Microfinance Institutions Could Report Higher Credit Costs and Losses for 1QFY18-2QFY18

India Ratings and Research (Ind-Ra) expects microfinance institutions (MFIs, both listed and unlisted) with significant exposure to the states of Maharashtra, Madhya Pradesh, Uttar Pradesh, Uttarakhand and Karnataka to witness 5%-10% of December 2016 assets under management as credit costs over FY18-FY19.

For instance, if an MFI with significant exposure to the above states had assets under management of INR30 billion as of December 2016, it could experience a loss of INR1.5 billion-3.00 billion over FY18-FY19. Of this, 50% is likely to be borne over 1QFY18-2QFY18, leading to PAT losses and capital impairment. Ind-Ra in its earlier report titled MFIs Need to Address Existing Structural Issues, Likely Capital Erosion had highlighted that non-recovering portfolio (a part of which may be off books) could result in higher credit costs and capital erosion and thus higher leverage for MFIs in FY18 and partly in FY19.

According to Ind-Ra's calculations, the cumulative collection levels of the affected MFIs on the December 2016 portfolio were 82%-87% of the total demand from November 2016 to June 2017. Assuming 10%-15% portfolio growth in 1QFY18, Ind-Ra expects 8%-10% lower credit costs than its earlier assessment, as incremental disbursements would yield operating profits similar to pre-demonetisation levels. Mid- or small-sized MFIs may immediately require capital infusions to stay above the regulatory minimum levels to mitigate the impact of losses in 1QFY18-2QFY18. Some of the larger MFIs raised equity just before demonetisation, which may help them to scrape through these assessed credit costs and capital impairment without the need for capital infusion. The losses given default may be only marginal for MFI borrowers that are not intentional defaulters, assuming that the overdue payments come at the end of the loan tenors. Nevertheless, even these accounts may need to be provided for in FY18.

Credit costs and capital impairment have been increasingly impacting the sector since 1QFY18 because the regulatory dispensation of 90 days from November 2016 on recognising NPAs got effectively extended till March 2017 due to financial reporting. In line with the provisioning norms applicable to non-banking financial companies-MFIs, these companies would have to provide for 50% of the overdue installments in case of loans overdue for 90-180 days and 100% of the overdue installments in case the loans overdue for 180 days or more. This implies that for loans that are overdue since November 2016, 50% of the overdue installments and income reversals thereof would need to be provided for in 1QFY18. For the same loans, 100% of the overdue installments would need to be provided for in 2QFY18.

In FY18 till date, Ind-Ra has revised the Outlook on two MFIs under its portfolio to Negative (Satin CreditCare Network Limited ('IND BBB+'/Negative) and SV Creditline Private Limited ('IND BBB'/Negative)) while maintaining the other MFIs on a Stable Outlook. The agency will continue to monitor the situation closely.

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