The following article reports on optimistic trends found on the loaner’s side of micro-finance, although there is not much information on the impact the borrowers have experienced.
This article reports on the grading done by Indian financial rating firm, CRISIL. The article “Asset quality of microfinance institutions improves: Crisil” written by Gayatri Nayak, was reported by The Economic Times, a subsection of the Indian newspaper India Times. The report comes with optimistic news of the microfinance institutions, whether comprised of small banks or non-banks, seeing improvements in their loan portfolios especially after an economic shock. Particularly when it came to stability in asset quality. As defined by the United States Federal Deposit Insurance Corporation, asset quality rating reflects the quantity of existing and potential credit risk associated with the loan and investment portfolios, other real estate owned, and other assets, as well as off-balance sheet transactions . The report attributes this rise to three factors: the decrease in delinquencies, rising cumulative collection efficiencies, and an increase in investor support. However, do these attributes show any similar optimistic changes to the actual borrower?
The first of the attributes to the improvement in asset quality comes from more loans being paid back. Delinquencies have dropped from 7.6% (June 2017) to 5.6% (December 2017) of payments that are 30 days past due. Similar results for 60 days past due: 6.8% (June 2017) dropped to 5.3% (December 2017). Meaning that there are fewer people who are not paying back the money they have borrowed. According to CRISIL’s senior director, Krishnan Sitaraman, lower delinquencies indicates that borrowers are paying more than one installment and that existing delinquents are paying back what they owe. Having a greater payback rate is an important thing to point out. A greater payback rate signifies that more borrowers are finding successful output from their investments. Hence, successful investments can lead to greater economic development in theory.
The second attribute highlighted has to do with the rise of cumulative collection efficiencies. In other words, the collection of debt has increased. CRISIL reported that there has been a 99% increase in the efficiency for disbursements made after April 2017. An increase such as this one is indicative of an improving market environment and better borrowing discipline. These two outcomes are a hugely positive outlook for India’s
micro-financial markets, who have suffered from demonetization in 2016 and early 2017. Demonetization is, according to Investopedia, the act of stripping a currency of its legal status of being an official medium of payment . In November 2016, India’s government called for the demonetization of all 500 and 1000 rupees banknotes . Given such short notice, announcing such radical plan caused money shortage leading there to be a serious disruption in economic output . Therefore, seeing the market make a rebound such as this one, gives strength to the microfinance market as a viable stimulant of the economy. However, the microfinance market is still susceptible to further effect from the demonetization. CRISIL estimates that 5-7% of credit was lost due to the demonetization. So, it is a critical focus for micro-finance institutions to have increased funding in order to provide a cushion from sudden shocks.
Such funding results in the third attribute mentioned by CRISIL, Investors. There has been an increase in investor support toward the micro-finance sector. According to CRISIL’s report, investors have especially invested in both equity and debt capital markets. Since the events of the demonetization, CRISIL estimates micro-finance institutions to have raised around Rs 4,000 crore of equity and Rs 7,000 crore of debt from their investors. Refinance institutions and larger banks have also continued their funding for micro-finance institutions. These lendings are facilitated by giving priority for transfers to occur toward micro-finance institutions . As discussed earlier, more funding for micro-finance institutions allows for market shocks to have less of an effect on the institutions being able to continue lending out loans regularly.
This report highlights how much micro-finance institutions impact can have in analyzing the health of the credit market. Based on CRISIL’s latest analysis, there seems to be a lot of growth currently happening in India; at least as of February, when this report was written. Having this report shines an optimistic light on micro-finance institutions’ role in supporting the economy. India still has an economy recovering from the demonetization, micro-finance institutions are seeing greater frequencies of paybacks from their borrowers. However, an important thing to point out is whether or not the borrowers are seeing a greater impact on their loans as well.
A microcredit market possesses two types of borrowers: risky borrowers and safe borrowers. Risky borrowers invest in risky projects with a particular probability of that project succeeding, thus making returns on their investment in order to pay back the loan. A safe borrower invests in a safe project in which they will always be able to pay back the loan.
Now with the context of both types of borrowers, it becomes unclear as to how much of a positive impact micro-finance institution are having in helping the economy. Particularly low-income citizens rebound from the effects of the demonetization. Due to having an increase in the number of loans that are paid back, at least three main outcomes could come as a result. One, more safe borrowers leading to safer assurance that payment will happen back to the lender. Two, there is an increase in risky borrowers actually having their risky projects succeed. Or three, a mix of both types succeeding. Personally, I believe given a recent financial shock, borrowers will most likely be risk-averse, meaning that they plan to avoid as much financial risk as possible. Therefore, the most likely case is the first. In this case, there are more safe borrowers in the market leading to less delinquent accounts since safe borrowers always pay back their loan.