After a steady growth in last few years, external commercial borrowings (ECBs) of domestic microfinance companies have more than halved in FY21 amid a sharp decline in fresh disbursements, coupled with ample liquidity and competitive interest rates in the domestic market.

According to RBI data, overseas borrowing of microfinance institutions (NBFC-MFIs) fell to $59.29 million between April 2020 and February 2021. In contrast, their borrowing during the corresponding period last year stood at $137 million.

“One of the primary reasons (for lower borrowing) could be the overall cut back on fresh disbursements by MFIs, especially in the first two quarters of FY21,” said Aastha, Partner, Argus Partners, adding: “Microfinance borrowers, having been the worst hit by the pandemic and the consequent lockdown, were unable to repay their loans and the collection operations (largely cash-based) of MFIs also took a major hit. These liquidity issues would have led MFIs to go slow on lending and conserve capital.”

Disbursements pick up

According to the recent edition of Micrometer, loans disbursed by NBFC-MFIs fell sharply from ₹19,661 crore in March 2020 to mere ₹570 crore in June 2020. The disbursements, however, picked up to ₹10,617 crore in September and touched ₹19,696 crore as of December quarter.

“Almost the first 6-9 months was quite muted last year. We had lockdowns from March to August. Even when we opened up in September, the focus was more on collections and recoveries and getting the existing clients activated so the focus was not much on disbursements,” said Manoj Kumar Nambiar, Managing Director, Arohan Financial Services.

He also added that the various measures taken by the RBI and the government to provide liquidity support to MFIs last year have also helped large and mid-sized MFIs, who typically go for market borrowings through non-convertible debentures (NCDs) and ECBs, to tide over the liquidity crisis.

Overseas borrowing by MFIs has been growing over the last few years. From a mere $15.97 in FY18, ECBs of microfinance players went up to $52.81 million in FY19. ECB fundraising touched an all-time high of $143 million in FY20.

Just to be clear, banks and NBFCs still continue to be the major source of borrowing for MFIs. According to Micrometer, outstanding borrowings of NBFC-MFIs as on December 2020 stood at ₹58,564 crore. Of the total borrowings, banks alone contributed 35.9 per cent, while non-bank entities accounted for 21.2 per cent. ECBs account only for 3.2 per cent of the total borrowings.

Ample liquidity

Industry players say that the ample liquidity and interest rate arbitrage in the domestic market is also one of the reasons for the decline in demand of overseas loans in recent months.

“If domestic liquidity is available at a fairly reasonable price, why would you go for something which is complex and which requires a fair bit of coordination between foreign investors, hedging requirements, local arrangement, listing requirements and legal opinions,” said Arohan’s Nambiar, adding, “ECBs are not very easy transaction as compared to straightaway taking an online term loan from the banks.”

However, with the second wave Covid-19 sweeping across the country, Nambiar expects the demand for credit from the bottom of the pyramid to go up and to the extent of growth, additional disbursements will happen, and companies may tap overseas funding if the interest rates are competitive.

“The ongoing second wave of the pandemic may lead to continued economic slowdown. However, given the need for credit in the MFI sector and the pent-up demand due to the pandemic, once economic activity starts to pick up, MFIs would continue to tap the ECB market for their funding requirements,” said Argus Partners’ Aastha.

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