The Next Debt Crisis: Small Borrowers’ Big Defaults - CRIF Insights

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 lowincome 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.

Source: ET PRIME