After banks and non-banking finance companies (NBFCs), the microfinance sector has now reached out to the Reserve Bank of India (RBI), seeking additional support to combat the challenges arising out of the second COVID wave.
SaDhan, India’s largest and oldest association of the microfinance sector, has written a letter to the RBI governor Shaktikanta Das, highlighting the challenges faced by both MFIs and their borrowers. CNBC-TV18 has reviewed a copy of this letter.
"The microfinance sector and its clients had shown a lot of resilience which was seen in collection efficiency reaching around 90+ percent in most of the States by March 2021. However, due to the sudden surge in COVID cases from April 2021, the microfinance sector and its clients have been facing a lot of challenges," the letter read.
While the MFIs thanked the RBI for the Rs 10,000 crore Special Long Term Repo Operation of Rs 10,000 crore announced on May 5 for on-lending by small finance banks to the sector, it said more support was needed.
SaDhan pointed out in its letter, "Compared to the 1st wave, presently we see a relatively larger proportion of MFI clients and staff being infected in the 2nd wave even in rural pockets. We expect the economic impact on borrowers to worsen further as the number of states announcing complete lockdowns have been increasing manifold. This may affect the microfinance clients and the sector adversely unless adequate and appropriate support systems are provided by the Reserve Bank."
Among several support measures proposed, the MFIs have requested RBI to introduce an Emergency Credit Line of up to 25 percent of their outstanding with their lending banks. Through this, SaDhan said, the MFIs would be able to mobilize Rs 15,000 crore, which would help in the immediate flow of funds to MFIs from banks.
Secondly, it also sought a special liquidity facility of at least Rs 15,000 crore through NABARD and SIDBI to MFIs. It proposed that RBI direct at least 40 percent of funds under this may be earmarked for MFIs with a portfolio below Rs 500 crore.
Third, it requested that RBI push more lending from banks to the microfinance sector under the on-tap TLTRO. "If the sector could be supported with the amount of Rs 25,000 crore under this funding window, it would immensely help MFIs in coping their liquidity and funding challenges. During TLTRO 2.0 we had observed that even large MFIs with good ratings were not able to receive any support under the funding window," it said.
Fourth, it asked RBI to consider introducing a Partial Credit Guarantee Scheme 3.0 to help boost the confidence of banks in the present uncertain times to lend to the microfinance sector especially small and mid-size MFIs with relatively lower ratings.
It also said that RBI can allow banks and DFIs to assess the cash flow situation of MFIs and accordingly provide them moratorium or restructuring support for up to 6 months to 1 year. "During the 1st wave of COVID, only 40 percent of lenders provided moratorium to MFIs which led to the severe liquidity crunch for MFIs," SaDhan said in its letter.
Among other relief measures, it also sought relaxation in provisioning norms for MFIs for bad loans to facilitate easier liquidity.
"The present base rate linked interest rate cap may be replaced with margin cap based interest rate with an overall cap of 26 percent or inclusion of base rate of SFBs in the overall base rate calculation," the institution proposed.
MFIs have also requested RBI to re-iterate to state governments the ill-effects of loan waivers, and their implications on credit discipline and flow of funds to the marginalized sections.
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The RBI had recently held a meeting with non-banking financial company-micro finance institutions (NBFC-MFIs) earlier in May to take stock of the industry’s position. The regulator discussed the outlook on potential stress on their balance sheets in the backdrop of the second wave of the COVID-19 pandemic during the meeting and also sought information on whether they were able to meet their funding requirements. The meeting also took stock of credit flows to borrowers of NBFC-MFIs. Following this meeting, and a series of other meetings held with banks and NBFCs, the RBI had announced a series of relief measures on May 5.
MFIs, as the lenders to the most vulnerable section of borrowers, have been one of the worst-hit sectors due to the pandemic. According to Acuité, given the wider coverage of the virus across semi-urban and rural areas in this cycle, the risks of a sharper impact on the lives and livelihoods of the microfinance borrower are higher in the near term. Acuité expects 30-day delinquencies to increase at least by 30 percent by June 2021 even if the pandemic intensity starts to taper down from the middle of May and may more than double if there is no taper down off the pandemic intensity and the local lockdowns continue till the end of Q1FY22.
Similarly, India Ratings and Research said microfinance institutions would face a rise in softer delinquencies due to the second wave. While microfinance loans are yet to normalise their collection to pre-COVID levels, urban microfinance loans could be severely impacted and collection efficiency could moderate with the pandemic widening its spread in hinterlands and the consequent labour migration.