COVID-19 Impact on Economy: Challenges Ahead for Microfinance Industry in Nepal

May 18, 2020

The COVID-19 pandemic has posed unprecedented challenges to both health and economic sectors all over the world. Governments in many countries have announced lockdowns and other measures to contain spread of the coronavirus. While these measures have helped in controlling infection, the economic activities have been severely affected.
The scale of the impact and the long-term consequences to the economy will become clearer in the coming months. How badly the economy is affected will largely depend on how long this crisis will prolong. While almost every sector of the economy will bear the burnt, low-income households and small businesses will be disproportionately affected as they will have little savings/assets to help them cope.
In Nepal, as in many other developing countries, Microfinance Institutions (MFIs) are at the forefront of providing financial services to the low-income population. According to Nepal Rastra Bank (NRB), some 4.5 million people, mostly women, are availing financial services from 87 MFIs in Nepal as of mid-Jan 2020. A total of NPR 256 billion (GBP1.71 billion) loans is outstanding with around 2.8 million clients. MFIs provide loans for income-generating activities in different areas such as agriculture and establishment/expansion of small businesses. MFI loans are also used by clients to manage their day-to-day consumption and health-related expenses among others. As low-income households and small businesses constitute the majority of MFI clients, there is bound to be a notable impact on the MFI business.

Major Challenges

While the effect on the financial sector is already visible, we will get a clearer picture in the coming months. Some of the major challenges that MFIs are likely to face due to COVID-19 pandemic are as follows:

Increase in Delinquency

Decrease in clients’ income will be reflected in the delinquency in repayment. Due to the lockdown, MFIs are not able to conduct regular centre meetings with clients to carry out transactions. Further, NRB has given a three-month moratorium (payment holiday) up to mid-July 2020 to all borrowers, as an initial measure to respond to the pandemic, which will delay the loan repayments. Some of the factors that will contribute to the delinquency problem are:
Decrease in Economic Activity:  Farmers are unable to sell their produce or are forced to sell at a very low price as the supply chain is disrupted due to the lockdown. Many small enterprises are also not able to operate their businesses with uncertainty on when they can reopen.
Decrease in the Flow of Remittance: Many Nepalese migrant workers, within and outside the country, have lost their jobs. The World Bank has estimated that Nepal will see a 14% reduction in the remittance in 2020. This will affect the repayment of loans to MFIs as remittance is a major source of fund for many low-income households.
Job Loss in the Informal Sector: According to a rapid survey conducted by the Institute for Integrated Development Studies (IIDS), 60% of workers working in the small and medium enterprises in Nepal have lost their job due to COVID-19. If the source of income of an MFI client or her family members comes under the informal sector, which is more likely than not, loan repayment/savings collection of MFIs will be affected.
Inability to Continue Centre Meetings: MFIs conduct regular centre meetings (monthly or fortnightly) to conduct financial transactions. During lockdown, these meetings cannot be conducted. If the social distancing measure continues even after the lockdown is over, conducting those meetings might be challenging. A similar parallel can be drawn from the Ebola crisis of West Africa where BRAC, an MFI operating in seven countries including the Ebola-affected Liberia and Sierra Leone had to close its entire operation for seven months to contain the transmission of the disease. 

Decrease in Liquidity 

Unfortunately, COVID-19 is likely to severely affect the liquidity of the entire financial sector. Some of the contributing factors for this are:

Reduction in Loan and Savings Collection: The decreased loan repayment and low appetite for savings among the clients will adversely impact the liquidity of MFIs.
The Constraint in Accessing Wholesale Fund: According to NRB’s quarterly progress report of MFIs, as of mid-Jan 2020 the average ratio of savings to total loan, which indicates the proportion of clients savings in the total loan portfolio, is 38.53% but in some MFIs, the ratio is as low as 9.33%. This shows that MFIs have a higher dependency on external borrowing to provide loans to their clients. However, wholesale loan providers experiencing a liquidity stretch could limit the wholesale loan for MFIs.

