Demonetisation: Micro Finance Institutions to take a short term hit

The industry is in talks with the Reserve Bank of India and Finance Ministry to allow MFIs to collect discontinued currency.

Other segments, like Diamond Financing and lending in SMEs, not likely to face any slowdown. Photo: Reuters

Following the announcement of demonetisation, the banks are expecting stable trends with respect to repayments across its loan books, except for the Micro Finance Institutions (MFIs), a report said.

MFIs, that offers financial services to low income population, likely to get hit by Prime Minister Narendra Modi's recent move to abolish high denomination currency.

According to a Morgan Stanley report, IndusInd Bank and Bharat Financial Inclusion (BHAF) at an Annual Asia Pacific Summit, said there will be a short term impact on MFIs, till the new currency is well circulated especially in the rural areas.

For IndusInd Bank, MFIs segment forms approximately 3% of the overall loan book and the bank has witnessed sharp moderation in repayment rates following demonetization. "This is true even of the portfolio originated by business correspondents (two-thirds of the total), where repayments can be collected even if they are in the form of discontinued notes (unlike non-banks)", the report said.

Similarly scenario was seen by BHAF. The financial institution said that this short term slowdown in disbursements will be seen more as a postponement of demand. In fact, the industry is in talks with the Reserve Bank of India and Finance Ministry to allow MFIs to collect discontinued currency.

Following MFIs, another segment which is likely to take a hit is vehicle finance. For IndusInd Bank, approximately 85% of the loan repayments happen via non-cash mode. Though the banks are allowed to collect repayments via Rs 500 and Rs 1000 notes till December 30, 2016, but, a small portion of cash collection in remote areas have been affected, the report said.

Other segments, which has higher exposure like Diamond Financing and lending in SMEs, not likely to face any slowdown following the demonetisation, IndusInd and BHAF said.

At 1250 hours, the shares of Bharat Financial Inclusion was trading at Rs 683.25 per piece, down 0.29%, or Rs 1.30.