The government’s decision to demonetise high-value currency notes will take its toll on the microfinance industry and could lead to losses in the range of Rs 1,500 crore to Rs 1,700 crore, Chandrashekhar Ghosh, CEO of Bandhan Bank, has said.
Earlier this week, Bandhan Bank, which was one of the largest micro finance institutions before it became a bank last year, suspended its micro-credit disbursement after the government demonitised Rs 500 and Rs 1,000 notes on November 8.
“With the invalidation of high-value currency, the existing capital base for micro finance institutions has mostly been wiped out. Now these MFIs will have to wait till returns from their lending operations accumulate, which could take time,” Pronab Sen, former advisor, Plan Panel, was quoted by Hindustan Times as saying.
The business of MFIs, which works largely in cash, cannot accept demonetised notes as they are not banks. As a result, collections from customers have stopped since last Tuesday, affecting the entire industry. Eventually, the disbursement rate will also slow down significantly in the October-December quarter.
Meanwhile, rating agency India Ratings and Research (Ind-Ra) on Thursday said microfinance institutions (MFIs) may experience high overdues.
"Ind-Ra believes demonetisation is likely to affect MFI borrowers and MFIs across the country, albeit temporarily. MFIs' borrowers are expected to reprioritise their expenses on account of face cash flow mismatches. As a result, MFIs may experience high overdues.
Moreover, demonetisation indicates lack of diversification in MFIs' borrower profiles," it said in a special report.
The agency's analysis shows that most MFIs have liquidity in the form of "unencumbered cash" and unavailed bank lines to meet debt obligations for 30-60 days in the event of business disruption.
"If money flow does not fully normalise by 4Q FY17 (January-March quarter of 2016-17), Tier 1 capital of few MFIs could come close to regulatory minimum levels," the report said.
The rating agency further said it expects banking habits to improve in the long term, as currency flow resumes, and this would be a positive development for the institutions as well as their borrowers when their credit history improves.
MFIs have temporarily stopped providing credit to their customers after the demonetisation of high-value currency notes. Loan repayments have also taken a major hit. Microfinance firms have deferred the repayment schedule of their borrowers for the next few days.