs through development financial institutions like the Small Industries Development Bank of India.
MFIs need a few months of deferral of loan instalments on a case-to-case basis, Satish said. “We are not using the word moratorium because we don’t need that kind of blanket assistance but on a case-to-case basis, MFIs need to be given some kind of repayment holiday to regain their financial balance,” said Satish.
MFIs, it is learned, have made this request to the RBI in multiple meetings.
MFIs representatives said although the sector had recovered from the severe impact of the lockdown in April-June 2020 and was returning to normal, the second wave of the pandemic and intermittently increasing local lockdowns were creating problems. They said a larger number of MFI staff were being affected by the second wave, leaving employees fretful.
Also, a large number of MFI borrowers and their families had been taken ill, even in rural areas, compared to last year’s outbreak. Many MFIs reported normal collection levels in the early part of April before things worsened by May.
The RBI is yet to act on the industry demand.
“We hope there will be some more case-specific relief measures for MFI sector from the RBI. The MFIs are not covered under the restructuring scheme. It covers only small companies and individual borrowers,” an industry official said on condition of anonymity.
On May 5, the RBI also said it will conduct special three-year repo operations of Rs10,000 crore at the repo rate for SFBs, to be deployed for fresh lending of up to Rs10 lakh per borrower. This facility will be available until October 31, 2021.
Last year, the RBI announced a six-month moratorium and a subsequent one-time restructuring facility for banks.
That helped banks to escape a huge spike in their non-performing assets (NPAs). A loan becomes an NPA if there is no repayment of interest or principal for 90 days. Once a loan becomes an NPA, banks need to set aside money to cover the potential losses from such accounts. High provisions hurt banks’ profitability.
This time, the central bank has not announced a blanket moratorium. It said those who availed of restructuring under the Covid resolution framework 1.0 can seek a loan moratorium of up to two years.
For other borrowers, the RBI has announced a separate loan restructuring scheme (resolution framework 2.0) under which individuals and small businesses and MSMEs having aggregate exposure of up to Rs25 crore can opt for a recast.