The demonetisation move may hit the micro finance sector hard, said Bandhan Bank CEO Chandrashekhar Ghosh, estimating the temporary loss to be around Rs 1,500-Rs 1,700 crore.
Bandhan Bank, which was one of the largest micro finance institutions before it became a bank last year, has suspended its micro-credit disbursement after the government demonetised Rs 500 and Rs 1,000 notes on November 8. Bandhan still has a large micro lending business.
The micro finance sector, like any financial sector, has a capital base that is replenished by profits earned from its lending business. “With the invalidation of high-value currency, the existing capital base for micro finance institutions has mostly been wiped out,” said Pronab Sen, former advisor, Plan Panel. “Now these MFIs will have to wait till returns from their lending operations accumulate, which could take time,” he added.
Micro finance institutions (MFIs), which do business largely in cash, cannot accept demonetised notes as they are not banks. So, collections from customers have stopped since last Tuesday, impacting the entire industry. The disbursement rate will also slow down significantly in the October-December quarter.
Ratna Vishwanathan, CEO, MFIN (MFI Network), said, “We do see some of our repayments being affected as more than 85% of our business is in cash. Our repayments range averages around 800-2,500 per instalment, which is on a weekly, fortnightly and monthly basis.
“So, we have asked if we can have a limit on repayment through Specified Bank Notes (as against no repayments) as this can help borrowers and the institution. If we do not have timely collection, we cannot disburse money on time and the loan cycles get affected …. This would impact the NPAs of both the borrowers (which is currently below 1% and repayment around 99%) as well as the institutions’ ability to service their own loans.”
Given the change in banking habits and limited currency flow, India Ratings and Research, the Indian arm of Fitch Ratings, expects MFI borrowers to re-prioritise their expenses in the next few weeks.
“This would lead to an increase in one-month overdues of many micro finance institutions. If money flow does not fully normalise by 4QFY17 (January to March period), tier 1 capital of few MFIs could reach near regulatory minimum levels,” said the rating firm.
It has also indicated that most micro finance institutions have liquidity in the form of unencumbered cash and unavailed bank lines to meet debt obligations for 30-60 days in the event of business disruption.