A majority of microfinance banks are struggling to recover loans of significant value after the Covid-19 pandemic and lockdowns hit businesses and the financial capability of their clients across the country.
In the last two years, various indicators of the microfinance sector witnessed a significant slump from the number of loan disbursements, loan values, average loan size, and the penetration rate of the microfinance sector.
The micro, small and medium-sized businesses were adversely affected by the pandemic as many of the borrowers could not maintain income streams from their businesses hence their capability of loan repayment was also compromised.
Hundreds of thousands of borrowers availed the facility of rescheduling loans provided on the directives of the State Bank of Pakistan. As a result, microfinance banks and DFIs are reluctant to give new loans to borrowers except for nano loans or interest-free loans through a government-backed program.
A number of banks will show losses in their balance sheet after a significant number of borrowers will default, said a former president of a leading microfinance bank.
If the situation is not controlled, a few banks may face liquidity issues in the next few months, he added on the condition of anonymity. State Bank of Pakistan (SBP) should support microfinance banks to prevent a crisis and maintain the financing facility for the low-income segment of the country, mainly in rural areas.
COVID-19’s Impact on Businesses
According to a survey study published in 2020 by Pakistan Microfinance Network, 82% of the respondents reported that their businesses had been negatively impacted by the coronavirus pandemic with 66% reporting a significant decline in revenue and 16% reporting some decline in revenue whereas a very small proportion of clients (4%) reported significant or some increases in revenue.
Out of those whose incomes had decreased, more than half (57%) cited market closure as the reason, followed by a decline in market demand (12%) and travel restrictions (11%) impacting mobility to earn a living.
The survey interviewed over 400 borrowers of different microfinance providers. A majority of them (88%) were sole owners of their business whereas only 11% had up to 5 full-time employees.
The pandemic has hurt small and medium businesses including those that borrowed from microfinance banks. As a result, the income resource of various customers could not sustain, said Mohsin Ahmed CEO of Pakistan Microfinance Network.
The rescheduling of the loan facilities also made the situation worst which caused losses to banks ultimately as they have to face the burden of bad debts, he further said. The recovery of rescheduled loans up to the period of six months is possible but very difficult for the extended period up to one year in the prevailing situation.
Banks are working to raise the Tier II capital in order to match the liquidity against the bad debts and it is expected that loans recovery will be made possible with different strategies for affected borrowers, he hopefully said.
Micro, small and medium enterprises account for 90 percent of total economic enterprises and 30 percent of the GDP, contributing over 25 percent of earnings in export, and employ 78 percent of the non-agricultural labor force In Pakistan.
Almost half of the businesses fall in the trading (food, clothing, karyana store, etc.) or services (transport, tailoring, teaching, etc.) sector, followed by agriculture and livestock/poultry at 17% each.
In the last report published by PMN, the number of loans disbursed showed a drop of 29% from the last quarter to stand at 4.5 million.
Loans of over Rs.112 million were disbursed by microfinance providers. The number of active borrowers surged to over Rs. 8 million while the number of savers surged to 72 million.
Source: Pro Pakistani