Risk Mitigation Strategies for Micro Finance Institutions to Adapt to the New Normal

The microfinance industry successfully navigated through all the three COVID-19 waves. Globally the microfinance institutions (MFIs) responded to COVID-19 in four ways – giving leniency to clients, reducing lending activities, flexible staff arrangements and scaling up remote channels. In India, the Government of India and Reserve Bank of India (RBI) took many proactive steps like injecting liquidity in the system and announcing moratorium for borrowers. Past crises in the microfinance sector emphasises the need to keep the financial institution’s hierarchy of needs in mind, namely, liquidity, confidence, portfolio and capital. To adapt to the new normal, MFIs should revisit their business model and revise their product and service offerings, and should take a long-term view and train the staff to make them adapt to the new normal. MFIs should mitigate the key risks like liquidity risk, credit risk, operational risk and reputation risk. Extension of credit guarantee scheme for MFIs will improve the credit flow to small and medium sized MFIs and add to the liquidity and allow new lending to clients. The RBI shall expedite the roll out of the new microfinance regulations which will be applicable for all regulated entities, and this is expected to promote responsible lending among MFIs, boost the morale of the lenders and investors, and pave the way for the growth of the microfinance sector. This, in turn, would help to cover more people still remaining unserved through the microfinance services