Microfinance lenders may see a significant increase in asset quality pressures amid protracted COVID-19 curbs in April and May, Crisil Ratings said in a report released on Friday.
Crisil estimates that loans with overdue of more than 30 days may rise to 14-15 percent of NBFC-MFIs’ portfolio by June end from a recent low of 6-7 percent in March. This number had surged to a high of 11.7 percent in March 2017, after demonetisation. But the surge in COVID infections in the second wave and the localised lockdowns across states may push the 30+ delinquency levels to cross the demonetisation peak, Crisil said.
Krishnan Sitaraman, senior director and deputy chief ratings officer, CRISIL Ratings said, "Ground-level infrastructural and operational challenges, as well as restrictions on the movement of people, have impinged on the MFI sector's collection efficiency. Though overall collection efficiency is expected at 75-80 percent in May, compared to 90-95 percent in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave."
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Crisil expects that unlike last fiscal when the loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India (RBI)’s Resolution Framework 2.0 announced last month, and continue with higher provisioning.
With asset quality pressures rising, NBFC-MFIs are expected to resort to the restructuring of loans to a larger extent than last fiscal, "as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket," Crisil noted.
As a result, "demand under restructuring 2.0 could be in high-single digits compared to 1-2 percent seen during restructuring 1.0 for the overall sector," it said.
Despite this, the risk of protracted delinquencies eventually leading to credit costs staying elevated, remains. For one, borrowers’ track record of repayment ability is yet to be established for already restructured portfolios. Two, a lack of prudence is also a possibility. Crisil estimates that close to half of the total assets under management (AUM) of NBFC-MFIs of Rs 80,000 crore as of March 2021, were generated from December 2020 onwards.
"Given the relatively vulnerable credit profiles of borrowers and the fact that local economic activity is yet to normalise, sustainability of collections, especially for the recent disbursements, will be the key monitorable in the coming quarters," it said.
"To be sure, NBFC-MFIs have created provisions (including a special COVID-19 provision in the fourth quarter last fiscal) estimated at 3-5 percent of the AUM as of March 2021. Considering the likely rise in delinquencies and restructuring, higher-than-normal provisioning is warranted even in the first half of this fiscal to absorb the shocks. NBFC-MFIs with adequate liquidity, lower leverage, or those backed by strong parentage, will be better placed to withstand the current situation," said Ajit Velonie, director, Crisil Ratings.
The MFI sector is heavily dependent on door-to-door collections, which were hit due to the surge in infections. Their operations were also curbed across several states over the past couple of months as state governments imposed restrictions to curb the rising case. While the overall collection efficiency of the microfinance sector was at 95-98 percent as of March 2021, the situation changed drastically with the surge in infections, the MFI-body SaDhan said.
The Reserve Bank of India announced a few measures to help the microfinance sector and their small borrowers, who have been hit by the COVID-19 pandemic. RBI announced a second round of loan restructuring for smaller companies earlier this month.
It also allowed small finance banks (SFBs) to tag fresh lending to MFIs with asset sizes of up to Rs 500 crore for on-lending to individual borrowers as priority sector lending. RBI additionally announced special liquidity assistance to MFIs through development financial institutions like the Small Industries Development Bank of India.
MFIs have sought a case-to-case basis moratorium as well, but RBI has not obliged so far.
|NBFC-MFIs' 30+ portfolio at risk (PAR) trend|
|March 2021 (E):||6-7%|
|June 2021 (P):||14-16%|
(Edited by: By Jomy Jos Pullokaran)