Immediate Priority for MFIs 

The challenges posed by the pandemic have made it difficult for the MFIs to maintain the same level of service and performance delivery, hence meeting the expectations of clients, staff and shareholders will be difficult. So, in the post-COVID scenario, MFIs must prioritise certain activities to better manage their operations and provide the required services to its existing/potential clients. Listed below are some activities to be prioritised:

Facilitating Consumption Smoothing Among Clients: Many low-income clients will be struggling to meet their basic needs because of the pandemic. In such a case, MFIs need to facilitate clients to withdraw their savings and have access to emergency loans for consumption smoothing by managing required cashflow of MFIs.
Effective Communication with Staff and Clients: While working towards recovering from impact of the pandemic on their business, MFIs need to maintain proper communication with their staff and clients about their strategy and initiatives. Staff, especially those involved in loan recovery, should be oriented to respect clients and understand their hardship. In terms of communication with clients, Interactive Voice Response (IVR), mass media and social media could be used to reach out to them on measures taken by the MFIs and expected roles of clients. In addition, the health and safety of both staff and clients should be prioritized and appropriate measures, such as social distancing, use of personal protective items such as mask, should be promoted.
Target Potential Clients: The return of migrant workers from cities and other countries can become an opportunity for financial institutions to expand their customer base. MFIs can provide required capital to these workers who are willing to establish new enterprises. MFIs/cooperatives can especially play an important role in helping the returnee migrants in setting up their enterprises and make the economy more vibrant.
New Loan to Existing Loanee: Financial institutions. in many cases, might need to provide additional loans to their existing loan clients to help their business recover and enable them to repay loans. MFIs need to develop appropriate criteria to identify eligible clients for the same.

What can MFIs expect from Other Stakeholders?

The pandemic has affected the livelihood of millions of people and the MFI sector will not be immune to the disruption. Stronger collaboration with investors and funders, plus positive support of the regulators can help MFIs navigate through this crisis.

Regulators: While the immediate priority of the country is to help the economy recover from the impact of the COVID-19, the regulator should work towards making MFIs more resilient to deal with such crisis in the future. Financial institutions, including MFIs and cooperatives, in rural areas, should not be neglected in resource allocation. Central Bank needs to inject more liquidity, through enhancing refinancing facility and other measures, to help MFIs undertake their business.
Regulators should introduce measures that will help both MFIs and their clients. Though a good portion of MFIs portfolio is in agriculture, interest subsidy for agriculture loan is not routed through MFIs. Providing the subsidy to genuine loan clients will be beneficial to both MFIs and their clients. Once the immediate problems are resolved, the regulator might also encourage mergers of smaller MFIs to make the industry more resilient.
Investors/Creditors: In recent years, MFIs have been considered as an attractive area of investment because of the returns it offers to investors. But in the post-COVID context, investors need to manage their expectations and not pressurize the management for a higher return until the economy bounces back. In addition, the creditors also should be flexible to restructure/re-schedule loans for the MFIs

Adapting to New Circumstances

How quickly can an MFI adapt to the changed situation will be the key to its long term survival. While the duration and extent of the ongoing crisis are critical to see how things will evolve, MFIs are already exploring possible quick fixes. Below are a few key areas MFIs can focus on:

Digital Channel for Transaction: This can be an opportunity for MFIs to digitize their operations and transactions with clients. Adoption of a digital channel will help manage regular transactions without conducting centre meetings, at the same time it will also reduce the potential spread of the virus through physical cash. UKaid Sakchyam Access to Finance programme has supported MFI industry in Nepal to adopt tablet banking and enhance their Core Banking System (CBS), which has prepared a basis for them to integrate the next wave of digitization.  In the initial period, MFIs should go for agent-assisted digital transactions and gradually educate clients to adopt the client-initiated digital transactions in the future.
Empowering Centre Chiefs: If the social distancing measure is applicable for a longer period, MFIs need to explore alternative ways to stay in touch with the clients. Empowerment of the centre chiefs can be a good alternative to maintain a bridge between clients and MFIs.
The MFI industry and the stakeholders should also consider how the core features of services such as group guarantee to provide loans, high touch service delivery to clients could be evolved to meet the changing ways of operating business due to the pandemic.

The Way Forward 
The role of MFIs along with other FIs will be critical in reviving the economy, with MFIs likely to have a more prominent role in the rural economy, after the pandemic is over. Therefore, MFIs themselves must rebound first for which they require the support of other stakeholders including investors, creditors, regulators and staff. This crisis can also be an opportunity for the MFIs to reinvent themselves and bring additional innovations to serve low-income clients. Adoption of digitization can be an area which MFIs can leverage to weather this storm and provide an alternative window to interact with clients.

Text by Omkar Pandey