Microfinance institutions look at new ways to boost collections

Suryoday SFB took the route of funding its customers through its overdraft facility, where the customer is charged only on the amount withdrawn by them from the account.

Banks and non-bank lenders engaged in the microfinance space have started to put in place hybrid models of collections from borrowers in the wake of the second wave of the pandemic. They are trying to use a combination of physical and digital modes of collections in order to avoid disruptions in the process.

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Traditionally, repayments in the microfinance segment were made through group meetings as the core borrower base is more comfortable making cash payments. While the loan moratorium precluded the need for collections in the first wave of the pandemic, the collection effort became a major challenge during the second wave in April-May this year.

Harish Prasad, head of banking – India, FIS, said it has been an ongoing process for banks engaged in microfinance to adopt a multi-mode model for collections. “They are now exploring ways of making sure collections can be made through digital channels like UPI when cash collections are not possible,” Prasad said.

Lenders have now begun to team up with fintech players and payment gateway companies to digitise some aspects of the collection process. The aim here is to ensure repayments are not hurt even when group meetings cannot be held or agents cannot go out for collections.

R Baskar Babu, MD & CEO, Suryoday Small Finance Bank, said before the pandemic, such initiatives of behavioural change for customers would have been a time-consuming and challenging affair. “The pandemic has propelled efforts to digitise the collections and there has been some movement, with 3-5% of the customers making payment via digital mode from the full microfinance customer base,” he said. While this is only a small portion of the entire borrower base, the share of digital repayments may improve now that both customers and institutions have seen its benefits, Babu said.

Suryoday SFB took the route of funding its customers through its overdraft facility, where the customer is charged only on the amount withdrawn by them from the account. The bank then sent digital payment links for repayments and saw a fair degree of success through this mode.

A March 2021 report by KPMG and MicroFinance Institutions Network identified Unified Payments Interface (UPI), Aadhaar Pay and National Automated Clearing House (NACH) as channels that could be tapped into for digital collections. “There are mobility solutions available that can be accessed both online and offline for the field staff to post daily transactions (repayment collections) at the field,” the report said.

The first quarter of FY22 was a tough one for microfinance repayments, with the portfolios at risk (PAR) rising across institutions. Brickwork Ratings expects PAR levels to remain around 5.5-6% through the year. “The impact of the pandemic, along with the economic impact of mini state level lockdowns at regular intervals will again hamper the collection cycle, which has not reached pre-Covid levels even after improving in H2FY21,” Brickwork said in a recent report.