Baby steps

| Updated on July 02, 2021

The relief provided for MFIs is welcome, but the scope of the scheme could have been wider

The RBI’s latest Financial Stability Report (FSR) lends credence to the recent move by the government to provide credit support to the microfinance sector. The report reveals that the GNPA ratio of NBFC-MFIs surged from 2 per cent of total advances in March 2020 to 4.9 per cent in March 2021 as smaller borrowers witnessed greater stress last fiscal year. According to MFIN, an industry body, the percentage of loans that are outstanding more than 30 days beyond due date has surged from the pre-pandemic level of around 3 per cent to 9.2 per cent in March 2021. The ongoing second wave of the Covid-19 pandemic has taken a toll on the income and livelihood of the poor and low-income earners, who make up the MFI clientele.

The government’s support to the MFI segment is timely though there is scope for further improving the outreach. There are currently 5.93 crore unique micro-finance borrowers (many of them households with uncertain incomes these days) servicing loan portfolios amounting to ₹2.59-lakh crore as on March 2021. The government’s intention is to help only 25 lakh borrowers by way of a loan guarantee to the MFIs (up to 75 per cent of the default amount for three years). The amount earmarked for the scheme — ₹7,500 crore — appears inadequate compared to the size of the loan book in this segment. The Centre has taken a couple of steps to reduce the cost of funds in the MFI chain. First, the lending rates on loans to the final borrowers, who now pay well over 20 per cent, have been capped at 2 per cent below the RBI ceiling (23-24 per cent). Second, MFIs can avail themselves of funds at 2 per cent above MCLR (7-8 per cent). The move to classify lending by Small Finance Banks to smaller NBFC-MFIs as priority sector lending in May this year and allowing SFBs the leeway to restructure microfinance loans on a case-to-case basis will help provide liquidity to the smaller MFIs. MFI self-regulation has improved in the aftermath of the crisis that broke out in Andhra Pradesh a decade ago. The improved ecosystem may ensure that small ticket borrowers do not fall prey to usury.

As for micro entrepreneurs, the Covid impact is undeniable: reports point out that loans under the Pradhan Mantri Mudra Yojana dropped 21 per cent in 2020-21 to ₹2.7-lakh crore from ₹3.4-lakh crore the previous year. It is worth considering whether the 42 million borrowers who took Mudra loans last year need support. The MSME space is hit by collapse of business confidence, reflected in the drop in working capital credit and the preference for cash. The challenge is to break the risk aversion at all levels.

Published on July 02, 2021

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