Category: Banking & Finance

Shobha Roy

The spurt in fresh infections following the second wave of Covid-19 pandemic and the lockdown being announced in several States mayimpact the collection efficiency of microfinance institutions.

Industry experts, however, feel it is still too premature to gauge the exact impact on loan growth and repayments, as there is still a lot of uncertainty around when the second wave will peak out.

According to Alok Misra, CEO and Director, MFIN (Microfinance Institutions Network), the first quarter is likely to be tepid as there is still uncertainty, but going by various mathematical and statistical predictions, the curve is likely to flatten out in end May or early June. Post that there could be a pick-up in business activity, given that there is a lot of pent-up demand.

“We need to understand that there is no national lockdown and, in all States, where mini containment or other restrictions have been announced, the governments have declared NBFC-MFIs as providers of essential services.

“Though there is stress in some rural pockets and business containment, most of them also work in production of essential goods and services and those are going on, and we are also seeing credit demand from customers,” he said.

And considering the last five quarters there is lot of pent-up demand, so that will come up by Q2 and Q3 of this fiscal.

“So, if the second wave dies down by end May/ early June and unless there is a third wave, which could then upset the apple cart, considering the last five quarters’ demand and given that there is need to build livelihoods, we should see a good demand and an improved business environment in Q2, Q3, and Q4 of the current fiscal,” Misra told BusinessLine.

Credit growth to pick up

The second wave is troublesome for the sector as a larger proportion of borrowers and employees have been affected by Covid; however, if it peaks by this month-end and starts tapering off and a larger proportion is vaccinated, then the effect of the pandemic on the sector will not be that significant.

However, if the pandemic persists for a longer time and vaccination drive falters, there could be issues for the sector, said P Satish, Executive Director of Sa-Dhan, an RBI-recognised self-regulatory organisation for MFIs.

On credit growth, he said: “ Loan growth was muted last year due to liquidity issues, not due to the lack of demand. Last year, only about 40 per cent of MFIs received moratorium from their lenders.

“So, the available funds were used up to meet repayment obligations rather than expand the credit flow.”

Satish observed that if liquidity is ensured by the RBI and government through appropriate measures by sensitising the banking sector and by giving necessary directions to NABARD and SIDBI and their subsidiaries, then the credit growth will be substantial this fiscal.

According to Shalabh Saxena, MD and CEO, BFIL (Bharat Financial Inclusion Ltd), given the overall operating environment and the fact that the basic demand in the economy is intact, the situation should return to normalcy very soon. Moreover, the lessons learnt last year will help the sector effectively plan for any emerging scenarios in future.

“We anticipate rural demand to remain healthy on the back of a normal monsoon. We are optimistic that the above-mentioned factors will translate into solid growth for BFIL, given our strong presence in Bharat,” he said.

Impact on collections

According to a recent report by ICRA, with the Covid-19 pandemic still not under control as reflected by the sharp increase in the rate of infections in some regions in the last one-and-a-half months, the risk perception for the microfinance industry remains high.

Though some States have classified the microfinance industry as an essential activity, the cash flows of borrowers may be affected due to the restrictions/ lockdowns, thereby affecting their repayment ability. Moreover, the risk of infections spreading faster in other regions and increased restrictions/ lockdowns will impact collections.

The sector’s collection efficiency is estimated to have stalled at 90-94 per cent in the past few months compared to the pre-pandemic level of 98-99 per cent.

“Rapidly rising Covid-19 infections for the last few weeks have put the country’s critical healthcare infrastructure under severe strain.

“Several States and Union Territories have either imposed lockdowns or have placed significant restrictions on people movement and gatherings to curb the spread of pandemic. This is creating disruptions in the economic activities and impacting the field operations of MFIs,” said Sachin Sachdeva, Vice-President and Sector Head, Financial Sector Ratings, ICRA, in the report.

Consequently, the industry is witnessing a reduction in collections and the recovery seen in Q4 FY21 is being challenged again.

ICRA estimates a sequential drop of 8-10 per cent in collections in April 2021 and it may dip further if infections continue to rise and more restrictions are imposed across locations.

A Crisil report suggests that while NBFC-MFIs were better prepared to deal with the situation – because of their experience with the lockdowns of last fiscal and by weathering other storms of the past – their ability to manage asset quality and maintain healthy collections would bear watching.

The fact that many of the larger MFIs have strengthened their capitalisation over time and are also maintaining higher liquidity levels will help support their efforts to manage the situation, it added.

RBI measures

The RBI move to recognise loans given by small finance banks to smaller NBFC-MFIs as priority sector lending will help ensure liquidity to the sector.

