<p>Small loan specialists in India that typically cater to people without bank accounts are facing a jump in pandemic-related defaults that could force some of them out of business, industry experts warn.</p>.<p>Loans overdue by 30 days are expected to reach 14-16 per cent of all so-called microfinance loans in the immediate aftermath of the second Covid-19 wave sweeping India, said Krishnan Sitaraman, senior director at credit rating agency CRISIL.</p>.<p>That's higher than 6-7 per cent in March, before the second wave took hold, and also above the 11.7 per cent reached in March 2017 after India's demonetisation drive - an attempt to boost digital transactions and crack down on undeclared money that also hit microfinance lenders hard.</p>.<p>"Older loans that were taken in 2019 or early 2020 are at a higher risk of defaults and they form about 60-65 per cent of the loan book for lenders," said Harsh Shrivastava, former head of the Microfinance Institutions Network, an association representing the sector in India.</p>.<p>Rahul Johri, chair of Vector Finance, a microfinance firm that provides loans to small enterprises, said many support measures brought in by the government had only helped larger institutions, while smaller players had struggled.</p>.<p>"It has become an existence issue for several small and mid-sized microfinance institutions as business has been severely impacted and collections are down," said Johri.</p>.<p>Loan collection efficiency across the total loan pool has fallen to about 70 per cent from a peak of nearly 95 per cent in March, analysts say, indicating a potential build up in stress.</p>.<p>The gross loan portfolio of India's microfinance lenders stood at 2.6 trillion rupees ($35 billion) as of March 31, according to CRISIL.</p>.<p><strong>Bumpy Road Ahead</strong></p>.<p>Despite the short-term challenges, some remain bullish on the sector and expect it to bounce back if an anticipated third wave of Covid-19 infections in India is not so severe.</p>.<p>"About 55 per cent of the market is still untapped which means there is huge market opportunity ... so things will look up soon," said Johri.</p>.<p>But for now, many smaller microfinance firms are struggling.</p>.<p>Such companies, typically with loan books of less than 5 billion rupees ($67 million), have also seen their cost of funds rise by 100-150 basis points as banks and companies have become less willing to lend to them, said one industry executive, speaking on condition of anonymity.</p>.<p>Some microfinance firms have had to scale back capital raising plans due to tepid interest from investors, said the heads of two firms that have been looking to raise funds.</p>.<p>As smaller players falter, some have stopped paying salaries, or incentives to employees in recent months, they added, asking not to be identified due to the sensitivity of the matter.</p>.<p>"We are now only getting basic salaries, incentives have completely stopped in the last few months as collections are down," said a collection agent at one microfinance lender in eastern India.</p>
<p>Small loan specialists in India that typically cater to people without bank accounts are facing a jump in pandemic-related defaults that could force some of them out of business, industry experts warn.</p>.<p>Loans overdue by 30 days are expected to reach 14-16 per cent of all so-called microfinance loans in the immediate aftermath of the second Covid-19 wave sweeping India, said Krishnan Sitaraman, senior director at credit rating agency CRISIL.</p>.<p>That's higher than 6-7 per cent in March, before the second wave took hold, and also above the 11.7 per cent reached in March 2017 after India's demonetisation drive - an attempt to boost digital transactions and crack down on undeclared money that also hit microfinance lenders hard.</p>.<p>"Older loans that were taken in 2019 or early 2020 are at a higher risk of defaults and they form about 60-65 per cent of the loan book for lenders," said Harsh Shrivastava, former head of the Microfinance Institutions Network, an association representing the sector in India.</p>.<p>Rahul Johri, chair of Vector Finance, a microfinance firm that provides loans to small enterprises, said many support measures brought in by the government had only helped larger institutions, while smaller players had struggled.</p>.<p>"It has become an existence issue for several small and mid-sized microfinance institutions as business has been severely impacted and collections are down," said Johri.</p>.<p>Loan collection efficiency across the total loan pool has fallen to about 70 per cent from a peak of nearly 95 per cent in March, analysts say, indicating a potential build up in stress.</p>.<p>The gross loan portfolio of India's microfinance lenders stood at 2.6 trillion rupees ($35 billion) as of March 31, according to CRISIL.</p>.<p><strong>Bumpy Road Ahead</strong></p>.<p>Despite the short-term challenges, some remain bullish on the sector and expect it to bounce back if an anticipated third wave of Covid-19 infections in India is not so severe.</p>.<p>"About 55 per cent of the market is still untapped which means there is huge market opportunity ... so things will look up soon," said Johri.</p>.<p>But for now, many smaller microfinance firms are struggling.</p>.<p>Such companies, typically with loan books of less than 5 billion rupees ($67 million), have also seen their cost of funds rise by 100-150 basis points as banks and companies have become less willing to lend to them, said one industry executive, speaking on condition of anonymity.</p>.<p>Some microfinance firms have had to scale back capital raising plans due to tepid interest from investors, said the heads of two firms that have been looking to raise funds.</p>.<p>As smaller players falter, some have stopped paying salaries, or incentives to employees in recent months, they added, asking not to be identified due to the sensitivity of the matter.</p>.<p>"We are now only getting basic salaries, incentives have completely stopped in the last few months as collections are down," said a collection agent at one microfinance lender in eastern India.</p>