India’s Micro Borrowers And Lenders Find Themselves Stuck In A Vicious Cycle
For Suman Nandy, a housewife who lives with her family of five in the industrial city of Raigarh in Chhattisgarh, the past year has brought one set of troubles after another. The last two months have been especially bad.
Nandy borrowed Rs 30,000 last year from a small microfinance company Aviral Finance Pvt. to sell sarees from her home. But she could not sell her complete stock due to the pandemic and the nationwide lockdown that followed.
Later in September, when her family members contracted Covid-19, Nandy had to take more loans—first from a bank, and then another by mortgaging all her gold.
Now her saree business has shut due to another lockdown in her state starting mid-April, leaving her two children and mother to survive solely on her husband’s monthly income of Rs 15,000, which also frequently gets deducted as he is unable to attend work regularly at the factory.
Nandy's total debt has now touched Rs 60,000, and a third of her family’s income goes towards monthly installments, making it hard to get another loan approved.
I tried taking another loan, but I didn’t get one because I already had existing loans.Suman Nandy
Even if Nandy had qualified for another loan, getting one would have been tough. Many micro lenders have had to stop disbursements since mid-April as a spread in Covid-19 infections and localised lockdowns impacted lending operations.
That, in sum, is the double whammy facing the country’s micro lenders—on the one hand, borrowers are increasingly distressed raising the risk in lending and on the other hand, operations have slowed due to the feet-on-the-street nature of the business.
India Ratings & Research, in a report dated May 24, said the microfinance sector is expected to see a drop of 10%-15% in collections in May. While disbursements are seasonally low in April and May, unless they pick up in time for the agricultural season starting June, micro borrowers could face a credit crunch and microlenders witness a worsening of their balance sheets, the rating agency warned.
Lending Stalls; Collections Slip
BloombergQuint spoke to four micro lenders catering mainly to Uttar Pradesh, Haryana, Chhattisgarh, Bihar and Maharashtra, where Covid infections have spread rapidly since April.
Each of them said lending has come to a halt.
This, as most microfinance institutions follow the joint liability group model for lending, under which borrowers—mostly women, are organised into groups of four to 10 members each. While each member gets a separate loan, the repayment liability is shared by the group.
By design, micro-lenders are required to follow a set of norms for approving and monitoring these group loans. The process includes field surveys, a four-five day-long group training programme to orient borrowers on loan policies and a group recognition test for loan appraisals. Besides, regular group meetings, home visits and weekly reporting also need to happen for monitoring the end-utilisation of loans and ensuring timely repayments.
“I am sure our borrowers need the money right now, but they cannot get these loans from micro-lenders because field officers are not allowed to conduct group meetings due to lockdown curbs,” said Aqueel Ahmed Khan, managing director of Mitrata Inclusive Financial Services Pvt., that lends mainly in Uttar Pradesh and Haryana, with close to a quarter of its portfolio in Madhya Pradesh, Rajasthan and Bihar. The lender stopped all fresh disbursements since mid-April. “Until microfinance institutions cannot undertake these compulsory processes, they cannot lend the money.”
Sampada Entrepreneurship & Livelihoods Foundation, a non-profit MFI based and operating in rural Maharashtra, and Aviral Finance Pvt., a microfinancier based in Chhattisgarh, have the same story to tell. As does Adi Chitragupta Finance Pvt., an MFI that lends mostly in Bihar.
Group meetings and evaluation form an important part of the joint lending process, which further helps MFIs to ensure credit quality. If those processes cannot happen, the lending cannot happen.Gyan Mohan, Director & CEO at Adi Chitragupta Finance
Officials at the micro lenders are hopeful that operations will resume in June as the infection rate declines. It's important that lending restarts, said Jindal Haria, director at India Ratings and Research.
"June is when disbursements would really need to pick up the pace to meet the credit demand, and if that doesn't happen, we're looking at a period of prolonged distress and credit crunch for low-income borrowers in the microfinance ecosystem,” Haria said.
While fresh disbursements have been put on hold for the moment, collections have not been affected to the same extent. All the four micro-financiers saw a 5-10% drop in their collections during the lockdown, as collection efficiencies remained at 90% or higher for all of them.
