The upcoming assembly elections in four states are raising concerns about the potential impact on loan repayment behaviour. As political parties vie for voters’ support, they often make promises of loan waivers ahead of the elections, which could disrupt loan repayments temporarily at the grassroots level. However, experts suggest that this disruption might be short-lived due to the increasing financial awareness among bottom-of-the-pyramid borrowers. These borrowers have learned the significance of maintaining a good credit score over the years.Leaders in the microfinance industry note that borrowers have become more financially savvy. They understand that timely repayment ensures continued access to loans, particularly during times of financial need. Thus, the disruption caused by debt waiver announcements is likely to be temporary and may not lead to widespread defaults or a significant increase in credit costs.
Unless debt waiver policies explicitly target microfinance borrowers, the repercussions are likely to be short-term. Vulnerable borrowers might postpone one or two loan installments in response to the waiver announcements. However, they typically resume loan repayment once the temporary disruption subsides.
Loan exposure
Industry reports indicate that the cumulative exposure of Non-Banking Financial Companies-Microfinance Institutions (NBFC-MFIs) to the four states constitutes around 12% of their total assets under management, amounting to Rs 1.4 lakh crore by the end of March. Among these states, Madhya Pradesh’s share is 6%, Rajasthan’s stands at 5%, while Chhattisgarh and Telangana have negligible shares of 1% and 0.5%, respectively. Notably, the portfolio at risk for over 30 days (PAR 30+) was recorded at 2.8% for Madhya Pradesh, 3% for Rajasthan, and 2.7% for Chhattisgarh.
The microfinance sector’s outstanding loan portfolio reached over Rs 3.5 lakh crore by the end of March. While concerns might arise over lower collections due to temporary payment delays caused by political announcements, experts anticipate that any potential loss will likely be contained.
Furthermore, it’s important to highlight that collection efficiencies for microfinance lenders, including Non-Banking Financial Companies-Microfinance Institutions (NBFC-MFIs) and small finance banks, have returned to pre-Covid levels across the spectrum of borrowers. This suggests positive trends in loan repayments.
Taking a broader view, a significant portion of the credit cost linked to the Covid-19 pandemic was absorbed by the financial system until FY2023. Therefore, the remaining credit cost, expected to be absorbed in FY2024, is predicted to be lower. This outlook comes from credit rating agency ICRA, which adds a positive perspective to the evolving landscape of microfinance and lending practices in light of these unique socio-political circumstances.
