Green shoots, parched roots

Good morning! Media reports would have you believe that microfinance is thriving in India. In today’s edition, we ask a simple question: how so? Indians today are grappling with falling remittances, a decrease in government allocations for rural schemes, and the long-term effects of Covid, Goods and Services Tax (GST), and demonetisation. You’d assume loan repayments in the hinterland are recovering slower than in urban India, but that’s not the case. This faster rate of repayments seems like a pleasant surprise… until you realise the lengths people go to close those loans. Plus: don’t miss our curated picks of this week’s best longreads.

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Once again, an old contradiction is rearing its head.

Micro loan repayment trends show that, after being ravaged by the pandemic, tiny livelihood businesses at the grassroots level are recovering well. Yet, there are signs of distress too. Bad loans rose 16% in the December quarter of 2022 compared with the previous three months to a record high of ₹42,300 crore (~$5.1 billion).

Microlenders’ association Sa-Dhan reported that bad loans for the sector as a whole in September-December 2022, however, stayed at 13%, the same as Q3 2021. It was the quantum of loans where borrowers missed payments for over six months that inched up from 11.02% in Q2 2022 to 11.49% in Q3. But collections had improved on loans staying unpaid over 30 days, 60 days, and 90 days.

The difference in distress levels was on account of the losses that occurred during the pandemic period carrying over while loans taken out later achieved pre-pandemic levels of repayments.

In ‘The Bharat Microfinance Report 2022’ (pdf), finalised last November, Sa-Dhan said the sector, which claims to keep poverty at bay by bolstering incomes and consumption at the absolute bottom of the pyramid, was affected by the pandemic. But “towards the closing months of the year 2020-21, there had been a turnaround and the sector started progressing well with lending and collections almost normalized”.

The annual review comprises banks, NBFC-MFIs (Non-Banking Financial Companies-Microfinance Institutions), small finance banks, NBFCs, and non-profits.

Why are we splitting hairs over microfinance now? Because despite various studies and analyses by government and private agencies, a true picture of how the Indian economy is faring, and how a vast majority of its citizens are getting by, is still missing. Even economists working for the government admit that they are handicapped by a lack of data. It is then surprising that the microfinance sector, which reported the highest-ever non-performing loans, is said to be thriving. Surely there is more to it than meets the eye.

The Intersection scoured through media reports, essays by economists, and held conversations with field activists to find that rural India, the lower middle class, and those below the poverty line—the typical clientele for microlenders—are still struggling.

How is India doing?

“Incomes are not recovering,” says Abhijit Banerji, director of Lucknow-based FINISH Society, a non-profit that works on water, sanitation and hygiene in Bihar, Uttar Pradesh, and Odisha. “MSMEs (Micro, Small, and Medium Enterprises) are in trouble. There are no jobs. People have not gone back in the numbers they used to. Instead, they have gone back to land. Only now, there are three [people] working on a small patch as opposed to two.”

Associate professor at Jawaharlal Nehru University and visiting fellow at the New Delhi-based Centre de Sciences Humaines, Himanshu, wrote that 33 million workers left farming between 2004-05 and 2011-12. A matching number left in the next six years too. The slowdown and the pandemic drove them back, with 36 million workers returning to farms between 2017-18 and 2021-22.

In another column written shortly after the budget, Himanshu said that “per capita [rural] incomes in real terms in 2021-22 are still below the 2018-19 levels”. In Andhra and Telangana, says GV Ramajaneyulu, head of Hyderabad’s Centre for Sustainable Agriculture, expenditure (on cost of living and cost of farm inputs) is rising much faster than incomes, leaving people more indebted than before.

Similar accounts of rural distress come from elsewhere in India as well. Be it Gujarat, Madhya Pradesh, or Assam, farmers complain of costly inputs but low incomes. Climate change has added to these pressures. Banerji cites the example of Sitapur near Lucknow, which was lashed by unseasonal rains. “The whole [Rabi] crop has been destroyed. We are seeing more such events, like heatwaves, sudden rains, and floods, all eating further into rural incomes.”

There are other signs of impoverishment, such as a rising number of families finding cooking gas increasingly expensive and falling back on traditional fuels.

The question writes itself. If rural India—and the lower middle class—are still struggling, how is microfinance doing well?

The old ghosts of 2010 (and the new ghosts of 2023)

In some ways, the current situation resembles what India has seen in the past. Micro-loan providers were the ‘unicorns’ of an era that was defined by a phrase coined by then US Federal Reserve Chair Alan Greenspan, “irrational exuberance”.

In the mid-2000s, impelled by the Reserve Bank of India’s (RBI’s) mantra of inclusion, banks pushed hundreds of crores into MFIs, particularly in Andhra Pradesh. The MFIs, suddenly flush with enough money to double their loan books each year, began expanding aggressively, lending recklessly as social entrepreneurs eyed glorious IPO exits.

More money flowed in than the villages and hamlets of the then-undivided Andhra Pradesh could absorb. By 2009, micro-loan penetration among poor households was so high (823%) that each home would be servicing eight loans.

By early 2010, women were borrowing from one MFI to repay another, all of which was indirectly underwritten by a scheme under the National Rural Employment Guarantee Act (NREGA). A large number of borrowers were relying on NREGA jobs to repay their loans, and Andhra Pradesh was offering more NREGA work days than any other state. The music stopped when the union government told states to cap NREGA work days at 100 a year. Borrowers defaulted en masse.

A similar process is at work this time around too. With the economy sluggish, corporates are not borrowing. “At the same time, banks have to lend somewhere, which is where microfinance has re-entered the picture,” says Himanshu. MFIs’ gross loan portfolios have climbed from ₹2.56 lakh crore ($31 billion) in 2021 to ₹3.2 lakh crore ($38.7 billion) in 2022. In a throwback to the mid-2000s, some MFIs are back to boasting about 440% growth in five years.

