Credit costs of MFIs may surge up to 10% by March 22, says Ind-Ra

With a sharp drop in collections during the second wave of Covid-19, the credit costs of micro-finance institutions (MFIs) in India may surge to 6-10 per cent by March 2022 from an earlier estimate of 3-6 per cent.

However, most of the large MFIs would be able to absorb this through their income statement, with minimal impact on equity, according to rating agency India Ratings (Ind-Ra).

In May 2021, the rating agency had predicted that overall the microfinance sector’s collections could drop by a cumulative 10-15 per cent during the month compared to March 2021. However, the collection lag in the second half of May 2021 was more severe than the agency’s initial estimates, and hence, collections during the month dipped 60-70 per cent for many microfinance institutions (MFIs).

The actual credit costs, the amount set aside for stressed loan portfolio, may depend on the geographies of operations' concentration. The difference in the performance of the companies operating in this sector will be based on the funding available to them.

The larger MFIs with a diverse customer base are better placed to raise funding at competitive costs, and hence, Indi-Ra reiterates its 'stable' outlook for large and group-owned MFIs and a 'negative' outlook for the rest for FY22.

During June 2021, with lifting of restrictions in the first half of the month in the northern and western states of India, there was a modest improvement in the collection efficiencies of these regions. In the southern states, however, the restrictions began to ease very slowly only towards the second half of June 2021.

In fact, the daily number of Covid-19 cases in Kerala is starting to show an increasing trend again. Overall, for a diversified portfolio, the collections in June 2021 are likely to have been higher by 5-10 per cent compared to May 2021, Ind-Ra added.