'Cashless' MFIs

Demonetisation has set back microfinance institutions

There have been conflicting views and data pointers on how demonetisation has affected economic activity in the country, but one possible way of gauging the impact on those who are at the bottom of the pyramid is to look at what has happened to the microfinance sector. Microfinance institutions (MFIs) provide small unsecured loans to economically active yet poor women. The key to survival and growth of MFIs lies in inculcating among borrowers the discipline of regular repayment of instalments. However, note ban has disrupted this process: From November till mid-December, collection efficiency fell to 85 per cent. This is a significant reduction since, historically, the recovery rate in the sector has been around 99 per cent — a USP of this sector. MFIs have been encouraging their customers to open bank accounts, with the process being eased by the provisions of the Jan Dhan Yojana and loans being increasingly disbursed in a “cashless” manner. Yet repayment still takes place mostly in cash. MFIs do over 85 per cent of their business in cash and that is what has made them more vulnerable to note ban. Typically, a borrower will keep saving and setting aside small amounts of cash through the month in order to have the instalment ready for repayment by the monthly due date. The possible threat of losing one’s savings as well as the resulting wastage of time and earning, while queueing up outside a bank, has adversely affected MFI borrowers as well.

What is worse for MFIs, though, is the impact of the Reserve Bank of India, in November, allowing lenders a 60-day relaxation in classifying a defaulting loan as sub-standard in order to help them tide over the disruption. This has created some confusion among borrowers with motivated local operatives saying the government has allowed relaxation on repayment. Thus, some borrowers have used the excuse of cash shortage not to repay on time. MFIs, on their part, have been trying to explain to borrowers that it is in the borrowers’ own interest to repay on time otherwise their credit rating will suffer. Typically, regions with an already poor repayment record have been more badly affected, the laggard being northern India, dragged down by western Uttar Pradesh. Conversely, the south and east, followed by the west, have done much better. In a similar vein, better-run MFIs have been less badly affected.

The sector is hopeful that the setback will be temporary, but there is no doubt that financial performance in the current year will be affected. This is all the more true because disbursal of new loans has slowed down as most of these are funded by repayments. After the first setback, disbursals fell sharply in early December because of the fall in November’s recovery. Inevitably, parallels are being drawn with the Andhra Pradesh crisis of 2010, the most severe faced by the sector. However, that crisis was localised, whereas the impact of demonetisation is being felt across the country. The setback to MFIs indicates that it is not the destitute (they remain where they were) but the aspirational among the poor who have been affected most. It is ironic that this should happen when the justification of the move to demonetise was to help the poor.