Demonetisation lands sharp blow on microfinance sector
Delinquency rose from 1.4% in September 2016 to peak at 23.7% in February 2017
Subir Roy 	|  Kolkata
May 1, 2017	Last Updated at 23:45 IST

It is not widely realised that demonetisation dealt a severe blow to the microfinance sector. As a result, significant sections of India’s working poor, who were seeking to pull themselves out of poverty by taking small loans form microfinance institutions (MFIs), also suffered a setback.

This went against the aim of two official policies. Eight of the 10 small finance bank licences issued by the Reserve Bank of India went to MFIs, making them a key engine to promote financial inclusion and reduce poverty. Trouble for them has meant a setback to those goals. Plus, the government’s declared aim of promoting inclusive growth, sabka vikas, also suffered a setback through the travails faced by the micro, small and medium enterprises (MSMEs) which are at the forefront of creating jobs.

Microfinance, which runs on small unsecured loans for one to two years to economically active poor women, relies heavily on loans being repaid in regular weekly or monthly instalments so that fresh loans can be given. Demonetisation upset this repayment cycle and put a break on lending growth. According to Equifax data for 56 NBFC-MFIs, which are members of MFIN (Microfinance Institutions Network), there was a fall of over 50 per cent in disbursals during the first two months of demonetisation, November and December 2016, compared to the previous three months. But despite a sharp recovery in disbursals during March 2017, they still were 16 per cent lower than in March 2016. During 2015-16 the outstanding of the entire microfinance sector, according to Sa-Dhan, grew by 31 per cent.

According to Equifax, delinquency rose from 1.4 per cent in September 2016 to peak at 23.7 per cent in February 2017, and then fell to 20.9 per cent in March 2017. Every state has witnessed a recovery in March over February but Uttar Pradesh (UP), Maharashtra, Karnataka and Madhya Pradesh continued to be down with over 10 per cent of balances due for over 90 days. Orissa was the star performer with two per cent total overdues (up to six months) and UP the absolute laggard with 49 per cent.

Demonetisation hit UP the hardest and in particular western UP with its various clusters of small units specialising in different artisan-based manufacturing, all mostly dealing in cash. Among the first to be affected was Moradabad, known for its brassware, which had a vocal political leadership. A strong demand quickly surfaced there for a loan waiver. This became more strident once the Reserve Bank of India (RBI) announced a 60-day relaxation in provisioning by lending institutions which was seen as paving the way for a loan waiver and repayment problems spread to other urban centres such as Aligarh, Hapur and Agra. The impending Assembly elections in the state prompted local political leaders seeking to project themselves to mobilise opinion against repayment with disinformation playing an important role.

Manish Kumar Raj, head of microfinance (north and west) at Ujjivan Small Finance Bank, an MFI until February, recalls that “when we realised what was happening we, all MFIs, took the help of Uttar Pradesh Microfinance Association (UPMA), then MFIN and also Nabard and Sidbi to approach the UP chief secretary, and the finance secretary wrote to all the district collectors,” explaining the correct status. A customer awareness campaign was run in the media under the UPMA banner. “Overall, the dynamics in UP was – quick slide and then stabilisation, without improvement.”

Eastern UP presented a similar picture. Varanasi-based Utkarsh, an MFI extensively  present in the entire sari and carpet belt which became a small finance bank in January, felt the full impact. “Demonetisation has hit us very badly, for several reasons,” said Govind Singh, managing director and chief executive officer. Because of demonetisation, initially trade channels paying in old currency and workers getting paid in old currency were overriding issues. For the first one and a half months since November 8, borrowers could not repay as they did not have legal tender. The result of this was that Utkarsh itself did not have the right currency to disburse new loans.

Then RBI came up with its revised guidelines allowing 60 days’ relaxation in provisioning which some sections of the media reported as a loan waiver or deferment for 60 days. So, people were misled. The third challenge was some political interests getting involved in this, telling borrowers, “don’t pay now, loans will be waived”.

