Introduction:
The microfinance industry looks to provide basic financial services to people who work actively in the economy but belong to the low-income category. The industry tries to meet the demands of such people by giving loans, opening savings accounts and offering insurance. The term in the literal sense implies provision of small loans for micro- entrepreneurs. It creates a functioning environment for the poor to hone their skills by putting their ideas into practice and escape poverty. Their only other alternative would be local moneylenders who charge exorbitant interest rates on the money lent. Commercial banks cannot alleviate the poor of their misery in this context as low- income people often do not have any collateral, a necessary condition for loan approvals from commercial banks.
Microfinance model followed in India:
India’s self-help group (SHG) movement has developed as the most successful and the world’s largest network of women owned community-based microfinance institution. The SHG-BLP (Self Help Group Bank Linkage Programme) is a pioneering model initiated by NABARD in 1992 to provide affordable door-step banking services in India. The SHG-BLP initially started as a bank outreach programme but has now achieved goals of financial inclusion in rural India. Studies conducted by NABARD to deliver a viable financial model for India’s rural credit system revealed that the poor needs better access to timely available financial products and services tailored to their requirements rather than cheap credit. One key innovation that led to huge shift in developing banking in India was the introduction of collateral free lending and the permission to lend to groups without specification of purpose/activity/project. SHGs have also been supported by way of special budgetary provision by the GoI since 1999. As of March 31, 2019 the SHG-BLP programme reached a total membership of about 1 crore groups and extending loans to the extent of Rs. 87000 crores to 50.77 lakh SHGs.
Beginning of the pandemic:
The pandemic had prolonged effects on the globe. To avoid a major health crisis, lockdowns were imposed. The lockdown took a major hit on the microfinance industry specially after facing crises like 2010 AP amendment bill and 2016’s demonetization. MFIs play a key role in between commercial lending institutions wanting to take moderate risk for better returns and clients in need of non-collateralized loans to finance their livelihood activities. In such scenarios small and micro loans serve a large segment of population running small and micro enterprises. The industry works on a crude principle of “Close Contact, Trust and Financing Sustainable Livelihoods” fueling micro and small enterprises as well as generating employment opportunities.
A complete lockdown in 2020 brought every business to a standstill but among them the worst affected were those with small or no reserves and operated in a high liquid model. The earning capacity of MFIs clients during the lockdown has threatened the MFI existence even though the government tried to reschedule loans.
MFI providers are expected to face a serious liquidity crunch during the pandemic due to increasing gap between revenue and operational expenditures and depleting resources. This shrinking liquidity may pose serious problems to small and mid-size MFIs.
Another lockdown in 2021:
The second lockdown in India comes during 2021 when covid cases have started spiking again. The GoI did not impose a nationwide lockdown instead individual states had their own mini lockdowns. Industry experts say while there will be no immediate or direct impact on MFIs, restriction will impact livelihood activity and in turn repayments. Disruptions caused in economic activity due to lockdowns, night curfews will impact the cash flows of the business and the collection efficiency gains witnessed between the lockdowns of 2020 and 2021 may start disappearing. Maharashtra having the most stringent lockdown is among the top 5 states in terms of microfinance loans with assets under management (MFI AUM) at Rs. 16700 crore amounting to around 7% of all microfinance loans. The collection efficiency of MFIs was already lower even before these new restrictions due to previous curbs and extended lockdowns. The sector’s efficiency has stalled at 90-94% now compared to pre-pandemic levels of 98-99%. It is also said that compared to the fiscal year of 2020 disruption in economic activity will be relatively moderate this year.
Non-banking finance company microfinanciers (NBFC-MFIs) which account for 40% of all microfinance loans have been allowed to continue operations in Maharashtra during these mini-lockdowns which is a big relief as microfinance requires high personal connect. NBFC-MFIs exposure in Maharashtra accounts for 65% of Maharashtra’s MFI AUM and ranges from 5-28% of their total loan book. Most lenders had already made a provision of 2-5% in December 2020 after a very stringent lockdown but they make increase the provision if the situation demands it. In all, it is noted that NBFCs are better equipped to deal with the current situation due to learnings from the last lockdown as well as previous setbacks.
Supply-side of MFIs:
From a funding perspective, things have improved and liquidity is not an issue anymore. This is because since there is no nationwide lockdown, the impact is calculated to be lower. Disbursements for the industry as a whole during Q3 FY21 was around 96% of the same period last year.
Conclusion:
The post pandemic period is going to put a lot of pressure on microfinance institutions with surges in demand for more income generating loans and more gestation period building way for financial restructuring through new mergers and acquisitions. Last time in FY20 the segment was able to recoup in a quick and positive way but with lockdowns extending, small businesses and street vendors are likely to face the brunt as these are typically MFI customers and their business is run on daily cash flows. The only way out of this would be to accelerate the vaccination process so it acts like a “good buffer” for the industry.
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