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Microfinance Institutions on the brink...yet again!!

The microfinance industry in India could never really recover from the Andhra crisis of 2009-10. Just when things start to normalise, a new crisis rocks the boat. There has been no respite. Thread 1/11
From inept legislation to demonetisation, from political interference to religious diktats and from frauds to natural calamities, Microfinance Institutions (MFIs) have been battered by every risk possible. The latest in this series of pitfalls is the Corona lock-down. 2/11
Following is why I feel it's the biggest threat ever:

1) Collections have come to a grinding halt - The loan collections have largely been in cash. The lock-down has severely impaired collection efforts as the mobility of collection agents and borrowers is restricted. 3/11
2) Borrowers have been displaced - Migrants labours constitute a large chunk of MFI clients at urban centres. Lock-down, and the consequent loss of wages, has forced many migrants to head back home. Many may not return; many others may re-locate to other greener pastures. 4/11
3) Small businesses may shut shop - It is very hard to imagine that once the lock-down is lifted micro/ small businesses would switch back to normalcy in a jiffy. Some MFI funded businesses may run out of steam; many others may limp for long periods. 5/11
4) Consumption would consume everything - Many borrowers would use up the MFI loans for consumption purposes. Such behaviour is expected from people at the bottom of pyramid (BoP) in times of distress. Loans once consumed by BoP borrowers are very hard to recover. 6/11
5) Political activism would stage a comeback - Post lock-down period would be marked by abundant political activity. Politicians of all hues would rake up issues concerning 'poor'. Many MFIs would be branded as Shylocks and demands for loan waivers would resonate all around. 7/11
6) Credit profile of borrowers would deteriorate - The leverage of MFI borrowers would have increased substantially post lock-down. Most MFI clients would be forced to borrow their way out of lockdown. Over-leverage, at some point, would result in increased delinquencies. 8/11
7) Capital raising would be a challenge - Foreign investors/ parents have acted as White Knights to MFIs on numerous occasions. However, the prevailing macro-evonomic uncertainties would hinder capital commitments to MFIs from foreign investors. 9/11
8) Worsening portfolio quality may limit Priority Sector Lending (PSL) - Most banks lend to MFIs to fulfil their PSL obligations. Owing to lock-down, if the portfolio quality worsens, many banks may choke PSL fund flows to MFIs thereby aggravating liquidity issues. 10/11
In summary, the next few months are going to be very challenging for MFIs. The 99% collection efficiencies would be consigned to history. Investors should shun everything that has any microfinance link viz NBFC-MFIs, Small Finance Banks and Banks with large MFI exposures. 11/ 11
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