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Covid-19: Impact on microfinance sector

R Basil

Q. How are you seeing the credit off take post lockdown in the microfinance space??

A: The coronavirus pandemic has disrupted operations in every sector across the globe. During the national lockdown which went on about two months almost every sector came to a halt except sectors dealing in essential services. Since the microfinance sector majorly deals in financial services in rural area, it has not been adversely impacted by the crisis. Good number of borrowers are involved in essential services i.e. dairy and grocery. Microfinance sector which is unique in being a double bottom line of financial and social objectives, has the potential to sail through such crisis. India is largely driven by entrepreneurship, big or small. Since a large section of our population is self-employed and a major part of it is low-income segment which is credit-starved, they would need financial help to restart their operations and get back on track. Once normalcy resumes, there may be an increased demand for loans from micro enterprises to fund working capital requirements and restart businesses, which can be serviced by MFIs and Small Finance Banks (SFBs). The microfinance sector will play a significant role in ensuring help and credit at the grass root level when it is needed the most to rebuild our country. In last we see the normalcy will come in the month of November as we have already reached the level of 80% to the pre covid level in the month of September 2020.

Q. Expected timeline to normalise MFI operations from the current slowdown? How resilient they are?

A: Over the years, MFIs have proven their resilience. During demonetisation, repayment rates recovered from 50% to 80% within a month and settled at upward of 90% within three months. With this as a reference point, we can hope that repayment rates of MFIs will bounce back in the range of 90%-95% within 3-4 months. This may rise further over a time horizon of, say, six months. Gradual increase in disbursements will be a strategy for MFIs, particularly in the first few months. Post the Finance Ministers announcements with regard to the various liquidity schemes, funding to MFIs has been adequate. It will take 9 to 12 months for a full rebound, depending on the extent of the problems post the initial lockdown. Portfolio at risk (PAR) will shoot up initially. It will gradually decline over 2-3 quarters once full-fledged operations resume.

Q. How much was the portfolio growth in FY20? What is your outlook on the loan portfolio growth in FY21? What strategy/approach will be used to grow business going forward?

A: The microfinance sector has shown annual portfolio growth of 29.26% in FY 20 over FY 19 whereas Midland’s growth rate has been 41.62%. The overall industry growth for the FY21 may slip to 15 per cent. As mentioned above, MFIs strategy would be to slow down fresh loan disbursements in the first few months. It is interesting to see how the crisis has also ensued opportunity for innovation and learnings. Covid-19 lockdown has expedited the digital-first approach. Post COVID, digital lending will gain momentum. Microfinance lenders must be equipped to address the credit requirement while offering affordable and convenient repayment solutions to ease the impact of the crisis. MFI staff will have to deal with customers who have now been affected by the loss of income. Understanding customer psychology and dealing with them appropriately will be key. Hence, MFI staff need to model and demonstrate best practices to protect themselves and educate their clients.

Q. What was the monthly disbursement rate pre covid? By when would the disbursement reach pre covid levels?

A: Pre COVID, Midland’s monthly disbursement was around Rs.100 Cr on average basis. Midland will take 2-3 months to reach pre covid levels as the microfinance sector is upbeat about a faster revival in the rural economy with lifting of the lockdown restrictions.

Q. What percentage of your loan book have opted for moratorium?

A: Moratorium 1.0 has been provided to 100% of loan portfolio while the moratorium 2.0 was opted by 51% of total loans.

Q. During the lockdown, the collections were impacted severely, till to what extent did the collections improve post lockdown and how are you seeing it going forward? How much time will it take to reach the pre-covid levels of 98/99%?

A: The disbursements as well as collections were adversely impacted due to the coronavirus outbreak and nationwide lockdown. Portfolio at risk (PAR) will shoot up initially. It will gradually decline over 2-3 quarters once full-fledged operations resume. During demonetisation, it took two quarters for PAR (>90 days) to start its downward journey. Post demonetisation, the demand for credit shot up as customers needed the liquidity to re-establish their business. We may expect a similar outcome this time around. Of course, clients will need additional time to repay their current loans. MFIs in India have some experience of dealing with stresses in customer liquidity, which should come in handy in managing the current situation. Midland’s customers have shown very positive response in repayment even in the moratorium period. Collection efficiency was around 70-80% in past 3 months. So, we expect to reach the level of 98/99% within a period of three months i.e. till Nov/Dec 20.

Q. What impact do you see on the asset quality post the moratorium?

A: MFIs will take time to resume loan repayment collections as most borrowers have been affected by the lockdown and their incomes are constrained. It will be difficult for lenders to recover multiple instalments over the next quarters as most borrowers don’t have material income buffers. This would result in credit costs doubling to 2.5 to 3 percent from the present levels of 1 to 1.5 percent for most players. Midland’s maintained its asset quality from the very beginning with an NPA level of around 0.40 percent pre COVID. Even in the present scenario, NPA level is only 0.60 percent which will be reduced to minimum level in the next 2-3 months.

Q. How is the debt raising? Is it only TLTRO & PCG? Are you planning to raise equity to cover for asset side risks?

A: Midland’s liquidity position has been extremely sound even during the pandemic. The company has raised around Rs.150 Cr during first 5 months of FY 2020-21 in the form of Term Loans from largest financial institutions & banks, External Commercial Borrowings and NCDs from foreign investors. The credibility of Midland in past has enable it to raise funding from various investors in this scenario of COVID. Midland has raised equity of Rs. 18.61 Cr through private placement to the promoters in the month of March 2020. The company has also planned to raise equity of Rs. 51 Cr through rights issue from the existing shareholders.

Q. 9. What will be your suggestions to the government / regulator to provide relief to the sector?

A: Prioritize relief measures for microfinance clients.

  • Increase MFIs access to liquidity.
  • Remove restrictions on foreign investment in the MFIs.
  • Reduce or defer non critical supervisory processes and compliances.
  • Revised guidelines over the MSME definition and operations over current account opening.

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