Background

The entire world is fighting against the spread of the pandemic “COVID-19” which has unfolded its impact on the economy and on the people of under-developed and developed countries. The World Health Organization has reported that the COVID-19 has spread to 175 countries affecting 17,10,799 people and causing 103,513 deaths so far. This level of disruptions to normal life is unprecedented in the last several decades. For the financial sector and especially for the microfinance sector, COVID-19 has emerged as a black swan event.

In India, COVID-19 has affected 8016 people across 284 districts out of the total 720 districts and caused 261 deaths so far. Both Govt. of India and concerned state governments are taking up many actions to contain the COVID-19 spread and to protect the people.

 

Emerging challenges

The lockdown since 25th March has brought most of the economic activities to a halt. People are staying at home as per the govt regulations and only the essential services are made available and people are getting accustomed to a new mode of life mostly confined to on-line activities and social media. All the offices cannot afford to allow the work from home format for their employees and hence, many offices especially MSME segment is severely affected. Some migrants reached their home state and some of them are in their work place and suffering as they are mostly employed as contract labourers. Farmers are also facing the problems as they are not able to take up the farm operations following the social distancing norms and not able to transport their produce to markets. International Labour Organization has estimated that 40 crore people in the informal sector in India is at the risk of moving into poverty.  Goldman Sachs slashes its forecast on India’s GDP growth rate 1.6% for 2020-21. As the income flow has been stopped to the people, financial institutions started feeling the heat of missing payments.

Initiatives so far

Govt. of India has initiated several measures to give relief to the people at the bottom of the pyramid-like the direct benefit cash transfer to Jan dhan women account holders, free LPG cylinders, Rice, Dal and cooking oil to poor and allocated funding for building up the health infrastructure for providing health cover to the people. State governments also announced many relief programs like food distribution to the poor, cash transfer to ration cardholders and no rent for migrants. Health department is coordinating with other departments and working round the clock to test the people, isolate the suspects and to provide treatment to the affected.

RBI’s Directives

Reserve Bank of India issued the directions on 16^th March 2020 on operational and business continuity measures and advised the financial institutions to ensure the availability of critical services and to operationalize the business continuity plans. RBI further advised the financial institutions to have a quick response team to report the developments to the top management, regulator and other outside agencies. RBI directive also asked financial institutions to take care of the staff safety and to move the clients for digital transactions. RBI has reduced the repos rates by 75 basis points to 4.4% and reverse repo rates by 90 basis points to 4.0% and improved the liquidity in the system by reducing CRR (Cash Reserve Ratio) by 100 basis points to 3% and by offering Long Term Repo Operations facilities.  On 27^th March 2020, RBI announced the moratorium of 3 months from 1^st March 2020 to 31^st May 2020 for all term loans and working capital availed by borrowers from banks and NBFCs. Accordingly, MFIs announced the moratorium of 3 months to its clients, but it is expecting the same from Banks and MFIN has already submitted a request to RBI to announce the moratorium to NBFC-MFIs.

 

Six Rs Strategies for MFIs

Every day, the spread of COVID-19 is intensifying and there is a talk that lockdown may not end on 15^th April and it is going to continue in different forms based on the vulnerability of each region. So, what is in store in the near future is not known to anybody. It is a prudent option to prepare a strategy for overcoming COVID-19 challenges. I would like to suggest the “Six Rs strategies” for MFIs to manage the challenges of this black swan event.

 

1. Radiate positivity

Crisis determines the leadership’s tenacity and commitment and hence, leadership at all levels of MFIs should stand up united radiating positivity and continue to engage with the clients and staff through positive messages. Now people at home consume a lot of negative news as they most of the time see forwarded WhatsApp messages mostly on COVID-19 effects and breaking news in TVs. All of you know that what we focus attention on, that expands and grows. So, let us radiate positivity around us in all our thoughts, conversations and actions. Ask senior management staff (each one staff to contribute two messages per day for 10 to 15 minutes – one for staff and one for clients focusing on moral stories, a summary of auto-biography of great leaders like Mahatma Gandhi, Nelson Mandela and so on, health -safety measures (refer the website www.mohfw.gov.in awareness materials, training manuals and pocket books are available), mindfulness practice, meditation, fitness, relationship and personal & professional growth messages of Robin Sharma, Tony Robbins, Brian Tracy, John Maxwell, Jack Canfield and Les Brown and so on), to come out with the content and this can be vetted by any one member of the Quick Response Team[1] at Head office formed exclusively and sent to the staff and the field staff will forward those message to the clients. This may be sent as a WhatsApp message or telecall. Each field officer with a caseload of 500 clients (100 Joint Liability Groups), daily a field officer can talk to at least 20 group leaders and in 5 days, the field officer would have completed one round of talks to all the groups. The feeding of positive messages will change their mindset to think positive and do the right things to use their time at home.

