Microfinance sector stares at sequentially challenging year: India Ratings

Collections in May could see shortfall of 10-15%; credit costs may escalate in FY22

The microfinance sector is expected to see a shortfall of 10-15 per cent in collections on a consolidated basis in May 2021 due to the effect of lockdowns imposed to contain the Covid-19 pandemic.

The variation among Micro-finance institutions (MFIs) could be wider, depending on their level of concentration in regions where lifting of restrictions could be slow, according to India Ratings (Ind-Ra).

The Micro-finance institutions (MFIs) could again see credit costs in the range of 3-6 per cent in FY22, if the early trends of the collection performance were to persist.

Ind-Ra, in “microfinance outlook” had estimated credit costs for MFIs to be in the range of 3-8 per cent in FY21. The collections during the first wave picked up in the pre-covid portfolio and normalised for post September 2020 originations.

Commenting on April-May 2021 period, the rating agency said collections for MFIs and small finance banks (SFBs) have declined 3-5 per cent in April 2021 and additional 5-7 per cent in the first fortnight of May 2021, both on a month-on-month basis.

This time around the pandemic had penetrated widely in rural India. In the first covid wave, the rural portfolio was impacted to a lesser extent than urban portfolio and thus saw a faster recovery as disbursements also recovered especially in H2FY21.

The incidence of most of the relevant provisions will also fall in FY22, given that the bulk of the second wave portfolio deterioration would happen at the beginning of FY22.

As a consequence, the impact of credit costs on account of the second wave would be higher in the annual financials for FY22 than FY21. It may possibly be even higher than the demonetisation crisis where credit costs were spread over three years as the event occurred at the middle of Q3FY17 and the regulator provided forbearance for NPA recognition, it added.