Micro-finance rebound shows rural India recovering from cash ban

Bloomberg

India’s vast rural hinterland, which makes up 70 percent of the South Asian country’s population, is showing signs of recovery from last year’s cash crunch, boosting optimism that increased spending will help the broader economy regain its vigor.
The micro-finance industry is rebounding, real rural incomes are rising and unemployment is falling, according to brokerage Motilal Oswal Securities Ltd. and an Indian unit of HSBC Holdings Plc in analysis that contrasts to the distress that’s swept the farming sector.
“We believe repayments and improved collection trends have increased the confidence of companies to start disbursing loans at a healthy pace again,” Mumbai-based Alpesh Mehta and colleagues wrote in a report from Motilal Oswal.
India’s micro-finance industry, which provides small loans to entrepreneurs and business owners who have little collateral, was slammed when the government withdrew high-denomination bank notes from circulation late last year in a bid to stamp out corruption.
And while farmers have taken to the streets across India to protest plunging food prices, laborers who get paid a wage to work the land have actually seen their incomes rise after last year’s good monsoon, the HSBC economists wrote.
Loan collection rates in Uttar Pradesh, India’s largest and most populous state, are largely back at about 98 percent levels, up from less than 50 percent after denomonetization, Mehta, Piran Engineer, and Subham Banka said in their July 3 note. Other major states such as Karnataka are displaying “much improved collection trends,” they said.
Micro-finance disbursements, which grew 13 percent last year compared with 80 percent the prior year, are expected to return to pre-ban levels in three to six months, according to Motilal Oswal.
Gold loan company Manappuram Finance Ltd. has risen 68 percent from its low after demonetization in November and Bharat Financial Inclusion Ltd., India’s largest listed micro-finance firm, has rebounded 64 percent over the same time frame.
However, the Indian state of Maharashtra, home to India’s financial capital, Mumbai, is lagging other states and continues to face delinquency pressures, with about 20 percent of loans unpaid 90 days past due, according to Motilal Oswal.
Interactions with micro-finance companies reveal no expectation of disruption from the rise of farm loan waivers in Indian states but instead a focus on the effects of demonetization, the report said. Microfinance Institutions Network — India’s largest group of microfinance firms — reported that “demonetization severely impacted the micro-finance business in multiple ways including slowing down of growth due to non-availability of cash for a few months.”
Motilal intends to observe
delinquency trends for a few more quarters before reaching conclus-ions over the impact of waivers on micro-finance. Maharashtra, Punjab, Uttar Pradesh have all announced, waiver programs.