Update on Microfinance Sector after demonetization
Local politicians in the districts of Maharashtra region have alleged that MFIs have resorted to coercive recovery and harassment of women for repayment. As a result, the Chief Minister of Maharashtra has ordered an SIT to probe violations by NBFC-MFIs. It is expected that the SIT will be formed in a few weeks and will submit their findings to RBI in a couple of months.
Local political interference has always been a risk factor for the microfinance sector and has manifested itself in Maharashtra, where local politicians are trying to win brownie points from local population which is reeling from impact of demonetization. However, the sequence of events leads us to believe that this is different when compared to the Andhra Pradesh crisis of 2010. Here, the State Government is aware that MFIs are regulated by RBI. Hence, it has constituted an SIT, which will investigate and submit its report to RBI. It will be upon RBI to act on these findings.
The major MFI companies (like Bharat Financial, Equitas and Ujjivan) which holds majority of the market share have strict adherence to RBI guidelines – in spirit as well as in practice. The violations referred by the local politicians could come from moneylenders or fringe MFIs, who have heavily resorted to individual lending.
Media reports as well as collection data shared by various MFIs confirm instances of political interference in western parts of Uttar Pradesh. This state is expected to go for elections in the month of February. Most MFIs have reported collections to the tune of 30% to 40% in this region (compared to 90%+ in other states).
Given that political risks are playing out in certain areas, we can no longer ignore the possibility of some write-offs. However, we remain confident that current phase is transient in nature and the strong players will endure some collateral damage. A big positive that can emerge out of the current situation is that the indiscipline caused by fringe MFIs could be curbed.
Given that RBI has not allowed the MFIs to transact in invalid currency and the shortage of new currency, the operations had come to a standstill for initial few days. There was a possibility that MFIs would be unable to collect from its customers but will have to honor their liability repayments. The pertinent question then is – will there be a liquidity crisis for MFIs? Let’s have a look at the ALMs of a few big ones. Let us assume that there are ZERO customer repayments for the next one month. Even in that case, most of the MFIs will be able to honor their debt repayments to banks or the bond markets.
A stress case assumption would be if the political risks result in permanent losses. Even in that case, most of the listed MFIs are fairly diversified and sitting on healthy tier 1 capital and have the capacity to absorb some losses.
The big fear was that if the new currency does not reach the grass roots level in next two or three weeks, lot of small businesses will collapse and customers may permanently lose their repayment capability. However, that a majority of microfinance loans are given towards essential day-to-day activity and that cannot come to a standstill. This has been vindicated by the initial collections reported by various MFIs.
Since MFI funding has been essentially towards day to day activity, they will be restored to normalcy once new currency starts circulation. Few of the large MFIs have continued to conduct center meetings, so that the customer connect is maintained. In a recent interview management of Bharat Financial Inclusion has said that repayment or collection rate is at 91.2% which has improved from 89%. In Maharashtra Company operates in 27 districts out which the repayment rate for 24 districts is 95%.