Microfinance lenders in Assam brace for more pain amid loan forgiveness talks
Assam has seen a decline in lender collection efficiency amid discussions over a political party loan waiver and a new microfinance bill currently being approved by the state, adding to concerns about the deterioration of asset quality in the industry.
“In our recent channel audits, we found that collection efficiency in some districts of Assam fell to 45-50% in January 2021. This compares to the 87% reported by Bandhan Bank Ltd. and 74% by Ujjivan SFB (small fundraising bank) in October 2020, ”Macquarie said in a research report Tuesday.
It comes when the ruling party and the main opposition proposed to forgo microfinance loans ahead of state government elections later this year. While political parties have discussed a waiver, the likelihood that it will cover all state microfinance borrowers is low. Since the state’s total budget expenditure is just over Rs 1 lakh crore, Macquarie said it would be impractical to forgo all loans. The cumulative microfinance loans in the state exceed Rs 12,000 crore, he said.
Partial loan forgiveness will directly affect lenders such as Bandhan Bank, Arohan Microfinance, ASA International, RGVN Small Finance Bank and Ujjivan Small Finance Bank. Moral hazard problems, according to Macquarie, will spread to all categories of borrowers if one group’s dues are canceled and the others are not. “. . . . . . . . . . . . Others soon stop repaying. If the waiver is not comprehensive enough, there will be significant losses in the industry, ”the research report said.
For Bandhan Bank, Assam accounts for 16-17% of microfinance assets or 10-11% of the total loan portfolio and contributes around 45% of the lender’s equity. Bandhan Bank holds around 60% of Assam’s microfinance market share. Its total loan portfolio stood at Rs 76,620 crore as of September 30, 2020. Ujjivan Small Finance Bank, with a total loan portfolio of Rs 13,890 crore as of September 30, has an exposure to microfinance loans of approximately Rs 350 crore in Assam, according to Macquarie.
While Assam has been one of the fastest growing microfinance markets in recent years, asset quality issues for state lenders are not new. In January 2020, Assam witnessed a rise in unpaid bills due to protests following the bill amending the citizenship bill introduced by the central government. Again in February of the same year, CRIF High Mark highlighted that Assam microlenders have seen the greatest repayment pressure among the top 10 states as “socio-political factors” affected northeast India.
The Assam government, however, has taken steps to protect borrowers from any difficult collection practices lenders follow, including going to their homes to collect money. Last month, he approved a new bill that requires all microfinance lenders to register with the state government within 30 days of its passage. He proposes to prevent lenders from taking collection action unless they are registered. Retrieval should only be done at the Gram Panchayat office or other publicly designated areas. The bill even prohibits microfinance lenders from lending too much.