Home / Industry / Cash-dominated microfinance sector reels under demonetization stress

Most microfinance institutions (MFIs) have liquidity in the form of unencumbered cash and unavailed bank lines of credit for just 30-60 days to meet debt obligations in case of business disruption, India Ratings and Research said.

In a report on Thursday, the rating agency said that the capital levels of some MFIs may near the minimum regulatory level by March if the repayment cycle does not return to pre-demonetization levels.

All MFIs are required to maintain a capital adequacy ratio of 15%, according to the central bank’s norms. Capital adequacy is a measure of financial strength expressed as a ratio of capital to risk-weighted assets.

“The agency expects MFI borrowers to reprioritize their expenses on account of a cash flow mismatch in the next few weeks. This would lead to an increase in one-month overdues of many MFIs," the report noted.

The cash-dominated microfinance industry, which extends small loans to unbanked and self-employed low-income earners, has come to a halt after the government’s move on 8 Nov­ember to scrap Rs500 and Rs1,000 notes. Most micro lenders have deferred repayment by a week for the convenience of borrowers.

“We have cash for 60-90 days to meet our debt obligation. We have seen behaviour changes in our borrowers as a few of them have started paying us by cheques from Monday onwards," said K. Paul Thomas, chairman and managing director of Esaf Microfinance.

The Microfinance Institutions Network (MFIN) and Sa-dhan, two self-regulatory bodies of MFIs, have sought clarification from the central bank on whether to accept scrapped currency notes.

The India Ratings report said that, in the short term, microfinance borrowers will switch to regular banking and in the long term will park their savings with MFIs that turn into small finance banks.

“More cash-out points need to be in place, which will hopefully come up with payment banks. Account usage and savings behaviour is likely to significantly improve after the demonetization move," said Sucharita Mukherjee, chief executive of IFMR Holdings.

According to data available with MFIN for the first quarter, the eight microfinance companies that will become small finance banks by March account for 40.50%, or 1.45 crore, of the 3.58 crore customers of MFIs.

Among the eight, Equitas’s small finance bank has started operations and Suryoday Microfinance Pvt. Ltd and Ujjivan Financial Services Ltd have received final approvals.

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