22% by the end of the year. Disbursements declined by approximately 29% in the second half of Fiscal 2017 as compared
to 60% growth in the first half of Fiscal 2017.

Customers belonging to this industry are the bottom of the pyramid and majority of their earnings are cash-based. Further,
customers relying on daily-businesses experienced significant earnings loss due to decreased demand on account of non-
availability of cash. Most of these customers belong to rural areas where the penetration of banking is low, and the cash
crunch significantly affected the industry.

NBEC liquidity crisis

The liquidity crisis affecting NBFCs in India had a minor ripple effect on micro-lenders. The lenders who relied on
NBFCs for funding reduced disbursement and sought alternate sources for funding. However, the impact of the crisis was
not that profound as large NBFC-MFIs had a diversified funding mix and were able to leverage this to their advantage.
NBFC-MFIs’ outstanding borrowings increased at 23% CAGR from Fiscal 2018 to Fiscal 2020.

COVID-19 pandemic

The extended nationwide lockdown to contain the spread of COVID-19 has affected the income-generating ability and
the savings of borrowers accessing MFIs, those typically with weaker credit profiles compared with borrowers of other
types of lenders. About 70% to 80% of the micro loan borrowers have sought moratorium under the ‘COVID-19 -
Regulatory Package’ announced by the RBI. Due to the nationwide lockdown, and several state-imposed lockdowns
thereafter, normal operations of MFIs — loan origination and collections — have been a challenge, as the operations of
MFIs are field-intensive, involving high personal interactions, such as home visits and physical collection of cash.

Prior to the lockdown, many MFIs had managed to support their liquidity by March-end, as typically collection days are
the first two weeks, prior to the lockdown was announced. Collection efficiency was largely intact at 98% to 99%. The
MFIs also drew down bank loans for the purpose of on-lending in the last week of March, typically a period marked by
high business activity. However, disbursements did not happen as planned on account of the lockdown.

With lockdowns being implemented by state governments, based on the infection rate trajectory in a region, and
restrictions being lifted only in a phased manner, disruption of income-generating activities of borrowers is expected to
continue. It is therefore crucial to assess how quickly borrowers return to normal repayment discipline once the situation
normalises. Borrowers are not expected to clear their overdue immediately, therefore PAR>30 days is projected to
increase by 800-900 bps on-year in the second and third quarters of Fiscal 2021.

In the past, MFIs have recovered after periods of stress, such as post demonetisation, floods and other local socio-political
disturbances.

Key reforms proposed by the government for microfinance to counter COVID-19 crisis

* — Refinance support from RBI: In April 2020, the RBI announced refinancing support of & 250 billion to NABARD,
which provides support to NBFC-MFIs, RRBs and co-operative banks

* Loan interest subvention scheme: Under this scheme, the government has provided 2% interest subvention to loans
given under the Mudra-Shishu scheme. These loans are up to a ticket size of = 50,000, and are primarily given by
NBFC-MFIs catering to low income groups.

Rising penetration is expected to support healthy growth of the industry over the next three fiscals

 

As of March 31, 2020, the microfinance industry had grown at a CAGR of 24% since Fiscal 2017. In Fiscal 2020, the
industry grew by 16% to amount to 2 3.3 trillion in March 2020. In light of COVID-19 outbreak, the microfinance sector
is expected to find it challenging in the current Fiscal 2021. Overall growth of microfinance sector is expected to remain
subdued in the current fiscal to amount to @ 3.5 trillion owing to high sensitivity of the sector towards external shocks.
However, the domestic microfinance industry has shown resilience towards external shocks in the past and is expected to
gain momentum in the next two fiscals covering the least penetrated areas.

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