Pakistan’s microfinance industry, which is already struggling to recover from the impacts of the first wave of the Covid-19 pandemic, could face tougher times in the next six to 12 months should the increasing virus infections lead to fresh business disturbances in the country, squeezing the repayment capacity of the small borrowers further.

The microfinance banks and institutions are already facing considerable difficulties in recovering their old loans because a majority of the borrowers are still unable to meet their repayment schedules owing to losses in their incomes. According to industry sources, the number of active borrowers has shrunk from its peak of 7.4 million in 2019 to 6.8m in 2020 because of the health crisis, which forced the government to enforce the lockdown across the country, causing significant disruptions to the agriculture supply chain. The failure of the cotton crop has added to the woes of the microfinance lenders.

If the present trend of rising infections continues, the industry will have to restructure more loans going forward and reduce loan disbursements further

The loan recovery rate in March stood at 80 per cent, down from over 90pc a month before, before dropping to 20pc in April. It recovered to 50pc in June after the lockdown restrictions on businesses were eased with the dropping Covid-19 cases, according to the Pakistan Microfinance Network.

The number of small active borrowers was decreasing because of overall economic slowdown and rising inflation even before the coronavirus outbreak in the country. In March, the total number of active borrowers of the microfinance sector had dropped to 7.1m million from 7.4m in December 2019. The Covid-19 health crisis and decline in agriculture had only exacerbated the crisis. This is the first time that the industry, which was growing rather rapidly, has recorded a decline in its size.

The microfinance industry comprising banks and not-for-profit microfinance institutions (MFIs) had already seen its loans in arrears for 30 days, the most common indicator used to see how the sector is performing, increase from 5.8pc in 2018 to 6.1pc in 2019 because of the challenging and uncertain macroeconomic environment and runaway inflation.

A Pakistan Microfinance Network survey on the impact of the Covid-19 outbreak on borrowers in May had shown that businesses of 82pc of the respondents were negatively affected. About 85pc respondents had reported significant or somewhat decrease in their household incomes, squeezing their repayment capacity. Some 40pc borrowers thought that they could sustain themselves for less than a month. Only a small proportion of clients (6pc) were in a position to sustain themselves for up to six months. Around 58pc borrowers wanted repayments of their debts delayed because of the stress on their cash flows while 20pc respondents wanted their liabilities to be written off completely.

“Luckily, the pace of loan recovery has only slowed down. A majority of the borrowers are still making debt repayments on schedule,” a microfinance banker told this correspondent last week. Before the pandemic, the non-performing loan (NPL) portfolio of the industry was around 1-2pc. It is now on the increase, according to industry sources. The actual impact of the first wave of the pandemic on loan recoveries will not be known before June when the repayments of rescheduled and restructure debt become due, according to Mubashar Bashir, the Deputy Chief Financial Officer at the Finca Microfinance Bank.

He said the microfinance banks were able to keep their balance sheets clean this year because of the State Bank of Pakistan (SBP) scheme that allows restructuring of loans to ward off defaults. “The possibility of loan defaults over the next several months cannot be ruled out. New disbursements have also slowed over business conditions and there are fears of defaults as one in every three microfinance loan is being rescheduled. If the present trend of rising infections continues, the industry will have to restructure more loans going forward and reduce loan disbursements further.”

Mudassar Aqil, CEO of Telenor Microfinance Bank, had told this correspondent in August that the “accounting relief” provided by the SBP through its debt deferment scheme had helped prevent erosion of the banks’ capital but, at the same time, shifted the problem (of the potential defaults) to a later period.

The exact size of the restructured loans is not clear as yet. What happens next is in the future. But Mubashar Bashir sees a silver lining in the crisis. “The health crisis has helped the microfinance industry digitise its services and launch digital wallets and allied services very rapidly. The developments in the digital sphere were long overdue; the pandemic has pushed the microfinance banks to achieve the six-year target in just six months.”

Published in Dawn, The Business and Finance Weekly, December 28th, 2020