A recent CRIF High Mark report showed that stress in the lower days of past due (DPD) buckets is easing, indicating a return to normal. That is good news. The bad news is that the portfolio’s risk, which is more than 180 days past due, has increased to 9.3%. That means about Rs 24500 in microfinance loans became extremely sticky. What is your observation on this?
The situation on the ground had changed a lot in the two years of the pandemic. If you think about the severe suffering of the last two years, I would say that 9% is a very small part of the loans that have not been repaid after 180 days due. Here we are dealing with unsecured loans, which are given to customers at the bottom of the pyramid. These people depend on local supply chains that have been disrupted in the last two years. Think of the small shopkeepers at train stations, think of the fleet owners – they were on the receiving end. For them it is a loss of livelihood.
Also, we need to understand that these people aren’t saying they won’t pay. They’re just looking for more time. I think the loss would be limited to 5-6% of the total microfinance portfolio. We had written off only about Rs 64 crore in Bandhan’s entire lifetime from 2001 to 2020. None of this came from Assam. So my borrowers are not bad. That is the strength of the industry. What is happening now is solely due to the extraordinary situation. So I have confidence that the majority would come back and pay back.
The report also states that stress is particularly high in Maharashtra and West Bengal. Now that two thirds of Bandhan’s loans are in West Bengal. How big is the concern?
West Bengal is the fourth most populous state after Uttar Pradesh, Maharashtra and Bihar. For this reason, the stress is considered higher compared to other states with smaller population, for example Tamil Nadu or Karnataka. Another problem: you may remember that stress in West Bengal only started to build up late, during the second wave. Since the problems started late, recovery will be late. Then the impact of Cyclone Yaas in May 2021 also impacted borrowers, delaying the recovery.
What are the largest states for Bandhan’s operation? How is the microfinance situation developing in Assam?
After West Bengal, Assam and Bihar contribute the most in terms of business.
The situation in Assam is gradually improving day by day. Collection efficiency in Assam has risen close to the national average. Improving Gathering Efficiency from 25-30% to 96% is no small feat. Borrowers come back to repay because they know they need a good Schufa report to get new loans in the future.
But defaulting customers have already applied for an entry in the Schufa. This remains after they have paid their dues. Will lenders offer them new loans?
Correct, Schufa entry will mark the NPA customer. However, lenders will use their discretion to decide whether or not to extend credit. Microcredits depend largely on the behavior of borrowers.
They had taken aggressive precautions in the second quarter to cover the resulting risk. Do you need more promotions like this in the future?
We had suffered one time pain… additional pain. We have created the buffer so that future business remains stable. Now my money is back. The NPA is coming down. With improved recovery, we can write back the provision, which directly contributes to profit. We took the pain on ourselves so we can let the balance sheet grow freely.
The Single Microfinance Standard has changed the definition of microfinance by raising the household income criteria for microcredit seeking. How will this affect the microfinance sector? Is there a risk or just a gain?
Ten years ago, the issue worrying the sector was the interest rate. The malegam committee addressed this by proposing a 10% margin cap. In the last 10 years we have seen microfinance companies transform into banks and small financial banks. Of course, there were talks about reaching a level playing field. Interest rates for banks are set by the board of directors, while for NBFC-MFIs they are set by the RBI. As the Assam issue came to the fore, we have seen the issues surrounding microfinance and its borrowers shift from interest rates to over-lending. The problem of over-borrowing can best be addressed by calculating family income and limiting monthly amortization expenses. There is currently no system for determining family income. Lenders determine a lender’s family income almost arbitrarily. The RBI has now created a format for tracking family income.
About 50% of our lenders have been with us for more than four years. We have borrowers borrowing from us for 20 years…10 years on average. So your income level has gone up over those 10 years, right? If our borrowers have not been able to increase their income levels in these 10 years, then we must say that microfinance has failed.
Some of your colleagues in the microfinance sector were unhappy when you didn’t sign their Responsible Lending Code. RBI’s uniform microfinance standards aim to create a responsible lending culture and a level playing field. What would you like to say to your microfinance friends?
You see, when a lender lends, they have to be responsible for it, otherwise they wouldn’t get their money back. Bandhan practices responsibility from the start, as all microfinance providers do. But on some levels, Bandhan’s Bank’s practice may not be consistent with that of other MFIs. Whenever a platform creates rules, it should consider the issues affecting each segment of lenders. The rules should apply to everyone. If you make such rules, please bring all lenders to the table. For example, MFIN (the network of microfinance institutions) created the Responsible Code. Why hasn’t it worked with the IBA (Indian Banks’ Association) on this?
Let’s shift our focus away from macro issues. Where does Bandhan’s diversification stand in personal loans?
For 2020 we have created a five-year business roadmap. We have decided to increase the proportion of home loans to 30% by 2025, the proportion of microfinance group loans will decrease to 30%, the proportion of MSMEs plus individual loans (those who have concluded group loans) will be 30%. The remaining 10% will be our retail book, other than housing. We are on our way. In December 2021, microfinance accounted for 52% of total lending, 24% for housing loans, 2% for other retail lending and the rest for lending to MSMEs and individuals.
This is your plan as far as the assets side of the balance sheet goes. What strategy are you pursuing on the liabilities side?
The strategy on the liability side is simple. We will double the number of stores over the next three years to increase our reach. We currently have around 1200 branches.