Covid pandemic hit microfinance biz hard, but collections improving now

The Covid pandemic and its multi-pronged effects are few of the most talked about topics for any country around the globe. Microfinance sector in India 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. Going by the latest MFIN report, the sector currently caters 3.22 crore clients with gross loan portfolio of Rs 74,371 crore. This converts to an average loan amount of over Rs 22,000 for all active accounts, which shows 6 per cent YoY increase. The sector holds a strong position, when it comes to return on investment in monetary and social returns. 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 have been impacted. Earning capacity of MFI clients is on the wane and that in turn is now becoming threat to MFI existence. Speaking to Bizz Buzz, Kuldip Maity, Managing Director and CEO, Kolkata-based Village Financial Services, one of the leading MFIs in the country, shares his thoughts on the challenging times and the way forward

There has been huge increase in the number of borrowers in the last five years which has resulted in growth of the company. VFS has almost reached to more than five lakh families, clocking an overall growth of about 30 per cent to 40 per cent

Microfinance business is an equity driven business as per the growth and as per the statutory requirement. Most of the growing MFIs raise equity on regular intervals. At present, we have seen most equity transactions have happened not because of liquidity crisis. Such transactions will rather help the entity to grow further

How has the Covid 19 pandemic hit the MFI industry in India, in general and on your organisation, in particular?

The pandemic and lockdown have had a major negative impact on the MFI Industry in general. Most Microfinance takes weekly/fortnightly repayments from customers, who have little in the form of savings and for whom the sharp drop-in economic activity would have meant almost immediate defaulting on their loans. In addition to this, moratorium was a big relief for the borrowers to resume their occupation and regain confidence in microfinance institutions. VFS being a micro finance institute (MFI) was also affected in the initial stages of the lockdown. However, things are now slowly getting on track and collections have improved a lot.

What did you do (or you are still doing) to withstand the pressures and come out of the crisis, given the fact that most of your borrowers are the people most vulnerable to the economic shocks of the pandemic as well as to the virus itself?

As we were aware that most of the borrowers shall be deprived to make the payment in the initial stages, the time was used to improve upon building the relationships and educating the borrowers regarding safety measures to be used during pandemic as well as how to plan on re-starting the life after pandemic. As the borrowers belonging to the MFI industry are mostly from low-income society, it was important to make them understand the current scenario as well as after-effects of the pandemic that affected the world globally. The results of those efforts are being seen now as people have slowly started generating income as well as making repayment on time.

Going by MFIN figures, in the past five years, the pool of small borrowers has almost doubled in this country. Is it true in case of your organization as well?

There has been huge increase in the number of borrowers in the last five years which has resulted in growth of the company. VFS has almost reached to more than five lakh families bringing about 30 per cent-40 per cent of overall growth in the organization.

The recent MFI Bill in Assam, regulating the microlenders, seems to have had an immediate impact on microlenders in that State, with lenders reporting lower collections. How has it impacted you?

The draft MFI Bill in Assam has affected all the micro-lenders working in that State. After the Bill, the collections have also taken a hit as now people are paying less as compared to earlier situation. However, we are pretty sure that things will fall in place in few months and everything will be smooth for both micro-lenders as well as for the borrowers, in Assam. Incidentally, VFS has only three per cent portfolio in Assam, so this has not impacted majorly on the overall performance of the company.

In this context, what is your take on the apex bank's (RBI's) move to bring harmony across class of lenders in microfinance field? Would it reduce the competitive intensity among the various forms of entities operating in this sector?

We welcome the move by the Reserve Bank of India (RBI) to bring harmony across class of lenders in microfinance field as considering the various kind and sizes of lenders operating in the sector, this was the need of the hour. It will improve lending in the sector as well as safeguard the interests of the borrowers.

Do you think that if mid and small MFIs are unable to mitigate liquidity risk during this challenging period, they may become potential candidates to be acquired by larger entities, eventually triggering major consolidations in the MFI sector?

Yes, lenders have started investing in the microfinance sector. Yes, we agree to the fact that consolidation in microfinance industry may have a positive impact on the same and it will also give ultimate benefit to the borrowers.

Some of the MFIs are taking the equity infusion route to come out of the liquidity crisis. What would be your take on this?

Microfinance business is an equity driven business as per the growth and as per the statutory requirement. Most of the growing MFIs raise equity on regular intervals. At present, we have seen most equity transactions happened that is not because of liquidity crisis rather it will help the entity to grow further. Equity infusion during this challenging time will actually enhance the confidence of the equity investor on the Indian microfinance sector.