Collections have now become close to normal in areas of eastern UP (repayments at 96-98 per cent), Bihar and Jharkhand where Utkarsh is present. The overall picture is that collections will be 90 per cent for the 2016-17 financial year compared to more than 99.5 per cent in the previous year. “We could not grow in the last six months because disbursements went for a toss. We may have an impact of close to Rs 100 crore on the profit and loss account because of demonetisation. There will ultimately be an erosion of net worth.”

The next important state to be hit by demonetisation after UP was Maharashtra. In the first couple of weeks the issue uppermost there was the same as elsewhere – the cash challenge, customers’ frustration over trying to find cash manifesting itself in long queues at branches and before ATMs. As in UP, impending elections, to municipalities in the case of Maharashtra, and the heightened political temperature they created, did their bit to add to the woes of MFIs. Vikram Shingade, Ujjivan’s regional business manager for the west, said: “Nagar sevaks (municipal level political workers) were quick to connect to the disruption caused by factory owners, mainly of textile units in the Nagpur and Amravati areas, paying wages in demonetised currency notes to our customers.”

The close link between MFIs’ troubles over repayment and textile mill owners continuing to pay wages till December in old currency notes was evident in other areas of Maharashtra such as Solapur in the central region, Nasik in the west and even Mumbai areas like Mankhurd. Thus, trouble was widespread across Maharashtra.

graph R Baskar Babu, MD and CEO of Maharashtra-based Suryoday, which also converted into a small finance bank in January, said demonetisation had “affected us negative as of now. Things are improving in the last couple of months but we are yet to fully recover. It is likely that it will cause some damage to our system. We will be left with a hard core of delinquency and write-offs. For 2016-17, we have provided an extra Rs 20 crore, which is close to 40 per cent of our yearly profit.”

By far the most significant troubles in the south happened in Bengaluru. In the area served by Ujjivan’s K B Sandra branch, local leaders spread rumours that a particular MFI was closing down and alleged that MFIs had distributed loans with black money, so now that demonetisation and the drive against black money had come, borrowers did not have to repay. People were charged Rs 300-400 for a form, a photocopy of a simple letter addressed to Narendra Modi requesting a waiver which they had to sign and attach to a copy of their loan card. All those whose names eventually appeared in the list would not have to repay, said the leaders. Across Bengaluru and adjoining talukas, customers started approaching these leaders. When MFIs initiated a public information campaign, the local leaders organised rallies and announced that loans were being waived.

Udaya Kumar, MD and CEO of Karnataka-based Grameen Koota, which remains an MFI, is one of the few sector leaders who is not overwhelmed by the fallout of demonetisation. He feels that “it has had an impact, but it is a manageable impact.” Right now, recovery was at 92-93 per cent. It would take four-five months to get back to near normal, at least 98 per cent, as these were underprivileged customers and they would take some time to recover from the impact.

He explained that “we are comparatively less affected among MFIs as we go for weekly collections, with weekly instalments being around Rs 500-600. So chance of default is less.” Its profits for FY17 are likely to be down to Rs 70-75 crore, compared with Rs 84 crore in 2015-16.

But there has been a long-term negative fallout for Grameen Koota, too. “The old 99 per cent recovery will not come back immediately as the discipline will have been lost. After getting six to seven weeks to repay (when the confusion over the RBI directive arose) customers think that repaying within one month is okay.” This is the new normal.

As Samit Ghosh, CEO of Ujjivan, sees it, “Something like demonetisation impacts the unorganised sector the most. Mr (Narendra) Modi realised that employment for the masses who come in from the countryside is provided by the micro and small businesses. The government had taken such good measures like MUDRA, to promote these sectors, but unfortunately demonetisation impacted them the worst and consequently set back the whole process of providing gainful employment and livelihood through MSME businesses. I think that will have a long-term negative impact.”