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The anticipations over pent up demand for loans post lockdown relaxation is expected to trigger swift recovery of the sector.
The coronavirus pandemic has disrupted operations in every sector across the globe. From the unprecedented transformation of organisational functioning to a total or complete shutdown of many businesses, the repercussions have been harsh. The microfinance sector, which had experienced a huge negative impact on asset quality following demonetisation in 2016, is closely monitoring the impact of COVID-19 on the sector. Needless to say, the microfinance institutions have been badly hit. According to Investment Information and Credit Rating Agency of India (ICRA), COVID-19 will strain the liquidity and asset quality profiles of microfinance institutions (MFI), and also impact their ability to pay interest on borrowings.
The microfinance sector in India
According to a PWC-SIDBI report released in November 2019, the global microfinance industry stood at over Rs 8.90 trillion with the loan disbursed amount increasing at an average annual rate of 11.5 percent over the last five years. With the largest number of borrowers in 2018 (85.6 million) which is growing at a rate of 13.8 percent, South Asia remains one of the leading markets in the global microfinance industry. A significant part of these borrowers are in India.
The microfinance sector in India is diverse with different players like banks, MFIs, SFBs, NBFCs and not-for-profitMFIs enabling microlending in India. Out of all, MFIs hold the largest share of the loan portfolio, standing at Rs 681 billion and accounting for 38 percent of the total industry portfolio.
The impact
Due to the rising delinquencies caused by protests against CAA (Citizenship Amendment Act), the microfinance sector of the country has already been witnessing tough times since the last few months. According to data from CRIF MicroLend, the portfolio at risk (PAR) for the sector for repayment between 31 and 180 days stood at 1.5 percent for Q3 of 2019-20, 50 percent higher on a year-on-year basis.
Recently, the Reserve Bank of India (RBI) directed all financial institutions to extend a moratorium on term loans due between March 1, 2020 and May 31, 2020 to their borrowers. However, there has been no formal announcement about moratorium to MFIs from their lenders and the delay could severely impact their ability to pay interest on their borrowings. In the light of RBI directions, ICRA studied a sample size of 29 MFIs which together form around 70 percent of the segment in terms of portfolio. It found that these MFIs had around Rs 8,000 crore of total repayment obligations and operational expenditure for the June quarter. However, their combined on-balance sheet liquidity buffer is around Rs 5,400 crore only, a shortfall of Rs 2,600 crore when there is no scope of any external funding by way of additional debt, equity, or extension of the moratorium. As a result, ICRA projects the credit costs for MFIs will rise from current levels of 1.0-1.5 percent to 2.5-3.0 percent for most players.
The way forward
Though the sector that caters to the bottom of the pyramid clients has been adversely impacted by the crisis, it will bounce back.
Repayments might get delayed and tenures of loans might get extended, but microfinance sector which is unique in being a double bottom line of financial and social objectives, has the potential to survive such crisis, mirror their cash flows especially in such difficult times and evolve stronger every time.
India is largely driven by entrepreneurship, big or small. Since a large section of our population is self-employed and a major part of it is low-income segment which is perennially credit-starved, they would need financial help to restart their operations and get back on track.
Once normalcy resumes, there may be an increased demand for loans by farmers and micro enterprises and kirana shop owners to fund working capital requirements and restart businesses, which can be serviced by MFIs and small finance banks. The microfinance sector will play a significant role in ensuring help and credit at the grassroots when it is needed the most to rebuild our country.
Summing it all up
Though there are multiple players in the microfinance landscape, India still represents a huge opportunity for the microfinance sector as a significant portion of its population falls in the low income band and also, a large part of its population still lacks access to credit from the formal sector forcing them to borrow from informal channels. This indicates the scope of microlending in achieving financial inclusion.
However, in the present scenario, it is important for the sector to realise this growth opportunity, identify and assess the emerging needs within the sector and address the same through relevant initiatives.
Though the formal economy could take time to normalise, the industry is upbeat about a faster revival in the rural economy with the lifting of the lockdown restrictions.
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