Are loan repayments in lockdown mode?

The spurt in fresh infections following the second wave of Covid-19 pandemic and the lockdown being announced in several States mayimpact the collection efficiency of microfinance institutions.

Industry experts, however, feel it is still too premature to gauge the exact impact on loan growth and repayments, as there is still a lot of uncertainty around when the second wave will peak out.

According to Alok Misra, CEO and Director, MFIN (Microfinance Institutions Network), the first quarter is likely to be tepid as there is still uncertainty, but going by various mathematical and statistical predictions, the curve is likely to flatten out in end May or early June. Post that there could be a pick-up in business activity, given that there is a lot of pent-up demand.

“We need to understand that there is no national lockdown and, in all States, where mini containment or other restrictions have been announced, the governments have declared NBFC-MFIs as providers of essential services.

“Though there is stress in some rural pockets and business containment, most of them also work in production of essential goods and services and those are going on, and we are also seeing credit demand from customers,” he said.

And considering the last five quarters there is lot of pent-up demand, so that will come up by Q2 and Q3 of this fiscal.

“So, if the second wave dies down by end May/ early June and unless there is a third wave, which could then upset the apple cart, considering the last five quarters’ demand and given that there is need to build livelihoods, we should see a good demand and an improved business environment in Q2, Q3, and Q4 of the current fiscal,” Misra told BusinessLine .

Credit growth to pick up

The second wave is troublesome for the sector as a larger proportion of borrowers and employees have been affected by Covid; however, if it peaks by this month-end and starts tapering off and a larger proportion is vaccinated, then the effect of the pandemic on the sector will not be that significant.

However, if the pandemic persists for a longer time and vaccination drive falters, there could be issues for the sector, said P Satish, Executive Director of Sa-Dhan, an RBI-recognised self-regulatory organisation for MFIs.

On credit growth, he said: “ Loan growth was muted last year due to liquidity issues, not due to the lack of demand. Last year, only about 40 per cent of MFIs received moratorium from their lenders.

“So, the available funds were used up to meet repayment obligations rather than expand the credit flow.”

Satish observed that if liquidity is ensured by the RBI and government through appropriate measures by sensitising the banking sector and by giving necessary directions to NABARD and SIDBI and their subsidiaries, then the credit growth will be substantial this fiscal.

According to Shalabh Saxena, MD and CEO, BFIL (Bharat Financial Inclusion Ltd), given the overall operating environment and the fact that the basic demand in the economy is intact, the situation should return to normalcy very soon. Moreover, the lessons learnt last year will help the sector effectively plan for any emerging scenarios in future.

“We anticipate rural demand to remain healthy on the back of a normal monsoon. We are optimistic that the above-mentioned factors will translate into solid growth for BFIL, given our strong presence in Bharat,” he said.

Impact on collections

According to a recent report by ICRA, with the Covid-19 pandemic still not under control as reflected by the sharp increase in the rate of infections in some regions in the last one-and-a-half months, the risk perception for the microfinance industry remains high.

Though some States have classified the microfinance industry as an essential activity, the cash flows of borrowers may be affected due to the restrictions/ lockdowns, thereby affecting their repayment ability. Moreover, the risk of infections spreading faster in other regions and increased restrictions/ lockdowns will impact collections.

The sector’s collection efficiency is estimated to have stalled at 90-94 per cent in the past few months compared to the pre-pandemic level of 98-99 per cent.

“Rapidly rising Covid-19 infections for the last few weeks have put the country’s critical healthcare infrastructure under severe strain.

“Several States and Union Territories have either imposed lockdowns or have placed significant restrictions on people movement and gatherings to curb the spread of pandemic. This is creating disruptions in the economic activities and impacting the field operations of MFIs,” said Sachin Sachdeva, Vice-President and Sector Head, Financial Sector Ratings, ICRA, in the report.

Consequently, the industry is witnessing a reduction in collections and the recovery seen in Q4 FY21 is being challenged again.

ICRA estimates a sequential drop of 8-10 per cent in collections in April 2021 and it may dip further if infections continue to rise and more restrictions are imposed across locations.

A Crisil report suggests that while NBFC-MFIs were better prepared to deal with the situation – because of their experience with the lockdowns of last fiscal and by weathering other storms of the past – their ability to manage asset quality and maintain healthy collections would bear watching.

The fact that many of the larger MFIs have strengthened their capitalisation over time and are also maintaining higher liquidity levels will help support their efforts to manage the situation, it added.

RBI measures

The RBI move to recognise loans given by small finance banks to smaller NBFC-MFIs as priority sector lending will help ensure liquidity to the sector.

This apart, by allowing lenders the flexibility to restructure microfinance loans on a case-to-case basis, will also help provide relief to stressed clients.

“Seeing the severity of the situation, the RBI Governor has proactively met sector representatives and followed it up with possibly first steps – he mentioned in the beginning that the policy response will be calibrated, sequenced and well-timed.

“Liquidity is the key and I hope along with the April announcement of ₹50,000 crore support to All India Financial Institutions (AIFIs) and today’s measure will help the sector. We also expect that with changes in the evolving situation, the RBI will keep introducing newer relief measures,” said Misra.

MFIN will also keep engaging with the RBI on creating a systemic support for allocating a specific sub-total out of the overall liquidity support for the smaller NBFC-MFIs. It also hoped that the pricing issue would also be resolved soon.

Tweaking business model

While MFIs have been bringing in small and steady changes in their business model ever since the demonetisation days, the emphasis is likely to increase on low touch and cashless transactions moving forward, said Manoj Kumar Nambiar, Managing Director, Arohan Financial Services.

“Our customers have bank accounts but no banking habit and for that the neighbourhood kirana shops have to be enabled to facilitate transactions.

“The BC (business correspondent) model has to become more viable, and lenders will have to stop collecting repayments in cash. Eventually, it has to be that way though it may take some time,” he said.

According to Satish, since loans are non-collateralised, there is requirement of collateral substitute like joint liability. So, the JLG model will continue. There will, however, be improvisations in group meetings, loan processing methodologies and collection and repayment systems, where there is likely to be greater adoption of digital modes.

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