New Delhi: The post-COVID world has changed the entire paradigm on how businesses have performed--Microfinance being one segment among several entities that has seen a lot of changes since the pandemic hit in 2020. While the pandemic pushed several people out of job and employment, Microfinance Industry saw its penetration only go deeper.


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Sadaf Sayeed, CEO of Muthoot Microfin talked elaborately with Reema Sharma of Zee Media on post-COVID scenario in the Microfinance Industry, RBI's slew of interventions and reforms to protect customers’ interest.


Excerpts...


1. With effect from April 1, 2022, RBI has imposed the ‘Regulatory Framework for Microfinance Loans Directions 2022’. How has it affected microfinance loans?


The new regulations are very progressive and a big leap forward for the Microfinance industry. First and foremost, with 14 th March circular RBI has harmonised the regulation for all regulated entities operating in the microfinance space. Irrespective of the type of entity, be it NBFC-MFI, SFB or Bank, the new regulation uniformly applies to all removing any regulatory arbitrage that existed earlier. Further, to protect customers’ interest from overleveraging and to ensure that there is responsible lending, RBI has introduced a concept of FOIR (Fixed Obligation to Income Ratio) at household level and capped the FOIR to 50% for all lenders. The new regulation also provides room for risk-based pricing, allows MFIs to price their loan as per their cost, margin, and risk premium. This is particularly good measure for small and medium MFIs who were facing squeeze on the margins as the prices came down during Covid. However, these are early days, it will take a couple more quarters to quantitatively measure the impact. Many small MFIs would take time to implement the changes too. As of now, the loan disbursal and volume growth has crossed the pre-covid levels. Even for large MFIs, the operational efficiency has not reached the optimum level as staff training and process changes would take some time to implement and run smooth.


2. How has the Micro Finance Industry picked up since the 2020 Covid-induced lockdown. How is the situation today vis-a-vis last two years?


Covid-19 Pandemic and consequential lock down was an unprecedented crisis which took the world by surprise. During the lockdown, microfinance industry was hit very hard as there was no movement allowed during the lockdown. However, with timely interventions by RBI and resilience shown by microfinance borrowers, MFI industry was back to 96% collection on time as of March 2021. The second wave was hard, however the industry and the country were lot more prepared to deal with covid, there were decent vaccinated population and awareness of covid appropriate behaviour. This time the lockdowns were also staggered and more state specific, which allowed for business activity to continue. As a result, MFI industry was back to normal operations in the month of July 2021 itself. As of now, all the disbursements that been done post second wave of covid, the collection efficiency is plus 99%.


3. RBI has set a common household limit of Rs 3 lakh for loans to qualify as microfinance. How do you explain it?


The income criterion of Rs 300,000 is timely and most appropriate, earlier differentiated limits of Rs 1,25,000 for rural and Rs 200,000 for urban area were only revised once in 2015 after Malegam Committee recommendation fixed the cap in 2010-11. This is a good move, more importantly, instead of evaluating a customer on her individual obligation, now microfinance loans would be given based on household income, while taking all household level loan obligations into consideration, this is a better way of underwriting a loan. From MFI perspective it broadens the market that an MFI can cater too. It also clearly defines the MFI market and target segment.


4. RBI has also recently allowed microfinance lenders to fix interest rates on loans. Can borrower see their benefit in this? Please explain


This was perhaps the biggest reform that RBI has announced. This was badly needed as lot of small MFIs who could not command better rates were suffering due to margin cap regulation. This problem got particularly severe when the rates were going down during covid period. Irrespective of the borrowing cost or operating cost, the lending rate was capped at 2.75 times the average base rate of top 5 banks. With the new regulations, MFIs can price their loans as per their cost structure and risk perception. Many MFIs are charging lower rate to the existing customer and 50-100bps higher to NTC customer based on their risk profile. Further, as the collection efficiency improves in coming days and credit cost reduces, MFIs would have the scope to further reduce the lending rates.


5. How is the microfinance operation different in terms of geography, i.e. south vis- a-vis north India?


Just like any other business each state offers its own unique features. Some states like Kerala, Karnataka have higher per capita income so they can absorb more credit and some states like Odisha, Bihar have comparatively lower per capita income so lower credit per household. The level of microfinance penetration also varies across geography and the need for loans also varies. In under penetrated states/districts, the demand is for starting a new business and in more established states, the demand of loan is to meet working capital requirements. Availability of human resource and its trainability as microfinance becomes more and more digital savvy also plays a role. Clients’ digital literacy will also be important in coming days. For instance, we (Muthoot Microfin) are market leaders in south and we would like to maintain that position, while we continue to expand in North, West, and Eastern regions of the country.