Moneycontrol
Jan 06, 2017 10:17 PM IST IST | Source: Moneycontrol.com

Demonetisation led to drop in MFI collection rate: CARE Ratings

The report said that on account of non-availability of cash post demonetisation, the borrowers were not in a position to service their loans which led to delay and drop in collection rates.


Moneycontrol Bureau

The demonetisation drive by the government led to a drop in collection rates for microfinance institutions (MFIs), according to a report by CARE Ratings. The report said that on account of non-availability of cash post demonetisation, the borrowers were not in a position to service their loans which led to delay and drop in collection rates.

On November 8, Prime Minister Narendra Modi declared that old Rs 500 and Rs 1000 notes will no longer be legal tender from the midnight of that day onwards.
As on date, there are 71 NBFC-MFIs registered with the RBI. As on September 30, 2016, the gross loan portfolio of NBFC-MFIs stood at Rs 55,254 crore. The report said that the major positive for the sector was collection rates of more than 99 percent in the past. However, for the first two weeks following the announcement of demonetisation, the collection ratio declined to 80 percent.


“The collections have come down subsequently due to slowdown in business activities of the borrowers and dispensation provided by RBI (earlier by 60 days and later increased to 90 days) to financial institutions in terms of recognising NPAs,” said the report. MFIs seek to promote financial inclusion by providing financial services to clients of financially un-served and under-served households.


According to CARE Ratings, despite the efforts to increase cashless disbursement, majority of the disbursements were still cash-based. Because of the withdrawal limits imposed on current accounts, MFIs were not able to withdraw cash for further disbursement and the incremental disbursements were restricted to the collections.


By the second week of December 2016, the ratio of disbursements to collections fell to around 30 percent. It said that the main reason for this significant drop in disbursements was due to the focus of MFIs shifting from disbursements to collections. Also, it said that they also adopted a wait and watch approach in order to comprehend the position.

Post demonetisation, the report said that MFIs are increasingly looking for cashless disbursement and collection through Jan-Dhan accounts and by leveraging technology. CARE Ratings said that with eight NBFC-MFIs converting into Small Finance Banks (SFBs) by March 2017, the competitive environment is bound to undergo a major shift within the microfinance industry as a whole.

As these entities are expected to remain focused on microfinance, the report said that cashless disbursement and collection of loans is bound to increase in the future. However, it said that MFIs with high financial leverage and low collections efficiencies are expected to face deterioration in their credit profile.
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