A local meeting in progress in Kerala (Source: Jaimoen87/ Wikimedia Commons)

Demonetisation Hit: Microfinance Disbursements Fall 26%; Portfolio Quality Deteriorates

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  • The microfinance industry reported a 26 percent year-on-year decline in the number of disbursements in the third quarter of FY17, reflecting the impact of demonetisation. Moreover, there was a 16 percent reduction in the loan amounts disbursed during the same time period, said a quarterly report by industry body Microfinance Institutions Network (MFIN) released on Thursday.

    “The pulling out of the high-value currency notes from circulation significantly impacted the microfinance sector which is 99 percent cash driven,” the organisation said in a media release. The self regulatory organisation, recognised by the Reserve Bank of India (RBI), comprises of 51 NBFC-MFIs out of a total 73 operating in the space.

    The aggregate gross loan portfolio of companies covered by MFIN stood at Rs 56,634 crore at the end of December, representing a year-on-year growth of 53 percent. The gross loan portfolio was 2 percent lower than last quarter.

    The government decided to demonetise notes of Rs 500 and Rs 1,000 on November 8, which resulted in a severe cash shortage. Ratna Vishwanathan, chief executive officer of MFIN, said that the industry was “thrown out of gear initially” after the demonetisation announcement. This was to be expected in a sector which is cash intensive and follows a doorstep delivery model.

    During the whole two months post discontinuation of high-value currency notes, MFIN has had to engage with State Governments at both the ministerial level as well as the bureaucracy, the RBI and extensively with the press to quell the surge of disinformation with reference to microfinance practices.
    Ratna Vishwanathan, CEO, MFIN

    Vishwanathan was referring to alleged instances of misinformation being spread by interested parties who were telling customers that their loans have been waived-off after a special dispensation was announced by the regulator. Instead, the RBI had only provided a 60 day window over which repayments could be deferred without the account being classified as a non performing asset (NPA). This window was later extended to 90 days.

    Impact On Asset Quality

    Rating agencies, like India Ratings, have flagged off rising risk across the sector due to overleveraged borrowers with limited ability to repay their loans in time. Demonetisation adds a new dimension of risk, India Ratings had said in a report on November 17.

    The MFIN report mirrors this concern and shows that the portfolio at risk for the industry has increased significantly in the aftermath of demonetisation.

    Portfolio at risk (PAR) over a 30-day horizon has increased to 7.52 percent from under 1 percent in the previous quarter. This abnormal increase is attributed to lower recoveries post demonetisation, which had an adverse impact on income and livelihoods of low-income households, said MFIN.

    A large share of PAR comes from states such as Uttar Pradesh, Haryana, Punjab and Madhya Pradesh where more than 8 percent of their respective portfolios were reported to be at risk of turning bad.

    In its report, MFIN observed that the number of clients serviced by MFIs rose to 3.38 crore this quarter – an increase of 42 percent from last year. However, the body admitted that these numbers could include some degree of overlap between multiple companies.

    BloombergQuint