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Updated: Nov 10, 2020


Anushka Sharma, V year of B.A.,LL.B.(Hons.), Amity Law School, Amity University, Noida

On 11 March 2020, WHO declared novel coronavirus disease (Covid-19) outbreak as a pandemic, Covid- 19 solidarity response fund launched to receive a donation from private individuals, corporations and institutions. “India reported the first confirmed case of the coronavirus infection 30 January 2020 in the state of Kerala.” India was facing this kind of situation after Independence. The Indian government has to take immediate actions and scale up the response to treat, detect and reduce transmission to save people's lives. Therefore, the Prime Minister has to take a major decision of the lockdown which disrupted the operation of many sectors across the country. The country was on complete shutdown and no organizations were functioning. The microfinance business has to see the huge negative impact due to the current situation in the country. The microfinance sector has experienced such impact in 2016 due to demonetisation in India and is closely monitoring the same impact of Covid-19 on this sector. Therefore the microfinance sector has been badly hit during the covid-19 pandemic.

Microfinance is defined as any activity that includes the provision of financial services which are credit, savings, and insurance to low-income individuals which is nationally defined poverty line and poor individuals who fall under below poverty line to create social value. The social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provisions of capital for micro-enterprise, and insurance and saving for risk mitigation and consumption smoothing. Large varieties provide microfinance in India.

The COVID-19 (coronavirus) epidemic endangers the health and economic opportunities around the globe. The outlook is particularly sobering for the most vulnerable communities in developing countries. Under extreme financial strain caused by social distance and the lockdown steps to avoid the outbreak, informal workers, farmers and micro-enterprises are suffering. Much rely on microfinance services, including basic savings accounts, small loans, and remittances, though poor people are resilient. In case publicly funded safety networks fall short, microfinance systems provide consumers with the flexibility to deal with emergencies.[i]

The new MFIN Report indicates 3.22 crore customers with a total loan portfolio of Rs. 74,371 crore, as is the case for the industry. This translates into an average Rs 22,000 plus loan sum for all active accounts, which indicates a rise of 6%.In terms of return on investment in monetary and social returns, the sector is well placed. The money invested in this sector reaches huge numbers of customers with sustainable and traceable livelihood options which have a greater effect on social scientists and financial investors. They note that the industry earned Rs. 42,140 as debt and Rs. 16,140 as equity, 33 per cent (in each category) higher than the prior year, which represents a rise in loan demand and confidence growth among the lenders. The “close contact”, trust and fund sustainable livelihoods' theory is being established by the microfinance industry.

Firstly, it fuels micro and small businesses, while in the unorganised and organised sector it creates job opportunities. Even during pandemics, it is reported that this sector employs more than 2 lakh, people who work on the ground, organise virtual meetings with customers and solve their concerns about market survival, finances, the convergence of government support and even personal health management in the COVID 19 context. Apart from internal jobs, almost all those who take loans, i.e. 3,22crore people, have a work and business opportunity in the sector. Secondly, each loan created by revenue is averaged five to change the lives of all families.

Complete lockdown stopped virtually all companies, but those with minimal to no reserves were worst affected and worked in a high liquid model. Most micro and small enterprises are affected except for those involved in activities involving basic products and services, as the government has announced occasionally.

Currently, the decline in MFIs earning ability is threatening MFIs life, even as the government is attempting to ease its operations by rescheduling loans. MFIs have their debt and liquidity needs. In the wake of the pandemic, there is no question that the sector with a rise in demand is placed under pressure for more loans and more gestation. The scenario is developing for new fusions and acquisitions of financial restructuring in the sector.[ii]

In exchange, their micro-financial service providers, and thus commercial banks, have been impacted by affected cash flow from business firms. Unorganized sector unemployment has exceeded and has impacted migrants in major urban areas, business owners in urban areas, rural entrepreneurs and professional workers in the MSME ecosystem.[iii] Micro financing providers are anticipated to face the severe liquidity crunch of COVID-19, with a widening gap between revenues and operating expenditure. This declining liquidity does not create problems for large or stable MFIs, but it can be sufficient to haunt small and medium-sized MFIs. Safe funding MFIs, well-established innovations and large group holdings are more likely to thrive during and after this pandemic.

To alleviate the crisis urgent actions need to be balanced by forwarding vision. It is an act of equilibrium. Firstly, emergency steps should ensure the continued availability of micro-finance programmes and that funding is efficiently directed towards vulnerable clients. Secondly, the microfinance sector must play its central role in medium-term recovery by crisis response. This ensures that sustainable, accountable MFPs will thrive and maintain its customers' trust. It also means strengthening the motivation for MFPs to start loaning again at the end of the lockdown thus facilitating redemption of non-performing loans (many of which are renovated). MFPs are in a strong position to do so because their small business and micro customers seem to be quite resilient — and easy to restart and search for fresh money. Thirdly, there is the need to make it easier for organisations that cannot maintain themselves, even those which have already been affected by the crisis to be orderly consolidated or abandoned.

Equilibrium is required both to make relief measures efficient and compatible with a well-run sector and credible long-term regulation. This ensures that emergency assistance should be targeted so that crisis MFPs can comply rapidly with the usually in place (pre / post-crisis) rules. Rescue packages go awry when policymakers lose sight of the discipline needed to respond to financial institutions chronic vulnerabilities, often because of nationalist appeals that override rational policies.[iv]

The crisis of COVID-19 demonstrates that the improvement of remote operations should be the agenda. This could lead to an acceleration in the transition to the digitization of front end services and back end transactions, with MFPs using mobile services and exploring bonds with digital platforms. It will also be essential to expand the role of agents. The MFPs themselves could act as agents for banks, providers of digital financing and social transfer programmes. These transformations are already underway globally, with varying reach and speed across countries. In certain cases greater focus needs to be put on supporting remote operations, enhancing digital interoperability and increasing access to remittances.

Another next step is to increase MFPs programmes and revenue sources. The crisis reveals that many such organisations have a weak resource base. Government and the microfinance community could encourage stronger collaborations between the MFPs and banks and financial technology, linking to mobile and sending money and alternative financing instruments such as wholesale loans and debt. More focus on savings in this respect is also justified since it increases resilience in a crisis.

Finally, there are many areas where the regulatory framework must be improved. During the recession, consumer safety was a major concern. The need for stricter standards as well as complaint resolution systems and customer service, particularly by remote means, are highlighted by scams and harassment by lenders. Politicians and regulators often have struggled to effectively coordinate crisis initiatives[v] with consumers. This can contribute to a lack of understanding, incomprehension and misapplication. Cross-compliance with various regulatory frameworks for banks and non-banks and restricted scope of the regulatory authority has revealed fragmentation in the regulatory system. Lastly, a few large MFPs follow regulatory requirements and several unapproved MFPs take deposits. The MFPs do not have licence or power. Moving to a practical, graduated tiered regulatory structure may be part of the solution. Tier setting regulation may be required, in compliance with well-established guidelines, to fulfil the overall requirement for a proportionate, risk-based regulatory and surveillance framework. Other components include frequent industry contact and consultation and well-tuned software, as well as high-quality data enabling prudent suppliers to track the situation.


[i]Covid Impact on Microfinance :

[ii] Impact of Covid on Microfinance Sector :


[iv]Microfinance-And-Covid19-Framework-Regulatory-Response https://www.cgap.prg/reserach/publication/microfinance-and-covid19-framework-regulatory-response


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