In a sector dominated by cash, assessing household income is an onerous task
By Jagriti Bhattacharyya
Historically, the microfinance sector in India, barring isolated events such as the Andhra Pradesh crisis of 2010, has boasted of near-perfect repayment rates. The social pressure or social collateral advantage of the self-help group or joint liability group-based microfinance institution (MFI) lending model has ensured that borrowers make repayments on time, even if that meant availing a second loan to repay the dues of the first!
However, last year, in the aftermath of the first Covid-19 wave, the once seemingly resilient microfinance sector had shown the first signs of distress. At that time, I had highlighted (via a column this paper) the dire need for the central regulator to re-look at the tenets of MFI lending. Against the backdrop of a crippling second Covid-19 wave, the distress signals from those at the bottom of the economic pyramid are only growing. A recent MFIN report has shown that portfolio-at-risk (PAR) has been on an upward trend since June 2020, while a Crisil report pegged the 30-day PAR to exceed 14% by June 2021, which is even higher than the demonetisation peak of March 2017.
In states like Assam where indebtedness levels are alarming and MFI customers are already stressed with loss of livelihoods because of the pandemic, the government has agreed to waive off loans under certain conditions.
The good news, however, is that the Reserve Bank of India (RBI) has taken cognisance of the proliferating stress in the sector and has proposed MFI reforms that signal an attempt to address the challenges. Among the proposed changes, two deserve a special mention.
First, RBI has proposed to link the maximum permissible loan amount, irrespective of the financial institution, to 50% of the household income. This stipulation was definitely needed. In its absence, financial institutions could easily lend up to the maximum permissible loan limit of `1,25,000 to each customer irrespective of their repaying capacity. However, the process of assessing household income shall continue to fall under the purview of the financial institution.
Second, and most importantly, RBI has proposed to bring all MFI loans (irrespective of the lending institution) under the same set of prudential guidelines. This means that not only will the same customer no longer be allowed to borrow from multiple financial institutions beyond the specified loan limit, but also lending institutions will no longer be able to leverage this loophole and overburden gullible customers.
But, overall, with the proposed reforms in microfinance lending, perhaps there could not have been a more pragmatic approach from RBI at this hour.
In order to tap the irrational exuberance in MFI lending, SROs and state governments also need to step up and play their part. In a sector dominated by cash, assessing household income is an onerous task. This is where SROs and state governments in particular should ensure that MFI loans are strictly offered only to those who fall within the income brackets as stipulated by RBI. Moreover, as the latest guidelines propose to do away with the interest rate ceiling, it is the prerogative of all stakeholders involved to ensure that customers are not being offered loans at usurious rates. It is worthwhile to understand that loans at avaricious terms to scrupulous customers can never be a sustainable option, neither to the customer nor to the lending institution; done right, however, microfinance holds the promise of alleviating the lives and livelihoods of those who are stuck at the bottom of the economic pyramid.
Research scholar at the Indian Institute of Science