Microfinance's potential rocky road.

Pakistan's microfinance industry 9 pandemic, could face tougher times in the next six to 12 months should the increasing virus infections lead to fresh business disturbances in the country, squeezing the repayment capacity of the small borrowers further.

The microfinance banks and institutions are already facing considerable difficulties in recovering their old loans because a majority of the borrowers are still unable to meet their repayment schedules owing to losses in their incomes. According to industry sources, the number of active borrowers has shrunk from its peak of 7.4 million in 2019 to 6.8m in 2020 because of the health crisis, which forced the government to enforce the lockdown across the country, causing significant disruptions to the agriculture supply chain. The failure of the cotton crop has added to the woes of the microfinance lenders.

If the present trend of rising infections continues, the industry will have to restructure more loans going forward and reduce loan disbursements further

The loan recovery rate in March stood at 80 per cent, down from over 90pc a month before, before dropping to 20pc in April. It recovered to 50pc in June after the lockdown restrictions on businesses were eased with the dropping Covid-19 cases, according to the Pakistan Microfinance Network.

The number of small active borrowers was decreasing because of overall economic slowdown and rising inflation even before the coronavirus outbreak in the country. In March, the total number of active borrowers of the microfinance sector had dropped to 7.1m million from 7.4m in December 2019. The Covid-19 health crisis and decline in agriculture had only exacerbated the crisis. This is the first time that the industry, which was growing rather rapidly, has recorded a decline in its size.

The microfinance industry comprising banks and not-for-profit microfinance institutions (MFIs) had already seen its loans in arrears for 30 days, the most common indicator used to see how the sector is performing, increase from 5.8pc in 2018 to 6.1pc in 2019 because of the challenging and uncertain macroeconomic environment and runaway inflation.

A Pakistan Microfinance Network survey on the impact of the Covid-19 outbreak on borrowers in May had shown that businesses of 82pc of the respondents were negatively affected. About 85pc respondents had reported significant or somewhat decrease in their household incomes, squeezing their repayment capacity. Some 40pc borrowers...