Coronavirus impact | MFIs feel there will be pent-up demand for loans after lockdown ends

While the coronavirus crisis disrupting operations in every sector, the microfinance institutions (MFIs) have also been badly hit. But they are hopeful of bouncing back as the stakeholders feel there will be pent-up demand for loans after the lockdown restrictions are lifted.

"India is largely driven by entrepreneurship. A large section of our population is self-employed, driving their businesses, for their livelihoods. We expect a bounce back since this self-employed low-income segment is perennially credit-starved. Funds will always pursue quality credit. Whenever required, and as per their credit records, MFIs would provide financial help to help borrowers get back on track," said Harsh Shrivastava, CEO, Microfinance Institutions Network (MFIN).

There may be an increased demand for loans by kirana shop owners, farmers and micro enterprises (vegetable owners, tea shop vendors) to fund working capital requirements and recommence businesses, which can be serviced by MFIs and small finance banks, according to Sanjay Doshi, Leader, Financial Services, KPMG India.

"It is easier for small and micro-enterprises in unorganised and informal sectors to resume operations quicker than the formal organised sectors. MFIs can step in to provide the needed credit," he said.

This funding is, however, dependent on lending institutions like banks, financial institutes and NBFCs extending additional funding to the sector," said P. Satish, Executive Director, Sa-Dhan, Association of Community Development Finance Institutions.

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Most microfinance institutions may, however, be forced to push back their expansion plans.

"Once the lockdown is lifted, MFIs will be concentrating more on their existing portfolios and may shelve their expansion plans for the time being. With the right steps and support from RBI and Government, the industry will be back on track once this is over.," said Shrivastava.

While the RBI has announced a three-month moratorium over term loans, there remains confusion whether MFIs are eligible to get moratorium from their lenders. MFIN and Sa-Dhan have jointly pitched for a clarification from the regulator on the issue.

There is a loss of income to the borrowers as their income generation activities are disrupted. Since the borrowers will need time to restart their businesses, they expect a moratorium on repayments for a period.

According to Satish, MFIs can extend this moratorium if their lenders also extend this moratorium back to back to MFIs. The impact on the sector  can be mitigated for the MFIs if the lending institutions extend the RBI moratorium on repayments to MFIs.

Urban MFIs have seen a reduction in business as consumption pattern may take a while to resume. The MFI model still serves as an important last- mile connect in the rural areas.

However, the model of MFIs is a highly personal connect model with customers which is likely to change.

"Currently, most MFIs have converted to cashless disbursements.  The recent challenge of social distancing and lockdown will push MFIs to digitise their collection model," said Joshi.

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