Why MFIs could end up losing Rs 1,500 cr

Industry fears waiver of interest on interest would distort credit culture, may encourage borrowers who can pay to defer repayment.

The microfinance industry (MFI) will lose nearly Rs 1,500 crore if it has to forgo interest on interest for six months on loan which is eligible for moratorium.

“Interest component for the industry during the six-month moratorium on loan outstanding of about Rs 2.3 trillion comes to around Rs 27,500 crore.

Of this, the component of interest would be nearly Rs 1,500 crore,” said Manoj Nambiar, chairman, Microfinance Institutions Network (MFIN).

In view of further interest payable on interest, a substantial number of rural borrowers are already on course to repay their dues.

In June, the MFI expects to recover close to 50 per cent of its dues.

“When we interacted with our customers, we informed them about the costs associated with the moratorium. Several borrowers preferred to repay rather than seek moratorium,” said Nambiar.

The industry apprehends that waiver of further interest on interest would distort credit culture and may encourage borrowers who can pay to defer their repayments.

“MFIs should also get interest waiver on their borrowings from banks and financial institutions. Otherwise, they will be hit hard and many may post losses,” said P Satish, executive director, Sa-Dhan, a representative body of MFIs.

In March, the Reserve Bank of India (RBI) had initially come out with dispensation of three months’ moratorium and later extended it to six months to protect borrowers on account of slowdown in economic activity due to the Covid-19 outbreak.

On Friday, the Supreme Court had said it was not considering a complete waiver of interest but was only concerned that postponement of interest shouldn’t accrue further interest.

Support package for small MFIs

The microfinance industry is pitching for a relief package for small microfinance organisations, which are finding it difficult to sustain in the absence of credit support.

In a representation to the Union finance ministry, Sa-Dhan has said, of the 96 small MFIs, 60 need equity support.

It called for equity support of Rs 10 crore each, or proportionate to their loan portfolio, with a minimum level of Rs 6 crore each.

Remaining of the 36 MFIs are either societies, trusts or cooperatives.

This would require a package of about Rs 520 crore, Sa-Dhan said.

Also, the industry body sought long-term loans of Rs 10-20 crore with five to seven years of repayment period. The total requirement for such credit support would be around Rs 1,600 crore.

Sa-Dhan also sought support for payment of rent for office premises and payment of utility bills for small MFIs for the period of the lockdown.

It also sought 50 per cent support for a period of three months, post lockdown.

Further, salaries paid to employees and their provident fund contribution should be reimbursed fully for the lockdown period and 50 per cent for three months beyond the lockdown, according to the representation.

The cost of this relief package is estimated to be around Rs 140 crore.

As on December 31, 2019, non-banking financial company (NBFC)-MFIs had about 30 million customers, with an aggregate gross loan portfolio at Rs 67,320 crore.

About 80 per cent of the MFIs, which fall in the small and mid-sized categories, don’t have investment grade rating.

This makes them ineligible to avail most benefits from the relief package.