There are, however, important differences between microcredit between 2010 and 2023. As reported above, NREGA was one reason Andhra did not see a loan default till 2010. Borrowers had another cash flow that enabled them to keep repaying.

That doesn’t hold now. Government allocations for rural India schemes are falling. So are domestic remittances. “Even now, our business is not back to pre-Covid levels,” says Abhishek Sinha, head of Eko India, which helps migrant workers remit earnings back home. “Pre-Covid, our average transaction was ₹3,300 ($40). Now, despite rising inflation and the passage of three years, it stands at ₹3,200 ($38.7).”

In tandem, new curbs are in place too, prohibiting MFIs from lumbering households with so much debt that more than half of their monthly income goes to repay loan instalments. This, says Praseeda Kunam, promoter of Bhopal-based Samhita Community Development Services, is meant to curb the risk of households slipping into debt traps.

How are Indians repaying?

All these loans are flowing to a population that has been sequentially hammered by demonetisation, GST, and two years of Covid.

Many borrowers repay loans by cutting back on household expenditure, while some others borrow elsewhere to stave off micro-loan dues. “People are repaying,” says Kunam. “I see that in my own organisation.”

She traced this back to two factors. First, unlike before, lenders are more cautious, giving loans only to those with high credit scores. “There is tighter screening and, therefore, some riskier people have been excluded,” she elaborates. “The rest [of the borrowers], very aware of the need to have a good credit rating, are trying not to default.”

Second, in the context of the prevalence of rural distress, Kunam says: “People are repaying these loans by cutting back elsewhere. There are cases where parents have taken their kids off convent schools and put them into government schools.”

According to Sa-Dhan’s executive director and CEO Jiji Mammen, multiple income sources help borrowers repay. “In a recent sample study done by an independent body supported by Sa-Dhan,” he tells The Intersection, “it was found that around 75% of the borrowers have two or more income sources, which may also include wage labour, etc. Hence, the repayment is from multiple sources of income the borrower has.”

Another set of borrowers is also turning to debt recycling. Notwithstanding RBI strictures telling MFIs to track household indebtedness, says Manoj Sharma, the managing director of Lucknow-based Microsave, families and field agents collude to create outcomes where members of one household borrow from different MFIs.

This is an old response. By 2016, as expenses rose faster than incomes, households in Tamil Nadu turned to borrowings. They borrowed from banks, and then from MFIs to retire the first set of loans, and then from informal moneylenders. When the pressure to repay got too high, they turned to yet more desperate measures such as selling land, migrating for work to cities, pledging ration cards as collateral, tying up as bonded labour with contractors, etc.

If anything, this picture has only gotten more complicated. Over the past 10 years, the country’s lending market has seen a lot of change. Earlier, it comprised MFIs, self-help groups, banking correspondents and informal moneylenders. Today, payment banks, small finance banks and a plethora of lending apps, including Chinese ones, have swelled those ranks further. India had the highest number of installs for lending apps in Asia-Pacific in 2020, wrote Business Insider: “The venture capital tracking platform Tracxn reportedly estimates that there are 484 alternative lending startups currently operating in the country.”

The resulting interplay between these diverse actors is poorly understood. Such data is not collected. What we do know is that urban and rural loan markets draw different players. Small finance banks, payment banks, and loan apps are more widespread in urban India than in the hinterland. In the latter, other actors are stepping in.

Take Andhra Pradesh. Twelve years have passed since the state cracked down on MFIs. The state, however, has been more successful at curbing MFIs’ growth than at creating alternative sources of debt, says Ramajaneyulu. “About 4-5 years ago, we began to see the rise of call money rackets. These are very organised informal market lenders. Goondas, really. Like them, we have seen the rise of newer lenders—gold loan schemes, pyramid schemes. In all, 3-4 such models have emerged.” The rates of interest, he adds, range between 2-3% a month to as high as 10%.

The Intersection asked Sa-Dhan’s Jiji Mammen if the association collects data on how people are repaying loans. “As regards evergreening, we have tried to find out the truth from credit bureau data,” he shares. “The result is negligible. Regarding rotating the funds, there is a proper regulation by the RBI, which says that the repayment obligation from all sources of a household should not exceed more than 50% of monthly income. Hence, the possibility is limited.”

Informal lenders, however, operate in an unsupervised space. As do the lending apps. And, borrowing through different members, households don’t always reveal the full extent of their indebtedness.

What it all means

Put all this together, and a complex picture emerges.

Some MFIs are lending more cautiously. Others aren’t. “I have heard of cases where loans are given without the waiting period,” FINISH Society’s Banerji says.

At the same time, rural borrowers are hamstrung, with lesser cash flowing into their economy. The situation might be even direr for middle-income households than folks in rural India, Himanshu tells The Intersection. “What India has seen after Covid is not a K-shaped recovery. The poor have suffered, but they were also protected to some extent. They had food schemes, NREGA, PM-Awas, etc.” It is the middle class that has been squeezed, he emphasises. “Not only is it more integrated into the market, it has nothing to fall back on.”

Kunam agrees, saying that loan repayments in rural India are recovering faster than those in urban areas.

The bigger question in all this is about India’s people. Marked by demonetisation, GST, and Covid, these are extraordinary times. How are they managing in this era of low incomes, high joblessness, and rising expenditure?

We keep seeing isolated reports about debt forcing individuals and families into taking extreme steps. As this discussion shows too, something less than normalcy explains Sa-Dhan’s numbers as well.

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