Small loan specialists in India that typically cater to people without bank accounts are facing a jump in pandemic-related defaults that could force some of them out of business, industry experts warn.

Loans overdue by 30 days are expected to reach 14-16 per cent of all so-called microfinance loans in the immediate aftermath of the second Covid-19 wave sweeping India, said Krishnan Sitaraman, senior director at credit rating agency Crisil.

That’s higher than 6-7 per cent in March, before the second wave took hold, and also above the 11.7 per cent reached in March 2017 after the demonetisation drive — an attempt to boost digital transactions and crack down on undeclared money that also hit microfinance lenders hard.

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“Older loans that were taken in 2019 or early 2020 are at a higher risk of defaults and they form about 60-65 per cent of the loanbook for lenders,” said Harsh Shrivastava, former head of the Microfinance Institutions Network, an association representing the sector in India.

Rahul Johri, chair of Vector Finance, a microfinance firm that provides loans to small enterprises, said many support measures brought in by the government had only helped larger institutions, while smaller players had struggled.

“It has become an existence issue for several small and mid-sized microfinance institutions as business has been severely impacted and collections are down,” said Johri.

Loan collection efficiency across the total loan pool has fallen to about 70 per cent from a peak of nearly 95 per cent in March, analysts say, indicating a potential build up in stress.

The gross loan portfolio of India’s microfinance lenders stood at ₹2.6-lakh crore ($35 billion) as of March 31, according to Crisil.

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Bumpy road ahead

Despite the short-term challenges, some remain bullish on the sector and expect it to bounce back if an anticipated third wave is not so severe.

“About 55 per cent of the market is still untapped which means there is huge market opportunity ... so things will look up soon,”said Johri.

But for now, many smaller microfinance firms are struggling.

Such companies, typically with loan books of less than ₹5-lakh crore ($67 million), have also seen their cost of funds rise by 100-150 basis points as banks and companies have become less willing to lend to them, said one industry executive, speaking on condition of anonymity.

Some microfinance firms have had to scale back capital raising plans due to tepid interest from investors, said the heads of two firms that have been looking to raise funds.

As smaller players falter, some have stopped paying salaries, or incentives to employees in recent months, they added, asking not to be identified due to the sensitivity of the matter.

“We are now only getting basic salaries, incentives have completely stopped in the last few months as collections are down,” said a collection agent.

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