Globally, it is proven that access to finance is a necessary condition for sustaining livelihoods and raising incomes. This is especially true for Bottom-of-Pyramid (BoP) families, who have traditionally been bypassed by the formal sector on account of their small requirements and the need for personalized touch. Microfinance emerged as a response to this; offering small scale financial services through doorstep delivery.
The enormous success of the model in reaching the underserved market is amply demonstrated by the fact that at present microfinance reaches around 60 million low income clients in India. The figure is impressive by itself but becomes more significant seen with the fact that comparable figure for all Scheduled Commercial Banks (SCBs) in India stands at 36.5 million loan accounts [Total loan accounts with credit facility below ₹25,000].
Though, the Microfinance Institutions (MFIs) are the bedrock of microfinance in India, over a period of time, several other players like Small Finance Banks, Commercial Banks and non-banking finance companies (NBFCs) have also entered the market in a big way; however quite a few of them have graduated as banks from their earlier avatar as NBFC-MFIs and retain the essential operational features.
Not only has the sector become a major source of financial services to BoP families, it has been resilient in the wake of crises and adapted to the needs of the segment by keeping clients at the core. MFIs weathered several pan India crises like the Andhra Pradesh crisis of 2010 and demonetization in 2016 as well as several local and state level events.
Despite naysayers, the BoP families have demonstrated almost perfect repayment record; this is in stark contrast to the corporate loans that have turned into non-performing assets (NPAs) in India. The resilience of BoP families is based on the premise that they continue to have access to reliable small scale financial services. Client centricity is evident from MFIs’ ability to offer diversified services, lowering the cost of credit despite doorstep delivery and adapting to the digital world.
It is noteworthy that Indian MFIs have the lowest operational cost globally; they retail money more efficiently than their global peers. In the wake of the covid crisis, the sector has once again demonstrated its sensitivity to the needs of its clients by suspending recovery of loans till 31 May 2020 and proportionately extending the loan tenure. Based on ground reports, clients are highly appreciative of this measure.
However, the policy support required for sustaining and strengthening microfinance has not been adequate and has the potential to severely dent the livelihoods of 60 million clients. While MFIs have suspended recovery to give relief, thereby depriving MFIs of cash inflows, it was expected that banks and NBFCs which provide wholesale funds to MFIs will also match it with moratorium from their side.
The same has not happened as many lenders, citing RBI’s covid-Regulatory package guidelines, dated 27 March 2020, indicate that a moratorium is applicable for retail borrowers and not financial intermediaries. Before we see the logic or otherwise of these claims by lenders, two things need to be mentioned. First, MFIs have no other source of funds other than wholesale borrowings and equity and secondly, typically ~90% of their assets are deployed in loans.
Coming to logic of lenders, it is a narrow technical interpretation, which does not seem to be the intention of RBI. With no cash inflows till 31 May 2020 and continuing operational expenses of salary and other overheads, there is no way MFIs can service their debt obligations to banks and other lenders during this period. Even though the new norms of Liquidity Coverage Ratio (LCR) prescribed by RBI in accordance with Basel-III norms is applicable to only a few large MFIs, those maintaining their LCR will also not be able to service their debts.
This is because “High Quality Liquid Assets (HQLA)" in case of MFIs are primarily loan repayments by clients. As such, if the lenders continue to insist on repayment of debt, while there is suspension or moratorium on client level repayments, it will in all probability lead to defaults by MFIs—now or in near future.
During the post-lockdown period, a critical requirement of BoP clients will be access to fresh credit to build their livelihoods and resume their economic cycle. The mass migration to rural areas from cities will further add to the demand of microfinance. In this milieu, it is critically important that MFIs not only get relief on debt repayments for the moratorium period but also be supported through additional liquidity.
The absence of these measures will endanger livelihoods of nearly 60 million clients; a blow which the Indian economy cannot afford as it might push clients in poverty trap and back in the clutches of moneylenders.
Indian policymakers need to seize the moment and align policies with the Prime Minister’s call for “Jaan bhi, jahaan bhi" (lives and livelihoods both). If credit flows to BoP clients is impeded and MFIs are forced to default, their jahaan (world) will suffer a body blow, and years of efforts for inclusive growth will be set back.
In comparison to the huge negative effects, what is being asked for is mere a back-to-back moratorium by lenders to match moratoriums given by MFIs to their clients. This does not entail any financial loss to lenders as interest and principal can be serviced after economic activity resumes. The time to act is now, and hopefully RBI and the government will take cognizance of this and clarify the spirit behind the regulatory package to eliminate narrow technical interpretations of it by lenders.
The author is a professor of Public Policy and Governance, at Management Development Institute, Gurgaon