Do Not Write an Obit for Indian Microfinance Sector Just Yet

Feb 2021
India, February, 15 2021 - With its potential to emerge stronger through every crisis over the years, large entities in the NBFC-MFI sector have started drawing positive interest from bankers as they now look at this sector favourably.

The global pandemic that hit the world in 2020 has changed the way of managing businesses all across. The post-COVID era thus urges us to look at things differently. Liquidity management has become a lot different now, due to changes in the behaviour of underlying assets and liabilities. While a significant number of NBFC-MFIs granted moratorium to most of their customers, they did not receive the same relief from their lenders. This has led to the creation of an asset liability mismatch in the books of NBFC-MFIs.

Given the current macro-environment, lenders’ appetite has gone down significantly, in as much as that non-recourse and partial recourse transactions in the form of securitization and assignment has had no takers in the market. Access to traditional sources of capital has also become a challenge since most financial institutions decided to wait and watch on how collection numbers would unwind post the unlocking.

However, with interventions from the Reserve Bank of India and the Central Government in the form of special liquidity scheme, Third Targeted Long-Term Repo Operation (TLTRO) and Partial Credit Guarantee Scheme (PCGS) to provide relief, the market has seen an increased credit flow while keeping the interest rates towards the lower side. This has helped some of the larger NBFC-MFIs, who were earlier grappling with an unknown amount of receivables on one side and servicing liability on the other side. It was imperative to use effective management to strike a fine balance between carrying high liquidity in the books and taking the drag of negative carry on such liquid assets, to navigate successfully through this period. With additional provisions due to stress on financial assets further complicating the situation, management of most of the larger entities rightly opted for liquidity over profitability.

With its potential to emerge stronger through every crisis over the years, large entities in the NBFC-MFI sector have started drawing positive interest from bankers as they now look at this sector favourably. Subsequently NBFC-MFIs contribute significantly to their priority sector asset base. However, their appetite to fund mid and small MFIs will only increase with time, after careful assessment of collection efficiency numbers. Until then, mid and small MFIs may continue to face challenges while raising resources and may have to run down their books to service their liabilities. If mid and small-sized MFIs are unable to mitigate liquidity risk during this period, they may become potential candidates to be acquired by larger entities. This may trigger major consolidations in the MFI sector.

In uncertain times, such as the current one, management aren’t spared the responsibility of critical decision-making. If anything, the time frame for making choices shortens and the prevailing uncertainty makes decision-making even more difficult. Management across the sector iskeen to see their collection numbers improving at the cost of business growth. Each entity is ensuring that it steadily increases its collection efficiencies towards normalcy in pre-COVID times.

The current disruption has had a huge impact on household incomes of a large part of India with customer behaviour and centre-discipline taking a hit, thus resulting in sub-optimal collection efficiencies at large. Companies with good business understanding, better customer connect, efficient communication with customers, persistence in overdue customers’ follow-up, good employee discipline, well-documented protocol to manage issues along with a strong field leadership will differentiate themselves from their peers.

Entities will need to adapt to the changing business environment swiftly, and gear up for digitalization accordingly. Most MFIs are cashless on disbursement, however, none of the MFIs are 100% cashless on collections. During the COVID-19 period, centre discipline has gone down with MFI employees being forced to collect repayments from the customers’ doorstep. This raises a question on the economics of the business for the sector and hence it is only a matter of time for businesses to adopt a cashless collection approach, just like the sector moved to cashless disbursements after demonetization.

While any disruption of this magnitude unsettles business models, it also opens opportunities for formidable players. Unlike other businesses, the demand for microfinance is expected to grow manifold and hit the roof as most of the customers would have exhausted their meagre savings for consumption during the COVID-19 period. Due to muted cash flows they will require additional

funds to restart their businesses and restore normalcy reminiscent of the pre-COVID era. The NBFC-MFI industry is there to shoulder this responsibility and support nation building with its focus on financial inclusion.

Microfinance industry has bounced back after every crisis. Similar resilience is expected from the sector post the COVID-19 crisis as well. Companies backed by adequate capital, sufficient liquidity and enough data mining capabilities to ascertain and retain good quality customers will definitely have a lasting edge and outgrow the market in foreseeable future.


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