The Covid pandemic has disrupted normal operations in most industry sectors. From the unprecedented change in organization functioning to complete closure of businesses, the repercussions have been cruel.
The microfinance industry, suffered pressure on portfolio quality after the demonetisation exercise in 2016 and has taken a severe hit in the current Covid-times as well. However, the sector has withstood such headwinds in the past as well and survived, infact thrived!
According to the report release by PWC-SIDBI in November 2019, the worldwide microfinance industry stood at over Rs 8.90 trillion with the loan disbursed amount increasing at a mean annual rate of 11.5 percent over the last 5 years. With the biggest number of borrowers in 2018 (85.6 million) which is growing at a pace of 13.8 percent, South Asia stays remains one of the leading markets in the worldwide microfinance industry and a significant part of these borrowers are in India.
In a later report of Investment Information and Credit Rating Agency of India (ICRA), COVID-19 will strain the liquidity and asset quality profiles of microfinance institutions (MFI), and furthermore sway their capacity to pay interest on borrowings.
The Digital Element in the recovery process!
The microfinance business, which serves the unbanked and underbanked has taken a hit. However, the most positive feature of the entire crisis is that it has altered the approach towards digital by all stakeholders viz. clients, banks and finance companies. This is great news, one which will immensely help in the formalization and subsequent increase in the capacity to give more credit to the underserved, besides making the entire process easy and simple.
This pandemic has also given MFIs the opportunity for growing the right customer segments because of the pent-up demand. The micro entrepreneurs, who are in dire need to start or re-start their business, purchase machinery, equipment, material etc. represent a healthy demand. Being Digital will play a big role in making contact-less and less-contact enrolment, onboarding and servicing of customers possible, thus providing adequate supply of banking solutions.
This paradigm shift towards digitisation for processes for serving their customers is imperative due to the on-going changes in the transaction habits of consumers.
Collection efficiency – The key element!
The Collection efficiency of microfinance institutions (MFIs) which had plunged to near zero in April 2020 in view of the nationwide lockdown to stem the spread of the Covid-19 pandemic, bounced back to 70-75% in July and is nearing 90-92% in Sep. So, as the restrictions have been lifted, gradually the numbers have shown an upward trend.
According to the rating agency, while the rebound has been faster than imagined, improving it to the pre-pandemic levels of 98-99% will be a critical factor from a portfolio quality perspective.
With the Covid-19 infection rate still high and spreading, the MFIs need to put focus and efforts to improve collections further and that will be a key monitorable for measuring the sector’s recovery.
The Way Forward
The sector caters to the base of the pyramid and has survived multiple crises over the year, it shall bounce back, given the strong roots of micro entrepreneurship, big or small, in the country. Since a large section of our populace is self-employed and a significant part of it is in the low-income segment which is perennially credit-starved, the demand for financial help to keep the operations going remains high.
Once normalcy resumes, an expanded demand for credit by farmers and micro enterprises and kirana-store owners to finance working capital necessities and restart businesses, the opportunity that Small Finance Banks and NBFC-MFI’s shall embrace with open arms.
The microfinance sector shall play a noteworthy part in ensuring help and credit at the grassroots when it is required the most to revamp our grassroot economy. Though there are multiple players in the microfinance landscape, India still represents an enormous opportunity for the sector, as a significant portion of its populace falls in the low income band and furthermore, a huge part of its population still lacks access to credit from the formal sector, thus leaving room for further expansion. The sector’s growth signifies the scope of microlending in achieving financial inclusion.
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