Ganesh Chandra Modak, the MD of Grameen Shakti Microfinance, laments

about the “eroding repayment habit” among low-income borrowers across

the country. Modak, a micro-credit veteran, blames banks and NBFCs for
starting this trend.

While the spread of banks and NBFCs into smaller towns and villages is
aiding ‘financial inclusion’, it has tripped the operational matrices of mid-
and small-sized microfinance institutions (MFIs). Conventional lenders like
Modak are befuddled when daily-wage earners - whose monthly earnings
may not be more than Rs 15,000 – approach them for loans as high as Rs
3 lakh.

“I turn them down, saying you’re taking too much debt… they simply walk
off to the nearest bank or NBFC branch to get that money. It has become
extremely difficult to operate in such conditions,” he says.

The deep dive of large institutional lenders to touch the ‘bottom of the
pyramid’ has thrown up undesirable outcomes for MFIs – mainly in the form
of a significant drop in ‘collection rates’, marginal hike in delinquencies and
a palpable rise in rural indebtedness. Equifax, a credit bureau, estimates
that out of 6.8 crore unique live MFI borrowers, close 1.40 crore borrowers
have taken retail loans (from banks or NBFCs), over and above their
borrowings from MFIs. These retail loans are mostly granted to buy two-
wheelers, home appliances or for home refurbishment purposes, says the
retail banking head of a private sector bank.

As of November 2019, MFIs have an outstanding loan book of Rs 2.08 lakh

crore spread across 10.5 crore borrowers. Average MFI loan ticket-size has
grown Rs 29,555 in 2018 to Rs 33,515 a year later. Tamil Nadu, Karnataka,
West Bengal and Bihar top the list of states with maximum disbursals. A
rapidly growing loan book invariably leads to higher delinquencies. As per
data from Crif Highmark, loans worth Rs 9,210 crore have not been repaid
to MFIs even after 180 days past the due date. That’s nearly 5% of the MFI
portfolio.

DELINQUENT BEHAVIOUR
Countrywide delinquency rates hover around 1.1 and 1.2% for loans not
paid 1-to-180 days past due (DPD). If you go state-wise, all of North East
shows a deterioration in portfolio with delinquencies (loans that are 90 days
past due date) ranging between 0.2% and 0.6%. Odisha leads the defaults
tally at 1.39% among all states.
“Overall industry-level delinquency numbers look stable, barring a few blips
in certain pockets,” says Wilfred Sigler, a director at Crif Highmark.

“Normally, MFIs face relatively less credit risk; they manage to recoup the
money they lend. Problem only starts when they get affected by external
factors,” he adds.
Most MFIs expect headline industry numbers to have worsened in the third
quarter of this fiscal – mainly on account of the CAA/NRC protests. Data for
this period is awaited. Assam, which witnessed a slew of anti-CAA protests
in December, could be amongst the worst-affected. The state had also bore
the brunt of an anti-MFI agitation started by an activist group. A recent
sector report by ICICI Securities states that “collection efficiency” in Assam
may drop to levels that mirrored the ‘post-demonetization phase’ at 70 –
80%, with 5 to 8% loan write-offs.

“External disturbances erodes discipline among low-income borrowers… It

takes some time to get them all back in the fold. We’re in touch with all
people concerned (in Assam),” assures Manoj Nambiar, MD of Arohan
Financial Services and chairman of industry body Microfinance Institutions
Network (MFIN).

“Local activists and some politicians created problems for MFIs in Assam…
CAA protests, bandhs and curfews also affected our collections there. But
the situation is fast changing… Borrowers are coming back to us and
repaying their missed instalments now,” Nambiar adds.

COLLECTIONS GONE AWRY

Not so long ago, MFIs boasted of collection rates as high as 99.5%; but
that is not the case anymore. These days most micro-lenders are quite
contented getting back at least 90% of the loaned funds. A devastating
cyclone or sustained political interference is enough to land MFIs in credit
losses.
“MFIs will have to tighten their risk management practices,” says Baskar
Babu, MD & CEO of Suryoday Small Finance Bank.

“Overall delinquencies have gone up for most MFIs… they’ll have to newer,
under-penetrated regions to grow healthily. They’ll have to go slow on
lending in micro-markets that show signs of indebtedness,” he adds.

Suryoday SFB, an MFI in its earlier avatar, runs a legacy lending book
comprising mostly low-income earners. Just 20% of its customer base hail
from non-MFI backgrounds. Suryoday peddles longer-tenured loans to its
customers.

“Our loans are structured as per borrowers’ cash flows, and are spread out
for a longer tenure to lessen the EMI burden,” Babu adds.

Financial flexibility and capital raising options give banks and large-sized
NBFCs an unbeatable edge over MFIs.

INSTITUTIONAL CONCENTRATION
The large presence of cash-rich banks (especially small finance banks or
SFBs) and NBFCs, alongside MFIs, has created “hot zones” in several
traditional micro-credit markets. Take the case of Bihar, UP and
Maharashtra, which have 80 to 100 lenders scurrying around for the same
pie of customer base. Other MFI-populated states such as Tamil Nadu,
Odisha, Karnataka, Madhya Pradesh, Rajasthan, Jharkhand and West
Bengal have 60 – 80 banks and NBFCs canvassing almost similar set of
clients.

“There’s a risk of institutional concentration… MFIs have will have to

diversify further into the hinterlands to stay afloat,” says Manu Sehgal, VP-
strategy, Equifax.
“Almost 80% of MFIs are focused only on 265 districts across the country,”
he adds.

To stay ahead of competition, several MFIs are now focusing on adding

more new-to-credit (NTC) customers. These are first-time borrowers with
no credit history – making them less attractive for larger lenders. Roughly
25 – 28% of new customers acquired by MFIs in the recent months, are
first-time borrowers, industry experts opine.

“India has close to 90 million families that has no access to banking

funds… Banks do not serve these people. This segment is good enough for
MFIs to achieve 30 – 35% growth every year,” says Udaya Kumar Hebbar,
MD-CEO of Credit Access Grameen.

“MFIs should not remain in tier 2-3 cities; they should go well beyond that -
to taluks and tehsils now,” he adds.

CODE GONE COLD

To curb the aggressive expansion strategies of large lenders, industry body
MFIN recently floated a ‘code for responsible lending’ (CRL) for all lenders,
including banks and NBFCs. The code proposes to limit the loan size to Rs
1 lakh per MFI borrower – sourced from a maximum of three borrowers.
But for now, CRL is seen as a “toothless overlay” mimicking an RBI rule
which restricts MFIs from lending more than Rs 1.25 lakh per borrower.
This diktat is not applicable to banks or NBFCs. “Only four small banks
have signed the code till now… Other large lenders, including SFBs, have
refused to be a part of it. They see the code as rigid and restrictive,” says
the head of a mid-sized MFI.

One thing is clear: the big boys will continue write big loan cheques
favouring low-income borrowers. MFIs will have to steer clear - or dive
deeper - for there is a good chance they may just get swamped over.