Are Microfinance Institutions Stepping Close To ICU…
Pandemic has changed the way many sectors used to perform and work in past, it spared the resilient ones and engulfed weaker institutions. All sectors have seen the brutal actions performed directly or indirectly by the Covid-19 virus with no partiality to people, institutions and economies. Out of all the financial sector faced a strong headwind during this time, especially institutions dealing with small and micro-credits. The nature of microfinance clients makes the situation more critical, as service delivery deals with a vulnerable yet most important subset of economic development.
Pandemic brought a situation for all to choose among Life and Livelihood, both being separate hillocks of social well-being. Reverse labour migration, lockdowns, social distancing, and many more steps brought local livelihood activities to a standstill. This effected the cash inflow of microfinance clients and increased credit/operational risk of lending institutions. In fact, it effected the overall financial system. Well, that’s an old story, seeing this government and central bank took some easing out measures including moratorium period to commercial financial institutions and individual/institutional debtors.
As of today (October 2020), the moratorium period is over and financial institutions are working hard to bring back their money from field. Field teams are working hard to serve their institution, save their job, achieve repayment and disbursement targets. Easing out lock down ristrictions is allowing debtors to start their business activities and earn money. The ongoing festival season brought in a ray of hope to all financial system stakeholders, as this might accelerate the local economy wheel. Everyone out there is planning to make up for the loss in last two quarters.
By default, small and weak microfinance operators might push hard its clients for repayment and its field team to lend more money to stabilize its operations. In doing so, MFI employees are expected to repeat the same mistake we all observed in 2010. Well, it is going to be suicidal for the financial ecosystem of any country. On the other hand, if MFIs remain sympathetic to repayment collection, soon we may observe the failing lending institutions due to liquidity crises and high NPAs.
The situation is critical as institutions and their employees are not sufficiently trained in handling this situation, where they need to strike the right balance between long-term sustainability and short-term risk management. Reading, writing and publishing this phrase is easy, but knitting it in organizational DNA takes a long time than expected. Indian MFIs are still low on reporting their Social Impact or making their Social Audit reports public, expecting MFIs to handle this critical situation in a transparent way is less realistic.
The current situation might create similar market conditions as those were in the 2010 MFI crisis, but how strongly our regulators and policymakers are ready to handle the crisis this time. Time will give better answers to all these worries, but this is definitely a global phenomenon where mergers and acquisitions within the MFI sector can not be ruled out.
