While the microfinance sector seems to have weathered the first coronavirus wave, there is a sense that it only managed to delay the inevitable. (For a rundown of the the sector’s health during the lockdown quarter, read “Microfinance during Covid,” published in this space September 22, 2020). When the deferred loans become due for payment next year, the sector will face a real test of liquidity. Besides, economic weaknesses, which pre-dated Sars-Cov-2, have exacerbated, hurting the bottom of pyramid the most.
First came research during the lockdowns indicating a massive slump in weekly incomes of microfinance borrowers and associated risk of widespread loan defaults (refer to this May-2020 study by Oxford Review of Economic Policy; data was collected in early April). Then came a report highlighting that majority of borrowers were unaware of regulatory measures on loan repayment deferments (refer to this May-2020 study by the Pakistan Microfinance Network; data collection took place in last week of April).
And post-lockdowns, it appears that economic distress has carried forward. Micro, small and medium enterprises, especially in rural areas, have reported dissatisfaction with government measures, calling for meaningful support in the form of measures such as input subsidies, wage support and protection against falling commodity prices post-lockdowns (refer to these two July-2020 surveys in Sindh and Balochistan from GRASP Project that is funded by European Union and implemented by International Trade Center).
Since the onset of Covid-19 in March, the two regulatory bodies – SBP for Microfinance Banks and the SECP for Non-Banking Microfinance Companies – have provided a one-year extension on loan repayments. During this grace period, interest rate is charged to clients, unless a borrower requests deferment and the SBP approves it (for microfinance bank clients).
In addition, loans can be requested by borrower to be restructured if the repayment is problematic even after one-year extension. Besides, SME loan exposure limit has been raised. General Covid-19 relief measures – such as cheaper payroll financing, concessionary financing, subsidies on fuel and electricity bill payments, etc. – serve to indirectly help the microfinance sector by lowering cost of some inputs.
Question is, beyond the significant-yet-now-expired loan extension relief, do the two regulators have the appetite for more supportive measures? It’s a trade-off: supporting borrowers beyond a reasonable degree will undermine the sector’s financial soundness; but focusing on short-term prudence indicators alone will hurt distressed borrowers. Offer nothing more and it risks poorer clients going under; offer too much and it creates a moral hazard.
In the end, there is no way to objectively evaluate which clients genuinely need relief and which ones will be fine without an intervention. The situation is compounded for non-banking microfinance providers that are more exposed to the Covid-19 economic impact than their banking counterparts. These institutions have a more direct interface with rural economies and they don't have access to public deposits as a cheaper source of debt. They also suffered due to lockdowns more than their banking peers.
What can the regulators do to help in the aftermath of lockdowns? Find out in this space tomorrow!