2. Reassure continuity

Many surveys or forecasts by Industry associations and media is giving out news continuously that this COVID-19 will throw away many people out of job. A CEOs’ snap poll survey by CII (Confederation of Indian Industry) has found that 32% of firms expect to shed about 15 to 30% of jobs, once the lockdown ends and 47% of firms expect the job loss less than 15%. In many organizations, now people are worried whether they are going to be in or will be dropped. This kind of worries makes the people more depressed than the COVID-19’s direct attack on the people. True leadership is known during the crisis periods. What has happened so far is out of our control and how we can respond to this is in our hands and it is our choice to show our real leadership i.e. caring for our staff. Leaders should assure the staff at all levels about their continuity and at this point in time, no one should be dropped. This one step itself will build momentum and will add commitment among the staff to improve their performance. If the MFI is facing an extreme liquidity problem, as a last resort, MFI can start a dialogue with staff to have a flexible pay-out like paying 70 to 80% of salary bills now and then the rest of the payment may be deferred to be paid later or in survival issue cases, may be cut as per the individual case. Now, it is the duty of the leaders to reassure their staff that they are behind them to support. How you make them feel safe will change their game of contribution to the organization.

3. Revise the Plan

All the MFIs would have planned for the FY 2020-21 earlier. But, now as the operations have been severely hit, that plan will not work. Now, it is the time to plan for revising the plan with various scenarios, as we yet do not see the light at the end of the tunnel. MFIs can at least visualize two scenarios – Plan: A – assuming that the operations will resume to near new normal after 3 months (Apr, May and June) i.e. from July 2020 and another one Plan: B- assuming that the operations will resume to near new normal after 6 months (i.e. from Oct 2020). While making revisions, all the regular business assumptions need to be changed as the way of working after the lifting of lockdown will change drastically. MFIs need to evolve their model to this changing needs to survive this crisis.

4. Reinvent the model

This lockdown downtime is the ideal time to reinvent our business model because in the new near-normal life, even if partially relaxed, we may have to follow the safety norms like disinfecting the offices, following the social distancing norms and so on. Hence, high touch model of microfinance needs to be revisited. Like How MFIs adopted the disbursements through bank transfers direct to the account of the individual borrowers, now as a first step, all repayment by clients should be converted to the digital mode using the BC points near the clients’ locations. As the operational model is being changed and disbursement to full capacity will take a longer time to stabilize, MFIs will find the surplus staff at the short term and they need to be given different roles. MFIs can partner with federations of groups or NGOs to offer the business development services and these surplus staff can be assigned to look after those services so that surplus staff can be employed and value-added services can be offered to the clients and a small fee may be charged to the clients through the federation, part of which will flow back as an income to the MFI. This lockdown period is to be used very creatively by MFIs for training their staff on weak areas and the middle management should be focusing on the system development and senior management should be focused on developing a rapport with the bankers and other govt stakeholders like development finance Institutions for getting special lines of credit to overcome the crisis and the top management should have constant discussion with investors to assure them about the long term prospects of the business and try for long term funds as additional capital. This preparation phase will help the MFI to encash the huge opportunity that will come up later once the full lockdown effects are over. Staff engagement during this crucial period will push the MFI to a different level. As the staff are working from home and all staff cannot adapt to this model, daily goals may be given to the staff and daily review over the phone in the evening for 5 to 10 minutes by their immediate superiors on retaining clients in our fold and it is not advisable to go for recovery even over the phone during the crisis, when the RBI has announced the moratorium. This will hurt the feelings of the clients. Hence, MFIs should empathize with the clients at this crucial period of their suffering.

5. Relief to the client:

Governments (Both Govt. of India and state governments) have announced various welfare measures to the poor people to save them from this crisis. MFIs can ask their field staff to inform their clients over the phone about the schemes announced by the govt and the concerned offices, where they should contact for getting the benefits. Some NGOs, Corporates and Farmer Producer Companies are distributing the essential goods like rice, dal and cooking oil packs to the poor communities at the local level. MFIs staff can identify such distributions in their area and enable the poor in our clients’ groups to get such assistance. Once the lockdown is over, international organizations and governments will start a major relief program targeting the poor as the poor would have suffered most because of the COVID-19. Now itself, MFIs can think of some strategic partnership with reputed NGOs in their areas so that those development programs benefit the clients of MFI. Moreover, MFIs having the CSR budget can use the budget for giving relief to the affected people in the operational areas of MFI.

