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Government, RBI Offer Relief To Microfinance Lenders Amid Covid-19 Crisis

Non-bank lenders are allowed to resume operations with bare minimum staff.

A woman receives a micro-loan during a meeting organized by SKS Microfinance Ltd. in Sadasivpet, India. (Photographer: Adeel Halim/Bloomberg)
A woman receives a micro-loan during a meeting organized by SKS Microfinance Ltd. in Sadasivpet, India. (Photographer: Adeel Halim/Bloomberg)

India expanded its list to allow non-bank lenders to resume operations from April 20, aiming to kick-start the economy even as it extended the lockdown to contain the new coronavirus pandemic. Not only that, but the nation’s central bank also stepped in to boost liquidity and support the battered sector.

In continuation of the revised guidelines issued on April 15, non-bank lenders, including housing finance companies and micro-finance institutions, are allowed to resume operations with bare minimum staff, according to an order by the Ministry of Home Affairs. Besides, all agricultural and horticultural activities, plantations, cooperative credit societies and construction activities in rural areas are allowed to operate. Earlier this week, the ministry had allowed select sectors to resume operations from April 20 with strict social distancing guidelines.

Separately, RBI Governor Shaktikanta Das announced a second round of targeted long-term repo operations of Rs 50,000 crore to maintain ample liquidity among various segments of microfinance and non-bank financial companies.

Also, all India financial Institutions such as Nabard, Sidbi and the National Housing Bank will be provided with special refinance facility of Rs 50,000 crore at the repo rate, Das said.

  • Of this, the National Bank for Agriculture and Rural Development has been allocated Rs 25,000 crore to enable refinancing of regional rural banks, cooperative banks and microfinance institutions.
  • The Small Industries Development Bank of India has been given Rs 15,000 crore for on-lending and refinancing to scheduled commercial banks, non-banks and microfinance institutions.
  • The National Housing Bank will receive Rs 10,000 crore to support housing finance companies.

Besides, the central bank cut the reverse repo rate by 25 basis points to 3.75 percent. That, according to Keki Mistry, vice-chairman and chief executive officer at HDFC Ltd., should encourage banks to lend money.

In contrary to expectations, however, there was no announcement to cover NBFCs under a moratorium.

“In a scenario where MFIs do not receive moratorium on their bank loans, the liquidity levels they maintain will be an important determinant of their immediate term debt repayment ability,” Crisil Ratings Ltd. had said in a note dated April 15.

The outbreak of the highly contagious pathogen stalled economic activities and India went into the world’s biggest lockdown to curb its spread. Microfinance institutions faced disruptions as their operations are highly field intensive, including home visits and physical collection of cash.

A cash shortfall for 29 microfinance institutions—accounting for 70 percent of the industry’s loan portfolio—collectively stands at about Rs 2,600 crore in the absence of any external funding support by way of equity, additional debt or extension of moratorium, ICRA Ltd. had said in a prior report.

These lenders have Rs 8,000 crore worth of repayment obligations and operational expenditure in the quarter ending June compared with on-balance liquidity buffer of around Rs 5,400 crore, the rating agency said in a note.

Crisil, too, had said overdues were expected to rise once billings recommence because borrowers might not clear them immediately. “Collection efficiency is likely to take time to ramp up to pre-pandemic levels. Consequently, risk of larger credit losses and their impact on capitalisation metrics will be a key rating sensitivity factor in the road ahead.”

Ever since the nationwide lockdown was imposed, March 24, shares of pure-play microfinance companies Spandana Sphoorty, Satin Creditcare Network Ltd., and CreditAccess Grameen Ltd. remained flat or fell as much as 13 percent.