Covid woes: Banks’ collection efficiency for micro-loans drops significantly

The lockdown restrictions were relatively higher in South and some parts of central region,” said Rajat Kumar Singh-business head of MicroBanking and Rural Banking, Ujjivan Small Finance Bank.

Banks saw a significant drop in collection efficiencies for micro-loans during April and May as income generation of borrowers were badly impacted and movements of staff for collection activities in the field were restricted due to lockdowns across multiple states amid the second Covid wave.

Lenders feel that collection efficiency is likely to be ‘volatile’ in the first quarter of the current fiscal year due to the intermittent lockdowns, and the number of micro-finance customers availing loan restructuring will depend on how the economic scenario pans out post-lockdowns. They may be in a position to know the actual number of accounts required to be restructured by July.

As small entrepreneurs and individuals have continued to be affected under the second Covid wave, RBI has announced the Resolution Framework 2.0. for a one-time restructuring scheme. Banks and lending institutions can invoke restructuring under this framework till September 30.

“One EMI restricted collection efficiency in the inclusive finance business as on March 31, 2021, was 85%, which improved from 81% in December 31, 2020. In the month of April 2021 it was 83%. Collection efficiency is likely to be volatile in Q1FY22 due to the intermittent lockdowns. The second wave of Covid has been very severe in phases for the entire country,” Baskar Babu, MD and CEO, Suryoday Small Finance Bank, told FE.

“Due to the uncertainty created by the second wave, we will have to wait for a quarter to understand the incidental impact on collection efficiency. However, things are gradually improving and our focus continues to be supportive to our customers, as they navigate these tough times,” Babu said.

For Ujjivan Small Finance Bank, at the end of March 2021, 96% of its micro-finance customers were paying, fully or partly. In April, collection efficiency dropped to 88%. And, collection efficiency was lower in May compared to April.
“In the month of May, majority of states were under lockdown with different levels of restrictions. The lockdown restrictions were relatively higher in South and some parts of central region,” said Rajat Kumar Singh-business head of MicroBanking and Rural Banking, Ujjivan Small Finance Bank.

According to him, the impact on collection efficiency this time around is not as severe as compared to the first wave.
“We will provide the option of restructuring to all stressed customers. Additionally, we will also disburse loans to eligible customers to provide them the required liquidity support for revival of their income. This way, customers will be provided assistance to resume their business activities and get back to normalcy,” Singh added.

According to big data analytics company Spocto Solutions, which helps banks with its digital platform on collection-related activities, overall collection efficiency came down significantly not only in micro-finance segment, but also in segments like affordable housing, auto and personal loans.
“Bankers work with us for segmentation of borrowers and offering them differentiated solutions. There is a segment which needs restructuring, while there is a segment which may need deferment of payments for a month or two. If there is a real problem, lenders are using us to help borrowers restructure their loans,” Sumeet Srivastava, founder and CEO, Spocto, told FE.

ESAF Small Finance Bank said going ahead the outlook seemed to remain ‘bleak’ for some more time, and how fast the sector will recover depends on the customer segments. However, it expected things to pick up by July 2021.
“Customers availing restructuring depends on how the economic scenario will pan out, post lockdown. Generally, the MFI sector picks up faster than any other segment,” the bank added.