According to industry insiders, small microcredit lenders are barely surviving, but big creditors have somehow managed to weather the storm for now
Suffering from low demand for loans and the inability of many borrowers to pay instalments, the microcredit sector has been hit hard by Covid-19.
Microcredit is engaged in providing small-business loans, savings accounts, and non-financial support to help boost financial inclusion and entrepreneurship within lower-income communities, especially in rural areas.
But most microcredit borrowers are small traders, street hawkers, and daily wage labourers — the same group of people who are most vulnerable to the economic shocks of the pandemic.
According to industry insiders, small microcredit lenders are barely surviving, but big creditors have somehow managed to weather the storm for now.
Lenders said that the government's dual policy of suspending collection of loan instalments from clients but making it mandatory for micro-creditors to repay the banks at the same time has further worsened the situation.
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Earlier, Shameran Abed, senior director of Microfinance, BRAC and BRAC International, told the media that there was no pressure from them to collect the loan instalments. However, due to low debt collection, the institutions are under financial pressure.
He also said that debt collection activities were completely shut down during the lockdown last year.
Shams Azad, chief operating officer of Brac Microfinance Programme, said that the whole microfinance sector has been going through a rough patch since the pandemic broke out.
Tk3,400 crore of its Tk27,000 crore in investments have now turned into non-performing loans (NPLs).
“In 2020 we could not expand any branches. Finding new clients under the current circumstances is very challenging now,” he added.
He also said that on average, 183,000 new loans were provided every month this year in the first quarter of the year, but that came down to 34,500 loans per month in April and May.
“Brac Microfinance introduced refinance loans, that is, giving money to a client whose earlier loans have not yet been fully paid. We provided Tk5,000 crore to 500,000 such households across Bangladesh,” said Azad.
Habibur Rahman, joint deputy director of the Association for Social Advancement (ASA), said most creditors cannot borrow again if clients do not repay.
ASA's total loan portfolio stands at Tk17,000 crore, of which Tk2,000 crore are NPLs.
Officials of some microcredit organizations said that their loan recovery rate remained stuck at 60-65% since the fresh lockdown this year, which is usually at 96-97% during normal times.
An official of Palli Mangal Karmasuchy (PMK), a Savar-based microcredit lender, said that they incurred a huge loss last year due to the pandemic-led lockdown and failure to collect instalments from borrowers.
“We have 276,052 borrowers in Savar, Ashulia, Jatrabari, Manikganj, and Gazipur area and our running loan portfolio is Tk1,026 crore. Most of the borrowers of our institutions are small traders who were unable to repay the loans last year,” he added.
A director of Thengamara Mohila Sabuj Sangha (TMSS), the largest NGO from the country’s northern region, said that the small microcredit lenders are on the verge of shutting down.
“If the situation continues like this, we will not be able to survive. We have at least 32 small creditors and three to four of them have scaled back their operations. The rest have already been forced to close down,” she added.
Creditors explained that disbursement of loans has been reduced as the economic activities of the borrowers have been affected and previously taken loans are not being repaid.
These loans are likely to turn into bad loans at some point. If that is the case, the sector will suffer in the long run, they said.
Mofizur Rahman, managing director of SME Foundation, said: “Large NGOs have been able to handle the situation temporarily due to their tight financial position. In areas where the prevalence of coronavirus is up, the local administration has given verbal instructions so that NGOs do not apply pressure to collect micro-loans.
“Our allocation is low, but demand is high. If we can disburse loans with transparency, we will ask for more money from the government. Hopefully, then we will get extra money,” he added.
“We have disbursed Tk115 crore in loans with transparency and will try our best to distribute the remaining Tk200 crore in the next six months,” he further said.
Former governor of Bangladesh Bank Salehuddin Ahmed said the incentive package for SMEs has not been properly distributed.
“Due to this, a large part of the fund is lying idle. Therefore, microfinance institutions, NGOs, SME Foundation, and PKSF should be included to increase the loan disbursement of this fund,” he added.
Microlending institutions are delaying their loans on various pretexts. To alleviate poverty and keep the economy afloat, microlenders have to be allowed to play their role, he added.
He furthermore noted that many of the marginal entrepreneurs have downsized their businesses. Loans could not reach marginal entrepreneurs; the government needs special initiatives to turn around affected groups, he added.
Md Fashiullah, executive vice-chairman of Microcredit Regulatory Authority (MRA) said they have asked the government to allow running microfinance organizations on a limited scale by maintaining health guidelines.
According to the MRA, there are 746 registered microlenders and more than 31.22 million people in Bangladesh are borrowers of microloans.
In the microfinance sector, the total outstanding loans are around Tk67,390 crore, and savings are about 26,296 crore.
Loan amounts of up to Tk50,000 are generally considered microcredit.