The Resilience of Indian Microfinance: Why the Sector Has Successfully Navigated the COVID-19 Pandemic
While India’s microfinance sector has established itself as an effective model for financial inclusion, its sustainability has been tested time and again, especially in recent years. Over just the past decade, the sector has weathered the Andhra Pradesh crisis of 2010, the government’s demonetization drive of 2016 and the Non-Banking Financial Company (NBFC) meltdown of 2018.
When a crisis hits the financial system or economy at large, the microfinance sector is usually among the worst impacted, since it caters to the most economically vulnerable segments of the country. Nevertheless, the sector has survived these tests and grown to become stronger after each crisis, on the back of the lessons it has learned. These and other learnings have come in handy during the COVID-19 pandemic that has ravaged the country, along with so much of the world.
The Impact of the COVID-19 Pandemic on Indian Microfinance
In 2020, the lockdowns necessitated by the spread of COVID-19 brought almost every business to a halt, except essential services. The worst affected were enterprises with little or no reserves and high liquidity turnover operations, which was the case for typical micro and small businesses. This, in turn, adversely impacted their lenders: Prior to the lockdowns, many microfinance institutions (MFIs) still depended on physical interactions with customers, and door-step collections and disbursements. Their liquidity framework also depended heavily on steady cashflows — i.e., a stream of loan repayments from customers for upstream payments to banks and financial institutions from whom they had borrowed. When these MFIs faced a shutdown in collections and disbursements due to restrictions on mobility in the early months of the pandemic, the effect was devastating. By May 2020, nearly 98% of their accounts were under moratorium, confirming that the inflow of funds from these borrowers would not be forthcoming for the next three months. As they were already under pressure from their financiers to meet their obligations, these MFIs were crushed under liquidity issues.
Yet as 2020 progressed, the sector proved its resilience once again. By early 2021, despite the ongoing crisis, Indian microfinance providers were meeting the financial needs of 60 million unique customers, spread across 620 districts in 28 states and eight Union Territories. As a whole, the industry has a portfolio size of Rs 2.32 trillion, and despite the pandemic, some agile MFIs have reported 90%+ collection efficiency, while others have posted a sterling growth in customer acquisition.
As with previous crises, there are lessons to learn from the sector’s success in navigating the still-unfolding COVID-19 pandemic. Below, we’ll explore some of the characteristics of MFIs that have weathered the crisis successfully, and some effective measures Indian MFIs and policymakers have taken to address these historic challenges.
Policy Support and Austerity in Operations
To help MFIs address their liquidity issues, the central government offered them loans through its financial arms — the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the Reserve Bank of India’s Targeted Long-Term Repo Operations. In addition, the government acknowledged the role credit plays in the livelihoods of low-income households by including NBFC-MFIs in the essential services category. At the regulatory level, this allowed them to operate — albeit with very limited staff.
Focusing on Customer Needs
While MFIs quickly transitioned to remote and safe working environments for their employees, they were also conscious of their customers’ wellbeing. They adhered to the industry code of conduct set by their own Self-Regulatory Organisations (entities with the power to create and enforce industry standards) requiring fair interaction, suitability, transparency and addressing customer grievances. Many MFI customers were offered the opportunity to take advantage of the moratorium on loan repayments. And wherever necessary, MFIs worked to create awareness about the implications of the moratorium on interest/repayments, so that customers could make informed decisions.
The Relevance of Financial Strength
Large MFIs with strong, stable financial backups, in the form of lines of credit or capital commitments from financial institutions or private equity investors, were much less impacted by the pandemic than small and mid-sized MFIs, which struggled to access debt in a risk-averse market. The latter were squashed between their own commitments to their creditors and the lack of forthcoming collections on their loans to customers, until repayments started to trickle in after the lockdown was lifted in May 2020.
Accelerating the Move to Digitalisation While Maintaining Human Contact
MFIs that have a strong “phygital” (physical + digital) connection with their clients also had an advantage in navigating the crisis. They were able to find solutions that were tailored to the unique situations of their clients, for instance, by mapping repayment to cashflows, enabling them to get through the peak of the pandemic-led disruption. At the same time, digital disbursements and collections enabled these MFIs to continue to interact with their clients on an as-needed basis, even during the lockdown. Across the sector, MFIs’ ability to adopt a phygital approach at a low cost relative to their global peers has been key to their resilience — while also contributing to the broader recovery. Driven by fintech, Indian MFIs are leveraging advances in technology to ensure transparency, data security, and privacy and affordability for their customers. Alongside these digital efforts, the lower cost of educated employees in India makes it possible for MFIs to maintain “feet on the street,” enabling them to connect with customers inexpensively in person — while also providing employment opportunities and socio-economic growth to the communities they serve.
Other Reasons for Microfinance’s Resilience
A combination of various other factors also helped India’s microfinance sector bounce back from the challenges of 2020. These include the fact that the rural customers served by the sector are among the most resilient parts of the economy, as evidenced by the fact that default rates among microfinance borrowers are even lower than among many corporate borrowers. Additionally, their businesses have close to zero gestation periods between the time a loan is issued and the start of the business activities it supports, enabling them to resume their work faster.
Thanks to the above factors, microfinance in India is still standing strong, supporting the most vulnerable segments of society during these difficult times. In light of the current situation, as the country deals with a tragic resurgence of the virus, the sector will continue to depend on its resilient foundations, built in response to challenges it has learned to overcome through decades of hard experience.
Sudip Bandyopadhyay is Group Chairman at Inditrade Group of Companies.
Photo courtesy of Nicolas Mirguet.