Will microfinance survive the Covid-19 crisis? Yes, it will thrive

By Manoj Kumar Nambiar

It was almost 1130 hrs and Rekha Devi (name changed for privacy), in a village in Madhya Pradesh was getting worried as it was her repayment date/time to the microfinance company that she had taken a loan from, and the scheduled meeting did not happen that day. She had taken a small Rs 20,000 loan from the company, a few months back to run her small grocery shop and support her family of four. Being very particular about paying her installments back regularly, she walked alone to the branch office to pay the money to the surprise of the branch staff. The day was 25th March, 2020, the first day of the national lockdown announced in India!

Customers like her form the backbone of the microfinance sector in India, which today through various forms covers over 100 million women with a credit portfolio outstanding of over Rs 3 lakh crore. With a collection efficiency of an outstanding 99% plus it can put retail, MSME & corporate clients to shame.

Microfinance institutions (MFIs), with their field network, use the Grameen methodology, CB and residence checks, and financial literacy sessions, to provide unsecured loans to meet the credit needs of these clients, within a week of the initial application, to be paid back weekly/fortnightly or monthly as per the client’s preference. So how does this sector, which caters to the Bottom of the Pyramid clients, not only survive but evolves stronger after every crisis?

• Various studies done in India show that while 40% plus people from the underserved strata avail loans, only 8% subscribe to RBI regulated institutions, the rest coming from informal sources (Findex and NABARD studies 2018). In a country of over 1.3 billion people, one can imagine the extent of financial exclusion, especially in the semi-urban and rural geographies. Estimates show that even with this reach of credit supply, just about a third of the market is being served through formal institutions.
• The microfinance client has an almost zero gestation period business model and one which could give a 10- 20% return in a single day allowing it to be up and running immediately. Since it caters to basic necessities, demand is also not an issue.
• High level of customer connect, smaller ticket sizes and frequent repayments ensure high collection efficiency. Loans come at very reasonable Rs 1000 - 1200 interest charge for an Rs 10,000 loan for 12 months – the rate charged by private financiers could be sometimes 12 times that amount. Hence the customer would not want to spoil the suspension of any future-credit with group indiscipline and non-payment.
• This sector that has been built with these extraordinary women customers who have, over the last 30 years, survived many crises and bounced back through drought, flood or cyclone. The spectacular turnaround of a microfinance company that went through a CDR in the 2010 AP crisis, and went on to do a successful IPO last year reinforces the belief that both, the customers as well as the companies/employees in the sector are resilient and never give up. Post the AP crisis, the sector got regulated by the RBI with clear microfinance guidelines, established CB discipline and got two RBI recognised Self-Regulatory Organisations (SROs) followed by strong investor interest and bank support with debt funding. Post demonetisation in 2016, where the clients took time to get the old notes changed to new ones to pay while activists twisted the RBI forbearance on asset classification to a loan waiver, the industry pursued and embarked on a cashless initiative – today almost 95% plus on disbursements and an increasing 33% on repayments are made in a cashless manner, thanks to the PMJDY initiative. Post devastating floods in TN in 2017, Kerala in 2018 and Cyclone Fani in Odisha in 2019 crippled the clients’ businesses, MFIs played a key role in extending credit to and nursing them back to health.
• With entities like banks and non-banks now active in microfinance the sector, in a world class initiative, established the Code for Responsible Lending (CRL) in microcredit in 2019. Various other initiatives such as daily submission of credit data to the bureau, not lending to an NPA client, lending within agreed indebtedness limits have made this a responsible and responsive sector.
• Even in the current lockdown, the companies and its over 2 lakh employees are active, conducting virtual group meetings with their clients, highlighting the need for safety and hygiene in the COVID 19 crisis and reassuring them on the financial front

Does this mean the global pandemic will not have any impact on this sector? Of course, it will. Clients have to get back to normalcy, repayments might get delayed and tenures of loans might get extended. But, this business, unique in being a double bottom line of social and financial objectives, is about living with them and mirroring their cash flows especially in such difficult times.

Financial provisions will be taken, but eventual credit losses will be much lesser given the ecosystem today. When the lockdowns finish and clients make efforts to restore normalcy, they will find us ready and waiting to help. They will need help to fully avail the RBI moratorium announced till end August, 2020, financial advice to rebuild their lives and additional credit to support their livelihoods. Given the RBI and the government priority in ensuring liquidity, the lending banks will extend support.

The Indian microfinance sector can and will play a major role in ensuring confidence and credit at the grassroots when it is needed the most to rebuild our country. After all many more millions of Rekha Devi’s are waiting for us to serve them …and in the process aid nation building.

(Manoj Kumar Nambiar is MD of Arohan, the 5th largest NBFC MFI in India, an Aavishkaar Group company and is also the current Chair of MFIN, the industry SRO)