 

6. Reconstruct the livelihoods

MFI can classify the geography into three categories, the first one being where COVID-19 not at all affected – 436 districts of total 720 districts (60%) not affected, wherein the lockdown impact will be minimal, the second category- where the COVID-19 attack was noticed and the impact is significant and the third category is the rest – hotspots, where the intensity of the impact is more. MFI has to draw differential strategy to cater to these 3 segments in the new near-normal phase. Only when the relief stage is over and the people are psychologically ready for moving to the next level, the efforts for financing livelihood reconstruction should start. When the people in the area are expecting relief for their daily survival, MFIs should not start their livelihood reconstruction activity. Each MFI has to carefully play out this strategy as the time evolves. Reconstructing the people’s livelihoods require a totally new approach as the conventional vanilla product of MFI with fixed repayment will not work for the next one year. MFIs need to evolve a flexible and pragmatic solutions that will be a win-win for both MFIs and clients. Recently, SIDBI has come out with two wonderful loan schemes- SAFE (SIDBI Assistance to Facilitate Emergency response against Coronavirus) to MSMEs @5% interest rate  & sanction within 48 hours over the digital interface and another scheme for Start-ups to give liquidity support of up to Rs.2 crore with an initial holiday period of 12 months. If such loans are given to MFIs also by SIDBI, it will help MFIs to overcome the impact of COVID-19 challenges and MFIs can also offer some flexible loan products with higher holiday periods.

MFIs if they follow the 6 Rs strategies, they would be in a better position to minimize the risk and on seeing the proactiveness of the MFI, their banks and investors will come forward to support the MFI’s actions in this regard.

1. Recommendations to RBI

I would like to recall the experience of AP crisis in microfinance that happened in 2010, which affected the microfinance operations across India. Later, RBI stepped in and formed the Malegam committee to study the issues and came forward with its regulatory framework in 2011, which boosted the morale of bankers and investors and led to an exponential growth of the microfinance sector since 2010. Now, as the situation is very different and the impact will be much more than what we have seen during the AP crisis, RBI should come out with a package for helping the MFI sector so that 5.64 crore families (28.2 crore people), who depend on the MFI sector will rebuild their livelihoods and Rs.2.11 lakh crore of loans outstanding in the whole MFI industry, which is at stake will not turn bad causing a severe loss to the financial sector.  RBI should not give any room for any vested interests to talk about the write-off and waiver of loan principal and interest. The following support to MFIs by RBI will be of much help for them to pass on the necessary life support to the clients at the bottom of the pyramid.

• RBI should allow moratoriums to the MFIs for their loan repayments like how MFIs have given the moratorium to the clients for 3 months from 1^st March to 31 May 2020.
• RBI should ask SIDBI and NABARD to give special lines of credit to MFIs through online submission of applications and these loans should have a longer holiday period (like how SIDBI has come out with a special loan product for start-ups to survive this Coronavirus challenge, with a 12 months holiday period).
• RBI should ask banks and other financial institutions to pass on these benefits of these loan assistance to NGO-MFIs also as a special case during this crisis period, even though NGO-MFIs are not covered under RBI regulations.
• RBI should insist SIDBI, NABARD and Banks to give the loans to MFIs without BBB bank rating (most of the small and medium MFIs have BB bank rating but have very good microfinance operations management system) till the financial sector resumes to normalcy.
• RBI should take severe action on the people / vested interests who spread rumours like write-offs and waiver and try to exploit the situation and turn it against the smooth operation of MFIs at the ground level.
• RBI should ask the banks to lend liberally (up to the leverage[2] ratio of 6, as in general banks feel comfortable to lend 4 or 5 times) to the microfinance sector to revive the economy as the poorest are more in the informal sector and they need credit to survive. Blocking of formal channels like MFIs, which have the last mile connectivity would force them to fall into the traps of the moneylenders and they will end up paying exorbitant interest rates and it would push these households further into poverty.

Now, it is the time to come together for RBI, development finance institutions, banks and MFIs to stay together and enable the economy to get into the vibrancy and protect the people at the bottom of the pyramid.

Dr.N.Jeyaseelan

*Feedback / comments to this article may be sent to the author’s email

authorjeyaseelan@gmail.com

Dr.N.Jeyaseelan,

Chief Executive Officer,  Virutcham Academy for Social Changemakers LLP,

Mahindra World City, Chennai. 603 004. Phone / Whatsapp: +91-9244865356

[1] Quick Response Team is to be formed at Head office to be a single contact point as per the RBI’s directive on 16^th March 2020.
[2] RBI’s norm permitted is 7 times.