Double whammy for microfinance

Kolkata, November 13 

The demonetisation of high-value currency notes has come as a double whammy for microfinance institutions (MFIs), which have temporarily stopped providing credit to their customers while loan repayments have also taken a major hit, industry sources said.

"A lot of microfinance institutions put disbursement on hold because we need some clarity and it is currently quite ambiguous. We need clarity whether the institutions can collect Rs 500 or Rs 1,000 notes from their borrowers as repayments of loans or not. We are not sure about it," Microfinance Institutions Network CEO Ratna Viswanathan said.

The microfinance industry is cash-intensive. Most of the borrowers take loans in cash and they repay loans in cash, particularly in Rs 500 or Rs 1,000 notes. Even many of the borrowers who have bank accounts do not know how to transact through them. Thus, cash transactions in the rural economy, where most of the MFIs operate, become inevitable.

MFIs record a repayment rate of 99 percent but it took a blow after demonetisation. The sector is worried about taking the business forward in view of the increasing risk of defaults. "We have started deferring repayments and on Friday, the repayment was down to 70 percent from nearly 100 percent," Village Financial Services' Managing Director and CEO Kuldip Maity said. 

It is a double whammy for the industry as borrowers do not possess much cash in hand with new currency to repay loans in time and due to lack of liquidity in the system, MFIs are not able to disburse loans. — IANS