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Background discussions, anecdotal evidence and research studies all seem to suggest that the bottom of the pyramid has been the hardest hit during the pandemic. And the microfinance sector, which is about the only formal recourse for low-income individuals and un-banked micro enterprises for their personal and commercial borrowing requirements, has had to contend with challenging times lately.

The encouraging thing is that the credit seems to be flowing in the sector, despite microfinance providers having to defer loan repayments and restructure loans in line with the government’s directives early last year. Latest data released by the Pakistan Microfinance Network (PMN) – which is the sector association – show that there is healthy growth in credit outreach on part of the microfinance providers.

However, it is the microfinance banks (MFBs), well-entrenched in the country’s financial system, who are in the driving seat, as compared to non-banking microfinance companies (NBMFCs) which have a different regulator. As of June 2021, the microfinance sector’s total gross loan portfolio had reached a figure of Rs356 billion, as per the PMN data, reflecting one of the fastest-growing quarters in recent years.

The June-end loan portfolio figure translates into 19 percent growth (additional Rs56bn) since a year ago in June 2020, and 15 percent growth (Rs47bn more) since the pandemic started in earnest in late March 2020. In what can be cast as an important milestone, the number of active borrowers had crossed the 8 million mark as of June 2021. More than a million active borrowers have been netted in the year since June 2020 (a growth of 17 percent year-on-year).

Recall that the number of active borrowers had dipped between March and September 2020, but it has since recovered, with additional active borrowers standing at 0.7 million since March 2020. What is concerning is that the average loan size has sharply gone down to Rs17,320 during Apr-Jun 2021 – this is half the size compared to a year ago and a third of what it was in pre-pandemic period in late 2019.

This is partly due to proliferation of low-value digital loans, which also contributed to the growth in the number of active borrowers. While the credit numbers have picked up, there is a lot more that needs to be done, as current credit coverage of 8 million borrowers is only a sixth of the 47 million addressable market (41mn micro clients and 6mn micro enterprises, per a 2019 PMN study).

During the Apr-Jun quarter, the infection ratio – which is measured as the portion of loan portfolio that has been at risk for more than 30 days – stood at 5.2 percent for NBMFCs, which is more than double the level of 2.5 percent seen in the same period last year. As for MFBs, the infection ratio stood at 5.3 percent in the latest quarter, almost the same as in the Apr-Jun quarter of 2020.

On the savings front, the sector players (basically MFBs, who being a banking entity are legally allowed to raise direct public deposits) have also done well in the period under review, albeit there appears to be a slowdown in the growth momentum for raising this cheaper financing. Value of deposits had reached Rs379 billion as of June-end 2021, reflecting a growth of 29 percent year-on-year (Rs85 bn more). Growth since the pandemic era commenced in March 2020 stands at 44 percent (additional Rs115 bn).

The number of savers has also continued its upward trajectory. As per the PMN data, there were 70 million savers as of June-end 2021, growing 33 percent year-on-year (17mn more savers). Since the Covid-19 crisis hit with force in March 2020, the number of savers has undergone a growth of 43 percent (21mn additional savers in the system). Bulk of this growth in number of savers is attributed to the large uptake of mobile wallets, which command four-fifth of depositor-base but only an eighth of deposit value.

Deposit-value growth is key to sustain expansion of credit outreach. Between June 2020 and June 2021, the sector raised Rs85 billion in additional deposits, and they were able to extend two-thirds of it as additional lending to micro enterprises and individuals. However, NBMFCs, which include several rural support programs, grassroots organizations and non-profits, have to rely comparatively more on commercial banks and private investors for financing as they are not allowed to collect public deposits. As there is growing infection ratio among NBMFCs, those financing sources may have further tightened.

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