As COVID-19 is likely to pose financial risks for microfinance institutions (MFIs), there is a need to build capital buffers and manage cash positions for microlenders to protect their balance sheets from any disruptions, according to an article published in RBI’s monthly bulletin.

The article, prepared by Snimardeep Singh of Department of Supervision, Reserve Bank of India, said though COVID-19 presents new challenges and significant financial risks for the microfinance sector, it also presents an opportunity to build long-term resilience.

“Going forward, building capital buffers and managing liquidity would be crucial for MFIs in fortifying their balance sheets against COVID-19 led disruptions,” it said.

The article termed COVID-19 as the biggest tail risk event in a long time.

Owing to disruptions in supply chain and business operations, the likelihood of loss of livelihoods and consequent drop in household incomes is high, it said. “Non-banking financial company microfinance institutions, being specialised institutions extending collateral-free loans to low-income groups, are particularly exposed to credit risks in this scenario,” it said. The article said the repayment rates have dropped significantly, posing liquidity risks to MFIs.