Microfinance Institutions and COVID-19

By Prasanna Vaidya

As the COVID-19 pandemic continues, bringing the economy and life back on track remains the biggest challenge. With the increasing number of infections—Nepal’s total cases are now 603 with three deaths as of May 24, 2020–the country is plunging into deep health crisis. Because of ill-equipped health-care systems and lack of equipment to combat the virus, the effects of the pandemic in Nepal will be even more damaging. There are concerns whether urgent action is needed. The Government of Nepal should involve UN agencies, NGOs, Cooperative societies, Private sectors, and Civil Society Institutions in implementing activities in the grassroots to tackle the COVID-19 impacts. UN agencies, INGOs can monitor and provide technical assistance to the national and local levels.

During the pandemic, livelihoods and institutions are experiencing devastating collapses, some are even facing existential crisis- particularly those with smaller operating margins and household income. According to the United Nations Development Program (UNDP) in Nepal, the micro, small, and medium enterprises (MSMEs) have been adversely affected. Until now, three in every five employees of both formal and informal sectors have lost their jobs. In Nepal, SMEs contribute around 22% of the GDP and generates around 17 lakh employment. Formal and semi-formal sectors have financed half of the SMEs and the other half is financed by the informal sector. The Institute for Integrated Development Studies (IIDS) has revealed that the MSMEs have witnessed a fall of 95 percent in average monthly revenue across Nepal. While some researchers point that the COVID-19 is more of an “urban phenomenon” and since microfinance largely deals with services in rural and semi-urban areas, it is not likely to get affected adversely for a longer period if few appropriate measures are adopted. Over these years, microfinance institutions (MFIs) have played a critical role in poverty alleviation by supporting the income-generating activities, women empowerment, improvement in education, and health status for the poorer. Its objective is to achieve Sustainable Development Goals (SDGs) which in overall form an essential basis for social and economic development.

MFIs are suffering from a lack of repayments, access to capital, liquidity for both investors and creditors, and fund for on-going operations. It has also become difficult to raise funds for venture capital firms. As a result of the poor financial performance, additional credit will be difficult to generate. Although Nepal Rastra Bank (NRB) has already announced a number of relief measures including rescheduling of loan repayment and will also prioritize refinance facilities for small and medium scale enterprises, these are short-term measures and may not yield the desired results. The Government of Nepal and NRB (Regulators) should ensure prioritizing and points out the guideline which may manage the workforce, sustain the crisis and beyond. In several neighboring countries, their government has granted small businesses a 1-year moratorium on all principal repayments. They have introduced emergency loans to support MSMEs and flexibility for repayments of existing loans. Additionally, banks and microfinance institutions are also promoting digital channels like debit-card usage, and so on.

Regulators can take several measures like a financial support package which includes a loan support system and a comprehensive response plan to cope with the outbreak.

• Suspensions of loan repayment up to 9 months for financial institutions.
• Reducing the repo rate and cash reserve ratio to increase the liquidity in the market.
• Increase the Debt to Equity ratio and relaxing the Liquidity Ratio to increase on-going lending.
• Waiver on unsecured interest and interest rate.
• Reducing interest rates in debt financing.
• Increasing the provision of credit portfolio to a minimum of 7% for deprived sector lending.
• Enabling MFIs to access and facilitate in injections of capital.
• Direct lending support to MFIs from the Central Bank or intermediated through domestic banks.
• MFIs should offer new loan products and disaster recovery loans as a supportive loan.
• A concessional loan scheme for farmers and extending credit to mostly small and marginal groups.
• MFIs should restructure loans on assets.
• Encouraging (waived) MFIs to use digital channels, like mobile money, for loan collections and disbursements at scale immediately.
• Allowing MFIs with secure payments network to allow digital products, including self-account opening, digital savings, digital transfers to bank clients, and even retail payment schemes.
• Declaring MFIs an essential service and allow MFIs to resume operations from June with public health guidance.
• Establish a credit assessment institution as a private-public partnership.

The majority of borrowers who are connected to MFIs are poor people or low-income individuals. Because of less techno-friendly the MFIs should virtually educate and inform the borrowers about disbursements and contingency plans promptly which when implemented by the regulators. Information on export and domestic agricultural demands should be coordinated to provide farmers the confidence to produce a remunerative output and to reduce price volatility in agricultural markets. Direct relief schemes to low-income people and facilitating social protection should also be executed by the regulators.

Thus, MFIs have always been a valuable option for the provision of social protection and social assistance and will play also their vital role in recovery once the COVID-19 crisis recedes.

(The author is an M. Phil at Delhi School of Economics, Delhi University.)