Stories of distress from small borrowers

Sarama Koyal does not have a roof over her head. After the Amphan super cyclone ravaged her home in South 24 Parganas district of West Bengal in May, all she could afford was a black tarpaulin sheet. Despite this, what’s giving her sleepless nights is the repayment schedule of four micro-loans she took from banks and financial institutions. Over the past two years Koyal has borrowed ₹230,000; this includes a fresh loan from Bandhan Bank last month, to help repay a previous one from the same bank.

Her business of selling sarees is at a standstill thanks to covid-19 and local lockdowns; for months now Koyal’s husband who worked as a porter in the state capital Kolkata had had no work. For a household that barely earned ₹8,000 a month in good times, the twin blows of a cyclone and a pandemic has led to a tipping point.

“I am now repaying (weekly instalments) by selling the grains we grew on a small plot of land,” Koyal said. The microfinance institutions (MFIs) made it amply clear to her that there would be no relief. We did not ask you for repayments for three months (April to June) but cannot wait any longer, she was told sternly, despite a central bank mandated moratorium in place till the end of August.

While Koyal has started repaying at least one of her four loans, Kamini Devi from Araria town of Bihar is yet to find a way out. Devi’s husband, Sridev Paswan, used to work in a plywood factory in Purnia, some 55km away. Following the lockdown, the factory was shut—it resumed operations in July but Paswan has no affordable means to commute to work. An autorickshaw ride costs ₹150 now compared to the ₹10 he used to pay earlier for a train ticket.

“They (field staff) keep coming every week. They tell us if you’re able to afford food, you can also repay your loans. I told them we don’t have enough to fill our stomach,” Paswan said. The family has two loans—one of ₹80,000 from Bandhan Bank and another of ₹40,000 from HDFC Bank.

In a conversation with Mint, CEO and managing director of Bandhan Bank Chandra Sekhar Ghosh said that all customers were offered and explained the loan moratorium process—that a moratorium is not a waiver and will lead to a higher interest burden later. “We stopped collections on 23 March before the first lock down was announced... (in June), we went back to borrowers, explained what a moratorium means, and left it to their choice whether to defer or start repaying.”

Mint spoke to several micro-finance borrowers from states like Madhya Pradesh, Maharashtra, West Bengal, Bihar and Odisha to understand how they are coping with the pandemic-induced loss in incomes. Many have started repaying loans, but their financial situation is precarious. Most said lenders did not give them a choice to delay repayments beyond July.

The scale of the crisis, however, is not limited to the financial stress faced by individual families. In the coming months, it could spill over to India’s large microfinance sector; for now, the moratorium is masking ground realities.

A rise in delinquency will be an added burden for non-banking financial companies and banks exposed to micro-loans. The Reserve Bank of India has projected a spike in gross non-performing assets (NPAs), from 8.5% in March 2020 to 12.5% by March next year which could even escalate to 14.7% in a severely stressed scenario.

A payment crisis in micro-finance would make matters worse. As of March 2020, the micro-finance sector’s gross loan portfolio was an impressive ₹2.3 trillion, growing at 23% year-on-year. Most of the portfolio consisted of small unsecured loans to women borrowers—63 million customers and 110 million active loans with an average loan size of ₹34,000.

The key question is: what will be the extent of slippages due to a pandemic-induced recession? The write-offs were a healthy 1.6% in 2019-20, but will higher delinquencies lead to more NPAs?

Unless there is a sharp recovery in economic activity, MFIs and banks (with micro-loan portfolios) will have to restructure or write-off loans though the situation will not be clear until November, said an analyst with a mutual fund who tracks the sector closely and did not want to be identified.

There are several risks which can upend repayments, the analyst added. This include floods in parts of eastern India in Bihar and Assam, upcoming elections in states like Bihar and West Bengal (if local politicians discourage borrowers to repay or promise a waiver), and more importantly, the growing incidence of covid-19 infections in rural India which can lead to more localised lockdowns stalling economic activity.

And aggressive lenders who advance multiple loans, adjust previous loans against new ones, or provide large ticket sizes may see higher defaults.

Risk of slippage

Unlike conventional loans advanced by banks, micro-loans have their pluses too. “The industry is prone to socio-political risks in certain geographies and this is an occupational hazard which MFIs have internalized. But willful defaults are minimal in the industry since micro-loans are often the only source of credit for MFI clients,” said Krishnan Sitaraman, senior director at Crisil Ratings.

“During the month of July, loan recovery revived to 60-80% (up from next to nil in April and May) but the spread and intensity of infections in rural India will be a key monitorable,” he added.

According to Vijay Mahajan, founder and former head of Basix, a pioneering micro-finance and livelihood support organisation, the fact that rural economy and agriculture has been least affected by the pandemic will support the repayment capacity of MFI borrowers. “The lockdown in cities could affect a small portion of the urban portfolio of MFIs (45% of MFI clients are from urban areas) but I remain optimistic on the prospect of micro-entrepreneurs and micro-finance bouncing back,” Mahajan said.

