Assam MFI Bill may hike asset-quality challenges for micro lenders: Crisil

The recently passed Micro Finance Institutions (MFI) Bill, 2020 by the Assam Assembly has the potential to increase asset quality challenges for micro lenders, according to a Crisil Ratings report.

It said announcement of any loan waiver could affect the repayment discipline which could further worsen the situation for micro financiers. Assam's microfinance portfolio (including banks and non-banks) was estimated at Rs 12,400 crore as of September 2020 or around five per cent of such loans in the country.

"For the sector, it's dj vu a decade after the Andhra Pradesh (AP) ordinance of 2010," the rating agency said in the report.

It said the legislation is the latest in a string of events affecting microfinance lenders in Assam: economic stress in the tea plantation industry in October 2019, agitation over Citizenship Amendment Bill that December, and the COVID-19 pandemic that hit the entire nation.

Due to this, lenders -- especially Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) -- had already begun steadily paring down their portfolio in the state, the report said.

The share of NBFC-MFIs in Assam's total microfinance portfolio was around 18 per cent (close to Rs 2,300 crore as on September 2020).

"In the case of NBFC-MFIs, the 30+ portfolio at risk for Assam was already high at around 20 per cent as on March 2020. In this milieu, the Bill, along with statements on the loan waiver, can create significant moral hazard," the agency's senior director Krishnan Sitaraman said.

There was a similar case in December 2019 in a few districts of coastal Karnataka, which ended with MFIs taking a hit in terms of high provisioning/ write-offs on loans in those districts, he said.

"These instances reinforce the need for NBFCs-MFIs to maintain strong capital buffers and diversify geographical presence," he added.

Some of the Assam Bill's provisions such as sanctioning and disbursement of loans only at a central location, loan repayment to be done only at gram panchayat office or designated public place and different lending norms for tea-garden labourers are similar in principle to the AP ordinance, the report said.

The agency also said the exposures of its rated NBFC-MFIs to Assam is just 0-4 per cent of their total loan book.

Further, the agency noted that it is monitoring the progress on the implementation of the Bill and will take necessary action based on developments and its impact on collections, earnings profile and capitalisation metrics.