The fault lines of overleveraging in microfinance has come to the fore again, a little over two years after the Reserve Bank of India brought out the uniform microfinance regulation trying to curb the possibility of it.
Leaders in the microfinance sector pointed fingers to the random ways of measuring household income of customers at the bottom of the pyramid. The assessment of household income is at the heart of RBI’s formula of ensuring that no borrowers become indebted more than they can afford.
The central bank regulations prescribed that borrowers’ repayment obligation of a household in a month should not be more than 50% of their monthly income.
“So far, there is no foolproof way of measuring household income for borrowers in the microfinance sector. This is very subjective as of now, and largely depends on the feedback from the borrowers. As the field officers are under pressure to expand business, there is a possibility of over reporting of income which can result in over-lending,” said Jiji Mammen, executive director at Sa-Dhan, the older of two microfinance associations.
Both Sa-Dhan and the Microfinance Institutions Network (MFIN) have urged their members not to extend loan exposure from all microfinance lenders beyond Rs 2 lakh per borrower.
Sa-Dhan has formed a working group involving senior leaders of the microfinance industry to develop a model for assessment of household income. It has also told the members that no borrowers with non-performing loans more than Rs 3000 should get fresh finance.
MFIN chief executive Alok Misra said the problem of over-lending is limited so far, but has the potential to harm the credit quality in the future.
“All regulated MFIN members follow this (household income criteria) but still in some cases, breaches can happen,” he said, citing reasons like lenders’ inability to use Aadhaar for customer identification, while usage of voter ID is not fully reliable. He suggested daily data reporting to credit information companies.
The central bank earlier in the month mandated fortnightly data reporting instead of monthly reporting. “Microfinance clients being vulnerable, the reporting has to be daily as 15 days also will lead to a lender not able to factor loans given in the last 15-20 days,” Misra said.
A chief executive of a leading NBFC-MFI said the incidence of a single borrower taking loans from four different lenders is growing, leading to build-up of fresh stress.
The number of active micro loan account holders was 8.7 crore at the end of March with 12.3% of these borrowers having more than four loan accounts from different lenders, according to credit information company Crif High Mark.
Fusion Finance is one of the lenders which admitted over-leveraging by borrowers, resulting in default. “We noticed delinquency trends in certain pockets due to over-leverage and external factors. Due to which we have done early risk recognition and tightened our ECL (expected credit loss) model leading to higher than usual provisioning in this quarter that had an impact on our overall profitability,” Managing Director Devesh Sachdev said on August 6.
Lenders like Spandana Sphoorty and Satin Creditcare also took steps to address the renewed stress. Spandana has put a blanket ban on adding new-to-credit customers while stopping on-boarding new customers in certain pockets with higher delinquency. Satin stopped acquiring new-to-credit customers in 200 of its branches six months back, sensing trouble.
The sector saw higher delinquency in general in the first quarter of the fiscal due to the heatwave in the northern states and the two-month long general elections affecting movement of field workers and borrowers’/ group meetings, which are the key for higher recovery in the microfinance lending model.
This is deja vu for the sector which came out of the woods in 2023 after a two-year long Covid-related non-repayment of loans.
