The Looming Danger on the Indian Microfinance Industry
In 2020, the microfinance sector in India accounted for 32% of all the loans disbursed in the second-most populous country in the world. An industry which has steadily grown into a behemoth over the last decade, the Indian microfinance industry had a customer base of 32.5 million clients as of 2016, but the onset of the pandemic has made this traditionally perceived national asset into a liability as collection rates fell from 98% in pre-pandemic times to 85% in a post-pandemic India.
For an industry which operates on tight margins and conventionally relies on specialized loans from the formal banking sector, this is a worrisome time, and in today’s post, I explore how the times have changed for the microfinance industry in India.
Let’s get started.
The Growth of the Behemoth
A report published by the Financial Express in November 2020 accurately captures the tremendous growth the homegrown microfinance industry has experienced over the past financial years. In FY 2019–20, the microfinance industry registered an unprecedented growth of 31% as its reach within the heartland increased owing to technological advancements and knowledge of financial awareness. However, the growth in FY 2019–20 falls in line with other major milestones the industry has surpassed over the last three decades.
What started as a charitable initiative of uplifting millions of Indians out of poverty more than 30 years ago, the microfinance industry has registered a decent growth of 15% year on year since its inception.
Today, there are roughly 96 microfinance institutions across the mainland, and cumulatively they cover a loan portfolio worth more than $124 billion. Over the years, the industry with humble roots has expanded its coverage across the nation and today has a client roster of more than 140 million borrowers, more than 80% of which are women.
In contrast to traditional banking institutions, which have a strict set of criteria for dispersing loans, the microfinance industry is more lenient and operates with a goodwill initiative of uplifting the poorer populace of the fifth largest economy in the world.
The Start of the Problem
Before the COVID-19 pandemic hit the shores of India, the microfinance industry across the nation bolstered a collection rate of 98%, a number which is unheard of in traditional banking circles. As most of its clientele are men and women who are engaged in daily wage activities, a system of daily repayment and regular check-ins with clients have traditionally helped the industry flourish.
However, once the pandemic hit, the wide reach of the homegrown microfinance industry quickly became a liability. In December of 2020, the industry registered a collection rate of 85%, which is the lowest they have hit since their inception, despite the issuance of special loans to the microfinance sector by the Government of India and subsequent EMI moratoriums extended by the Reserve Bank of India. As of the latest reports, roughly 1 in 20 Indians are in debt, and they collectively owe the microfinance sector more than $31.6 billion.
Since a majority of the clients supported by these microfinance institutions are small-time traders and daily wage labourers who have no or few technological skills, they were the hardest hit by the pandemic. As the nation was forced into strict lockdowns, a majority of the clientele migrated back to their humble dwellings, unable to meet their daily obligations in the city and thus ultimaley falling behind on their repayment.
The pandemic and its subsequent lockdown were the first instances for millions of these borrowers who failed to meet their obligations for the first time since they started borrowing.
One harrowing account of this can be captured in Bloomberg’s recent interview of Arpita Das; a prawn trader settled in a remote village on the humble banks of the Kangsabati River. Das, who is 30, has been engaged in the prawn trade since her teenage and right before the pandemic, she took out a loan of $2,300 for furnishing equipment and other essential supplies for the upcoming harvest season. Although she was able to meet a couple of her monthly repayments of $180 each to two microlenders for a few months, as the nation started to realize the true effects of the pandemic, the demand for her prawns plummeted, and she was pushed into non-repayment.
As Das recounts, in the initial days of the pandemic, her borrowers would follow up with her every couple of weeks, checking if she could make a payment, however as she extended her default, the calls became more frequent and troublesome.
Das’s story is that of millions of Micro Borrowers in India, who are suffering the true wrath of the COVID-19 pandemic.
The Way Ahead
As the nation reels from the effects of the nationwide lockdown and the receding economy gradually opens up to the world, microfinance institutions across the country are now starting to enforce stricter guidelines on loan disbursement and their subsequent collections.
As Manjoy Nambiar, managing director at Arohan Financial Services Ltd., India’s fifth-biggest microfinancier, recollects in a recent interview to Bloomberg, “In the last few months we were focused on collections. Now we’re looking at stepping up lending.”
Muhammad Yunusg, the 80-year-old Nobel Lautaret and economics professor from Bangladesh, shares that now more than ever before, the industry is in need of fresh capital and a fundamental restructuring if it is to avoid succumbing to a steep rise in default rates and fearful borrowers ostracizing micro borrowing.
What do you think? Let me know by commenting below.
- Millions of Defaults Threaten Microfinance’s Future in India [Link]
- Market share in the microfinance industry in India from December 2019 to December 2020, by lending institution [Link]
- Number of clients of microfinance institutions in India from FY 2012 to FY 2016 [Link]
- Microfinance industry sees 31% rise in loan portfolio at Rs 2.36 lakh crore in FY20: Report [Link]
- Number of microfinance non-banking financial companies (NBFC-MFI) in India as of May 2021, by city [Link]