Business News/ Markets / Mark To Market/  Covid-19 puts microlenders on ventilator, investors on the edge

India’s microfinance institutions (MFIs), the last-mile connect for credit, are on a ventilator and would soon run out of cash. That is because borrowers aren’t paying them back given that the nationwide lockdown to curb the spread of covid-19 has put their very subsistence at risk.

The worst off do not have liquidity to last even for more than a month and time is running out, according to CARE Ratings Ltd. On average, lenders keep cash to suffice for 2.5 months and depend on constant collections to match their cash flow needs.

But the collection tap is dry now with no indication of any improvement as the outbreak ravages livelihoods. “As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cumulative cash shortfall," said Icra Ltd in a note.

Taps running dry.
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Taps running dry.

The odds of an immediate improvement are low. The proposed relaxation in rural areas by the government should help. That said, incomes have become uncertain. India’s villagers may choose to hold cash rather than repay debt if their next meal looks like a question mark.

Analysts believe local governments could encourage borrowers to seek relief rather than pay off debt. “There could be wilful defaults too," said Ravi Kumar Dasari, associate director at CARE Ratings, in a webinar. Collections won’t improve quickly once the lockdown is lifted, he added.

Icra believes a surge in defaults and credit costs are coming for MFIs.

Shares of microlenders such as CreditAccess Grameen Ltd and Spandana Sphoorty Financial Ltd have seen a sharp fall ever since the first announcement of lockdown on 24 March.

What MFIs need now is a lifeline to ride out this period. A loan moratorium won’t suffice as even with it, cash levels will deplete beyond two months. MFIs may also need cash and thus fund infusion in them becomes critical. According to Icra, the cash shortfall of 29 MFIs that account for 70% of the industry’s credit disbursal is about 2,600 crore.

Putting credit lines of MFIs on ice could backfire on banks as they would begin to see big defaults. Instead, lending more in these times of need works.

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Updated: 17 Apr 2020, 12:19 AM IST
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