The lockdown has brought the collection operations of microfinance institutions (MFIs) to a halt, as about 95 per cent of the loan repayments are still done through cash. Since loan officers meet in person and collect the payments from borrowers, the lockdown has put a freeze on loan collections, hurting MFIs.

“Collections have been suspended since March 25. While fieldwork can resume in May after the lockdown is lifted, a lot would depend upon the zone in which the particular district falls (red, green or orange, based on the severity of the virus outbreak). Also, given that MFIs will have to give the option of opting in or out of the moratorium in person (by taking the consent of the borrowers in writing), much of the effort in May would go around determining how many borrowers are opting for the moratorium,” says Manoj Kumar Nambiar, MD of Arohan Financial Services and Chairman of the Microfinance Institutions Network (MFIN).

Much will depend on how collections pan out after the moratorium ends.

“June will be a critical month and it can be good, if normalcy returns by mid-May. If the lockdown or restrictions are extended then it could take longer for collections to recover,” adds Nambiar.

Liquidity issues

What is of concern is also the ambiguity around the moratorium that the RBI has allowed lenders to give borrowers. While MFIs are extending the option of loan moratorium to their borrowers, they may not get the same leeway from their own lenders. NBFC-MFIs borrow from banks or other NBFCs to on-lend to their borrowers.

“Some banks have been very supportive, extending relief to MFIs on their loan repayments. But there are others that insist on loan repayment from MFIs, which could lead to huge liquidity gaps,” explains Nambiar.

The issue could get compounded by a sharp rise in demand for credit by MFI borrowers, post the lockdown. With most of them being daily-wage earners, with savings used up, they are likely to require funds urgently to restart their work. MFIs will need to have ample liquidity to cater to their credit needs.

RBI’s liquidity measures

In a bid to ease the pain for NBFCs and MFIs, the RBI on Friday announced new targeted long-term repo operations (TLTRO) of ₹50,000 crore. Banks will have to deploy the funds in investment grade bonds of NBFCs, with at least 50 per cent towards small and mid-sized NBFCs and MFIs. Of the 50 per cent, banks have to invest 10 per cent in instruments issued by MFIs.

But given that banks have been reluctant to lend to stressed small and mid-sized corporates, including NBFCs and MFIs, how many will borrow funds under TLTRO to deploy in MFIs remains the critical question.

“TLTRO is welcome and the 10 per cent carve-out for MFIs is a decent start, though one hopes banks would invest in small and medium MFI papers, too, besides securities of larger MFIs,” says Nambiar.

According to information accessed from MFIN, as of December 2019, the aggregate gross loan portfolio (GLP) of MFIs is ₹67,320 crore to 3.1 crore customers. Of 53 NBFC-MFIs (MFIN members), 13 are small (GLP < ₹100 crore), 18 are medium (GLP of ₹100-500 crore) and 22 are large (GLP > ₹500 crore).

The majority of debt funding for large MFIs comes from banks (68 per cent). But, for medium and small MFIs, the proportion of debt funding from banks is much lower, at 19 per cent and 26 per cent, respectively. In fact, in the September 2019 quarter, small MFIs could not source any funding from banks.

Investment in MFI bonds

Banks, under TLTRO, have to invest in only investment grade (BBB-rated and above) bonds of MFIs. Data from MFIN for 53 MFIs as of December 2019 reveal that only about 25 per cent are rated AA or A. MFIs with BBB rating form 43 per cent.

While banks can invest in BBB-rated bonds under TLTRO, they may prefer to stick with minimum A-rated MFIs, given their weak risk appetite and higher capital burden associated with low-rated bonds.