'Kerala flood: MFIs to be hit the most on weak credit quality'

The floods in Kerala is likely to impact the microfinance institutions (MFIs) the most given the weakened credit quality of the borrowers, a report said.

All the lenders are expected to see loss of business and low collection efficiency as the flood-affected borrowers would prioritise restoring normal life in such circumstances, Crisil said in its report Monday.

"The micro lenders (MFIs), many of whom had suspended collections till August 31, will feel the most pressure given the weakened credit quality of the borrowers," it said.

The ratings agency also expects delinquencies to rise in the micro, small and medium enterprise (MSME) segment as banks will face pressure to recover money, particularly from those engaged in the manufacturing activity.

"The loss of income-generating assets and savings, and the unanticipated damages caused by the floods, could impair the debt servicing ability of borrowers. Consequently, delinquencies are likely to rise," it said.

However, the long-term impact is not expected to be significant given the established nature of relationship with borrowers and reasonably high level of collateralisation, according to the report.

Impact on vehicle and housing financiers would be minimal because of the secured nature of loans, it said, adding that insurance companies will mitigate the risk of loss of vehicle or property loss for lenders.

Gold loan financiers would be "least affected" as they possess jewellery as collateral, it said, adding that if the delinquencies are elevated they may auction the precious metals.

Crisil said it is in discussions with lenders to assess the impact based on which it will take rating actions.

"It is too early to estimate the full impact of the deluge, particularly on Kerala-focused lenders including banks and non-banking finance companies (NBFCs), but the near-term impact in certain product segments appears high," it said in the report.

Over 400 people have died in the deluge in Kerala last month and massive rebuilding efforts are underway at present.

Crisil said while the impact has been felt in all the 14 districts of the southern state, the impact has been severe in seven - Alappuzha, Ernakulam, Idukki, Kottayam, Pathanamthitta, Thrissur and Wayanad.