India’s microloan portfolio —mostly small amounts loaned to individuals—is showing signs of recovery after shrinking in the aftermath of the second wave of the covid pandemic, data showed.

The September quarter trend, with signs of it continuing sequentially, is an important indicator of the health of the informal sector, in many respects the backbone of the Indian economy, because much of the microloans goes into establishing small businesses.

After a decline in the June quarter owing to the raging second wave, the gross loan portfolio of the microfinance sector rose 2% sequentially, according to new data from Crif Microlend’s quarterly report on the sector.

The impact of the devastating second wave, experts said, seems to be easing as loans to micro borrowers touched Rs2.49 trillion as of 30 September.

According to the report, small businesses and microfinanciers that lend to such businesses suffered great losses due to the covid wave in the first three months of FY22. While the effects continue to linger, the second quarter marked a turnaround for the microfinance industry which increased disbursements.

Lenders have disbursed microloans worth Rs62,321 crore in the three months to September compared with Rs25,799 crore in the June quarter, according to the report.

“Volume of inquiries witnessed good recovery in Q2 FY22, compared to Q1 FY22; the volume of inquiries in October (was) stable compared to September," it said.

Commenting on the data, analysts at Kotak Institutional Equities pointed out that banks seemed to have taken a back-seat in the growth of loans, with a higher share of disbursements from small finance banks (SFBs) and microfinance institutions during the quarter—a trend in contrast to that observed since the beginning of covid.

While banks continue to dominate in terms of outstanding loans and quarterly disbursements to the microfinance sector, their share in the disbursements declined 13 percentage points sequentially as of 30 September—55% to 42%.

Analysts also noted that the borrower base has shrunk since the onset of the pandemic.

“Since the start of covid-19 (March 2020), the industry has shed 7% of its borrower base, with a 15% increase in average exposure per borrower," the Kotak Institutional Equities report said, pointing to the loss of delinquent borrowers hit by covid-19 stress that made it difficult for customers to repay debt.

The decline in borrowers seems to be an industry-wide phenomenon.

Microfinance lender CreditAccess Grameen (CA Grameen) has shed 200,000 customers on a standalone basis for non-payment of dues following covid-19, its managing director and chief executive Udaya Kumar Hebbar said last month.

Meanwhile, experts warned that it is still unclear how restructured loans reflect in overdue loans, which means that the data should not be taken at face value.

That apart, the threat of the Omicron variant and how it will affect recoveries will have to be closely tracked. However, not all are worried and believe that India’s vaccination coverage would protect against any rekindling of covid-19 threat.

“Two months of the third quarter, so far, point to a clear improvement in collections as well as disbursements. The industry expects to close the December quarter with better results. As of now, Omicron is not perceived as a threat as a large percentage of borrowers and staff are vaccinated," said P. Satish, executive director, Sa-Dhan, an industry body of microfinance institutions across India.