The microfinance industry, which had seen its collection efficiency drop to as low as one per cent in April this year following the lockdown in the wake of Covid-19 pandemic, is crawling back to normalcy, albeit a bit slowly.

While the collection efficiency has improved to around 80-85 per cent in November, it is still way behind the industry normal which hovers around 98-99 per cent.

The lack of liquidity — both equity and debt — particularly for the small and medium-size entities is only adding to the woes of the sector.

The MFI industry, which includes banks (universal banks and small finance banks), NBFCs and NBFC-MFIs, had a total loan portfolio of ₹2,31,778 crore as of September 30, 2020. While this is up by nearly 15 per cent as compared to a loan portfolio of ₹2,01,724 crore as of September 2019, however, this cannot be truly indicative of a growth as it also includes the old outstanding.

According to Alok Misra, CEO, Microfinance Institutions Network (MFIN), the total disbursement during the July-September quarter by the microfinance industry, as a whole, was only 58 per cent of the disbursements last year. The total disbursement in Q2 of FY21 was around ₹31,261 crore (₹53,461 crore).

“We have roughly reached 50 per cent of last year in terms of disbursements during the second quarter. But it is to be noted that two-thirds of that quarter was under moratorium, and normal operations commenced only in September. By October and November, based on whatever bits and pieces of data that we have received it has reached 80-85 per cent of pre-Covid levels,” Misra told BusinessLine .

While the demand for credit is still there, disbursements, however, are lower primarily because of the increased focus of MFIs on recovery and collections. Moreover, additional credit checks have been introduced by the industry even while disbursing loans for existing customers so as to be sure of the repayment capacity of borrowers.

“We expect disbursements in Q4 of this year to be equal to that of last year. I do not expect growth (in disbursements) as we are all focusing on existing regular clients rather than looking at new clients. Customers who are completely new to credit and have no credit record are not being looked at in a big way. Moreover, no new branch expansion or geographical expansion has happened during this fiscal,” said Manoj Kumar Nambiar, Managing Director, Arohan Financial Services Ltd.

Household income drops

According to Misra, despite clients’ intention and resilience, still there are lots of pockets where there is “stress” and livelihoods have been affected. These loans may have to be restructured and as per Reserve Bank of India guidelines, December 31 is the last date for restructuring these loans.

While the average recovery rate is around 80-85 per cent, it is lower (at around 75 per cent) in some pockets or geographies.

“These are real stress lines due to livelihood problems. With loan restructuring and additional finance they would be able to come around unless something else of this magnitude happens again,” he said.

While the situation has been better in October, November and December (so far), however, the improvement has not been to the levels that the industry would want mainly because of the kind of collection efficiency it has been used to.

Though official data is still not available, but the collection efficiency in November is likely to be in the range of around 90-95 per cent and the situation is likely to be similar in December also, industry experts pointed out.

Outlook for future

Some of the key areas of concern for the industry is to see how the loans, which are being restructured, perform. Depending on that the industry will require to do higher provisioning. Funding also continues to be a challenge for small MFIs. This apart, there are some local level unrest in certain geographies by political and socio political elements, Misra said.

“In Assam, the State government has said they want to enact some regulation which is in contravention to RBI guidelines. We are trying to see how it will happen. On a broader perspective, RBI has said they will release a discussion paper on NBFC regulation by January 15. So we do not know what is going to be up there so these are the legal and regulatory challenges. Then there are balance sheet challenges and some geographical concentration risks,” he said.

Talking about liquidity, he said, entities, which are not able to raise capital, may not be able to get access to debt funds. The possibility of a higher provisioning on account of restructured accounts and the lack of funding may put some pressure on small and medium entities, thereby leading to some consolidation.

While there is still some uncertainty on how the pandemic will pan out, however, if the current trend of recovery continues then things are likely to “normalise” by the first quarter of 2021-22.

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