Why is the recovery of MFIs important
To put things in context, one needs to understand what a microfinance institution (MFI) is. An MFI is an organisation that offers financial services, primarily loans to low-income populations. Microfinance is one of the most effective tools to reduce poverty by providing credit to the economically marginalised populations, the poor and unbanked, to enable them to run viable productive income generation enterprises.
The COVID-19 pandemic and subsequent lockdown have had various negative effects — unemployment, increased poverty, increased inequality and lower economic growth. Although repercussions of a shutdown of many businesses have been harsh, the microfinance sector has been hit particularly badly due to the generally weak income profile of the borrower.
The microfinance industry had previously faced big crises — in 2010 when the Andhra Pradesh government suspended operations of MFIs in the state and effectively allowed borrowers to stop repaying their loans and then in 2016 when Prime Minister Narendra Modi announced demonetisation. These events led to a prolonged reduction in collections and asset quality.
To counter these negative impacts this time around and to provide a helping hand to the borrowers, the government announced a moratorium on term loans due between the period of March 1, 2020, to May 31, 2020, which was extended to August 31, 2020. Although this brought much-needed relief to retail borrowers, it was difficult for the MFIs to get a moratorium for their borrowings in phase I of the moratorium and a similar uncertainty was faced in phase II as well.
MFIs function in a group format whereby groups of individuals are formed, and each individual is responsible for the timeliness of repayments of all members of the group. Collections are done in joint group meetings, which are important for MFIs to maintain healthy collections. In the absence of such meetings due to the lockdown, collections had stopped. However, most MFIs are now able to operate a majority of their branches and reach out to customers, according to Investment Information and Credit Rating Agency of India (ICRA).
Some MFIs have even started disbursements in June 2020 to existing customers and more are expected to do so in the coming months as well. This further helps in improving collections and asset quality as customers see a benefit in repaying their loans.
As per a report from Blue Orchard Impact Investment Managers, the largest proportion of rescheduling requests received to date has come from India, as the implemented measures impact MFIs’ abilities to collect repayments. ICRA stated that Balance sheet Liquidity among MFIs is not enough to fulfil repayment obligations and pay for operating expenditure. However, such a cash shortfall risk is expected to be mitigated by the presence of undrawn sanctions and ramp-up in collections.
According to MFIN, NBFC-MFIs have a Gross Loan Portfolio of Rs 74,371 crore. NBFC-MFIs have a branch network of around 14,275 branches serving 3.22 crore clients and employing around 1,16,738 employees as of March 2020. These entities disbursed Rs 77,072 crore of loans in FY2020. It is easy to see why the good health of these financial institutions is paramount for India. Such institutions can, in turn, help their customers by initiating hygiene awareness campaigns, providing emergency kits, partnering with specialised organisations to assist clients and providing other services such as financial literacy and business development services.