Microfinance Lenders In Assam Brace For More Pain Amid Loan Waiver Talks
A local woman signs a register to receive a loan during a meeting organised by a microfinance institution in Sadasivpet, India. (Photographer: Adeel Halim/Bloomberg)

Microfinance Lenders In Assam Brace For More Pain Amid Loan Waiver Talks

Assam has seen a drop in collection efficiency of lenders amid talks of a loan waiver by political parties and a new microfinance bill being approved by the state, adding to concerns of worsening asset quality in the industry.

“In our recent channel checks, we have found that collection efficiency in some districts of Assam has fallen to as low as 45-50% in January 2021. This compares with 87% reported by Bandhan Bank Ltd. and 74% by Ujjivan SFB (small finance bank) in October 2020,” Macquarie said in a research report on Tuesday.

This comes when the ruling party and the primary opposition proposed to waive off microfinance loans ahead of the state government elections later this year. While political parties have been discussing a waiver, the likelihood of this covering all of the state’s microfinance borrowers is low. Since the state’s total budget outlay is a little more than Rs 1 lakh crore, Macquarie said it would be impractical to waive off all of the loans. The cumulative microfinance loans in the state are over Rs 12,000 crore, it said.

A partial waiver of loans will directly affect lenders such as Bandhan Bank, Arohan Microfinance, ASA International, RGVN Small Finance Bank and Ujjivan Small Finance Bank. Moral hazard problems, according to Macquarie, will spread across all borrower classes if dues of one group are waived off and the others aren’t. “...it’s typical for the moral hazard to creep in once a few members of a group stop repayments. Others soon stop making repayments, too. If the waiver is not comprehensive enough, there will be large losses in the industry,” the research report said.

For Bandhan Bank, Assam accounts for 16-17% of microfinance assets or 10-11% of the total loan book and contributes to about 45% of the lender’s net worth. Bandhan Bank has about 60% share in Assam’s microfinance market. Its total loan book stood at Rs 76,620 crore as on Sept. 30, 2020. Ujjivan Small Finance Bank, with a total loan book of Rs 13,890 crore as on Sept. 30, has a microfinance loan exposure of about Rs 350 crore in Assam, according to Macquarie.

While Assam has been one of the fastest-growing markets for microfinance in recent years, asset quality issues for lenders in the state aren’t new. In January 2020, Assam had witnessed a rise in delinquencies due to protests following the Citizenship Amendment Bill introduced by the central government. Again in February same year, CRIF High Mark highlighted that microlenders in Assam saw the highest repayment stress among the top 10 states as “socio-political factors” affected India’s northeast.

The Assam government, however, has been taking steps to protect borrowers from any tough recovery practices followed by the lenders, including visiting their homes to collect money. Last month, it approved a new bill that requires all microfinance lenders to register with the state government within 30 days of it being passed. It proposes to stop lenders from conducting recovery measures unless they are registered. Recovery must only be conducted at the gram panchayat office or other publicly designated areas. The bill even bars microfinance lenders from over-lending.

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