Micro lenders down and out

Almost all microcredit lenders are now going through a lean patch – be it small or big. Small lenders are seeing a cash crunch; most of their borrowers are not repaying installments and yet they have to continue to pay back the loans they took from their lenders. On the other hand, many big microcredit lenders have their money lying idle because of lax demand as the rural economy is yet to get back its pre-Covid momentum.

While big micro creditors have somehow managed to absorb the pandemic shock with their financial strength for the time being, small institutions have found themselves at risk of closure - some have already wound down their activities. 

Dr Hosne Ara Begum, executive director at Thengamara Mohila Sabuj Sangha (TMSS), one of the largest NGOs based in the country's northern region, told The Business Standard, "Three to four microfinance  institutions out of 32 that work with us have scaled back their operations complying with the government's instructions to pause debt collection. The rest have already been forced to close down."

"We have around Tk1,000 crore in idle money as borrowers are not seeking new loans as they could not repay the previous ones. Not that they do not need it, rather, they are not willing to take new loans," she added.

Hosne Ara said if the current situation does not change, small microfinance institutions that have closed down will not be able to resume their activities. Many small borrowers have the ability to repay loan installments, but they are not doing so taking advantage of the repayment pause facility offered by the government. This is also a big problem.

"The government has asked us to keep lending to protect the rural economy. We are also withholding installment collection in compliance with the decision of the Microcredit Regulatory Authority (MRA)."

However, she complained that there is a communication gap between microcredit institutions and the government.

 "We now have Tk2,000 crore in loans remaining outstanding. The loan collection was almost 100% in pre-pandemic times. Customers used to repay and borrow again. Now, the situation has changed. I do not think any microfinance institution has been able to collect more than 60% of installments during the Covid period," Hosne Ara added.

Shams Azad, chief operating officer of the Brac Microfinance Programme, said, "One-eighth of our Tk27,000 crore in investment has now turned into non-performing loan. We are yet to recover the amount as installment collection remains suspended. Again, the clients are unable to take out a new loan after repaying the old ones."

"In the first quarter of this year, we disbursed Tk3,900 crore per month on an average, which came down by 70% to Tk1,150 crore in April. Now, we are paying interest to banks although the money is now lying idle with us," he added.

The amount of non-performing loans increased by 35% in the first quarter year-on-year, having a big impact on the balance sheet. "We have not cut the salaries of our staff during this period.  Operating costs apart, there is a huge expense in the form of Covid protection of our customers and workers."

Joint Deputy Director of ASA Habibur Rahman said, "Our situation is fragile. In the case of microcredit, if clients cannot repay, they do not want to borrow again."

ASA's total outstanding loans stand at Tk17,000 crore. Of the amount, there is Tk2,000 crore in non-performing loans, he said adding, "These loans are likely to turn into bad loans at some point. If that is the case, we will suffer in the long run."

Mostofa Aktheruzzaman, deputy director and focal person (the microcredit wing) at Shushilan, a Khulna-based NGO, said, "Even though it is a big NGO, our lending amounts to only Tk18 crore, but we incurred a Tk9 lakh loss in FY20 because of the pandemic-led shutdown towards the end of that fiscal year." 

The loss will be bigger in FY21 with no activities over the last one year, he added.   

Referring to the government's dual policy of suspending collection of loan installments from clients and making it mandatory for micro creditors to repay the banks at the same time, he said, "Last December, we started lending to customers after a fresh bank loan amounting to Tk1.5 crore. Earlier, we had another Tk12 crore in bank loan."

Mostofa said they have to pay back loan installments of Tk90 lakh—1 crore in each quarter. There is no breathing space for them. They are paying employees amid losses. Only two out of 10 clients are voluntarily paying installments.

Md Jashim Uddin, deputy managing director of Palli Karma-Sahayak Foundation (PKSF), said, "We are supporting 200 micro creditors under us so that they can recoup their losses to some extent.  Their inability to operate also affects customers and they are now in need of recovery loans."

Dr Monzur Hossain, research director at the Bangladesh Institute of Development Studies, said, "We need to strengthen these institutions to protect the rural economy and alleviate poverty."  

The government can give low-interest loans with easy terms or provide subsidies if required. But it has to be made clear that, in return, they will reduce conditions for marginalised people and offer them low interest loans. This will make the government's work easier and benefit both the parties, he pointed out.

The Microcredit Regulatory Authority (MRA) issued a circular on 2 May this year, allowing limited microfinance operations. The regulator allowed activities such as, disbursements of new loans and remittance payments and other social development services of microfinance institutions in compliance with health regulations and other government guidelines.

The circular had clear instructions on new loan disbursement, but it did not have anything on loan recovery.  During a field-level inquiry, it was learned that almost all the institutions collect loan installments regularly even at this pandemic time. 

The MRA does not have any information on how many microfinance institutions have shut down.

Amid a spike in Covid-19 infections, microcredit lenders have been told not to collect installments.

Ataul Haque Dolon, chairman of Shyamnagar upazila in Satkhira, said as per the district's coronavirus prevention advisory committee's advice, collection of installments from clients of all NGOs has been suspended during the ongoing lockdown enforced to rein in Covid-19. 

MRA Executive Vice-chairman Md Fashiullah said village people now need money to turn around from Covid-induced losses. That is why lending on a limited scale has been allowed. But, as per the government's decision, a suspension on installment collection has remained in force.

Terming it a double bind for them, he said. "We have already discussed it with the government. The government is also thinking about microcredit lenders alongside the livelihoods of people to keep the rural economy afloat."

There are currently three crore microcredit borrowers in Bangladesh. Disbursements have now dropped as loan recovery rate is poor with borrowers having been hit hard by Covid-19. That is why those who are in need of loans are being turned down by lenders.