Institutional lenders, microfinance companies, utilities and even grant funds stare at deficit recoveries with each passing month.
Collection efficiency is the ratio of total revenue earned to total revenue billed for a given month. This is an important metric for financial services and other subscriber-based businesses.
While this ratio has a direct bearing on payment collection policies and practices adopted by service providers, it also serves as a check on the health of household incomes at the macro level.
“I wouldn’t be surprised if there was a slight increase in delinquencies and late payments now,” said Yuvika Singhal, economist at QuantEco Research. “There is financial stress among low-income people. Curfews and closures (although shorter in duration) have impacted the lives of low-income households.”
“The service sector, which employs a lot of people, has been hit hard even in the third wave. Wages have fallen and many people are (even) not employed. These factors can lead to late payments or defaults in the service books suppliers,” Singhal said.
The banking and financial services sector is eyeing a portfolio value at risk of more than 10%, said the heads of personal loans at two major banks.
The situation worsened after several fintech players began offering payday loans and buy-it-now, pay-later options to borrowers with low credit profiles.
A recent Crif Highmark-EY survey revealed that almost 80% of Indian employees were short of cash well before the end of the month. Many end up borrowing money to meet the next pay cycle. This trend is worrying because household debt represents more than 37% of GDP.
Freed, a debt settlement company, saw average delinquencies in its portfolio from 5,500 clients with loans worth ₹310 crore dropping from 88 days past due (DPD) to almost 181 DPD. DPD shows the number of days a borrower has missed their EMI.
These are mainly personal, consumer or credit card loans. “Average delinquency is increasing among borrowers. People who have gone into debt are unable to service their IMEs. Many borrow from Paul to repay Robert; it practically puts them in a vicious circle,” says Ritesh Srivastava, CEO of Freed. “People on low incomes are the most affected,” he said. “This is a segment where many have lost their livelihoods or jobs. Wages and salaries have not increased; in some cases they have gone down. A third of our debt-ridden clients come from Tier II cities “, did he declare.
Even essential services such as electricity distribution companies are unable to get their payments on time. In December last year, the Maharashtra State Electricity Distribution Company (MSEDC) asked its consumers to pay their bills regularly. MSEDC has Rs 70,000 crore in consumer dues.
“Local bodies are unable to effectively collect our payments,” said Anil Kamble, a spokesperson for the MSEDC. “At some point, we’re going to have to start disconnecting services. Collecting payments has always been a problem for most state discoms, but now it’s getting even harder.”
Microfinance institutions (MFIs), which used to pride themselves on having collection efficiency rates as high as 99%, currently manage only 80-95%, depending on the state in which they operate. This industry is also aware that many thousands of its borrowers fall below the poverty line.
“If people do indeed become poor and fall below the poverty line, it could wipe out many years of our good work,” says Manoj Nambiar, managing director of Arohan Financial Services. “Household incomes have been hit by the sharp decline in economic activity in rural India. People have lost their jobs. Laborers who used to work in the cities have not returned to their places of work. palpable stress among households to repay loans. Many borrowers are only making installment payments now.”
Voucher fund operators – which typically serve small entrepreneurs and merchants – are also seeing late payments among 5-10% of their subscribers. It’s an industry that doesn’t tolerate even a day’s delay, without penalizing the subscriber. A chit fund is both a savings and credit product. It carries a predetermined value and is of a fixed duration, generally two to three years. Each scheme admits a specific number of members whose monthly contributions would add to the total value of the chit fund at the end of the term. Members can borrow from the pool every month by lottery.
“Curfews and shutdowns have had quite a severe impact on our subscribers,” says TS Sivaramakrishnan, owner of New Delhi-headquartered Balussery Benefit Chit Fund.
“Business doesn’t happen much these days; things were bad even before the Omicron wave. Many of our clients had just rebuilt their business when the third wave arrived. Late payments are mostly observed among subscribers residing in Delhi, Haryana, Maharashtra and Kerala; Tamil Nadu, Andhra Pradesh and Karnataka are doing better than other regions,” he adds.