Microfinance’s Twin Dilemma: Disbursements Delayed, Collections Drop

Is a crisis brewing in the microfinance industry?

A woman signs up for a loan during a meeting provided by a microfinance company (Photographer: Adeel Halim/ Bloomberg)
A woman signs up for a loan during a meeting provided by a microfinance company (Photographer: Adeel Halim/ Bloomberg)

Reeling from the impact of withdrawal of high-denomination currency notes, microfinance institutions across the country are looking for ways to tide over a period of cash shortage. The withdrawal of Rs 500 and Rs 1,000 currency notes, announced on November 8, has resulted in a severe cash crunch for both individuals and businesses across the country.

India’s largest microfinance company Bandhan Financial Services Ltd. has stopped all disbursements till Saturday in the wake of the cash crunch. The company requires Rs 130 crore to disburse as loans every day but limited cash availability means this disbursal is not possible, Chief Executive Officer and Managing Director Chandrashekhar Ghosh told BloombergQuint.

Cash is not available (with us) to send to the ground level. We need Rs 130 crore in a day to disburse to people. Even if people take loans, they won’t be able to withdraw cash so there’s no point. They will end up paying interest on loans though they can’t use the money.
Chandrashekhar Ghosh, CEO & MD, Bandhan Financial Services

Ghosh, however, said that collections have not been affected so far and added that the move to suspend disbursements temporarily was prompted by the company’s client base which consists of small traders and businesses.

“Many of our borrowers are small traders who want small denomination currency notes and they are not likely to take Rs 2,000 notes,” Ghosh added.

The currency shock is hitting the sector at a time of high growth. The Indian microfinance industry saw a 52 percent compounded annual growth in assets under management between financial years 2012-13 and 2014-15, brokerage firm Religare said in a report published last year. In 2015-16, the sector saw a growth of 60 percent, according to a September report by Sa-Dhan, a self-regulatory body for the microfinance sector.

MFIs recovered to post an impressive 50 percent+ CAGR over FY13-FY15 that raised total AUMs from Rs 17,400 crore to Rs 40,000 crore in FY15. Branch network has grown at a brisk clip of 20 percent in the last two years and aggregate MFI employee count has risen by 13 percent year-on-year in FY14 and 20 percent year-on-year in FY15.
Religare Capital Markets Report

Trouble Ahead?

Underneath that rapid growth, there could be a crisis brewing in the industry as a fight for market share could lead to weakening of credit appraisal standards, the report said. Microfinance loans are not as fail-safe as perceived by the industry and political or economical decisions can impact repayment trends heavily, it concluded.

The additional burden of demonetisation may lead to short-term challenges in collection and disbursement.

Over the last week, collections across the sector have dropped to around one-third of the usual level, said Alok Prasad, former chief of the Microfinance Institutions Network (MFIN). He, however, added that this is a “short-term operating problem” which should resolve itself as cash availability improves.

Collections have dropped quite dramatically. They are currently at 30-35 percent lower than normal levels. Those who disburse into accounts are less impacted, but most MFIs are still disbursing in cash. Those operating on pure cash basis are the worst hit.
Alok Prasad, Former CEO, Microfinance Institutions Network (MFIN)

Prasad also added that there is not enough clarity from the government on how regulated institutions such as MFIs should deal with the demonetisation situation. MFIN has sought clarifications from the Ministry of Finance as well as the Reserve Bank of India about accepting old Rs 500 and Rs 1,000 notes for the time being.

“For personal payments, the government has adequately clarified matters, but for institutions such as MFIs that has not happened yet,” he said.

Temporary Halt

Those views were echoed by Ratna Vishwanathan, the current head of MFIN. who said that some MFIs have stopped collections temporarily for this week keeping in mind the cash flow position of their customers and the industry body is urging more members to do the same.

“The main problem is that there’s still not enough cash in the system for people to repay their loans on time so we are asking our MFI members to allow people to defer payments temporarily since payments are happening in a staggered fashion.”

The MFIN is also trying to get the finance ministry and the RBI to treat microfinance institutions on par with banks, Vishwanathan added.

“We are trying to talk to the ministry and asking them to treat us on par with banks and allow MFIs to accept older notes because our clients are such that they don’t have access to the banking system so they are probably not able to replace their notes,” Vishwanathan said.

Long-Term Impact

There are also fears that the situation may not improve considerably even after the impact of demonetisation starts to taper, said Praseeda Kunam, the promoter and chief executive officer of Samhita Microfinance. The MFI services more than one lakh loan borrowers with total disbursements of Rs 759 crore up to October 31, 2016.

Most MFIs have postponed their collections by a week. Disbursements are not happening because of the withdrawal limit placed by the government. You can’t collect money in Rs 500 and Rs 1,000 notes anymore. Some MFIs have given a sort of moratorium. Rs 24,000 a week cash withdrawal limit is not practical enough for disbursements to happen.
Praseeda Kunam, Promoter & CEO, Samhita Microfinance

Kunam added that her organisation is not as badly hit because it functions as a business correspondent for banks which allows them to accept old currency notes. But that also means additional paperwork since collecting agents need to maintain a detailed database of old notes including the names, addresses and the number of old notes provided by a borrower, she said.

The impact may extend beyond the practical issue of lack of cash.

“People don’t have money for their domestic needs or household expenses so they may not pay on time. Most microfinance loans go out to traders and since businesses are struggling, their repayments could be delayed too. This could have a long-term impact on the repayment capacity of borrowers as well.”

Prasad, however, disagreed. It’s unlikely that incomes of borrowers will be get hit over the medium term, even if their core activities are cash flow driven, he said.

At some level, the microfinance industry is paying for its own lax attitude towards routing loan disbursements and repayments through bank accounts and connecting their clients to the formal banking system, he pointed out.

The industry made a commitment to work with banks towards opening of Jan Dhan accounts for all their customers as a part of the financial inclusion drive of the Government. But the industry didn’t put the required energy to make that happen. In some measure, they are facing the consequences of that relative slowness towards going ‘cashless’. If that had been done, an overwhelming majority of clients would have been operating through a bank account only, today.
Alok Prasad, Former CEO, Microfinance Institutions Network