This apart, by allowing lenders the flexibility to restructure microfinance loans on a case-to-case basis, will also help provide relief to stressed clients.

“Seeing the severity of the situation, the RBI Governor has proactively met sector representatives and followed it up with possibly first steps – he mentioned in the beginning that the policy response will be calibrated, sequenced and well-timed.

“Liquidity is the key and I hope along with the April announcement of ₹50,000 crore support to All India Financial Institutions (AIFIs) and today’s measure will help the sector. We also expect that with changes in the evolving situation, the RBI will keep introducing newer relief measures,” said Misra.

MFIN will also keep engaging with the RBI on creating a systemic support for allocating a specific sub-total out of the overall liquidity support for the smaller NBFC-MFIs. It also hoped that the pricing issue would also be resolved soon.

Tweaking business model

While MFIs have been bringing in small and steady changes in their business model ever since the demonetisation days, the emphasis is likely to increase on low touch and cashless transactions moving forward, said Manoj Kumar Nambiar, Managing Director, Arohan Financial Services.

“Our customers have bank accounts but no banking habit and for that the neighbourhood kirana shops have to be enabled to facilitate transactions.

“The BC (business correspondent) model has to become more viable, and lenders will have to stop collecting repayments in cash. Eventually, it has to be that way though it may take some time,” he said.

According to Satish, since loans are non-collateralised, there is requirement of collateral substitute like joint liability. So, the JLG model will continue. There will, however, be improvisations in group meetings, loan processing methodologies and collection and repayment systems, where there is likely to be greater adoption of digital modes.

Life Insurance Corporation of India’s (LIC) holding in nearly 300 companies has come to all time low, a study by Primeinfobase.com revealed on Monday. However, value is at all-time high. Concurrently, holding of Mutual Fund (MF) in various companies also declined for fourth successive three-month periods.

The study comprises of 296 companies where LIC has holding of at least 1 per cent.

In these companies, the study said, LIC’s holding slipped to an all-time low of 3.66 per cent as on March 31 from 3.7 per cent as on December 31, 2020. “this was on account of profit booking by India’s largest institutional investor,” Pranav Haldea, Managing Director of PRIME Database Group said which hosts primeinfobase.com. The insurer held all-time high holding of of 5 per cent as on June 30, 2012.

However, value of the holding in rupee terms reached an all-time high of ₹7.24 lakh crore in quarter ending March 31, 2021. This shows an increase of 6.30 per cent over previous quarter. It may be noted that Sensex and Nifty rose by 3.70 and 5.10 per cent respectively during this period. LIC also continues to command a lion’s share of investments in equities by insurance companies (76 per cent share).

Holding of Insurance companies as a whole also declined to a 5-year low of 4.80 per cent as on March 31, 2021, down from 5 per cent as on December 31, 2020. However, in rupees value terms, it went up by 3.09 per cent from the previous quarter to an all-time high of Rs 9.48 lakh crores as on March 31, 2021.

MF investment, outflows

In order to analyse investment pattern of the mutual fund, the agency analysed shareholding patterns filed by 1,639 of the total 1679 companies listed on NSE (main board) for the quarter ending March 31, 2021. It found that holding of domestic Mutual Funds in companies listed on NSE also reduced to 7.23 per cent as on March 31 down from 7.42 per cent as on December 31, 2020. According to Haldea, holding of Mutual Funds has now declined for four consecutive quarters, after 24 quarters of continuous rise (from 2.81 per cent as on March 31, 2014,to 7.96 per cent as on March 31, 2021).

Net outflows by domestic Mutual Funds stood at ₹26,810 crore during the quarter, as retail investors booked profits. In rupees value terms, the holding of domestic Mutual Funds went up by 4.81 per cent to ₹14.30 lakh crores as on March 31 from ₹13.64 lakh crores on December 31, 2020.

On the back of decrease in holdings of Mutual Funds and Insurance companies, holding of Domestic Institutional Investors (DII), which includes domestic Mutual Funds, Insurance Companies, Banks, Financial Institutions, Pension Funds, as a whole, also decreased to a 10-quarters low of 13.03 per cent as on March 31 from 13.56 per cent as on December 31, 2020. Net outflows from DIIs stood at ₹23,124 crore during the quarter. In rupees value terms, DII holding went up to an all-time high of ₹25.75 lakh crore as on March 31, an increase of 3.27 per cent over the last quarter.

For the first time in the last eight months, total balance in Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts has come down significantly in April.

As per latest government data, total balance in Jan Dhan accounts decreased to ₹1,43,297 crore as on April 28, 2021 as against ₹1,46,084 crore in the beginning of the month, a drop of ₹2,787 crore.

