The Covid-19 pandemic will undoubtedly send long-lasting shockwaves across all sectors and segments of society. To understand what this means for the Financial Inclusion sector, LEAD is taking a journey – virtual, of course – across India, speaking with experts and industry leaders. By doing so, we will take the pulse of the sector and understand how the crisis will affect the businesses of financial institutions, and the lives of their clients and members.
In the first post of this series, we reported insights from two discussions, one with the head of a non-profit MFI and one with a sector expert, on how the current crisis is affecting the operations of MFIs in the short term and what kind of changes are expected in the medium term. In this post, we share insights from discussions with two prominent sector experts: Dr. N. Jeyaseelan and Mr. N. Srinivasan.
Effects on the rural economy: multiple causes for concern
While rural India may have been mostly shielded from the health impacts of the coronavirus outbreak, the ensuing lockdown has created immense distress among its population. Even though the government has allowed the continuation of agricultural activities, deeming them as an essential service, several challenges have emerged in the last few months. One of the main challenges has been the disruption of supply chains, which has affected the agrarian sector during the harvest of the rabi season crop. As farmers find it difficult to sell their rabi crops, they have lost a major source of income. This is also the time for sowing of the Kharif crops, which may also be affected due to the lockdown. At the same time, the loss of livelihoods and reverse migration from the cities has dried up remittance-based income sources, compounding the other adverse economic effects created by the lockdown.
The impact of the lockdown on the agricultural sector has meant that farmers are unable to repay their outstanding loans. Mr. N Srinivasan points to the fact that this would make them ineligible to apply for a new loan for the Kharif sowing, which in turn might have long-lasting destabilizing consequences. No loan disbursements have taken place during the lockdown, as the risk appetite of financial institutions has gone down, in anticipation of a possible economic downturn, he further adds.
Against this backdrop, Mr. N. Srinivasan is of the opinion that the mergers of public sector bank announced by the government in August 2019, and implemented since April 2020, are expected to have adverse impacts on disbursing fresh loans to farmers. The merger, which will involve consolidation of the banks’ assets, is likely to make banks more risk-averse and may also lead to a shift in focus for banks that previously extended priority sector lending to agriculture.
Experts also note that branch officials, particularly in rural areas, are overwhelmed by the work required to deliver COVID-19 government relief packages to beneficiaries in the form of Direct Benefit Transfers (DBT). . This could further reduce their focus on the agricultural sector, and could in turn exacerbate the negative financial situation of farmers.
Both experts also believe that this might have further impacts on society as a whole. Challenges in sowing the kharif crops, due to non-availability of finance, coupled with the reverse migration flows witnessed after the implementation of lockdown measures, have resulted in excess labor supply in the rural economy.
Reviving the Rural Economy
Given the plight of the rural economy, we discussed with both experts on the measures that could be taken to revive it. Focus on solving the supply chain bottlenecks in the agricultural supply chain, and ensuring that enough credit is available for this sector, should be a key priority. Experts strongly believe that agriculture will play a major role in the revival of the economy in the post-lockdown phase, and every effort should be made to ease constraints, by increasing fiscal spending and investment in labour-intensive infrastructure projects to support the demand-side of the economy. To finance these investments, Mr. N Srinivasan suggested revising the income and wealth taxes.
Apart from these macro-recommendations, it was noted that MFIs can play an important role to help revitalize population groups that live in poverty. Dr. Jeyaseelan highlighted the importance of sensitizing MFIs and their staff to the challenges faced by their clients and to adopt a more holistic approach towards dealing with the crisis, going beyond extending credit to clients. For example, MFIs could help or support NGOs and governments in the distribution of essentials in their region. MFIs can also be in continuous touch, virtually, with their clients to check-in on their health and well-being and to provide information on measures to prevent the spread of the disease. There is some evidence that such initiatives are already being taken up by some groups, as per the discussions we had with industry experts. A study conducted by Sa-dhan also reveals that some MFIs are already engaging in relief work.
Given the unprecedented nature of the crisis, MFIs will also need to redesign their strategies as well as loan product offerings. Both experts suggested designing new loan products for livelihood reconstruction activities which could be initiated with repayment holidays. This would particularly help micro-businesses in injecting cash into their businesses and reviving them, before starting to repay the loans. A few steps to aid MFIs in this process have been taken by the RBI and Government of India. The Reserve Bank of India (RBI) has announced a INR 50,000 crore refinancing facility to NABARD, SIDBI and NHB, which are expected to infuse liquidity and help micro-businesses in their revival. Experts have suggested that this facility by RBI could be used to extend a loan moratorium of six months to one year to small and micro-businesses. In addition, SIDBI has launched a program for funding innovative startups, which includes a loan of up to INR 2 crore, and will also have a moratorium period of a maximum of 12 months.
