Explained | The good, bad and ugly of Assam’s microfinance relief scheme

Under category 2, the government will clear the overdue amount if payment is overdue by 1-89 days, the State government tweeted on Friday. Also, an incentive of Rs 25,000 will be paid after the borrowers restart regular repayment.

Under category 3, loans categorised as NPAs (non-performing assets) will be disposed of with Rs 7,200 crore-Rs 7,500 crore of State funds and a Rs 4,000 crore benefit to be transferred by lenders, the government said.

These announcements are part of the understanding reached by the State government with representatives of the microfinance industry.

Why has this scheme been launched now?

As explained above, the relief scheme has been launched in the backdrop of the severe Covid crisis. The pandemic has impacted livelihoods. Microfinance borrowers, who are typically at the bottom of the pyramid, are among the worst hit.

The Good

Logically, the Assam microfinance relief scheme is a win-win deal for both lenders and borrowers in the short term. An immediate asset-quality shock will be averted. A microfinance loan waiver of around Rs 7,500 crore will cover a large number of small borrowers. According to Assam Government data, up to June 2021, there were 1.4 million microfinance borrowers in the State and the new scheme would involve a Rs 12,000 crore credit portfolio, of which the State government would be required to expend around Rs 7,200 crore.

As mentioned above, the Covid pandemic was an unexpected jolt for many borrowers, impacting their ability to repay loans. In the absence of a relief scheme, a significant chunk of these loans would have become NPAs. In that sense, the Assam microfinance scheme is expected to offer some benefits to lenders operating in the State, including Bandhan Bank, which has seen a fall in collection efficiency in Assam.

The Bad

However, in the medium-term, this could set a bad precedent for the microfinance industry in other States. Loan waiver schemes are often used to appease vote banks. If other State governments, too, begin following the Assam model, especially bigger States where microcredit concentration is high, the resultant drop in credit discipline could create a problem for the industry. Even honest microborrowers could start defaulting on their loans in the hope that similar schemes would be announced.

According to senior industry officials, the Reserve Bank of India (RBI) was “annoyed” with the way the Assam relief scheme was rolled out. “There are RBI schemes for distressed borrowers. What was the need to have a government-sponsored waiver scheme,” asked a senior industry official, who spoke on condition of anonymity, adding that the RBI is quite unhappy with the scheme.

Notably, industry associations have asked member institutions to sign the agreement but have not signed it at an organisation level.

The Ugly

But, the real jolt could be felt on credit culture in the long-term, said the industry expert quoted earlier. The expectation of similar relief/waiver schemes could force more borrowers to stop repayments in other States. If politicians take up such promises to gain votes, this can lead to a repetition of the 2010 Assam microfinance crisis, where credit discipline was severely affected for a prolonged period, punching holes in the books of many banks, especially state-run lenders.

“Microlending is a high-risk business,” said Siddharth Purohit, an analyst at SMC Global Securities in Mumbai. “There is no collateral. The repayment ability of the borrower is closely linked to the economic situation on the ground. The Covid second wave wasn’t expected to have a big impact on asset quality initially. But, that’s not what happened ultimately,” said Purohit.

To sum up, if Assam’s neighbouring States and micro-credit heavy States in the southern part of the country roll out similar waivers, the end result won’t be pretty for loan originators.