An analysis of total balance trajectory shows that generally the increase per month ranges from ₹1,000 crore to ₹1,500 crore.

During March, there was an addition of ₹5,882 crore in the accounts opened under the Centre’s flagship financial inclusion scheme which was attributed to the ‘push’ given by the elections in five States.

“But for the first time in the last eight months, we notice a decrease in total balance, which is a noteworthy point,’’ a senior State Bank of India official told BusinessLine.

The data show that it was in August 2020 (during the first wave of the pandemic) there was a decrease in balance from ₹1,32,538 crore (in July 2020) to ₹1,29,719 crore.

A recent report from SBI states that the bank’s business index, which has been declining in April 21, has now dipped to a new low of 75.7, the level it has attained in August 2020, and a clear 24.3 per cent drop from the pre-pandemic level.

“This indicates that the disruption caused by increased lockdowns/restrictions in various States is now having a meaningful impact on economic activity,’’ it says.

‘Early signs’

According to a top executive of a major public sector bank, there are more withdrawals from rural areas, especially in pockets where there is massive incidence of the second wave of Covid. “These are, of course, early signs, we need to analyse further.’’

“With more States announcing lockdown, the earnings of working class and wage earners have been adversely impacted. There has been a dip in urban to rural remittances in some States. This might be leading to withdrawals from the zero balance accounts,’’ he said, adding that the government ‘needs to act urgently’ to lessen the impact of the pandemic on the rural poor.

There has also been a decrease in number of new Jan Dhan accounts opened in April 2021 compared to April. While in March 2021, about 50 lakh new accounts were opened, approximately 30 lakh new accounts got added last month.

Purpose of the scheme

The dip in Jan Dhan account balance also proves that the intended purpose of the scheme is being met as people now use the savings in their accounts in tough times, Prasanna Tantri, Executive Director, Center for Analytical Finance, Indian School of Business, said.

“This also shows increasing financial literacy on the part of the account holders most of whom are poor,’’ he added pointing out that the impact of the second wave of the pandemic is still not as bad as it was during last year April-May, he said.

State Bank of India sees the recently-introduced pre-packaged insolvency resolution process (PPIRP) for MSME corporates as another good tool in its armoury for resolving stress.

Swaminathan Janakiraman, Managing Director (Risk, Compliance and Stressed Assets Resolution Group (SARG), SBI, told BusinessLine that the bank was putting together a policy framework for the same.

“We are putting together a board-approved policy framework for implementation of pre-pack among our MSME corporate customers. Over the next 4-6 weeks, we will start implementation and much would depend on how the ongoing second wave of Covid-19 plays out,” said Janakiraman. He made it clear that SBI would like to have multiple tools for resolving stress and that PPIRP cannot be a one-size fits all solution for the bank.

“We would see this as yet another good tool for resolving stress rather than taking a position that this will be the be all and leave out everything else. Pre-packs will looked at on a case to case basis.

“It will get applied selectively to begin with as several existing mechanisms like RBI’s MSME restructuring, regulatory forbearance, one-time settlement, are all options that could be used by the bank to resolve stress,” he said.

In the Indian context, a pre-packaged insolvency is an arrangement where the resolution of a company’s business is negotiated with the corporate debtor before the appointment of an insolvency professional. It is a blend of informal and formal mechanisms, with the informal process stretching up to NCLT admission, followed by an existing NCLT supervised process for resolution, specified under the Insolvency and Bankruptcy Code (IBC).

“We are preparing the ground for pre-pack implementation, given the Covid-19 situation we would like to wait for sometime before we go full throttle on this,” said Janakiraman.

He also pointed out that since April 1,2019, an MSME restructuring package had been introduced by the government and after one-year extension, this facility got over on end March 2021. Now, the RBI has few days back announced similar measures for exposures up to ₹25 crore that can be invoked by banks.

“Since there is regulatory forbearance and enabling restructuring already in place, most likely banks for the present may go for these measures rather than adding additional layer of NCLT to the process by adopting PPIRP,” he noted.

A viable alternative

Pre-packs are billed as a viable alternative to the Corporate Insolvency Resolution Process (CIRP) as they would be significantly less time consuming and inexpensive as against the formal insolvency proceedings. Janakiraman felt it would not be right to compare PPIRP and CIRP as they cater to different segments of people.

Meanwhile, Ashok Haldia, Chairman of Indian Institute of Insolvency Professionals of ICAI, said: “Pre-pack is preferred and, in fact, it should be first option given the formal and informal — outside IBC, process outlined in the Framework- leading to speed, trust and transparency.”