Our collections were 100% in March, but have dropped to 90% in May as movement of field officers got restricted. But most of our borrowers are still paying on time, and we haven’t seen a major impact on our collections so far.Anirudha Mirikar, Director, Sampada Entrepreneurship & Livelihoods Foundation
At the industry level, too, the data showed similar trends. India Ratings and Research estimated collections for microfinance institutions to have fallen by 3%-5%, and an additional 5%-7% in May.
Trapped In A Vicious Cycle
Micro borrowers and lenders are trapped in a vicious cycle.
As the credit profile of their borrowers weakens, micro lenders are finding it tougher to raise funds, which, in turn, slows lending further.
Ankush Golechha, director at Aviral Finance, said even if lockdown restrictions ease in June, disbursements may remain slow. “Liquidity has been the biggest concern for small micro lenders like us since last year," he said. "Going forward too, if we're not able to borrow in-line with the credit demand of our borrowers, we will be forced to slow down our disbursements.
The likelihood of slower disbursements is also higher this year as the second Covid wave has exacerbated liquidity stress for small MFIs.
The situation is worse than the first wave because liquidity issues have persisted for more than a year, especially for small micro lenders, pushing them to the brink of a collapse. Already, in fiscal 2021, 60% of small MFIs with loan portfolio below Rs 100 crore did not receive any funding.P Satish, Executive Director, Sa-Dhan (SRO Representing 225 MFIs)
Agreed Khan of Mitrata. “While banks are lending money to microfinance institutions, these funds are mostly going to large players in the space, who are now sitting on a surplus," he said. "The schemes announced by the regulator are not reaching small MFIs like ours."
A similar view was also held by India Ratings, which said large MFIs with assets under management of over Rs 5,000 crore may not face immediate liquidity stress but smaller ones will.
India Ratings analysed the portfolio of small finance banks and their lending to MFIs with AUM of less than Rs 500 crore is marginal. India Ratings expects mid and small MFIs to continue to face challenges in fund raising and/ or borrowing costs.India Ratings & Research (May 24, 2021)
On May 11, Sa-Dhan wrote a letter to the regulator demanding a special liquidity facility of at least Rs 15,000 crore to be provided through National Bank for Agriculture and Rural Development and Small Industries Development Bank of India to MFIs.
"At least 40% of funds under this may be earmarked for MFIs with portfolio below Rs 500 crore," it asked among other demands.
But if liquidity does not ease, disbursements will also remain strained.
“The credit demand will inch up further in June as the new sowing season starts and lockdown restrictions get lifted, and that is when we would need to ramp up our disbursements too," Khan said. "If liquidity remains in short supply and cost of funds remains high, it will heavily impact our disbursements."
File photo of group training being carried out by a field officer of of Aviral Finance in Chhattisgarh. (Source: Aviral Finance Pvt.)
The ensuing credit crunch will hurt people like Ujjwala Gaikwad, a 35-year old housewife from Tisgaon village in Ahmednagar district in Maharashtra. Her family of four is now surviving solely on income from tamarind peeling as both Ujjwala and her husband lost their jobs during the lockdown in April. Their income has also reduced to half at Rs 100-150 a day compared to the pre-pandemic period, and even that often does not come on time.
As a result, the money from all the loans the family took has already been spent, but their children's school fees are still pending for two months.
I don’t have money left, not a single penny. If an emergency happens, we will borrow from our relatives. I feel so scared that I don’t even let him (her husband) step out, because if anything happens to him, we don’t even have money for treatment.Ujjwala Gaikwad
Ujjwala hopes that as the lockdown lifts she will be able to get another loan which can be used to build a small tailoring business.
“We will take credit to start something of our own once the lockdown is over. We will pay the installments with the income we get from these businesses,” she said.
That’s only if she gets one.
Mirikar of Sampada, from whom Ujjwala has taken a loan, says micro lenders are waiting and watching.
“We will be cautious on our new disbursements and will give borrowers time to repay their existing dues," he said. "But during that period, the credit crunch is inevitable.”