We hosted a call with Ms Ratna Vishwanathan, CEO of Micro finance Institutions Network (MFIN), to understand the impact of demonetization on the MFI sector. As micro finance collections are largely in cash, it is one of the most vulnerable businesses (due to demonization) in the financial services space. According to MFIN, despite demonetization, collection efficiency was good at 80%+, with two large MFIs reporting 90%+. Due to the moderate pace of new currency notes issued in the system, disbursements have come down by ~50%. In states where elections are scheduled in the near future, collections have slowed down sharply due to local issues. It is difficult to frame views on disbursements/recoveries in the ensuing days, and much will depend on how soon liquidity returns back to the system.
Overall collection efficiency of ~80%
All MFIs have collectively achieved collection efficiency of ~80% since 8 November2016, as borrowers were able to exchange old currency until 25 November. MFIs operating under monthly repayment models received majority of their collections in the first week of November itself. However, there could be some stress on collections in December as the window to exchange old notes has expired. Ms Vishwanathan said more clarity would emerge on the impact of demonetization by end-December.
Collection efficiency varying across geographies and companies
Ms Vishwanathan said only two of the 55 companies in MFIN recorded collection efficiency of 90%+. States such as Orissa and Jharkhand recorded 90%+ collection efficiency, while MP, UP, Maharashtra and to some extent Uttarakhand witnessed below-average collections. This was partly due to confusion regarding the RBI’s dispensation on NPA recognition resulting in some borrowers being politically misguided to skip repayment. However, collection efficiency in these states has been improving. Average industry-level collection pre-demonetization was INR2.1-2.15b/ day.
SFBs at advantage v/s NBFC-MFIsMs
Vishwanathan said only banks and SFBs were allowed to collect old notes. Even companies with in-principle SFB license but yet to convert to SFBs were not allowed to collect old currency. While MFIN had made a proposal to the RBI to allow MFIs to collect old currency from customers, it was rejected on the grounds of impartiality toward the sector. SFBs thus have been at a significant advantage v/s NBFC-MFIs so far.
Disbursements impacted due to lack of liquidity
Pre-demonetization, MFIs collectively disbursed INR2.2-2.3b/day. However, disbursals have declined 45-50% since 8 November. MFIs have recycled collections into disbursements as they have not been able to withdraw money from banks. Also, MFIs have not been disbursing much electronically as borrowers are unable to withdraw enough money from their bank accounts. While maximum withdrawal is INR24,000 per week, there is barely enough cash actually in circulation to meet this demand, especially in rural geographies. Ticket size of disbursements has dropped, but MFIs have been disbursing loans to borrowers to keep the system running. There has been hardly any growth in unique customer base over the past month. Ms Vishwanathan opined that disbursements pick-up will happen only after sufficient re-monetization.