Covid-19 and debt moratorium conundrum: The case of microfinance

The Government of India called for pre-budget consultations in early January 2025. Dvara Research was one of the invitees, and we are once again grateful to policy makers for reposing trust in our work. In the past as well, Dvara Research has been a partner and advisor of choice for key policy-making bodies in the country.

This blog presents key insights from the second round of the survey report, NAFIS 2021-22, and finds that the rural households’ investment portfolio continues to be dominated by physical assets, which is in contrast with the predominance of formal debt on the liabilities side of the household balance sheets.

This chapter emphasises the realities of the sector that create a feedback loop, where lenders are incentivised to over-lend and borrowers to over-borrow, until crisis intervenes as a necessary and often tragic correction

According to a report by Crif High Mark, microfinance loans overdue for up to 31-180 days increased from 2.1% in March 2024 to 2.7% in June 2024. While there could be several supply-side factors at play for the rise in defaults, in this blog we direct our attention to reviewing the household side of the story by assessing the changes in household balance sheets post the COVID-19 pandemic.

For two decades, India has doubled down on the policy prescription of providing financial ‘last-mile access’ to its rural and poor citizens. Has the effort succeeded? It depends on who you ask.

The 2016 Insolvency and Bankruptcy Code (IBC) is a landmark legislation with the potential to impact every borrower. This paper focuses on Part III of the IBC, which deals with natural persons, proprietorships, and personal guarantors for corporate debt. Through the paper, we attempt to estimate the potential consequences of the Fresh Start Process (FSP) defined under this Part. The IBC lays out economic criteria that can qualify (or disqualify) an applicant for FSP. Under FSP, a borrower must be asset-lite, have a low income, and hold minimal outstanding debt to qualify. These thresholds determine the applicability of the process once the IBC is fully notified. Thus, empirical estimates regarding the effects of the provisions on the Indian credit market are crucial to deciphering the impact of the IBC, more specifically, the FSP.