Money & Banking

‘Govt measures play a huge role in helping MFIs tide over Covid crisis’

NARAYANAN V Chennai | Updated on June 04, 2020

Kshama Fernandes, CEO, Northern Arc Capital

The Covid-19 pandemic-induced lockdown has severely affected the loan disbursement and recovery process of microfinance institutions (MFIs), which rely predominantly on cash settlements, field visits, and group meetings with micro borrowers. While the industry has emerged unscathed from several micro- and macro-level crises in the past, the uncertain end of the pandemic is posing a bigger challenge to the industry. In an interaction with BusinessLine, Northern Arc Capital MD and CEO, Kshama Fernandes, an expert in the MFI space, shares her views on the impact of the pandemic on the microfinance industry, its effect on loan recovery, and measures taken by the industry players to tide over the crisis. Excerpts:

How has the Covid-19 pandemic, and the resultant lockdown, impacted the industry?

While it is too early to attempt a holistic analysis of the impact (things will become clearer post the completion of the moratorium period), there are many distinct trends that are emerging. While field operations are not back to normal yet, despite the ongoing moratorium, collections are being witnessed by many entities at their branches as borrowers want to avoid paying excessive interest. MFIs continue to be in touch with their clients through calls and messages, continuously educating them about the moratorium and the benefits/ pitfalls associated with it. Collections in rural areas are better than metros as the pandemic and lockdown have had a bigger impact on major cities. Customers who are involved in businesses that supply essential commodities are expected to see lower defaults.

In what way is the current challenge different from the previous ones ?

The pandemic and the lockdown are wide ranging, impacting every aspect of the economy, and have extended over a reasonably large duration. There has been a doubly-whammy of demand erosion and impact on production and services.

Small- and mid-sized microfinance companies seem to have been worst hit by the pandemic. Your views.

Most small- and mid-sized MFIs have developed abilities in terms of geographic reach and customer service, which have enabled them to carve a niche for themselves. Entities that have sound corporate governance, conservative practices and are comfortable on capital and liquidity, will emerge stronger from the crisis. Northern Arc is working with many such entities to raise debt capital for them through innovative product structuring and a skin-in-the-game approach.

The industry has shown a phenomenal recovery rate and PAR levels after every crisis. Will the current crisis affect this?

It is true that historically the MFI sector has bounced back very sharply after macroeconomic shocks such as demonetisation. We believe that once the economy reopens, there will be a steady recovery, based on the credit culture built through the Joint Liability Group (JLG) model and strongly supported by credit bureau reporting.

How long do you think it will take for the industry to recover?

It will depend on the spread/ containment of the pandemic and the length of the lockdown.

Credit flow to MFIs, particularly small- and mid-sized companies, seems to be a challenge. Do you think the risk aversion of banks and NBFCs are affecting the flow?

Even before the onset of Covid-19, most banks had large exposures to NBFCs. Therefore, while incremental balance sheet exposure was becoming difficult, most banks supported NBFCs through the purchase of portfolio sell-downs. The regulatory support provided by the RBI through the TLTRO 2.0 scheme, the ₹30,000-crore liquidity support package, the Partial Credit Guarantee programme, and refinancing support being provided by domestic DFIs such as SIDBI and Nabard have played a huge role in helping MFIs tide over this crisis.

As household cash flow depletes, the majority of the microloan borrowers are opting for moratorium. Do you think this will affect the repayment discipline of the industry?

As mentioned earlier, many MFIs are reporting reasonable levels of collection despite the lockdown and moratorium. We have seen in the past that microfinance credit culture has survived economic shocks and natural disasters and recovered quickly. Even in cases when the borrowers’ homes and livelihoods get completely disrupted and they are required to start afresh, it has been seen that over a periodthey recover and start repaying loans. Since they find it hard to pay multiple instalments to become current, often improvement may not be visible in the PAR buckets. However, for all practical purposes, these loans become current and eventually get repaid.

Have you witnessed any default in repayments so far ?

Over the last decade, Northern Arc has created access to capital markets to close to 200 small and medium MFIs and NBFCs. While a few clients have opted for moratorium, Northern Arc has not witnessed any default so far.

Published on June 04, 2020

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