Home / News / India /  Moratoriums, a debt trap for microfinance?

The debt moratorium given by the Reserve Bank of India till August during the covid-19 pandemic is a major relief for borrowers. This gives a breather for poor households facing wage cuts and job losses, but as research shows, could go on to disrupt the microfinance model of lending.

In an Ideas for India article, Georgia Barboni of the University of Warwick and Misha Sharma of Dvara Research say microfinance institutions (MFIs) in India could be in trouble since they themselves have not got the moratorium from their own lenders, mostly banks. So the relaxation given to their borrowers could result in a liquidity crunch for them and credit ratings downgrades.

A large share of poor households depend on small loans from MFIs. According to industry body Sa-dhan, around 85% of the borrowers have already opted for the moratorium by May-end. The mounting interests during the moratorium period pose a huge challenge for the sustenance and profitability of MFIs.

In normal times, borrowers typically make repayments on a bi-weekly or monthly basis. The current situation can affect that repayment discipline and can also be mistaken as loan waivers by customers, the article says.

Microfinance has been crucial in providing credit to the poor and the unbanked, but the scenario can result in MFIs pressurizing borrowers for repayments, the authors add. This could push poor households towards costlier and informal lending, thus getting into a debt spiral.

In past crises such as the 2018 Kerala floods and demonetisation, the MFI sector recovered from the debt trap in six to nine months. However, this time, the sector needs to rethink its strategies and adopt technological solutions for collection of dues, maintaining customer relations and helping them plan repayment strategies, say the authors.

Also read: Covid-19 and debt moratorium conundrum: The case of microfinance

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