Microfinance sector rides on choppy waters with govt support

When we ended 2021, it was thought of as having ended the Covid scare and life returning to normal. The hope was short lived with the exponential rise of Omicron in the first month of 2022 and with it the spotlight is back on microfinance. Questions from funders, analysts and press focussed on how will the microfinance sector face this Omicron wave. Can it stand against this third wave? It is now almost a month and time to get the facts right and assure the stakeholders. 

If there is to be a tagline for Omicron’s impact on microfinance, as on date it is negligible, and there are reasons for it. First and foremost, the almost ubiquitous vaccination of field staff and active promotion of vaccination among clients by microfinance institutions.

Second, as the wave peaked in major cities and also as per the SIR model developed by IIT-Kanpur professors, we saw only minor curbs on economic activities like weekend curfew or timing restrictions for non-essential services.

Third, it is worth reiterating that a majority of microfinance clients’ economic activities are essential such as kirana stores or flour mill or vegetables hawking.

Finally, while we hope that the peak has been reached and it will not spread as widely in rural areas, even if it does, hope lies in three factors. Most of the staff and clients are vaccinated, and so far, the health impact has been minimal in a majority of cases, and the learnings of the sector from last two years. 

The first wave did catch the sector off guard as lockdowns challenged its doorstep delivery of financial services and close connect with clients. It is heartening that the challenge was met head-on by microfinance institutions with the adoption of new generation ways to maintain the client connect. Who could have imagined two years ago that group meetings will be conducted over video calling.

To reassure clients and educate them about their payment obligations, moratorium as well as Covid protocols, tele-calling and curated videos became mainstream. While nearly 100 per cent of loan disbursements now happens digitally in bank accounts, digital repayments are still a challenge. Microfinance institutions are, at present, trying a host of solutions to tackle this with Bharat Bill Pay, UPI and cash collection services of payment banks.

Clients have also adapted to the changes and the sector and are ready for any potential disruption in the future. Ground level reports indicate that except in a few urban pockets, there has been negligible impact on operations – both collections and disbursements – with recovery rates nearing 95 per cent at pan-India level. 

The microfinance sector (excluding Self Help Group-Bank linkage programme) today provides collateral free credit to nearly 6 crore low-income women. It is a testimony to its resilience that despite the black swan event, both institutions and clients have maintained their creditworthiness. This would not have been possible but for the seminal support from the RBI and the Government of India. Measures from the RBI and GoI focussed on providing resolution to stressed clients and liquidity. Liquidity funnelled through All India Financial Institutions [SIDBI, NABARD] by the RBI and Credit Guarantee Scheme of the GoI have kept the sector providing financial support to low-income clients. 

Inclusive India

Our dream of an Inclusive India, as it marches towards higher growth trajectory, will have to be predicated on the microfinance pillar. Ignoring it will lead to unequal growth and exacerbate societal disharmony. As we start 2022 and enter the Union Budget period, the microfinance sector has a few expectations from public policy. 

Leaving banks, NBFC-MFIs are the major players in microfinance space. Unlike banks, they do not have access to deposits and depend on a combination of wholesale debt and equity to finance their operations. As the Covid impact lingers, despite demonstrating resilience, funders are still risk averse and much of wholesale funding received during the last six months was under the umbrella of Credit Guarantee Scheme (CGSMFI) of the GoI. MFIN has been pursuing extension of this scheme with a second tranche of ₹10,000-15,000 crore – nearly 80 per cent of the funds received under CGSMFI have been disbursed benefitting nearly 16 lakh clients.

The problem of funding drying up from traditional sources during such episodic events probably needs a systemic solution beyond CGSMFI. A dedicated fund with budgetary support or routing priority sector shortfall of banks needs to be created with both SIDBI and NABARD to fund the sector; being development oriented institutions, their outlook can be broader. This will act as a core source, which can be relied upon extensively when the mainstream funders are risk averse. Additionally, these funds can bring down the cost of lending. 

Other than funding, the microfinance sector will hugely benefit from harmonised regulations and policy support on digital initiatives. Considering that microfinance space is dominated by banks, while specific microfinance regulations are applicable only to NBFC-MFIs, the sector is eagerly looking forward to the release of final policy. It has been nearly six months since the public feedback period on the Consultative Document on Regulation of Microfinance finished in July, 2021. The framework outlined in the Document centers on principles based approach over specific micro regulations, levelling the playing field and bringing client income and indebtedness to centre stage. The sector awaits its release and being put in force with immediate effect. 

Digital initiatives of MFIs need multiple support ranging from allowing for use of Aadhar for KYC and its use by Credit Bureaus for dedupe, lowering of charges on digital repayment modes like BBPS, waiver of e-NACH bounce charges and possibly an incentive to clients for digital repayments. 

As both microfinance clients and institutions are hard coded optimists, we hope that policy will continue to facilitate the sector in building an inclusive and prosperous India. 

(The writer is CEO & Director, MFIN)

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