Covid-19 effects on microfinance
The pandemic and its multi-pronged effects are no more a secret topic for any country around the globe. This article focuses on COVID-19 effect on microfinance sector in India.
Medical experts brought in an effective solution to contain this pandemic; that is voluntary Social Distancing further leading to complete Lock Down where situation is beyond self-discipline. Microfinance sector also got hit by this pandemic and is facing another big crisis after 2010 AP amendment bill and 2016’s demonetisation. Small and micro loans serve large segment of population running small and micro enterprises mostly in unorganised livelihood domains. These financial institutions play a key role between commercial lending institutions ready to take moderate risk for better returns and clients who are in need of non-collateralised loans to finance their livelihood activity.
Latest report published by MFIN, shows that as on the sector caters 3.22 crore clients with gross loan portfolio of Rs. 74,371 crore. This converts to average loan amount of Rs 22,000 plus for all active accounts, which shows 6% YoY increase. The sector holds a strong position, when it comes to return on investment in monetary and social returns. The amount of money deployed in this industry reaches out huge number of customers, with sustainable and traceable livelihood options and making it more impactful for social scientists and for financial investors. The reports also mention that the industry received Rs. 42,140 crore as debt and Rs. 16,140 crore as equity which is 33% higher (respectively under both categories) than previous year, showing increase in demand of loans and increase in trust from lenders. Microfinance industry works on a crude principle of ‘Close Contact, Trust and Financing Sustainable Livelihoods’. On one hand it fuels micro and small enterprises; while on other hand generates employment opportunities in unorganized and organized sector. It is estimated that even during pandemic this sector employs more than 2 lakh individuals working at field level, organizing virtual meeting with clients and resolving their queries related to business sustainability, finances, convergence of government support and even personal health management related to COVID-19. Other than internal employment, the sector gives employment and entrepreneurial opportunity to almost all those who take loan i.e. 3.22 crore individuals. In other words each income generating loan given is for changing the life of all family members, an average of five.
Complete lockdown brought halt to almost every business, but worst affected were those with small or no reserves and operate in high liquid model. Most micro and small businesses are impacted except the ones engaged in activities coming under essential goods and services as announced by government from time to time.
Diminishing earning capacity of MFI clients is now becoming threat to MFI existence, although government is trying to smooth out its operations through rescheduling of loans. MFIs have their own debt obligations and liquidity needs; post pandemic scenario is certainly going to put pressure on sector with surge in demand for more income generating loans and more gestation period. The scenario is building for new mergers and acquisition in the sector with lots of financial restructuring.
Affected cash flows of business enterprises in turn affected their microfinance service providers and hence the commercial banks at higher level. Unemployment in unorganised sector surpassed all levels till date, affecting migrants in big cities, enterprise owners in cities and towns, rural entrepreneurs and semi/skilled labour all across the MSME ecosystem. Microfinance providers are expected to face serious liquidity crunch during COVID-19, gap between revenue and operational expenditures are increasing with depleting reserves. This shrinking liquidity may not create problem for large MFIs or those with strong stable backup, but is sufficient to haunt small and mid size MFIs. MFIs with stable financing, well-established technology platforms and strong hold on communities have higher probability to survive during and after this pandemic. Criticality of microfinance operations is not limited to this sector only; slowly it will start effecting large financiers of these MFIs including commercial banks (private and public), donors and investors.
Reserve Bank of India, being a regulator of financial sector announced various steps to limit macro effect of pandemic on overall financial system of country, including increase of moratorium period for loans, part rebate of interest rate, special package etc; but most of these announcements from RBI are focussed on commercial banks and remained vague for MFIs and its customers in particular.