NEW DELHI: Stressing on the need to build capital buffers and manage liquidity, the Reserve Bank of India has warned that the pandemic can prove to be the “biggest tail risk event” for microfinance institutions (MFIs) in a long time. At this juncture, MFIs should learn from the past and adopt responsible lending practices to ensure that loan amounts are commensurate with the borrower’s ability to repay and that there are no instances of overlending, it said.
“COVID-19 is perhaps the biggest tail risk event in a long time. The NBFC-MFIs, being specialised institutions extending collateral free loans to low-income groups, are particularly exposed to credit risks in this scenario. Further, repayment rates have dropped significantly, posing liquidity risks.
Smaller NBFCs-MFIs are particularly vulnerable to credit rating downgrades, which may hamper their ability to raise fresh capital and access liquidity,” the RBI paper warned. It added, however, that though the pandemic presents new challenges and significant financial risks for the sector, it also presents an opportunity to build long-term resilience.