The debt moratorium given by the Reserve Bank of India till August following the covid-19 outbreak is a major relief for borrowers, and gives a breather to poor households facing wage cuts and job losses. However, it could disrupt the microfinance model of lending, research shows.
Microfinance institutions (MFIs) in India could be in trouble as they have not got the moratorium from their own lenders, mostly banks, say Georgia Barboni of the University of Warwick and Misha Sharma of Dvara Research in an Ideas for India article. As such, the relaxation given to their borrowers could result in a liquidity crunch and credit ratings downgrades for them.
A large share of poor households depend on small loans from MFIs. Around 85% of the borrowers opted for the moratorium by May end, according to industry body Sa-Dhan. The mounting interest during the moratorium period poses a big challenge for the sustenance and profitability of MFIs.
In normal times, borrowers typically make repayments once in two weeks, or on a monthly basis. The current situation can affect the repayment discipline and can also be mistaken as loan waivers by customers, the article says.
Microfinance has been crucial in providing credit to the poor and the unbanked, but the scenario can result in MFIs pressurizing borrowers for repayments, the authors add. This could push poor households towards costlier and informal lending and, thus, carries the risk of a debt spiral.
In past crises, such as the 2018 Kerala floods and demonetization, the MFI sector recovered from the debt trap in six to nine months. However, this time, the MFI sector needs to rethink its strategies and adopt technological solutions for collection of dues, maintenance of customer relations, and to help them plan repayment strategies, say the authors.