Covid-19 impact: Confusion over moratorium norms hit smaller MFIs hard

With confusion on whether the moratorium announced by the Reserve Bank of India (RBI) in the wake of Covid-19 is applicable to corporate loans, microfinance institutions (MFIs), especially the small and medium ones, are worried that they would not be able to meet their loan obligations this month. Several have either started defaulting or are on the verge of doing so.

During the recent monetary policy meet, the RBI had offered a moratorium of three months to all term loan borrowers who are likely to be impacted by the lockdown due to the Covid-19 outbreak. The RBI statement on the relaxation does not specifically mention loans taken by corporate entities, leading to ambiguity. Meanwhile, microfinance lenders have announced extension of a full three-month moratorium to all their microfinance clients.

Most small and mid-sized MFIs are heavily dependent on NBFCs for meeting their lending requirements, which in turn are dependent on banks for lending.

For example, Aviral Finance, the only MFI based in Chhattisgarh, already has Rs 15-20 lakh overdue to banks, says Ankush Golechha, founder of the firm. By the end of this month, the overdues would be about Rs 1.67 crore. The MFI has a loan outstanding of Rs about Rs 31 crore, and every month it collects about Rs 3.5 crore, which is rolled over as fresh lending. However, since March 23, when the lockdown was announced in Chhattisgarh, there have been no collections from end customers.

“It would be a question of life and death for us. We also have to meet all operational expenses, including employee salaries. While we have paid salaries for March, paying salaries for the month of April will be a difficult task if moratorium is not given to us,” says Golechha.

MFIs are also unable to curtail operational costs by way of salary cuts or retrenchments, as ground staffs are crucial for collection of repayment from the ground level.

According to Rahul Mittra, cofounder and CEO of Margadarshak Financial Services, a mid sized NBFC MFI based in Lucknow, the company would be forced to go for fresh market borrowing to pay salaries for next month if moratorium is not extended to the MFIs. About 60-65 per cent of the company’s borrowing is met by NBFCs.  

“While several public sector banks are saying they are awaiting board approval for moratorium, NBFCs are saying that they are confused if the RBI moratorium is applicable to corporate loans,” says Mittra.

“We are under leveraged but at the same time we have to pay our employees as they are the ones who connect with borrowers,” says Gyan Mohan, director and CEO of Adi Chitragupta Finance, an MFI based in Patna, with a loan outstanding of Rs 80 crore.

The MFI sector employs close to 200 thousand people, mostly field workers. MFIN (Microfinance Institutions Network) has also taken up the matter of moratorium with RBI.

“MFIN had written to the industry lenders early on. Moratorium is the need of the hour and that is why RBI released these timely guidelines. Our customers come from low income households.  Collections have been completely suspended by the industry and will take a while to resume even after the lockdown. Hence if moratoriums are not provided by lenders to MFIs, it may lead to defaults as smaller MFIs do not have the liquidity to repay (without having collected from their customers). Moreover, pressure on collections will increase, creating stress for the borrowers who are not in a position to repay.” said Harsh Shrivastava, MFIN CEO.

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