In a sharp indication that the second wave of the pandemic this summer has seriously impacted the rural economy unlike last year, loan defaults have been on a rise in April. The trend is expected to continue to affect May loan pool collections (June payouts) due to borrowers’ stretched liquidity and collection disruption on the side of lenders.
Loan defaults are expected to increase in rural areas this year compared to last year. The findings by India Ratings and Research (Ind-Ra) indicates that the second wave and its demand disruption will continue to impact borrowers at the bottom of the pyramid throughout the financial year 2021-22.
Across transactions rated by Ind-Ra, it was noticed that collections reduced to 73 per cent in April compared to 84 per cent the previous month. Rural business and employment was affected by containment restrictions as well as collection disruptions. Many lenders were forced to stop door-to-door collections after agents, staff and borrowers were taken ill in the rapidly spreading second wave through March, April and May. This meant that while ramping up of digital infra helped banks and new fintechs modes in metros and small cities, it disrupted loan collections in rural areas. This has affected servicing of the likes of microfinance loans pretty significantly.
Even in rural areas, the worst affected are those in low or middle income levels and those with small businesses, compared to those dependent on agriculture who have been less affected.
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When Covid-19 hit India in the spring of 2020, the spread was primarily in urban India. That coupled with good rains and low figures in rural areas meant the agriculture sector performed well, protecting the rural economy from the scourge in the first round. However, the second wave has been much more widely dispersed, with smaller towns and villages witnessing a sharp rise in infections and fatality.
This could affect the rural non-agri demand sentiment and rural employment levels, in addition to denting urban demand. With reduced income levels and higher health expenditures, the performance of segments like microfinance will be significantly affected, says Ind-Ra.
