Microfinance was strongly tested at the start of the Covid-19 pandemic. Microfinance institutions, running a high-touch business and serving lower income clients severely impacted by the pandemic, were projected to potentially become extinct.
Microfinance institutions managed to not merely survive the crisis, they are now seen as more resilient and relevant than before. What explains this? Looking back, the answers lie in how microfinance institutions responded to the pandemic and how they were supported by external factors.
At the onset of the pandemic, microfinance institutions reconnected with their clients, often with text messages on hygiene, and safety and social distancing reminders. Microfinance institutions reached out to their clients even as microfinance lending and loan collections came to a standstill.
These lenders sensibly avoided sending reminders on loan overdues and missed payments, instead focusing on the government-endorsed messages, which helped to build trust. Clients were also able to draw assurance from their past dealings with these microfinance institutions when they stood by them and extended lifeline credit.
First cautiously and then with renewed momentum, microfinance institutions reopened for business. The first wave of the pandemic, largely limited to cities, posed fewer operating challenges for microfinance institutions. With clearer regulations and improved liquidity, microfinance institutions helped restart pandemic-impacted livelihoods, with smaller-sized and speedily disbursed micro loans, often for amounts which were half the pre-pandemic levels.
For a borrower seeking credit amid such distressed circumstances, when other lenders have shied away, microfinance institutions emerged as a lender of last resort. And despite facing overdue loans and high operating costs, these institutions kept to fair lending practices and treated clients with respect and dignity, which reaffirmed this trust.
A variety of other factors were at play: help came as regulators stepped in; lenders and investors stayed confident; monsoons were normal and local socio-political uncertainties were kept aside.
Regulators have been notably supportive of microfinance, balancing the needs of the microfinance institutions (liquidity and loan portfolio quality) with micro-borrowers (loan obligations). Measures like loan moratoriums, directed lending and credit-guarantees were effective in injecting liquidity, preventing financial distress and contagion in the sector. Access to liquidity, which had been an Achilles Heel in previous crises - was a key factor in microfinance institutions' ability to bounce back.
The lenders to microfinance institutions, benefiting too from regulatory provisions, re-scheduled loans and steadily released funds for them. Many equity investors re-confirmed their confidence by injecting new capital, an act of immense confidence not overlooked by lenders.
Local socio-political processes, which often played critical roles in previous similar situations, have been largely neutral or non-interfering during the pandemic, supporting the recovery process. A normal spell of monsoons across South Asia and Southeast Asia supported farm-based income and cushioned the impact of lockdowns on the micro-borrowers, which are predominantly in the rural areas.
The clients responded positively, despite their challenged economic situation. With microfinance institutions seen as lenders of last resort, their clients too treated them as preferred creditors, taking extraordinary measures to service their dues. The borrowers' desire to keep clean repayment histories with credit bureaus, often a requirement for accessing new loans, has emerged as a form of collateral. The small-ticket loans, targeted at these paying borrowers, had a positive demonstration effect on repayment behaviour.
A data set for India which showed that the trend in collection efficiency, a key operating parameter in microfinance for analysing timely repayments, has been analysed to get a picture of sector. The trend analysis, also representative of most Asian developing countries, showed that the fall in collections in April 2020 and then later in May 2021 reflects the impact that the first and second waves of pandemic had on microfinance; while the recovery in the following months showed its resilience.
So, is microfinance out of its existential crises? Will it go back to pre-pandemic levels?
The future of microfinance is no longer in question. It has emerged stronger from the pandemic. For microfinance institutions, attaining the pre-pandemic levels of loan portfolio growth, collection efficiency, and scale economies in operations will likely take substantially longer, and some say may never be achieved.
After the initial 'V-shaped' recovery, more tapered improvements, amid smaller localised 'W-shaped' economic ripples, are expected ahead. The economic profile of microfinance institution clients has changed too, unfortunately not for the better.
Microfinance institutions are 'learning' organisations. The pandemic has again underscored their ability to learn and change. Factors like a culture of bottom-up planning, staff progression policies which encourage in-house talent and openness to adoption of technology and new processes, have enhanced their adaptability.
These lessons will be called upon as clients of microfinance institutions face greater economic pressures. For these clients, income streams like remittances from cities will diminish, and their mainstay agriculture and farm-based income will face increasing fluctuations from climate change-related weather events.
As a new normal sets in, there are more reasons to believe that the microfinance growth engine is back on tracks, though the journey ahead may often be uphill.
The piece is excerpted from www.blogs.adb.org