The Indian microfinance industry, an Rs 3.5 trillion industry and the second largest after mortgages, caters to the bottom of the consumer segment pyramid in the country by providing income-generating loans. The industry, which is attempting to bridge the gap between Bharat & India, has provided the convenience of doorstep financing - a major step towards financial inclusion.
Given this background, how is the Industry dealing with the pandemic? How are things playing out for the ~65 million customers who utilize the loans by microfinance lenders? In a lockdown or a pandemic situation, how are they coping with the challenging environment?
The first wave and the subsequent lockdown took everyone by surprise. The customers were not used to a long period of economic inactivity, the companies were learning every day on how to deal with the changing world.
How did the companies respond to the situation?
• Customer Connect -
the essence of a retail Industry. Stay in touch with the customer, understand their economic condition and help if you can but never make the customer feel left out. This was done very well by the Industry in totality.
• Providing short-term liquidity - The next step of course was to get the customer’s economic activity back on track. This was done by providing short-term liquidity so that they could resume their business cycle.
• Assurance of Support & Transparency - Never ask for repayment. Give a reassurance on continued commitment with repayments to happen in parallel to normalization of economic cycle of the customer. The customer’s confidence was restored, and the repayment cycles were back by end of the year (almost) back to pre-covid levels.
Regulatory and government intervention helped in easing the scenario as well. Steps like a moratorium on loans by RBI, announcement of the ECLGS scheme by the government of India helped the sector tide over the most difficult phase.
The microfinance industry on its part took these schemes to the grass roots thus ensuring a successful culmination of well-meaning programs. While the first and second quarter GDP numbers (at constant prices) looked dismal with contraction of 24.4 percent and 7.3 percent respectively, the agriculture sector continued to shine a bright ray of hope with quarterly growth rates of 3.3 percent and 3 percent respectively. This helped as the concentration of our customers are in rural and semi-urban markets.
While the economy started turning a corner in H2FY21, so did the industry’s outlook and this is evident through the increase in disbursals to ~60,000 crores in Q3FY21, an almost 100 percent jump over the previous quarter. The industry was also able to improve its collection efficiency from less than 75 percent by end of Q1 to around 95 percent by end of Q4FY21 which given the trying times was a very good outcome. Steps taken by all the key stakeholders worked in tandem - we did manage the first wave well.
The second wave & the associated disruption in less than a year was, to put it mildly, not desirable. The spread has been secular - rural areas and the hinterland have probably been more impacted. Microfinance is a high-touch business with a large people interface. Hence despite all precautions, the employees or their families have been impacted this time around. The first wave taught us to manage the customers, the second is teaching us to balance our employees & their families, our customers & their families & most importantly their businesses since cash flows are under stress. That is the challenge we are dealing with presently.
The macro-environment is projected to be challenging with many agencies cutting the GDP growth forecast for FY22 to around 9 percent - 10 percent from about 11 percent - 14 percent forecast earlier. While the impact of this wave will leave a deep scar on many of us, there appears to be some light if we go by the recent decline in number of reported cases.
The lessons learned along with a sharp focus on healthcare infrastructure and the rapid rollout of vaccinations would hasten the normalization. If the trend in the decline of cases continues (as we are witnessing it already) then we could expect the economy to turn around quickly.
Meanwhile, we will continue to stay focused and concentrate on -
• Well-being, safety & security of our employees
• Working with our customers on regularizing their business cycles & most importantly
• Continuing to increase our footprint across India
Microfinance companies have balanced risk with credit flows and quality very well in the past. The industry has a long history of facing challenges – be it natural calamities, political or economic disruptions. Through innovation, use of technology and sheer perseverance the industry has overcome its challenges in the past. With penetration levels still <40 percent of the addressable market, the potential of serving the largely underbanked population is immense in delivering banking services & associated financial products.
The Industry has shown the highest resilience in adverse times. Small blips can never dent a fundamentally strong story!
The author, Shalabh Saxena, is MD and CEO at BFIL. The views expressed are personal