After taking a severe hit during the COVID-19 lockdown, India’s microfinance industry is slowly limping back to normal operations. Microfinance institutions (MFIs) are in the business of giving small loans to low-income borrowers, typically farmers or small entrepreneurs. These companies source money from banks at 10-15 percent and onlend to their borrowers at 20-23 percent.
With COVID-19 onslaught forcing a nationwide lockdown starting the last week of March this year, the collection rates had fallen to a trickle as MFIs collect money from borrowers mostly in cash. The risk of infections and the rules stipulated by the government made the collection process nearly impossible. The situation continued for many months.
However, the repayment rates or collection rates have returned to 80-85 percent in September compared with 90-95 percent pre-COVID, said P Satish, executive director of Sa-Dhan, an industry lobby of microlenders. “The reports we get from across the states indicate that collection rates have picked up substantially. We saw around 85 percent in September, which is higher than around 70 percent in August,” said Satish.
Similarly, August-September saw an uptick in disbursement rates as well in the microlending industry. On an average, microlenders used to disburse Rs 17,000 to Rs 20,000 crore. After falling to extremely low levels, in March quarter, disbursement levels have improved to around Rs 13,000 crore monthly average in September. “There is a clear trend of disbursements picking up in some pockets as customers are returning to their normal lives,” said Satish.
Based on Q1FY21 data available for 52 NBFC MFI Members, loan amount disbursed through cashless mode is 93 percent. About 52 percent of members reported over 90 percent of disbursements in the cashless mode, while 42 percent members reported zero disbursements during the quarter.
According to the data, during Q1FY21, NBFC-MFIs that are members of MFIN disbursed 2.04 lakh loans amounting to Rs 570 crore, as compared to 59 lakh loans disbursed amounting to Rs 15,865 crore in Q1FY20, a year-on-year drop of 97 percent in the number of loans and 96 percent in the amount disbursed.
Of this, top 10 MFIs in terms of loan amount disbursed accounted for 96 percent of NBFC-MFI industry disbursements in Q1FY21, the data showed. MFIs are institutions that borrow from banks and lend to small borrowers at a margin. The COVID lockdown had severely impacted the operations of these institutions as the collection process took a hit.
Indian microlenders had suffered crisis situations twice prior to this. One, during the 2010 Andhra Pradesh microfinance crisis which happened due to a draconian local law. Secondly, during the 2016 demonetisation too MFIs were hit hard as cash flows dried up and supply chains were hit.
Trends in rural India
The fear of COVID infections have come down among rural population with better recovery rate and more information available on the epidemic, said Kishor Kumar Puli, managing director of Pradakshana Fintech, which operates as a banking correspondent.
While there has been a loss of income in rural India due to COVID, Puli said a lot of rural borrowers have adjusted to the new normal by tweaking business strategies and cutting down liabilities. “I have seen many borrowers shifting from selling non-essential goods to the sale of essential items,” Puli said. “There have been also many cases where borrowers rushed to pre-close their loans to get rid of liabilities in uncertain times,” Puli added.
During COVID, banks' reluctance to lend to smaller MFIs too added to their woes. Bigger MFIs, however, continued to get funding. During Q1FY21, NBFC-MFIs received a total of Rs 5,973 crore in debt funding, almost equal to Q1FY20 and 52 percent lower than Q4FY20 at Rs 12,448 crore, MFIN said. As on June 30, 2020, NBFC-MFIs collectively had a network of 14,167 branches with 1,09,239 employees.
Overall, the funding scenario has improved even though smaller companies are still struggling to get cheaper funds like the bigger ones. “There has been a lot of improvement in credit availability compared to the initial phase of lockdown. However, smaller ones will have to pay more,” said Satish of Sa-Dhan. While bigger MFIs get loans at 10 percent-14 percent, smaller ones, which typically borrow from non-banking finance companies, pay 16-17 percent.
Microlenders, especially smaller ones, are pinning hopes on Nabard’s Rs 5000 crore special liquidity scheme for smaller MFIs. “We expect this scheme to benefit smaller MFIs which are largely left out so far,” Satish said.
The MFI industry, which is largely dependent on rural India, had come to a complete halt during COVID. However, beginning September, normal activities are slowly returning to the sector. The rural economy which was hit hard by COVID is slowly getting back to normalcy. Customers are adjusting to the new normal. With collection rates are picking up and disbursements improving, small lenders are past the critical phase—at least that is the hope.