A year after the COVID-19 outbreak, small lenders are back to where they were -- facing an uncertain business environment due to lockdowns across states. Fears of another round of asset quality stress are looming large.
The worries escalated after states announced full or partial lockdowns, impacting collections and livelihoods. According to at least five industry officials across the microfinance and banking sector Moneycontrol spoke to, lockdowns have already started hitting small and medium business owners, forcing many to shut shops and stop collections by microlenders.
This could eventually lead to stress on their books, they said.
“The second wave will deal a body blow to small businesses if lockdowns prolong,” said Samit Ghosh, founder of Ujjivan Financial Services. “Now, we have seen the COVID impact for a year already and the second wave is spreading across India. This is both a medical and an economic problem. It is a double whammy for us. It is one of the biggest crises to hit the sector,” Ghosh said.
This view is shared by most of Ghosh’s colleagues in the microlending industry.
The hope is that, this time, lockdowns won’t last long. Last year, following the outbreak of the pandemic, the nationwide lockdown was announced in the last week of March and lockdowns continued till May-end in different phases. The economic cost of the total lockdowns were huge. There is no clear estimate of how many shops went out of business but the numbers are large. The resultant economic stress affected households and consumer demand.
Banks could avoid a major spike in NPAs (non-performing assets) due to the timely intervention of the government and the RBI. The government announced a COVID-relief package amounting to Rs 20 lakh crore, a significant part of which were the measures announced by the RBI.
In all, the RBI infused liquidity to the tune of Rs 12.7 lakh crore. The RBI also announced a six- month-long loan moratorium (deferral of EMIs) and a one-time loan recast facility under the COVID resolution framework 1.0. Liquidity assistance given was through a mix of instruments, including targeted long term repo operations (TLTRO)and special OMOs (open market operations). These measures helped both the banks and MFIs to avoid a big asset quality shock.
Comes the second wave
This year, the situation is slightly different.
Learning from last year's experience, the financial sector is better prepared to handle the shock. Banks have geared up against the second wave of COVID in two ways. First, by upping the provisions (the money set aside against the likely losses from COVID) and ramping up digital capabilities to reach out to customers.
Also, there is an expectation that the asset quality shock in this round will not be huge for two major reasons. One, most of the problematic accounts are either in NCLT or have sought a one -time loan recast scheme. Two, there is an expectation that with the vaccination drive progressing, the spread can be contained much sooner than last year.
But none of these can help if the second wave of COVID prolongs beyond the immediate term and the vaccination drive doesn't progress as expected.
According to an SBI research report, with the second wave and associated lockdowns/restrictions, an economic disruption is now clearly visible. At least 20 states are now in lockdown. The number of ratings downgrades are 3.7 times higher than upgrades in April 2021.
"Our Business Activity Index, which has been declining steeply since April, has dipped to a new level of 71.7, the level attained in mid-Aug’20. The latest week shows dip in all indicators, except for weekly food arrival and electricity consumption. The decline in labour participation is a matter of concern indicating that the disruption has percolated to the labour market as well. Even the monthly leading indicators, including GST e-way bills, vehicle sales, fertiliser sales have declined in Apr’21 compared to Mar’21,” the report said.
Vaccination progress key
The report further said that given the rise in cases and restrictions in every state, the real GDP growth of 10.4 percent looks a bit ambitious. Regarding the question if pent-up demand would support economic activity, once the restrictions are removed, SBI economists believe recovery will actually depend on the psyche of people to come out and this will not happen till the larger population is vaccinated, the report said.
“Thus, we again re-emphasise the power of vaccination as a primary tool to reduce the severity of infections. We must vaccinate our people on a mission mode, even if it means suspending economic activity for a while after the second wave subsides, and get everyone vaccinated. Also, single-dose vaccines should be prioritised,” the report said.
New round of RBI measures
In an unscheduled address, RBI Governor Shaktikanta Das announced a slew of measures on May 5. Among those, the most important one is a scheme -- resolution framework 2.0 that permits small companies which didn't restructure their loans last time to do so. Borrowers with exposure up to Rs 25 crore who didn’t avail earlier facilities and where loans are standard as on March 31, 2021, will be eligible for restructuring in the second round, Das said in his speech.
The restructuring under the proposed framework can be invoked up to September 30, 2021, and banks have to implement it within 90 days of invocation. Lenders can review the working capital limits of small businesses and MSMEs as a one-time measure. Those who availed the earlier window of restructuring can be given additional two years of moratorium, he said. The governor also announced a Rs 50,000-crore liquidity facility for banks to lend to ramp up COVID infrastructure.
The RBI has allowed loans from small finance banks to MFIs to be tagged as priority sector lending loans (PSLs). PSL refers to mandatory lending by banks to economically weaker sections. Banks need to lend 40 per cent of their loans to this category.
At present, lending by SFBs to MFIs for on-lending is not reckoned for PSL classification. “In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to Rs 500 crore) for on-lending to individual borrowers as priority sector lending,” the RBI Governor said. This facility will be available up to March 31, 2022, Das said.
Industry response mixed
Large banks may not have any immediate worry because of the large provisioning done on COVID impact. But these measures may not help smaller lenders survive the second wave if the situation doesn't improve on ground. This is because smaller MFIs do not have big cash reserves unlike big banks.
The RBI measures have been welcomed by the industry but there is a fear that if lockdowns do not end, the sector may face a deeper crisis. MFIs borrow from banks. These institutions aren't covered under the resolution framework 2.0 scheme. It applies to only individuals and small businesses and MSMEs having an aggregate exposure of up to Rs 25 crore and who didn't avail the scheme last time.
On the other side, MFIs have already started seeing disruptions in normal operations due to the lockdowns. "The biggest problem is to reach out to the customer. For MFIs, physical collections on the ground is very important," said the head of an MFI, on condition of anonymity.
The customers of MFIs are mostly small businessmen who are the first to be hit during lockdowns. P Satish, executive director at Sa-Dhan, said he expects more measures from the central bank in the next few days or weeks. “The permission to SFBs to classify fresh lending to smaller MFIs under the PSL tag is a good move. But MFIs were hoping for a moratorium on all loans for two to three months for their borrowers. This hasn’t come. We expect the RBI to come up with further announcements in future,” Satish said.
All eyes are on the pace of vaccinations.
However, the daily vaccine doses given is now at an average of 17 lakhs per day, compared to the average of 28 lakhs per day in April. “Given this trend, we believe India can only be able to vaccinate 15 per cent of the population by Oct ’21 (which is required for herd immunity, given the trend in other countries) but we have to vaccinate around 55 lakhs daily in September and October," the report said.
For now, the outlook remains uncertain for microlenders.