India’s microfinance sector hit by surge in defaults in pandemic


A man sits on a bicycle rickshaw in a wholesale market after authorities relaxed lockdown restrictions imposed to slow the spread of coronavirus disease (COVID-19), in old Delhi, in India, June 8, 2021. REUTERS / Adnan Abidi / File Photo

MUMBAI, July 14 (Reuters) – Small loan specialists in India who typically cater to people without bank accounts face an increase in pandemic-related defaults that could force some of them to close their doors , warn industry experts.

30-day delinquent loans are expected to reach 14-16% of all so-called microfinance loans in the aftermath of the second wave of COVID-19 that swept through India, said Krishnan Sitaraman, senior director of the rating agency CRISIL.

That’s above 6-7% in March, before the second wave took hold, and also above the 11.7% reached in March 2017 after India’s demonetization campaign – an attempt to boost digital transactions and crack down on unreported money which has also hit microfinance lenders hard.

“Older loans that were taken out in 2019 or early 2020 have a higher risk of default and they represent around 60-65% of lenders’ loan portfolio,” said Harsh Shrivastava, former director of Microfinance Institutions Network, an association representing the sector in India.

Rahul Johri, president of Vector Finance, a microfinance firm that provides loans to small businesses, said many of the support measures put in place by the government have only helped large institutions, while smaller players have had difficulty.

“It has become a problem of existence for several small and medium-sized microfinance institutions, as business has been badly affected and collections are declining,” said Johri.

The efficiency of loan collection across the entire loan portfolio has fallen to around 70% from a peak of almost 95% in March, analysts said, indicating a potential build-up of stress.

The gross loan portfolio of Indian microfinance lenders stood at 2.6 trillion rupees ($ 35 billion) as of March 31, according to CRISIL.


Despite the near-term challenges, some remain bullish on the sector and expect it to rebound if a predicted third wave of COVID-19 infections in India is not so bad.

“About 55% of the market is still untapped, which means there are huge market opportunities… so things will get better soon,” Johri said.

But for now, many small microfinance companies are struggling.

These companies, whose loan portfolios are typically less than 5 billion rupees ($ 67 million), have also seen their cost of funds rise by 100 to 150 basis points as banks and businesses have become less willing to pay. lend, said an industry executive. speaking on condition of anonymity.

Some microfinance companies have had to cut back on their capital raising plans due to mixed interest from investors, said executives of two companies seeking to raise funds.

As smaller players falter, some have stopped paying salaries or employee incentives in recent months, they added, asking not to be identified due to the sensitivity of the issue.

“We are now only receiving basic salaries, the incentives have completely ceased in recent months as collections are declining,” said a debt collector at a microfinance lender in eastern India.

Reporting by Nupur Anand Additional reporting by Jatindra Dash Editing by Mark Potter

Our Standards: Thomson Reuters Trust Principles.

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