The rural and unorganised sectors kept the Indian economy steady after the meltdown in 2008. Can they do an encore in 2020?

The answer is probably yes. If the rising payment recovery graph of microfinance lenders is anything to go by, roughly half of the Indian economy, in terms of contribution to GDP, may be back to normal at the end of this Kharif season.

If the rains are normal and the Covid-19 pandemic that has now reached rural India, remains under control, the microfinance sector will be back to normal in September, said Manoj Kumar Nambiar, Managing Director of Arohan Financial Services and Chairman of Microfinance Institutions Network (MFIN).

Microfinance institutions (MFI) practically resumed services from the second week of May. Despite such a limited work window, the industry collection now ranges between 20-40 per cent, depending on region and pockets. States like Bihar and Tripura, which are industrially backward and depend most on agriculture, are witnessing higher repayments.

Nambiar is focusing on September as the six-month moratorium window will end in August. However, privately larger players in the segment expect up to 90 per cent of the payments to be normalised by the end of July. “We do not expect defaults,” he said.

Healthy farm sector

As of December 2019, India had a total microfinance portfolio of ₹2.11-lakh crore, up roughly 24 per cent over the previous year. Loans are given to poor women for business activities. Roughly three-fourth of the portfolio is invested in agri-allied activities. The rest goes to non-farm activities, both in rural and semi-urban areas.

Portfolio-wise, commercial banks hold the largest 40 per cent share, followed by NBFC-MFIs (31 per cent), small finance banks (SFBs) 18 per cent, and NBFCs 10 per cent. The majority of commercial bank lending in the microfinance sector takes place through MFIs.

The payment recovery of MFIs, therefore, should act as a barometer of the liquidity position at the bottom of the pyramid. The sector bounced back within two months of demonetisation in 2016 and remained unaffected during the liquidity crisis of 2018-19, following the collapse of IL&FS.

As India went into lockdown mode beginning March 25, the country made a series of policy announcements to ensure that farm sector operations remain unaffected. Support prices were increased to offer better returns to farmers.

Parallel policy initiatives, such as free supply of food, improved wages and fund provisioning for employment guarantee schemes, and direct cash transfer to the poor, were rolled out to compensate for the loss of livelihood in non-farm activities. This was over and above other fiscal measures aimed at ensuring liquidity.

That the policy more or less worked was first evident from agri-input purchase data. India consumed 33 per cent more agri-input in April and May 2020 and payments were made mostly in cash. In 2019, credit ruled the roost in agri-input sales.

As additional proof to the liquidity position, now majority borrowers of MFIs are fast giving up the moratorium advantage in favour of repayment and future loans.

MFIs need funds

P Satish, Executive Director of Sa-Dhan or the Association of Community Development Finance Institutions, points out that the MFI sector can indeed play a key role in ensuring faster economic recovery.

However, there are a few challenges in the path to optimising this opportunity.

Small businesses, particularly those in non-farm activities, are suffering from resource crunch. As an accepted practice in the global microfinance sector, such businesses need top-up loans to restart business as well as make repayments. Unfortunately, resource crunch at the MFI level is limiting that opportunity.

There are many reasons for this state of affairs. First, MFIs raise finance from banks, development finance institutions (DFIs) and foreign investors. During the lockdown, MFIs offered moratorium to its borrowers, but didn’t get a matching breather from all their lenders. Many banks, which extended a three-month moratorium, are disinterested to continue with the facility for another three months.

Meanwhile, the refinance window that RBI opened for NBFC, MFIs, etc is yet to take off. Under the targeted long-term repo operations (TLTRO2.0), RBI auctioned ₹25,000 crore worth of funds. But only ₹12,850 crore worth of funds was subscribed.

DFIs ― NABARD and SIDBI ― started lending under the special refinancing facility, but only to entities with whom they had a relationship. Under this window, NABARD is provided with ₹25,000 crore to fund cooperative banks, regional rural banks and MFIs. SIDBI is offered ₹15,000 crore for MSMEs and MFIs.

Sources said, Micro Units Development and Refinance Agency Bank (MUDRA), which was launched in 2015, particularly to support smaller MFIs and NBFCs, is yet to sanction loans in this fiscal.

The net result is smaller MFIs, operating mostly in remote areas, are facing an existential crisis. Their inability to offer top-up loans limit their collection potential. Larger and more resourceful MFIs, had a buffer to sustain for the last two months. They have resumed fresh disbursements but on a cautious note.

“We maintain a contingency fund equivalent to two month’s instalment payment to lenders, which was exhausted during the lockdown. Assuming Covid-19 can throw up more surprises, we are now using a part of the fresh collections in rebuilding reserves,” said a source from a ₹1,300-crore MFI.