Millions of defaults threaten microfinance's future in Covid-hit India


Kristin Keough

19 Feb 2021

“Until this pandemic, there was no trigger for any self-doubt for the lenders”

While borrowers around the world have been hit hard by the Covid pandemic, the microfinance sector, particularly that in India, has suffered significantly. The sector has morphed into a global enterprise over the years offering tremendous reach, covering over 140 million borrowers, 80% of which are women. Yet, the pandemic has unravelled some of this progress, causing devastating effects such as soaring default rates on loans as borrowers are unable to repay their loans.

MFIs’ business models are also suffering as a consequence. Banks have curbed lendings to MFIs, and microcreditors are decreasing lending to conserve capital and reduce defaults. Arohan’s Nambiar states that he expects MFI credit growth in 2020-21 to be just half of that of the previous fiscal year. While India’s central bank has helped assist borrowers with repayment by introducing a 6-month loan moratorium, effectively decreasing the number of repayment delays, experts expect a leaner industry to emerge from the pandemic.

Recommendations

- Tighter risk management practices to limit the number of defaults
- Easing current capital-provisioning regulations for MFIs, which are currently rigid
- Stronger consumer protection regulations

Conclusion

As the Covid pandemic continues, borrowers are becoming trapped in endless debt cycles and subsequently worsening income opportunities. To keep the industry growing, Microlenders must ensure that tighter regulations are in place to limit the number of loan defaults.

Original Article: Millions of defaults threaten microfinance's future in Covid-hit India by Suvashree Ghosh & Shruti Srivastava