Ever wondered why the Gross NPA in the NBFC-MFI sector always comes out champs in relation to the other lending channels? The answer probably lies in the way lenders of various sectors engage with their borrowers.

Even in FY2019, a fiscal marked by much discussion about the rising NPAs and issues involved, NBFC-MFIs brought down their NPAs to about four per cent. Other channels, however, kept struggling with NPAs above five per cent and in some cases way above six.

If we want to seek a probable explanation to this huge difference in managing NPA we might have to look into the strategic engagement pattern and expectation differences in the respective sector’s client-patron relationship. There is an additional fact that might lead one to look into the differences in the client-patron relation in this context. The NBFC-MFIs have been able to significantly reduce their NPAs in FY19 over FY18 while others kept struggling with containment strategies.

In a generalised vein, all lending channels, save the ones from the MFI sector, depend on the past performance of the clients while considering their creditworthiness. The very structure of the lending channels perhaps creates a legacy driven assessment of the degree of efficiency in the deployment of funds, purely on the basis of financial performance.

While the traditional channels rely on assessing risk of lending on the past performance, the MFIs, by their mandate, have no legacy to depend on in assessing lending risks. In my last blog, I talked about joint liability and what it means in risk assurance. At the cost of repetition, let us revisit that so that the point I am trying to make may become clear.

The MFIs are channels to alleviate poverty. They try to empower the poor by creating access to capital and creating awareness about its productive deployment. But the poor have no traditional collateral against the capital they borrow. So the money is lent to a group where members together become responsible for productive deployment and repayment. This is called social collateral.

The MFIs, by their mandate, are also responsible for handholding the members in the use of the capital productively. This method ensures that in each turn of the process the borrowers or customers as they are called would keep correcting their course, reap surplus from engagements. The direct engagement of the channel in the customers’ business ensures that repayment failures are capped to a bare minimum.

On the other hand, in the traditional channels the disbursement is done against financial performance and historical financial parameters as risk evaluation method. At the operational level, in a manner of speaking, repeat failures in repayment lead to bleeping of warning lights.

We, however, should keep in mind the qualitative and quantitative difference between the two segments. What is possible in the MFI sector may not work for the traditional as the customer profiles are vastly different.