MICROFINANCE PAPER WRAP-UP: “Consumer Protection and COVID-19: Borrower Risks as Economies Reopen,” by Elisabeth Rhyne, Published by CGAP

Dr Rhyne has analyzed data collected by CGAP, microfinance investors and financial service providers (FSPs) to consider how FSPs can collect outstanding microloans – including after repayment moratoria – and issue new lines of credit effectively as economies continue to adjust to the COVID-19 pandemic.

The percentage of FSP portfolios that entered moratorium ranged widely, chiefly due to country-to-country variation in regulations. Relative to other regions, South Asian microfinance providers were implementing repayment holidays at the highest rate, with a median of 35 percent of their portfolios in moratorium, according to data from the 300 FSPs participating in the CGAP Global Pulse Survey. During the pandemic lockdowns, regulators generally allowed FSPs discretion in setting moratoria terms, which typically lasted from one month to three months, with loans continuing to accrue interest.

Microborrowers reported significant drops in income, with women in India and Pakistan, for example, experiencing greater decreases than men. Accordingly, the 30-day portfolio-at-risk (PAR) ratio among Pulse respondents averaged an elevated rate of 7.2 percent. To offset liquidity stress, some suspended lending altogether. Half cut lending by at least 50 percent, and three quarters cut lending to some extent. Of the entire group, 75 percent were providing repayment moratoria and other forms of relief to borrowers.

With lower cash flows due to repayment moratoria and delinquency, those FSPs that continued to lend tightened their credit standards. While some FSPs offered emergency loan programs, observers have questioned whether these funds are going to the people who are most in need.

The author states that “when moratoria and other rescheduling protocols are established, regulators and FSPs must address the practicalities of administering these changes in terms of staff capability, borrower communications, and IT [information technology] systems.” Regarding borrower communications, regulators and FSPs must be sure borrowers have sufficient information to make decisions regarding moratoria, such as the level of any interest and fees that would be charged during the delay in repayment.

Going forward, the author predicts that borrowers under moratoria will not have their credit reports downgraded, but she warns of a possible rise in aggressively marketed loans that endanger customers with unsustainable loan sizes and terms. Dr Rhyne suggests that future research focus on customer wellbeing such as through the analysis of customer complaint data and the usage of market monitoring tools.

This is a summary of a paper by Elisabeth Rhyne, published by CGAP, October 2020, 16 pages, available at https://www.cgap.org/sites/default/files/publications/2020_10_COVID_Briefing_Consumer_Protection.pdf

By Kate Finster, Research Associate

Additional Resources

CGAP homepage
https://www.cgap.org

Previous MicroCapital article on gauging nationwide over-indebtedness
https://www.microcapital.org/special-report-a-model-from-cambodia-for-preventing-overheating-not-just-multiple-lending-to-be-presented-at-european-microfinance-week-november-14-16-2018/

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