From response to recovery: How COVID-19 crisis spurred turnaround of microfinance industry

NBFC-MFIs provide micro-credit loans (mostly Rs 30-50 thousand loans) totaling over Rs 70,000 crore to 2.5 crore women in low-income-households, to enhance their livelihoods and well-being. The effects of COVID-19 on these low-income-households served by more than 90 NBFC-MFIs have been severe.  

In the first two months of lockdown between April 2020 and May 2020, customers, across sectors, experienced precipitous drop and uncertainty in their livelihoods. Though a vast majority, being rural and employed in 'essentials', were able to sustain and resume incomes rather swiftly as essential economic activities returned to normalcy. Not earning is never an option for low-income households.

For NBFC-MFIs, it brought a near-halt in the business i.e. collections and disbursements due to restrictions on functioning and mobility, leading to liquidity issues. Unsurprisingly, NBFC-MFIs were perhaps the worst affected amongst the financial institutions, with nearly 98% of accounts being under moratorium by May 2020.

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Besides their customers who were affected, NBFC-MFIs' heavy reliance on cash for recoveries (for their customers' livelihood are still rooted in cash economy), need for physical proximity to customers for door-step collections, disbursements and its unique liquidity-match framework which depended on steady cashflows of repayment recoveries from customers for upstream payments on borrowings, posed huge impediments under the new circumstances.   

So how did NBFC-MFIs manage to overcome this hard blow? As always, a supportive policy framework and an adaptive business are the linchpins of a turn around that is still underway.  

Given the nature and scale of the impact of the coronavirus-induced lockdown, policy/regulatory response was supportive around two broad measures. One, supporting customers to smoothen the cashflows, through government transfers such as cash, food essentials, and public works as well as relief in debt repayments through moratorium, interest subvention, restructuring, and ex-gratia schemes (waiver of compound interest component). Two, support to NBFC-MFIs through moratorium on borrowing and financing support through SIDBI, NABARD, and TLTRO to tide over the liquidity issues.

A noteworthy feature of policy interventions was the focus on credit discipline and prudence, therefore giving a strong policy signal to emphasise the importance of credit discipline for the effective credit market looking ahead. Further, acknowledging the role of credit in recovering the livelihoods of low-income households, NBFC-MFIs were covered under the essential services category, thereby easing their operations.  

At the business level, NBFC-MFIs - individually and collectively, responded to the crisis with agility and maturity, with 'customer well-being' as the cornerstone of the response. All customers were given a moratorium unless they chose to opt-out and close engagement with the customers which, among other things, focused on awareness about the moratorium and its implication on interest/loan repayments so they can take an informed decision. Self-regulatory Organisations (SROs) of NBFC-MFIs ensured that NBFC-MFIs stay empathetic to customers and committed to the core tenets of the industry code of conduct - fair interaction, suitability, transparency, and addressing customer grievances.

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Additionally, NBFC-MFIs quickly transitioned to a remote and safe working environment for employees, though varied and shifting regulations across states/districts made its implementation rather challenging. Liquidity was managed by rationalising expenses, taking moratorium on borrowings, and accessing fresh liquidity made available through RBI.

However, the situation remained precarious for several small/medium NBFC-MFIs, until repayments started to trickle in after the lockdown got lifted in May 2020 as not all their borrowings got moratorium, and accessing debt remained tough in a risk-averse market.

Nine months on, economic activities have largely resumed for most customers and NBFC-MFIs seem to have endured the crisis well. Collection efficiencies are on an upward trend inching towards 95%. Disbursements were close to 50% in the quarter July 20 - Sept 20 and are expected to normalise in the next couple of quarters.

By and large, there have been only a few cases of violation of the code of conduct and these have been addressed promptly and suitably. Administrative support at local level has been strong. The liquidity position is gradually easing out. While loan losses cannot be estimated yet, for much depending on how the overall economic recovery plays out in the coming months, they are expected to be much lower than predicted earlier. Of course, higher credit cost and provisioning (due to higher defaults) than previous years would impact the overall profitability of the NBFC-MFIs in the next couple of years while necessitating the need for capital.

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NBFC-MFIs never let a crisis go waste, for these periodic challenges seem to be part of the business environment now. The pandemic-led crisis has accelerated an overdue transition to digitalisation in business processes and enhanced efforts to address slow-burning issues such as liquidity management, cash, diversification, and capital. Moreover, it has demonstrated the importance of customer connect and well-being as well as adaptive and engaged employees for the business. Looking ahead, it should bode towards better managed NBFC-MFIs.  

NBFC-MFIs and their low-income customers have once again passed the test of crisis with ingenuity, and resilience. Soon enough, a difficult year will hopefully give way to a (new) normal year.   

(The writer is Head - SRO of MFIN, an industry association and RBI recognised Self-Regulatory Organisation (SRO) of the NBFC-MFIs.)