The gross loan portfolio of microfinance companies in India fell in the first quarter of FY22 as demand for credit dropped due to restrictions imposed during the second COVID-19 wave.
The loan portfolio declined 7 percent to Rs 2,36,100 crore in the April-June quarter from Rs 2,53,800 crore in the preceding quarter and dropped 0.86 percent from Rs 2,34,100 crore a year earlier, according to a report by CRIF High Mark, an Indian credit bureau.
Microfinance companies offer financial services to small businesses and individuals without access to conventional banking.
“During April-June, with the spread of COVID-2, local and regional lockdowns and limited movement of goods and services, many micro and small businesses saw a sudden dip in revenue,” said Hardika Shah, founder of Kinara Capital, referring to the company’s lending portfolio. “Even though the effect of the virus was severe on people, some amount of business was going on, so it was relatively better. We saw collections dip down to 75 percent but were back to pre-COVID levels by Q2.”
Disbursements declined 73 percent to Rs 23,700 crore in the April-June quarter from Rs 88,500 crore in the fourth quarter of FY21, according to the report.
Lenders attributed the drop in disbursements to the second wave of the COVID-19 pandemic. They noted that demand for credit fell due to lockdown restrictions in various states.
“The situation in the April-June quarter was actually probably even more stark than what is indicated. April-June last year was the peak of COVID and pretty much everything was shut down,” said Jairam Sridharan, MD of DHFL.
Sridharan observed that the second wave of COVID-19 was tough for micro, small and medium enterprises, but only the first two months of the quarter were difficult.
“By June, things had started to pick back up. So the MSMEs were much more resilient in the second wave than they were in the first wave. In the first wave, it took them six-seven months for them to pick business back up right after things started shutting down, but this time around, having been a lot more resilient, just after two months of real trouble, things had started to pick back up,” he said.
According to Sridharan, business volumes returned to normal by August-September.
Overall, the economy is showing green shoots of growth and the order books for many microenterprises are going up. However, access to capital remains the largest challenge for MSMEs, observed Shah of Kinara Capital.
While the outlook for microlending in India is positive, a few regulatory frameworks are needed, he said.
According to Shah, microenterprises should be treated differently to small and medium businesses and policies to help with the formalisation of microenterprises need to be simplified and easy to execute.
“Except in sectors where physical contact is required, overall demand for credit is going up, including the micro-sectors. We think that the micro-SME segment is reviving and is pretty robust and is going to see a lot of growth,” said Anuj Pandey, chief risk officer at U Gro Capital.
Sridharan of DHFL said three trends are seen driving demand for credit.
MSMEs are fundamentally changing their business altogether and moving to a different business, people are adding new businesses to what they’re doing because they realise some businesses are more vulnerable than others, and with work from home, many people have moved to their hometowns, increasing demand in the local market.
“So you’re starting to see all three trends are together resulting in an environment where MSMEs are investing more right now. And that means greater demand for credit,” noted Sridharan.
MSMEs are looking to invest, to open up some of these new businesses, get into these new lines of business, or cater to new incremental demand that they are seeing in the smaller towns because of migration from the big towns, he added.