The microfinance industry in India, which had witnessed a rise in delinquencies and negative impact on asset quality following demonetisation in 2016, is closely monitoring the impact, if any, of the Covid-19 outbreak on the sector.

According to Manoj Kumar Nambiar, Chairman of MFIN (Microfinance Institutions Network), and MD of Arohan Financial Services, while there is no impact of the recent outbreak on loan disbursements or collection efficiency, however, it is keeping a close eye on how things evolve moving forward.

“It is early days yet…..nothing much has come out as yet as to collection not happening or business not happening…... but if it continues for a longer while, then obviously we have to react based on how each stage evolves,” Nambiar told BusinessLine .

It is to be noted in the period immediately following demonetisation in 2016, the overall collection efficiency in the microfinance sector (MFIs and small finance banks put together) had dropped as low as 87 per cent in December 2016, thereby affecting asset quality.

However, the industry started showing signs of improvement in asset quality from early 2017 onwards with collection efficiency improving to 93 per cent in 2017 and over 98 per cent by September 2019.

No significant impact

The industry, however, does not expect any significant impact of the outbreak on the asset quality.

“Demonetisation was a very different thing where people did not have currency, then there was election, and there were so many rumours doing rounds naturally collections got impacted. I am seeing this (Covid-19) as more of a temporary disruption,” Devesh Sachdev, CEO and Founder, Fusion Microfinance.

Moreover, Covid-19 is more of an “urban phenomena” and since microfinance largely deals with lending in rural and semi-urban areas, it is not likely to get affected, said CS Ghosh, MD and CEO, Bandhan Bank. Nearly 75 per cent of the microcredit loans are extended to customers in the rural and semi urban areas.

As on December 31, 2019, the microfinance industry serves 5.64 crore unique borrowers through 10.11 crore loan accounts. The gross loan portfolio witnessed a growth of over 24 per cent at ₹2.11 lakh crore for Q3 FY20 when compared to the same period last year.

Banks hold the largest share of portfolio in micro-credit with total loan outstanding of ₹83,876 crore, mainly due to the merger of BFIL with Induslnd Bank during Q1 FY20.

NBFC-MFI has a total outstanding of ₹66,159 crore, while small finance banks hold ₹37,282 crore. Apart from this, NBFCs have total loan outstanding of ₹21,591 crore and other MFIs account for ₹2,395 crore in the total pie, as per MFIN data.

Contingency plans

The microfinance model in India involves organising group meetings to educate and inform borrowersfor disbursements as well as for routine collections. However, with Section 144 being imposed in some locations, organising such group meetings has become difficult. MFIs are, therefore, resorting to organising one-on-one meetings of customers with the loan officer and are also sending their personnel individually for collections.

“We are having meetings in very small numbers and mostly resorting to door-to-door visits. If this (outbreak) extends for more than a month-and-a-half then it will impact everybody, but the way the government has been reacting and tackling the situation, we are hopeful that things should be under control. We, however, have already made some contingency plans,” said Jugal Kataria, Chief Financial Officer, Satin Creditcare Network Ltd.

Village Financial Services has also deferred its group meetings and has been undertaking several measures to create awareness among its employees and customers about healthy practices. It is also looking to go slow on addition of new borrowers for growing its loan book.

“We are trying to go slow on new borrower acquisition so that if there is any impact both customers and the company remains insulated,” said Kuldip Maity, MD and CEO, VFS.

MFIN is keeping a track of the situation and monitoring on a daily basis. It is also in close discussions with the Reserve Bank of India to take necessary measures if the situation so warrantees, added Nambiar.