Microfinance Institutions are Having a Hard Time Recovering Loans

After the Covid-19 outbreak and lockdowns affected businesses and their clients’ financial viability across the country, most microfinance banks are battling to recoup large loans.

Various metrics of the microfinance sector have seen a considerable drop in the last two years, including the number of loan disbursements, loan values, average loan size, and microfinance penetration rate.

The pandemic hurt micro, small, and medium-sized enterprises because many borrowers could not maintain income streams from their firms, putting their capacity to repay loans at risk.

Hundreds of thousands of borrowers took advantage of the State Bank of Pakistan’s instruction to allow them to reschedule their loans. As a result, microfinance banks and DFIs are hesitant to make new loans to borrowers, except nano loans or government-backed interest-free loans.

According to a former president of a significant microfinance bank, many institutions will report losses on their balance sheets once a large number of borrowers default.

On the condition of anonymity, he noted that if the situation is not handled, a few institutions may suffer liquidity challenges in the coming months. The State Bank of Pakistan (SBP) should support microfinance banks to avoid a crisis and preserve financing for Pakistan’s low-income population, particularly in rural areas.

The Impact of COVID-19 on Businesses:

According to a survey study published in 2020 by Pakistan Microfinance Network, 82 percent of respondents said the coronavirus pandemic had negatively impacted their businesses, with 66 percent reporting a significant decline in revenue and 16 percent reporting some decline in revenue, while only a tiny percentage of clients (4 percent) reported substantial or some revenue increases.

More than half (57%) of individuals whose incomes had been reduced named market closure as the cause, followed by a drop in market demand (12%) and travel limitations (11%) limiting their ability to earn a living.

Over 400 borrowers from various microfinance providers were interviewed for the study. The majority (88 percent) were sole proprietors, with only 11% having up to five full-time employees.

Small and medium enterprises, especially those that borrowed from microfinance banks, have suffered due to the pandemic. As a result, many clients’ income resources could not be sustained, according to Mohsin Ahmed, CEO of Pakistan Microfinance Network.

He added that the rescheduling of lending facilities exacerbated the problem, resulting in bank losses as they are forced to deal with the burden of bad loans. In the current circumstances, it is possible to recover rescheduled loans for up to six months, but it is tough for an extended time of up to one year.

Banks are working to increase Tier II capital to match liquidity to bad debts, and it is envisaged that loans would be recovered using various ways for affected borrowers, he stated optimistically.

In Pakistan, micro, small, and medium enterprises (MSME) account for 90% of total economic firms and 30% of GDP, producing over 25% of export revenues and employing 78 percent of the non-agricultural labor force.

Almost half of the companies are in the commercial (food, clothing, Haryana shop, etc.) or service (transport, tailoring, teaching, etc.) sectors, with agriculture and livestock/poultry accounting for 17% of the total.

According to PMN’s most recent report, the number of loans awarded fell by 29% from the previous quarter to 4.5 million.

Microfinance institutions have disbursed loans totaling over Rs.112 million. Active borrowers have increased to nearly Rs. 8 million, while savers have increased to 72 million.

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