Provisioning will need to be made for credit losses, but the sector is focussed on a double bottomline with financial and social objectives. The government front-footing liquidity through loans as a measure to meet Covid 19 challenges means banks wouldn’t hesitate to lend
By Manoj Kumar Nambiar, Chairman, MFIN
On March 25, at around 11:30 am, Rekha Devi (name changed for privacy), from a village in Madhya Pradesh, was worried as she had to repay the microfinance company from where she had taken a loan and the scheduled meeting did not happen that day. She had taken a Rs 20,000 loan from the company a few months earlier, to run her small grocery shop and support her family of four. Being very particular about paying her instalments regularly, she walked alone to the branch office to pay the money to the surprise of the branch staff. The day was the first day of the national lockdown announced in India!
Customers like her form the backbone of the microfinance sector in India, which today, through various entities, covers over 100 million women with a credit portfolio outstanding of over Rs 3 lakh crore. With a collection efficiency of 99%-plus, it can put retail, MSME & corporate clients to shame!
Microfinance institutions, with their branch and field officer network, offer doorstep service to these clients in need for credit. Using the Grameen methodology, Credit Bureau and residence checks, and financial literacy sessions, unsecured loans are provided within a week of the initial application, to be paid back weekly/fortnightly or monthly as per the clients’ preference. So, how does this sector that caters for the ‘bottom of the pyramid’ clients not only survive but evolves stronger after every crisis?
While 40%-plus people from the under-served strata in India avail loans, only 8% of such loans have been from an RBI-regulated institution, with the rest coming from informal sources (Findex and NABARD studies 2018). In a country of over 1.3 billion people, one can imagine the extent of financial exclusion, especially in the semi-urban and rural geographies. Estimates show that even with this reach of credit supply, just about a third of the market is being served through formal institutions.
The microfinance client has an almost zero-gestation-period business model, one which could give a 10- 20% return in a single day, which allows it to be up and running immediately. Since their business caters mostly to necessities, demand is also not an issue.
A high level of customer connect, smaller ticket sizes and frequent repayments ensure high collection efficiency. Loans come at a very reasonable Rs 1000 – 1,200 interest charge for an Rs 10,000 loan for 12 months—the rate charged by private financiers could be 12 times that amount! Hence, the customer would not want to risk suspension of any future credit with group indiscipline and non-payment. This sector has been built with these extra-ordinary women customers who have, over last 30 years, survived many crises and bounced back through drought, flood or cyclone.
The spectacular turnaround of a microfinance company that went through a CDR in the 2010 Andhra Pradesh crisis, and went on to do a successful IPO last year reinforces the belief that both the customers as well as the companies/employees in the sector are resilient. Post the Andhra Pradesh crisis, the sector got regulated by RBI with clear microfinance guidelines, established Credit Bureau discipline, and got two RBI-recognised self-regulatory organisations (SROs) followed by strong investor interest and bank support with debt funding.
Post demonetisation in 2016, where the clients took time to get the old notes changed to new ones to pay while activists twisted RBI forbearance on asset classification to a loan waiver, the industry pursued and embarked on a cashless initiative—today, almost 95% plus disbursements and 33% repayments are made in a cashless manner, thanks to the PMJDY initiative.
Devastating floods in TN in 2017, Kerala in 2018 and Cyclone Fani in Odisha in 2019 crippled the clients’ businesses, MFIs played a key role in extending credit to and nursing them back to health.
With entities like banks and non-banks now active in microfinance, the sector, in a world class initiative, established the Code for Responsible Lending (CRL) in microcredit in 2019. Various other initiatives such as daily submission of credit data to the bureau, not lending to an NPA client, lending within agreed indebtedness limits have made this a responsible and responsive sector.
Even in the current lockdown, microfinance companies and their over 2 lakh employees are active, conducting virtual group meetings with their clients, highlighting the need for safety and hygiene in the COVID 19 crisis and reassuring them on the financial front.
Does this mean the global pandemic will not have any impact on this sector? Of course, it will. Clients have to get back to normalcy, repayments might get delayed and tenures of loans might get extended. But, this business, unique in having a double bottomline, of social and financial objectives, is about living with the clients and mirroring their cashflows, especially in such difficult times.
Financial provisions will be made, but the eventual credit losses will be much lesser given the ecosystem today. When the lockdown eases and clients make efforts to restore normalcy, they will find NBFC-MFIs ready and waiting to help. They will need help to fully avail the RBI moratorium announced till end of August 2020, financial advice to rebuild their lives and additional credit to support their livelihoods. Given RBI’s and the government’s priority in ensuring liquidity, the lending banks will extend support.
The Indian microfinance sector can, and will, play a major role in ensuring confidence and credit at the grassroots when it is needed the most to rebuild our country. After all, millions of Rekha Devi’s are waiting for us to serve them and, in the process, aid nation-building.
(The views expressed are the author’s own)