By Vinay Kumar Singh
The economic fallout from Covid hit micro and small enterprises hard. With limited financial reserves for emergencies, many struggled with loan repayments. The microfinance (MF) sector’s NPAs (non-performing assets), typically around 1%, saw a steep rise. This article outlines collective lender efforts, government support, regulatory measures, as well as the faith demonstrated by the MF borrowers, which spurred sector recovery. In the last 2 years, the gross loan portfolio (GLP) has grown at over 15 per cent year-on-year, with the customer base reaching 7.4 crores.
The government & Reserve Bank of India (RBI) initiatives provided vital support. Lenders were asked to offer a moratorium, allowing for a temporary halt in instalment repayments, to all borrowers. In August 2020, the RBI introduced a framework for a one-time restructuring of loans.
The lenders, in discussion with the borrowers, were allowed to reduce the value of the instalment and extend the tenure. The lenders were allowed to keep such restructured loans as ‘standard’ on their books. This helped in two ways: it prevented adverse impacts on borrowers’ credit bureau records and saved lenders from raising more capital due to the deteriorating portfolio quality.
As lenders faced liquidity constraints due to moratorium and restructuring, schemes were introduced. RBI announced a Targeted Long-Term Repo Operation (TLTRO)-2.0 of up to Rs 50,000 crores. These funds had to be deployed in investment-grade bonds, commercial papers, and non-convertible debentures of NBFCs. Out of this, 10% of the funds had to be earmarked for instruments issued by microfinance institutions (MFIs). Facilities for refinancing RRBs, Co-operative banks and MFIs were set up with SIDBI (Rs 15,000 crores) and NABARD (Rs 25,000 crores).
A NABARD refinance facility of Rs 5,000 crore was especially for NBFC-MFIs. Small Finance Banks (SFBs) were allowed to classify term loans extended to MFIs as Priority Sector Lending. The government extended the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)- credit losses incurred by lenders were covered up to a pre-agreed level. Cumulatively, these steps buttressed the efforts to enable credit flow to the most impacted population segment: the micro-enterprises and self-employed in the rural areas.
As opposed to the autonomous, self-contained relationship between borrower and lender in retail loans, microfinance lenders are embedded in the social fabric of the borrower community. The lending is facilitated through a group model, further strengthening the bonds within the community. During Covid, the microfinance lenders initiated multiple efforts to support the communities. Health camps, and vaccination drives were combined with efforts to ensure the availability of essential commodities. The field teams worked round the clock to save lives and help the borrowers.
Lender teams helped customers get acquainted with digital channels for repayments through phone calls, short video clips, recorded messages, and social media. It was essential to explain the moratorium to deserving borrowers while clarifying that repayments were only deferred and not waived off. MF organizations leveraged group leaders to reach individual borrowers. The facility to restructure loans ran the risk of large-scale dilution in the credit behaviour of borrowers if it was offered without proper due diligence. The effectiveness of these initiatives became apparent when the borrowers willingly resumed repayments when the situation improved.
Despite all these efforts, in many cases, the situation was irretrievable. Since Mar 2020, the MF sector has written off nearly Rs 30,000 crores. The NPAs have been secularly decreasing and are now around 1%. High levels of customer centricity, resilience of operational processes and the ability of the MF lenders to quickly adapt to the COVID shock did not go unnoticed. With cleaned-up balance sheets and quicker, nimbler operations, the NBFC-MFIs alone have raised more than Rs 50,000 crores (including securitisation) in H1 FY 2024 – a YOY increase of around 50%. Multiple successful IPOs by NBFC-MFIs and SFBs reflect investor confidence in the sector.
Over the last decade, the microfinance sector has grown nearly 20 times. Such rapid growth was actualized by the joint efforts of the lenders, borrowers and the supportive regulations and policies of the RBI and the government. Widespread adoption of customer-centric technology, coupled with a high-touch model aligned to customer behavior, positions the MF sector well to continue playing an important role in achieving equitable growth and realizing the dream of Viksit Bharat by 2047.
Vinay Kumar Singh is the Head Self-Regulation & Compliance at Microfinance Industry Network (MFIN)