Most microfinance institutions have a cushion of a couple of months’ cash. When that is exhausted, their future will be in jeopardy
IN NORMAL TIMES, says Samir Shah, of Dvara Trust, a private firm based in Chennai in southern India that helps bring financial services to the rural poor, default rates on the small loans it promotes are about 5%. But these days, more than 90% of borrowers are unable to repay the loans even if they want to and have the money. Traditional microfinance is a personal business. Repayment is in cash to an agent who visits.
They have made great progress. The most recent edition of an index of financial inclusion published by the World Bank, for 2017, estimated that the number of the “unbanked” worldwide had fallen to 1.7bn, down from 2bn in 2014 and 2.5bn in 2011. Now, says Mr Schlein, “decades of progress on reducing poverty and increasing financial inclusion—all of that is at risk.”
The Reserve Bank of India’s moratorium, announced in a circular on March 27th, covered a three-month period from March 1st. The RBI has also injected liquidity into the system. But Dvara’s Mr Shah says the money is not reaching the firms that lend to India’s poorest. Rather, it has “ended up going to the cash-rich”. The transmission mechanism is the banking system, and banks remain cautious about committing capital to the poor. Many have balance-sheets overladen anyway with non-performing loans.
Mobile money can solve a lot of problems. But it cannot conjure an oasis of creditworthy borrowers and liquid lenders out of a pandemic desert. Around the world there are fears that poor borrowers are going to find themselves in an ever worse predicament for three reasons. The first and biggest is that the loss of livelihoods is going to worsen poverty.
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