Worst is over but liquidity support remains a key concern, say MFI chiefs

Industry leaders at the Business Standard BFSI Insight Summit said that while collections and rural affordability are improving, liquidity support is critical to sustain the sector's ongoing recovery

While the microfinance sector appears to be recovering from its latest stress cycle, liquidity support will be crucial to sustain the return path, industry leaders said at the Business Standard BFSI Insight Summit.

 

Liquidity challenges remain despite recovery

At a panel titled Is the worst over for Microfinance Institutions in the current cycle?, participants agreed that though collections and borrower affordability have begun improving, the flow of funds to non-bank lenders remains tight.

 

“Liquidity is the key. If it doesn’t step in, the momentum that has been gained can go away,” cautioned Alok Misra, chief executive officer (CEO) of the Microfinance Industry Network (MFIN), the self-regulatory organisation (SRO) for microfinance institutions (MFIs). He added that discussions with the government are underway to create a guarantee mechanism that will boost sector confidence.

 

 

“We have suggested the government institute a larger guarantee fund of ₹20,000 crore, which will kick-start the virtuous cycle of funding and give confidence to the banks. If that happens, things will get better,” Misra said, adding that as far as new portfolios are concerned, “the worst is over.”

 

Tight funding, banks cautious

Liquidity constraints have been a major challenge for MFIs, particularly during the current stress cycle, which panellists said was triggered by multiple macroeconomic disruptions such as floods and elections.

 

“Whenever there is a crisis, liquidity starts drying up. Lenders get cold feet. But our raw material is only this. We don’t have the liberty to do deposits,” said HP Singh, chairman and managing director of Satin Creditcare Network. “Look at how banks are placed right now. Since they have an option, they have started reducing their microfinance portfolios,” he added.

 

Karthik Srinivasan, group head of financial sector ratings at ICRA, said banks’ caution is largely cyclical. “Banks can do anything. Today, they think there is a stretch in this portfolio, so they hold themselves. Maybe once the sector stabilises, banks will come back,” he said.

 

Early signs of stabilisation

Despite the funding squeeze, there are early signs of stabilisation. “We are already seeing the turn of the cycle. Since inflation has gone down and crops are good, the affordability of rural households has improved. As disbursement and cash flow improve, collections will also improve,” said Sadaf Sayeed, CEO of Muthoot Microfin.

 

Srinivasan echoed the view, saying: “We believe the worst is over. But are we going to be close to the highs is still some time away. In all likelihood, growth in the current year will be in single digits.”

 

Asset trends vary across institutions

Misra further noted that while there has been a degrowth in the current quarter in assets under management (AUM), the situation differs across players. “Some mid-sized players might have seen a sharp decline, while others like Muthoot may not have witnessed any dip. It has accentuated in a downturn cycle. Individual differences will accentuate until liquidity comes in. If it comes in, we will be in a situation where the rising tide is lifting all boats,” he said.