At a time when hard evidence of demonetisation’s impact on the economy seems to be trickling in, the microfinance sector in the country is likely to go through a rough patch of lower collections on loans already provided, said a report released by India Ratings on Thursday.
The report estimated that the collection efficiency, which is the percentage of monthly receipts out of total loans, is down to about 75% - 80%, according to the data collected at the end of May. This could mean that the microfinance companies will require additional capital to stay afloat and comply with regulatory requirements on capital.
“At 80%, these MFIs could require an equity of Rs 1 billion-Rs 3 billion (depending on loans under management) to ensure their capital levels remain over the regulatory minimum,” the press statement stated. It added that Maharashtra was one of the worst-hit states in the country where demonetisation has led to collections below 10% in certain districts.
Microfinance companies in the country have claimed for a long time that they have been able to collect more than 95% of their loans on time. “Furthermore, borrower discipline, a key ingredient for the smooth functioning of microfinance, has severely deteriorated in certain districts of affected states and may take years to be restored,” Jindal Haria, Associate Director at the ratings agency stated in the report.
This adds to the existing stress levels in the microfinance sector where borrowers have already taken too many loans. An earlier analysis showed that there has been a steady rise in late or no repayments across many states such as Karnataka and Uttar Pradesh. After demonetisation, this impact is likely to be magnified and force a rethink on part of the microfinance sector, the report said.