Small loan borrowers' repayment behaviour improving after being affected “temporarily” by moratoriums, MFIs say

The Reserve Bank of India’s (RBI) decision to allow lenders to restructure loans and offer moratoriums on repayments during COVID-19 period, has temporarily affected the loan repayment behaviour of small ticket loan borrowers, officials in the microfinance institutions (MFI) industry said. However, the situation is improving gradually, they added.

“In the past two years because of COVID-19, events like loan moratorium, loan restructuring, abeyance of centre meetings during lockdown period etc., have temporarily affected some of the borrower’s behaviour and group discipline in some stressed cases,” said Udaya Kumar Hebbar, MD and CEO at microfinance firm Creditaccess Grameen (CA Grameen).

CA Grameen is one of the biggest micro lenders in the Indian micro lending industry with a total asset size of Rs 15,615 crore as on June-end and a total borrower base of about 40 lakh customers.

“While we are witnessing the credit culture gradually normalise, we anticipate the steady state credit cost for the microfinance industry to be higher by 40-50 bps compared to pre-Covid levels,” Hebbar said.

Both the government and the RBI had announced a series of measures to help stressed borrowers in the wake of COVID-19 pandemic. These included providing moratoriums (i.e. temporary repayment holidays), and a one-time loan restructuring scheme.

That apart, the central bank opened special liquidity windows to help small borrowers. However, most of such schemes have expired by now and only parts of Expected Credit Loss Guarantee Scheme or ECLGS are in-play today, industry members say.

Asset quality improving

As per MFIN’s micrometre report released last week, overdue loans are gradually decreasing in numbers.

“Improvement in microfinance portfolio quality over the last one year has been good, with delinquency as measured by PAR>30 ratio, reducing to 13.8 percent as on June 30, 2022 from 22.4 percent in June 30, 2021,” said Alok Misra, CEO & Director of MFIN.

PAR (portfolio at risk) of a MFI indicates loans that are overdue. PAR>30 ratio refers to loans that overdue for more than 30 days, a lower PAR ratio means more borrowers are repaying on or before payment date.

As per an India Ratings & Research (Ind-Ra) report dated September 21, the COVID-19 induced stress and restructured loan book’s impact on credit costs has been largely absorbed till June-end by lenders. The rating agency said the overall macro-economic scenario, and inflationary trends, however, continue to present a dampener to the microfinance industry going ahead.

Micro loan borrowers earn a livelihood based on daily earnings, and often come from financially poor background, exposing MFI lenders to several asset quality risks.

“Ind-Ra expects credit costs to normalise as bulk of the portfolio now is based on post-Covid disbursements and the collection efficiencies at consolidated levels for the MFI sector has steadily improved as on June 2022, from June 2021,” it added.

The rating agency has maintained its credit costs estimate for microfinance lenders for the current fiscal between 1.5-5 percent, lower than 2-7 percent reported by small loan lenders during FY22.

Satin Creditcare Network  Chairman & MD HP Singh shared similar views, saying the microfinance industry is seeing a positive turn in asset quality this year. “Our asset quality has been on the positive tailwinds despite the challenges created by the pandemic in the past couple of years. Also, we have made sufficient provisions for the portfolio affected by pandemic, where we have provided ~8 percent of AUM as ECL against GNPA of 4.3 percent as on June 30, 2022,” he said.

Growth revives

Misra from MFIN says after the RBI issued harmonisation guidelines for the microfinance sector in March, most institutions took some time in making policy changes and adapting to the new guidelines.

However, lenders still recorded a growth of 23.5 percent on a yearly basis in their micro loan portfolio as on June end. On a sequential basis, the total small-ticket loans grew 2.7 percent, Misra said, adding growth should further strengthen in the coming quarters on account of “supportive operating and regulatory environment”.

Per the MFIN report, as on June 30, lenders’ total small ticket Gross Loan Portfolio (GLP) stood at Rs 2.93 lakh crore. The loan portfolio of pure-play MFI lenders stood at Rs 98,508 crores during the same period, up 30.2 percent on year.

Hebbar from CA Grameen said though the RBI guidelines have ensured fairness and broadened the scope of microfinance sector, there may be a temporary impact on disbursements for a couple of months as the industry needs time to adhere to the new guidelines.

“Overall, the microfinance industry currently has reached penetration levels of 33-35 percent, and hence it has a long runway to consistently grow at 20-25 percent CAGR over the medium to longer term,” Hebbar said.

“Business momentum has been robust during Q2 FY2023 and we anticipate further improvement over the coming quarters. We reiterate our annual performance guidance for FY2023 of 24-25 percent AUM growth, 4.0-4.2 percent ROA and 16-18 percent ROE,” he added.

Satin Chairman HP Singh says the RBI’s new harmonisation guidelines have ensured collateral-free small ticket loans to borrowers, and ensured lenders offer fair interest rates on them.

“The demand for credit has increased substantially within this quarter. The need for working capital and market growth has contributed to this hike. The credit growth in mid-August hit a high of 15.3 percent,” the Chairman said

“...We, at Satin Creditcare Network, are expecting an AUM growth of 15-20 percent for FY2023,” he added.

As per Ind-Ra, the MFI sector will likely grow between 20-30 percent in the current fiscal. The growth will be supported by small lenders increasing their capital levels during the COVID-19 period, which have provided them headroom for growth in FY23.

Further, funding the growth is also not likely to be a major challenges for MFIs on the back of government’s guarantee to banks for on-lending to MFIs, among others.

“… Ind-Ra expects the cost of borrowings to increase by 75-100bp for MFIs. However, with the removal of interest rate caps on lending, MFIs now have the ability to pass this on while maintaining their margins,” the rating agency said.