Contributed By : Meera Siva, CFA
October 5, Chennai
There are opinions galore about the impact of demonetization. As we near the one-year mark of this historic event, P Avinash, Head Risk, IFMR Capital, shared data and analysed the effects seen by NBFC-MFIs, from his vantage point. IFMR Capital is a Chennai headquartered NBFC which has facilitated debt funding of over INR 45,000 crores using advanced structured finance products.
Avinash started out at the IFMR Group in January 2014 to head the investment function at IFMR Investments where he set up IFMR’s first Alternative Investment Fund (AIF), focused on long term debt financing to retail financial institutions. Earlier, he worked in ICRA for 7 years in their credit rating practice specialising in financial sector entities and prior to that, he was with Deloitte in its Audit and Assurance practice. He is a Chartered Accountant, who ranked 5th in the CA exam.
Demonetization seems to have adversely affected the Rs 1 lakh crore MFI segment. From 99% collection efficiency on average, collections have slipped and collection efficiency stands at about 80%. The encouraging news is that this is improving from the steep fall seen immediately after the note ban. The big hit was due to loss of income for individuals and businesses as cash was removed from the system last November. This took a few months to stabilize and by January/February of 2017, the situation eased.
However, collections never went back to pre-demonetization levels as other issues began to surface. One, some MFIs had relaxed credit norms to grow their business. While this would have been manageable in the past, the new stress in the system pushed some loans to default. One example was the high exposure many MFIs had in Bengaluru city. After demonetization, defaults increased in this region, possibly due to risky lending practices. Two, in geographies where there were issues such as ring leaders and pipelining, repayment was affected – due to financial distress from business issues or just greed.
Three, some borrowers had lost their discipline of regular payments – in some cases due to MFIs that did not follow-up. As success depends on process and discipline, loss of process by MFIs led to loss of discipline and hence defaults.
Four, when there were defaults, MFIs in general tend not to take any legal action, considering the background of the borrowers and as the cost of such action may outweigh likely benefits . As a result, those with regular credit also opt to default, as there are no consequences to bad credit.
Data from IFMR Capital shows that there was mostly no difference between recovery rates of MFIs, at a district level, but rates varied across geographies. For example, bulk of the losses in Maharashtra were clustered around the Vidharba region. Weekly collections and smaller loan sizes had better recovery than monthly repayment and larger loans – intuitively enough.
In some cases, poor operational structure of MFIs aggravated collection issues and lowered recovery. Typically, a field staff handles about 900 borrowers. Some MFIs had pushed the limit to 1,500 borrowers in areas that witnessed high growth. While this was manageable and yielded efficiencies when collection was smooth, when multiple follow-ups were needed for collection, the staff could not handle it.
The MFIs, by luck or by design, had raised funds in September 2016 and had good liquidity. New loan disbursals, which were growing at a fast clip of 80% year-on-year in the past, fell in the December and March quarters. Growth has since recovered and in the September 2017 quarter it increased 20% y-o-y.
MFIs have been able to raise equity and are looking to grow. Investors continue to be interested in the segment, as seen by the success in fund raise. MFIs are looking at newer geographies for their expansion. For instance, Bihar and Rajasthan have shown good repayment resilience and there is interest to start operations in these States.
The segment has good scope for growth as there are still many districts that are under-penetrated. It takes over six credit cycles before a MFI borrower, who is lent on the joint liability group model, is eligible to be given an individual loan. Better credit data availability, technology adoption by MFIs and eKYC through Aadhar should help the industry’s growth in the long run. Consolidation – where there is little or no geographic reach – is an option to achieve better economies of scale, but has not happened due to culture issues in the MFIs. MFIN – the network of MFIs – has been doing a great job of communicating issues and working out solutions with stakeholders such as borrowers, local authorities, MFIs and the community.