Microfinance is perhaps the only industry of similar vintage in India whose historical journey is dotted with repeated crisis, testing its business model time and again. But the sector has shown resilience, which is predicated on two major pillars – its ability to meet the byte-sized financial needs of low income women clients at their doorstep and the proven link with development.

FINDEX, 2017 of the World Bank showed that while India has made significant progress in opening of bank accounts, credit penetration remains low; only 7 per cent adult Indians borrowed from a formal institution in last one year. Microfinance fills this credit gap for most low-income clients. Microfinance grew at a CAGR of 24 per cent over the last five years and as of March 31, 2021 catered to nearly 60 million low income clients with loan outstanding of ₹2,59,377 crore.

Last year, when the national lockdown happened, questions on the ability of contact intensive microfinance industry to survive surfaced again. RBI’s moratorium aggravated the concern as microfinance institutions depend heavily on client repayments for liquidity. Still, going with the RBI announcement, the industry extended moratorium to its clients but did not get any moratorium from its lenders, it is estimated that about 40 per cent lenders agreed to partial moratorium. This double whammy of no client repayments but the imperative to repay the lenders led to a serious issue for the MFIs.

RBI, govt measures

But help for the sector came with the RBI announcing Targeted Longer-Term Refinancing Operations (TLTRO 2.0) for NBFCs and MFIs. Simultaneously, leveraging the All-India Financial Institutions (AIFIs) infrastructure within the country, refinance facilities of ₹25,000 crorre was given to Nabard and ₹15,000 crore to SIDBI for on-lending/refinancing. Further, considering that small MFIs faced difficulties in availing these funds, the RBI allocated ₹5,000 crore to Nabard for refinancing them under ASLF. The government backed it up Partial Credit Guarantee Scheme which enabled 14 NBFC-MFIs to raise ₹4,011 crore through Bonds/CPs/NCDs. These measures enabled the sector to get some liquidity and by July 2020, client level repayments also started resuming. A combination of cash at hand, liquidity support and lower disbursements saw the MFIs scrape through the first wave – and to the credit of the sector, there were no defaults despite only partial moratorium by lenders.

But just as the sector started reviving the second wave hit the country. The spate of State-level lockdowns have hit the economic activities of clients.

The RBI and government measures were confined to larger NBFC-MFIs. AIFIs and lenders remained cautious and unfortunately adopted a risk matrix of normal times to screen eligible institutions. PCGS was a great help but again subscribers remained wary of going below A rated papers.

The experience of last year with economic shock showed that for such short term shocks, ensuring liquidity to institutions and in turn to clients is the key.

Acknowledging this RBI provided ₹50,000 crore to Nabard in April, 2021 to support NBFC-MFIs and NBFCs. RBI also issued Resolution Framework 2 guidelines on May 5 which enables Financial Institutions to provide relief to clients in stress.

Liquidity concerns

Liquidity continues to remain a concern as field repayments have dipped due to lockdowns and fresh lending is still skewed towards larger players — as there has been no relaxation in eligibility conditions. Smaller MFIs are struggling to stay afloat and meet their debt repayment conditions.

Policy makers must sustain the momentum and not hold back now.

The measures neede are: (a) ensuring AIFIs and lenders lend to small and mid-sized MFIs lowering their risk lens; (b) restarting of PCGC and also covering term loans from banks and AIFIs under it, this will give comfort to the risk averse lenders; (c) inclusion of small and medium sized NBFC-MFIs under Resolution Framework, so that lenders provide short term relief to cash starved MFIs.

The microfinance sector requires ₹15,000 crore of liquidity flow for the next three months to bounce back. This amount seems negligible in the face of 60 million women clients.

To the credit of the microfinance sector, it has done its part — adopted digital, provided relief to clients as per regulatory framework, not shed its field workforce in the face of severe cash crunch and spread Covid protocols to hinterland.

Unprecedented times call for bold policy steps to mitigate the risks as microfinance is integral to the vision of an Inclusive India.

If ever, there was a time to demonstrate policy intent and action, the time is now.

The writer is CEO & Director - MFIN, the industry association for Microfinance

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