The Managing Director of a reasonably large microfinance institution (MFI) is irritated.

His collections came to a grinding halt since March 25, due to the lockdown. On March 27, the RBI allowed a three-month moratorium on bank payments for both retail and corporate loans. But bankers, led by the State Bank of India, are demanding installments from MFIs.

Categorised as NBFC-MFI by the Central bank, microfinance institutions take term loan from banks for lending to the poor rural women. In financial parlance, such term loan is referred as “on-lending”. The reference was missing in the March 27 RBI circular.

Industry associations Sa-Dhan and MFIN decided against yielding to pressure from lenders and stopped paying. An appeal was made to the RBI governor on April 4. It failed to yield any response yet. Even lenders like SIDBI and MUDRA Bank, created to serve rural interests, are sending out harsh reminders,over phone.

“We were always treated as second-class citizens in India’s financial sector. Covid-19 made it apparent,” said another dejected MFI chief.

Plank for liquidity

But MFIs barely deserved such treatment. A crucial link to rural liquidity, they accounted for 31 per cent of the ₹2,08,032 crore pumped into the micro credit sector as on September 2019. Their granular network of 40,000 branches and three lakh employees directly connect nearly 30 crore lives through six crore borrower accounts.

The huge deployment of manpower, which reaches services at the doorstep of the poor in the remotest corners of the country, increases the cost of loan delivery, thereby pushing the interest rates above 20 per cent. The recovery rate is as high as 99 per cent.

The rural economies of industrially less-developed States in the eastern and northeastern regions of India are particularly dependent on micro credit for liquidity, followed by South India. In 2018, when India was rocked by collapse of IL&FS, the rural economy didn’t face any liquidity crisis, courtesy micro credit.

Attracted by the potential of the sector, banks doubled exposure in micro credit over the last year to corner 40 per cent of the market share.

However, excepting a few players — like Bandhan Bank and some small finance banks — majority of the bankers were so far operating through the MFIs for microcredit operations. The competition is expected to hot up soon with SBI preparing to enter the sector directly.

Banks to benefit?

Micro credit will assume huge significance in the post-Covid-19 period, particularly in April-September, when a robust rural economy will be India’s best bet to keep the economic wheel going. For banks, micro credit may be the biggest saviour, as demand from other sectors is expected to remain low.

And, that makes one ask: Will banks benefit, if MFIs find themselves in trouble? They are lenders to MFIs and are fast emerging as competitor to MFIs in the microcredit sector. It is questionable though if any such possibility will benefit the economy at this crucial juncture.

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Published on April 10, 2020