Another suggestion, from both experts, has been to refrain from adopting a ‘one size fits all’ approach. The COVID-19 pandemic and lockdown has had differing impacts on various clients. One needs to approach client requirements to respond to the crisis on a case by case basis. Financial Institutions will need to use their judgement to differentiate good loans, which, despite the moratorium, will be repaid at a later date; versus bad loans that are unlikely to be recovered. MFIs are well positioned to do so, given their close relationship with their clients.
The pandemic also presents an opportunity to offer more innovative products to clients. Insurance is an area less explored by MFIs. Dr. Jeyaseelan provided insights into his work in rural areas, which reveals an unmet demand for cattle insurance. This could be leveraged to create awareness about other forms of insurance like health, life, and crop insurance. which would increase the system’s resilience to future shocks. Dr. Jeyaseelan also believes that this may also be a time to move loan repayments to a digital platform. While most MFIs have made their loan application and processing digital, repayments are primarily done in cash. There are a lot of risks associated with cash, and moving to digital platforms may prove to be beneficial for all stakeholders involved. Although this may be a move in the right direction, there is a need to hand-hold MFI clients through this process in order to ensure smooth implementation. In this respect, it might be useful to document the learnings of MFIs who are trying to make this transition, before scaling up the initiative.
In addition to the financial products for the clients, there are also some regulatory hurdles in the financial sector that are hindering the implementation of relief measures by MFIs. There is ambiguity on whether the moratorium announced by the government applies to MFIs and NBFCs. Some banks have offered moratoriums to their MFI and NBFC clients, however there have been no clear guidelines from the RBI. If this moratorium does not extend to MFIs, this can create severe liquidity issues, especially for small MFIs. In the absence of repayments from clients, MFIs will not be able to repay banks and many are likely to default. This in-turn will curtail their ability to give fresh loans to the clients, who need the working capital for livelihood reconstruction activities. Moreover, lending has not been considered an essential service during the lockdown. However, as highlighted at the beginning of the article, given the crucial time in the agricultural sector and the large numbers of rural populations dependent on agriculture, lending for kharif crop sowing needs to be an essential service.
Way forward
Despite all of the issues discussed in this blog post, the rural economy may be well positioned to drive the reopening, growth and revival of the economy. Hence, it is essential that measures to ease restrictions and enable farmers to engage in livelihood generating activities be made a priority. Although the government has listed agriculture as an essential activity, the lockdown has exacerbated the bottlenecks in the agricultural value chain and has posed challenges to the farmers in terms of accessing and selling their produce in the markets. Removing these bottlenecks should be a top priority. The recent reforms in the agricultural sector, announced by the government, are surely a step in the right direction.
Since MFIs work on the ground and are aware of the field-level challenges, it is essential that banks, and regulatory bodies like SIDBI and NABARD engage closely with the MFIs r to get an in-depth understanding of the difficulties faced by the clients as well as MFIs as an institution. This will also help these institutions in designing their refinancing model to MFIs, so as to be most beneficial to the MFIs and clients.
This is also a time where MFIs can innovate and develop financial and non-financial products which would be useful to all stakeholders, even in the longer-run. The sa-dhan report has highlighted one such initiative by Satya Microcapital, wherein they developed a digital platform to provide virtual health-based consultations to their clients and employees. In order to ensure that these innovations are sustained, even after we come out of this pandemic, experts have suggested increasing the training of MFI field personnel.
These are surely unprecedented times, and there is no guide book to tackle the myriad challenges faced as a result of this pandemic and the required physical distancing measures. Continuous engagement and monitoring of the system, and innovation based on the ever-changing situation, seems to be the way forward.
About the Authors
Anoushaka Chandrashekhar is a development sector professional with a strong foundation in research and evaluation design. She currently works as a Project Manager with LEAD, managing research projects on women collectives and agriculture. She has over 5 years of experience in stakeholder management, data collection, and data cleaning and analysis, in India. Anoushaka holds a Master’s degree in Social Work from The University of Texas, and a bachelor’s degree in Economics from Shri Ram College of Commerce, Delhi University.
Fabrizio Valenti is the Head of LEAD’s Financial Inclusion team, overseeing the organization’s research portfolio on this topic. Commanding an extensive portfolio of international experience in development, he has previously worked for KSAR, Save the Children in Sierra Leone, UNDP in Indonesia as well as the University of Rome Tor Vergata, for which he has led projects in Italy and Bangladesh. Fabrizio has a PhD in Economics from the University of Rome Tor Vergata