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The second wave has hit small borrowers hard and by extension, microfinance lenders, despite the impact of lockdowns on business activity being milder than last year.

As experienced during last year’s stringent nationwide lockdown shows, stronger balance sheets with high provisioning and capital have shown resilience during the pandemic. If the stress is less on the balance sheet to start with, half the battle against defaults is won by the lender. This principle is true for even microfinance institutions (MFIs) that saw their stress surge in the wake of the pandemic.

Stressed out
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Stressed out

Loans where repayments were overdue for more than a month rose to 9.7% of gross loan portfolio of the industry, rising sharply from 4.1% a year ago, data from credit bureau Crif High Mark showed. What’s more is that loans where repayments were overdue for more than three months stood at 4.4%, a jump from 0.8% a year ago and 3.8% in the previous quarter. Simply put, more borrowers showed stress and already-stressed borrowers showed an increase in the intensity of pain. Analysts believe that the second wave could have aggravated this situation further.

What complicates this problem is the rise in leverage among small borrowers. The credit bureau found that more than 21% of borrowers had taken loans from four or more lenders. This ratio has been consistently high for certain states such as Tamil Nadu, Odisha, Assam and West Bengal. These states showed high leverage among borrowers compared with other states. An increase in leverage raises the probability of default during a crisis.

The situation is also tricky as during a crisis, lenders tend to give more loans to existing borrowers than take on new customers. Analysts at Kotak Institutional Equities pointed out in a 24 May note that even as the number of borrowers fell sharply in the December quarter, the loan portfolio grew for microfinance lenders. Indeed, defaults have been higher in the states mentioned above compared with other regions. This goes to show that unless leverage reduces, microfinance lenders may not be successful in reducing stress on their balance sheets.

Microfinance lenders cannot dodge the increase in stress due to the second wave. But lenders can protect themselves from outsized impact by avoiding leveraged borrowers.

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