Microfinance institutions (MFIs) expect to withstand financial risks due to COVID-19, building capital buffers and managing cash positions is required to secure balance sheets from disruptions, reports RBI monthly bulletin article.
Prepared by Snimardeep Singh of Department of Supervision, Reserve Bank of India, it said though COVID-19 causes new challenges and significant financial risks for the microfinance sector, it still allows an opportunity to build long-term resilience.
Further adding, “Going forward, building capital buffers and managing liquidity would be crucial for MFIs in fortifying their balance sheets against COVID-19 led disruptions,” it termed COVID-19 as the biggest tail risk event in a long time.
Following slowdowns in supply chain and business operations, the probability of loss of livelihoods and a consequent drop in household incomes is large.
“Non-banking financial company microfinance institutions (NBFC-MFIs), being specialised institutions extending collateral-free loans to low-income groups, are particularly exposed to credit risks in this scenario,” it said.
MFIs encounter liquidity risks following massive drops in repayment rates. Smaller NBFCs-MFIs are especially vulnerable to credit rating downgrades, preventing fresh capital and access liquidity. In order to sustain portfolio growth, fund sources require diversification.
The article discussed COVID-19’s affliction toward microfinance financially incoming terms and incentivising digitisation. MFI operational efficiency may significantly boost up by migrating loan collections to digital platforms, reducing event-based disruptions, it added. Data analytics may be leveraged to foretell portfolio behaviour, building risk models and customer-centric product design.