Microfinance loan waiver talks in Assam, West Bengal may impact MFIs

Microfinance loan waiver talks in Assam and West Bengal have the potential to damage long-term prospects of the sector and affect repayment discipline of microfinance borrowers, says a report.

The Assam Assembly recently passed the Micro Finance Institutions (MFI) Bill, 2020.

"While political movements in Assam in FY20 have been limited to a few districts, any clamour for microfinance loan waivers by political parties in the run-up to state assembly elections in 2021 could be debilitating for the industry in the state," India Ratings and Research said in a report.

This would be irrespective of the form of institution in the microfinance business and could have a long-term impact on the microfinance borrowers' discipline, it said.

Further, the report said this is also the first time that political parties are talking specifically about microfinance loan waivers.

It said West Bengal is a state with almost three times larger MFI Assets Under Management (AUM) than Assam's.

Even rumours of microfinance loan waivers in the run-up to state assembly elections could significantly damage customer discipline in the near future as well as before successive elections even in other parts of the country, should political parties there follow suit, it noted.

"This has the potential to damage the long-term prospects of microfinance in India, if this rhetoric gains pace," the report said.

In its state-wise ticket size and macroeconomics analysis, the agency said it has observed that the average outstanding per unique borrower is the highest in West Bengal and Assam, and this has been the case at least for the past three years.

Also, Assam and West Bengal are among the top 10 states (by microfinance AUM across forms of institutions) with per capita Net State Gross Domestic Product (NSGDP) lower than the national average.

"In short, these two states have lower per capita SGDP than the national average, while the outstanding per unique borrower is higher than the national average by 21 per cent and 35 per cent, respectively," it said.

According to the report, the trend generally observed is that the ticket size at the time of disbursement at portfolio level is about 50 per cent higher than the average outstanding, which implies that the peak risk could be higher than implied by average outstanding.

The report estimates 40-50 per cent of the microfinance loan portfolio in both Assam and West Bengal are from one institution.

While Assam and West Bengal have about 20 per cent of total microfinance loans, they constitute only 10-11 per cent of NBFC-MFIs' AUM, it said.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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