But the prognosis for rural India is not a singular narrative. While it is true that higher procurement of grains at support prices and increased spending under state run welfare schemes will support spending, small vegetable growers and dairy farmers have borne heavy losses due to volatility and crash in prices. These are the same (asset poor) families which MFIs lend to, who have seen their incomes shrink due to migrant workers returning home and remittances drying up.

For instance, a woman borrower and small vegetable grower from Rayagada district of Odisha who did not want to be named narrated her ordeal: “They (MFI field staff) came and sat outside my house late one evening and refused to leave till I paid the weekly installment.” Her earnings nosedived due to a crash in vegetable prices but she was told: “If you are able to eat despite a lockdown, you can repay your loans too.”

There are many such stories. Archana Gondane from Nagpur took loans from a local moneylender at an exorbitant 10% monthly interest to service a ₹40,000 micro-loan from Yes Bank. Rekha Bamne from Hoshangabad district of Madhya Pradesh is yet to resume repayments after buyers from her small poultry farm stopped payments. Geeta Devi from Banka, Bihar, is also unable to repay as her remittance income crashed after three migrant sons returned home.

Preparing for the worst

First quarter (April to June) results of listed micro-finance lenders show a cautious approach towards asset quality. Bandhan Bank, with micro-loans comprising over 60% of its loan book of ₹74,000 crore, reported a 32% fall in net profit due to additional provisions (for loans that may turn NPA) of ₹750 crore to cover for covid-19 related risks. The bank reported a collection efficiency of 68% for micro-loans in June, compared to zero collections in April, and expects the ratio to reach 90% by September.

Over 70% of our customers are engaged in agriculture, food processing and retail and their businesses are not severely impacted, said Bandhan’s Chandra Shekhar Ghosh. “Currently, on any given day, about 20% of our branches are shut due to local restrictions but in places where we are functional, loan recoveries are at about 90%. Fresh lending is at 60% of normal levels.”

Ujjivan Small Finance Bank, another listed micro-lender with a higher exposure in urban areas and a micro-loan book of over ₹11,000 crore, reported a 41% drop in net profit in its June quarter results. The bank reported a collection efficiency of 59% by end July (up from 16% in May) but had to make an additional Covid-19 provision of ₹129 crore, taking total provisions to ₹370 crore (2.6% of its loan book).

A critical factor for improved collection efficiency, the bank said in an earnings call on 1 August, will be the ability of customers to restart their livelihoods. It also observed that the gap in repayment numbers between urban and rural areas narrowed as “rural markets were also equally infected (due to spread of Covid-19), if not more as compared to the urban and the metro.” The Bank did not respond to queries from Mint.

Living on hope

The industry faced a serious problem in the initial months but now some (loan) recoveries have started flowing in, said Alok Misra, CEO of the Microfinance Institutions Network (MFIN), an industry body.

“Around 90% of the liquidity for MFIs comes from repayments and any disruption affects the liquidity situation. Though some support has come from special schemes announced by the Reserve Bank of India, still there is acute stress. Not having enough liquidity is seriously affecting small and medium MFIs and some of them are already facing trouble in meeting operational expenses and debt repayments,” he said.

Misra added that the MFI sector is not new to shocks (it weathered a payment crisis which hit Andhra Pradesh in 2010 and demonetization in 2016) and will likely be out of the woods in the next 6-7 months with suitable policy and liquidity support. “Micro-finance clients have time and again demonstrated their resilience.”

Of course, MFIs resuming lending is an indicator of whether rural activity is bouncing back. “Our July advances were about 55% of normal lending… obviously no new customer is being targeted; we are focused on our existing customers,” said Manoj Nambiar, managing director of Arohan Financial Services Ltd, a lender with operations in north-eastern, eastern and central India.

Nambiar, who is also the MFIN chairperson added: “the delinquency in the sector as of end March (2020) was just 3% (as a percentage of the total customers). By September the number will be at least in double digits. By next March we hope to come back to where we started the year.”

Saraswati Pendam, 40, who ran a grocery store in rural Nagpur, Maharashtra, till the pandemic hit in March, is also waiting to get back to her pre-pandemic economic status. She took ₹90,000 in three loans. During the initial months of the covid lockdown, as households demanded groceries on credit, Pendam decided to shut the store and ended up using the grains and pulses for home consumption.

After the lockdown was lifted in July, she and her husband started a small kiosk selling cigarettes and betel leaves. That barely suffices for family expenses, let alone paying back the loans. But Pendam was asked to start repaying and explained that a moratorium will only add to her financial burden later.

How did she manage? “My son started to work on daily wages assisting a plumber since his college is shut. I am using his earnings to repay,” Pendam said over the phone. A bigger worry for her is how to restart the grocery store. She needs to invest about ₹40,000 to restock the store but is afraid to take another loan.