• Thursday, Feb 09, 2023
  • Last Update : 09:54 am

MFIs on the edge of falling into NPL trap

  • Published at 01:29 pm August 19th, 2021
Microfinance: A Solution towards Climate Change Adaptation
Bandana Rani, a rural woman from Bhola, is building her family's assets through microfinance. Photo: Faisal Bin Islam

MFI insiders said that the loan recovery dropped significantly due to the repeated lockdowns

The country's microfinance institutions (MFIs) are on the verge of falling into the trap of non-performing loans (NPLs) due to non-recovery of loans on time amid the prolonged lockdowns caused by the Covid-19 pandemic.

MFI insiders said that the loan recovery dropped significantly due to the repeated lockdowns, while the entire microfinance sector has been going through rough patches since the outbreak in March last year.

According to the latest data published in Bangladesh Bank’s Financial Stability Report (FSR) 2020, the Microcredit Regulatory Authority (MRA) said that the non-performing loans (NPLs) grew by Tk5.9 billion to Tk29.5 billion in FY20, from Tk23.6 billion in the FY19.

Insiders also expressed their concern that the growing trend of NPLs may continue in FY21, even at a quicker pace.

According to the FSR 2020, the ratio of NPLs in the MFIs sector stood at 3.3% in FY20.

In the same fiscal, total outstanding loans in the sector increased by 12.9% while the NPLs ratio also increased by 0.3 percentage point compared to FY19.

Also Read - Microcredit lenders hit hard by Covid-19

“Although the ratio is moderately low compared to the NPLs ratio in the banking and the financial institutions sectors, an increasing trend of the same during the last couple of years appears to get close attention,” said the FSR 2020 report.

Talking to Dhaka Tribune, Shams Azad, chief operating officer of Brac Microfinance, said that clients are struggling to repay due to the ongoing lockdown.

Moreover, MFIs are failing to reach many clients who are willing to repay but cannot come out of their house due to movement restrictions. The effects of last year were still not in a manageable phase, yet MFIs and their clients will take another hit this year, he added.

He also said that if the MFIs cannot pump money into the rural economy, it would be tough for SMEs to cope with the sustained shocks of the pandemic.

“We were expecting that our operations would turn around by the first quarter of this year. But the rapid rise in Covid-19 infection cases has made it tough again altogether,” said Shams Azad.

He also said that in Q1 of 2021, Brac provided Tk3,875 crore to the clients each month on average.

But in April, it came down to Tk1,140 crore, a sharp decline by 70%.

NPLs stand at 14% currently, which was around 8.5% in the first quarter of this year, he also said.   

He also said that finding new clients under the current circumstances is also very challenging.

MFIs have to accept the fact that this is the new normal and they need to figure out how to support their clients in steering past this challenge.

“Brac Microfinance introduced refinance loans, that is, giving money to a client whose earlier loan is not yet fully paid. We believe that if we do not provide the financing support now, the economic hardship of that household will only increase,” he also said.

Talking to Dhaka Tribune, an official of Thengamara Mohila Sabuj Sangha (TMSS), requesting anonymity, said that loan recovery dropped significantly mainly due to the pandemic, which is threatening MFIs to fall into the NPL trap.

“Due to continuous restrictions on personal movement, the overall economic activities of Bangladesh had been almost shut since last year. Most of our institution's borrowers are small traders who were unable to repay the loans last year. These are turning into NPLs now,” he added.

Also Read - Is microfinance the solution to informal employment?

He feared that the growing trend of NPLs may continue in FY21 in the MFI sector because of the worsening pandemic situation in the country.

Due to the increasing trend in the NPL ratio, adequate measures are required for keeping the sector sound and stable in the near future, the FSR 2020 suggested.

If the borrower selection and their credit needs are not assessed prudently, overlapping of loans of borrowers may create credit traps in the long run, which may increase the sector's NPLs ratio further, the FSR report also said.

It also suggested that a structured credit information bureau (CIB) for MFIs and a technology-based monitoring system may be helpful in reducing these problems.

Contacting the MRA, an official, requesting anonymity, said that the authority has already taken measures to set up a CIB targeting to check overlapping of loans in the MFIs sector.

“We are going to establish a CIB for MFIs by taking support from the central bank shortly to mitigate their credit risks,” he added.

Meanwhile, total outstanding loans in the MFIs increased by nearly 12.9% to Tk889.0 billion in FY20 from Tk787.6 billion in FY19, said the FSR.

The top 10 MFIs mobilized 72% of total savings of the members, while 71.96% of the MFI sector's outstanding loans pertained to them, and they provided financial services to 73.3% of total members as of end FY20.

According to the FSR, there are 759 registered microlenders and more than 33.3 million people in Bangladesh are beneficiaries of the lenders.

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