Credit cost for MFIs to rise to 6-7% in two years as loans remain unpaid

About 12% of customers have not repaid till August end

With about 12 per cent of their customers not having repaid loans till end of August, the credit costs of Micro Finance Institutions (MFIs) could rise to 6-7 per cent over two years from 1.5 per cent in FY20, according to Icra.

The rating agency said 12 per cent of borrowers of 21 entities with collective assets under management (AUM) of around Rs 54,213 crore availed a complete moratorium during April-August 2020.

Consequently, near-term delinquencies (30+ days past due) are expected to increase to double digits. They would remain at these levels for a few months as it will be difficult for such borrowers to clear their dues.

However, the rise in credit costs could be lower at 6-7 per cent (spread over two years FY2021-FY2022; 1.5 per cent in FY2020). Entities with a higher share of such borrowers may face higher credit costs, said Supreeta Nijjar, Vice President and Sector Head, Financial Sector Ratings, ICRA.

The industry would require an external capital of Rs. 8,500-10,000 crore (30-35 per cent of the closing net worth as on March 31, 2020) for growing at a rate of 15-20 per cent over the next three years. This capital would be needed for absorbing rise in credit costs during this period and maintaining prudent capitalisation levels.

Most entities put on hold their plans to raise equity in H1 FY2021 as investors became wary. In H2 FY2021 too, equity infusion in the industry is expected to remain limited and is likely to flow to large and well-established entities, it added.

The overall collection efficiency -- total collections/scheduled demand unadjusted for moratorium -- of the MFIs gradually improved and stood at about 88 per cent in September 2020 compared with about two per cent in April 2020. The improvement was driven by easing of the lockdown restrictions and resumption of economic activities which led to gradual improvement in cash flows of several borrowers.

The collection efficiency was observed to be lower in Punjab and the eastern states such as West Bengal Odisha, Assam and Bihar, on account of cyclones, floods and local lockdowns or unrest. Borrowers in rural areas involved in agricultural, dairy and allied services, have performed better than those involved in other activities, Nijjar said.