'Demonetisation to have temporary impact on MFIs, borrowers'

The Centre's decision to demonetise Rs 500 and Rs 1,000 currency notes may impact microfinance institutions (MFIs) and their borrowers on short term, with the latter likely to face high overdoes.
The Narendra Modi-led government on November 8 had announced demonetising notes of Rs 500 and Rs 1,000 in a clampdown on black money and counterfeit notes.
"(Post demonetisation) we expect MFI borrowers to face cash flow mismatch, thereby reprioritising their expenses. As a result, MFIs could witness high overdues, indicating lack of diversification in MFIs' borrower profiles," India Ratings and Research associate director Jindal Haria told reporters here today.

The rating agency today released a report on microfinance sector.
He expects MFI borrowers to face cash flow mismatch, thereby reprioritising their expenses which will result into overdues for MFIs.
The report said demonetisation suggests higher core capital requirements for MFIs to withstand systemic stress.

"Most MFIs have liquidity in the form of steady-state unencumbered cash and unavailed bank lines to meet debt obligations for 30-60 days in the event of business disruption," the report said.
Furthermore, many MFIs have raised equity in the last six months, gaining additional liquidity buffers.
"We expect the capital levels of some MFIs to come close to regulatory levels, if money flow does not completely resume by fourth quarter of financial year of 2016-2017," Haria said.

He said as currency flow resumes, the banking habits of MFIs and their borrowers will further improve.
He, however, said it is unlikely that a significant percentage of one-month overdue loans would move to the three-month overdue loan bucket, if money flow normalises by the fourth quarter of the financial year 2016-17.