30-day overdues in microfinance loans may double to reach 14-16%: Crisil

Collection efficiency of MFIs likely to drop to 75-80% in May, from 90-95% in March, creating asset quality pressures

The second wave of the pandemic and the subsequent curbs imposed by the authorities to stop the spread of the virus has had a negative impact on the collection efficiency of microfinance lenders and this, in turn, will result in a deterioration in the asset quality of such lenders.

According to rating agency Crisil, the 30 day-plus delinquency bucket or 30-plus portfolio at risk (PAR) in this segment may rise to 14-16 per cent this month from 6-7 per cent in March. Post demonetisation, in March 2017, this number had reached a peak of 11.7 per cent.

Collection efficiency of micro-finance institutions is expected to drop to 75-80 per cent in May, from 90-95 per cent in March. This is likely to create asset quality pressures as, unlike the last time when there was a blanket moratorium on repayments for six months, the Reserve Bank of India has not come out with any such dispensation this time, despite their cash flows being impacted.

“But unlike last fiscal, when loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the RBIs resolution framework 2.0 announced last month, and continue with higher provisioning”, said Crisil.

The rating agency expects this sector will resort to more restructuring of loans this time than what they had done in the last fiscal year (FY21) to support their borrowers so that their accounts do not slip into non-performing assets (NPA). “As a result, the demand under restructuring 2.0 could be in high-single digits compared to 1-2 per cent seen during restructuring 1.0 for the overall sector,” the rating agency said.

“Yet, 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, the lack of prudence is also a possibility”, said the report noted.

The microfinance lenders have created provisions against loans turning sour, especially special Covid-19 provision in Q4FY21, equivalent to 3-5 per cent of their asset under management (AUM) as of March 2021. However, given the situation now, as delinquencies and restructuring is likely to rise significantly, higher-than-normal provisioning is warranted even in the H1FY22 to absorb the shocks. Microfinance lenders with ample liquidity, lower leverage, or those backed by strong parentage, will be better placed to withstand the current situation.

According to the rating agency, large MFIs rated by them, who by virtue of a strong parentage have access to capital or are sitting on a comfortable capital position already, with earing at about 3-3.5 times, will manage to mitigate the stress arising from the second wave of the pandemic. The large MFIs are also sitting on ample liquidity, which will be enough to see them through debt repayments imminent in the next two months, despite nil collections, as they have preserved cash due to low disbursements.

However, it is the smaller MFIs, which need to be watched, as access to liquidity will be crucial in their recovery process.