Farmers Loan Waiver - Difference between Bank and Institution loans

News flow on farm loan waivers may not have a material negative impact—at least as far as Maharashtra is concerned -- and borrowers appear to understand that the waivers being announced are for agri loans from banks while loans (availed) from micro-finance institutions (MFIs) are different, says a research note.

In the report, Credit Suisse says, "The borrowers we spoke to generally understood the distinction between farm loans that are being waived by the state government and microfinance loans. The chatter specifically about loan waiver for MFI loans peaked during the local election phase, and is now absent. Fear of bad bureau scores, and reinforcing behaviour by MFIs, like fresh loans only to customers with full payment track-record, has helped. Also, the fact that government machinery had only recently worked to clarify the status of MFI loans post demonetisation (i.e., as loans from legal private companies, who are regulated by Reserve Bank of India and who report all loan details to credit bureaus) helped stem any voices out to cause confusion."

The report is by Credit Suisse after field visits at the offices of Bharat Financial Inclusion Ltd (BHAFIN) in Vidarbha region of Maharashtra, one of the most affected regions post demonetisation. This area accounts for 5% of the nationwide portfolio of BHAFIN, the country's largest MFI. It says, “The company has not been adding any new borrowers since demonetisation. Fresh loans are disbursed only to fully current borrower groups. This seems to have helped reinforce better behaviour. Borrowers we spoke to were aware of the credit bureaus.”

Credit Suisse says during February-March, or at the peak of elections, collections for BHAFIN bottomed at about 55% in Vidarbha region. "Since then, collections have recovered swiftly—currently running at 85-90%.  The company has added more resources, including senior management who had experience handling Andhra Pradesh issue in 2010, to focus on the area. New client acquisition has not yet started, unlike elsewhere in the country, and loans are given only to borrowers or groups without any overdue, which is the norm in any case. The time freed up in afternoons (since no new customers are being acquired) is being used (by BHAFIN) to visit affected villages and convince borrowers to come forward and pay."

"There was also some regrouping done like clubbing fully current borrowers into the same group so that they can be treated as normal groups for disbursement purposes, which also had a signalling effect. We also believe that the weekly model followed by the company helped contain losses (smaller ticket size of instalments, frequent borrower interaction). Other than Grameen Koota, no other MFI follows weekly collections here," the report says.

According to Credit Suisse, the Vidarbha region saw significant political interference in the aftermath of demonetisation—with local politicians eyeing a series of local elections. 

"Our discussions made us conclude how easy it is to spread rumours in villages. For instance, after demonetisation, there were rumours that BHAFIN company has closed down and all loans are being waived. The company officials had to make frequent trips to the village and also rope in local administration to quell the rumours. Another well-known micro-finance company is now suffering a similar rumour! Another rumour sometime back was that Rs10 coins have been demonetised, that resulted in borrowers walking in to pay their instalments in bags of coins," it added.

( Inputs from Moneylife)