Microfinance business may attract closer scrutiny on the way it is done

Is all well among microfinance institutions (MFIs)? Just about everybody will tell you that collections are back on track. But the latest Micro-lend report by CRIF High Mark notes the portfolio-at-risk (PAR) in the 30 days past the due date bucket worsened to 15.4 per cent in June 2021 from 9.7 per cent in March 2021. In the case of PAR 90 days past the due date, it improved to 3.3 per cent from 4.4 per cent, but PAR 180s day past the due date rose to 7.1 per cent from 4.9 per cent. Then, you have the variance on collections: Many MFIs have stated that the second lockdown didn’t have much of an impact; and claim to have near, or over 100 per cent collection efficiency. The outstanding microfinance portfolio at Rs 236.1K crore as of June 2021 marks a seven per cent quarter-on-quarter de-growth and less than a per cent in year-on-year growth. This last data point could mean either MFIs went slow on vending money (as a prudent measure), or that customer indebtedness soared and they were not in a position to raise more loans. Or, it was a combination of both.

Of late, governance and hygiene issues, too, have cropped up. Shalabh Saxena and Ashish Damani of Bharat Financial Inclusion (BFIL) — managing director (MD) and chief executive officer (CEO); and executive director (ED) and chief financial officer, respectively — resigned last month. IndusInd Bank, of which BFIL is a wholly-owned arm, has appointed an audit firm to conduct a review to ascertain the veracity of the anonymous complaints on its microfinance business practices. Then you have Padmaja Reddy, Spandana Sphoorty Financials’ former MD, calling into question the very process of arriving at the remuneration for her successor; that it is exorbitant even as the microfinance business is yet to breathe easy in the aftermath of the pandemic.

And you read it here first now: The MFI business may attract the closer scrutiny of the Reserve Bank of India (RBI) — across lending platforms, be it MFIs which are non-banking financial companies (NBFCs), or those within the portals of banks. And the RBI’s December edition of the Financial Stability Report is in the works.

Whose numbers are they anyway?

A candid Udaya Kumar Hebbar, MD and CEO of CreditAccess Grameen, says: “There are no standard disclosures on collections. There are different definitions like collections excluding, or including arrears; collections from regular paying customers; collections excluding bad-load accounts. When MFIs say collections have reverted to their pre-pandemic levels, they are largely referring to paying customers and excluding delinquent or non-performing assets (NPAs).” 

He adds: “Ideally, collections excluding the arrears, calculated on the entire customer base (including NPAs), is the right way of looking at the collection efficiency.”

He’s seconded by Manoj Kumar Nambiar, MD at Arohan Financial Service: “I agree that some of the terms that the industry uses have to be defined properly for a proper like-to-like comparison. You can have more than 100 per cent collection efficiency if, along with what is current, you include past arrears collection for the period. So, it all depends on how the numerator and denominator are taken.”

But P Satish, executive director of Sa-Dhan, has a diametrically opposite view: “There is no issue with regard to non-uniformity in standards in the data. Usually the collection figures pertain to the ongoing or the current period whereas the PAR data is for the quarter ended previously. Current collections are reflected in the next quarter data, at the same time, the delinquency figures of the previous quarters also get reflected in the next quarter.” He explains that when the moratorium was extended to clients last year, there was less disbursement, no collection, low indebtedness and low PAR. The sector  was affected in Q1 of FY21 due to the second wave of the pandemic, which is reflected in PAR levels of the quarter.

Simply put, as things stand, MFIs’ financials can be called into question. Of course, this is not to suggest that there is mala fide. Just that, the way financials are collated is open to interpretation.

The clamour for a revisit

The RBI and MFIs are now in discussions over the fixed obligation to income ratio rather than the number of lenders. It is pointed out that for this to succeed, all lenders have to report borrowers’ data to credit bureaus (CBs) uniformly and in a timely manner. The micro-finance institutions network (MFIN) has nudged NBFC-MFIs towards daily reporting, but banks still report to CBs on a monthly basis and NBFCs on a weekly basis. “This data asymmetry at the time of loan origination leaves data gaps as a borrower may have loans from other regulated entities (REs) which are not reported at the time of loan origination,” says Alok Misra, CEO and director at MFIN.

But is the industry on the same page? For it brings the role of a self regulatory organisation (SRO) into play — it could become a contentious issue.

As of today, MFIN represents 90 per cent of NBFC-MFIs and 70 per cent of the universe, including banks and NBFCs. The Y H Malegam committee in 2010 wrote that “Sa-Dhan is an association of community development finance institutions, which also includes MFIs within its membership”, and MFIN; and SRO recognition for NBFC-MFIs was also given to Sa-Dhan in 2016. Should MFIN get primacy?

There is a view that a common SRO across lenders is not feasible as each set of institutions has its own sector organisations like the Indian Banks’ Association (for banks), the Finance Industry Development Council (for NBFCs) which act as quasi-SROs though not formally designated as such.  

When the RBI came forward with SRO for NBFC-MFIs, it was envisaged that there could be more than one SRO. As NBFC-MFIs have only a 35 per cent share of the microfinance market, Sa-Dhan had got together to help bring about a “Code of Responsible Lending” that was to bring all lender forms (non NBFC-MFIs as well) on a common platform — on a voluntary basis. “We feel there can be several SROs as now the sector has a diverse set of players handling 60-70 million clients and operating in nearly 650 districts. Uniformity and standards are enforced by the regulator (the RBI), but voluntary codes of conduct and best practices can be standardised through regular coordination amongst the SROs,” adds Satish.

Whichever way you look at MFIs, it will not be business as usual —in more ways than one.