Home / Industry / Banking /  Covid’s rural spread strains microfinance firms, NBFCs

The advance of the coronavirus pandemic into India’s hinterland has begun to hurt microfinanciers and non-bank lenders operating there, potentially impacting loan recoveries and driving up provisioning in the days ahead.

The microcredit sector was gradually recovering from the first wave when the second wave struck. Industry analysts said that while last year’s outbreak left the rural areas largely untouched, the situation is vastly different now.

Collections plunged in the last week of April, coinciding with the explosion of coronavirus cases that led to lockdowns.

“Before that, microfinance institutions (MFIs) were able to collect repayments on time," said P. Satish, executive director at Sa-Dhan, an industry body of 225 MFIs. “In May, various states started imposing lockdowns and even if MFIs are being treated at par with banks and being allowed to operate, venturing out to meet customers is difficult. Also, a larger number of microlending staff have been affected this time around," he said, adding that the spread of the virus in rural areas is a concern.

Non-banking financial company (NBFC) Mahindra and Mahindra Financial Services, which focuses on rural and semi-urban markets, made provisions upfront in the March quarter to cover against potential stress. Bandhan Bank, which has a large microfinance portfolio, saw collections drop 300-400 basis points in April. Others are expected to follow suit.

As on 31 December 2020, the combined micro-credit portfolio of 200 lenders was 2.27 trillion, a 16% rise on a year-on-year basis.

These 200 lenders include non-banking financial company-MFIs (NBFC-MFIs), universal banks, small finance banks and some other non-banks.

Experts said microlenders face significant risk from the second wave, given their limited wherewithal. For starters, liquidity has been an issue as commercial banks are reluctant to lend them money.

“The industry is witnessing a reduction in collections and the recovery seen in Q4FY21 is being challenged again," said Sachin Sachdeva, vice-president and sector head of financial sector ratings at Icra Ltd.

The rating agency estimates a sequential drop of 8-10% in collections in April and the same may dip further if the infections continue rising and more restrictions are imposed across locations.

India is in the middle of a major healthcare crisis as the second wave seems to have caught the nation and its government napping. There are more than 3.7 million active covid-19 infections in the country and 249,992 people have already succumbed to the virus, official data showed.

NBFCs cannot stay immune to the second wave either. The Finance Industry Development Council (FIDC), which represents NBFCs, wrote to the Reserve Bank of India (RBI) on 27 April seeking measures to weather the onslaught of covid-19.

“With many states like Maharashtra, Chhattisgarh, Madhya Pradesh, Karnataka, Rajasthan and Tamil Nadu already under lockdown or lockdown-like strict conditions resulting in the closure of our branches, it is becoming increasingly difficult to reach customers for collections as their business has come to a standstill and their livelihoods are under threat," wrote Mahesh Thakkar, director general, FIDC.

He wrote that it will not be long before rising bad loans start to hurt, and demands for moratoriums and loan restructuring start.

To be sure, the central bank has announced some measures to help microlenders overcome the stress. On 5 May, RBI governor Shaktikanta Das announced that small finance banks will be permitted to reckon fresh lending to MFIs with an asset size of up to 500 crore for on-lending to individual borrowers as priority sector lending. This facility will be available up to 31 March 2022, Das said.

While scheduled commercial banks have funded large MFIs, they have been reluctant to sanction loans to those smaller in size, Acuite Ratings and Research said on Monday.

A study undertaken on the MFI sector by Acuite indicated that bad loan provisions have impacted the profitability of the sector and a few MFIs are set to report losses in FY21. However, the overall operating environment, it said, was conducive for further recovery and healthy growth in the sector till India was hit by the second wave.

Shayan Ghosh
Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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