MFIs may face liquidity, debt servicing challenges in absence of loan moratorium from banks

Microfinance institutions (MFIs) are likely to face severe liquidity and debt servicing challenges if banks do not offer loan repayment moratorium to them, according to rating agencies.

Though most of the micro lenders have extended the three-month moratorium, announced by the Reserve Bank of India (RBI), on repayment of term loans to their borrowers, there is an ambiguity on whether the same is applicable for MFIs.

A clarification on repayment moratorium is still awaited from the banking regulator.

"MFIs are yet to formally receive moratorium from their lenders and the absence of the same could severely impact their ability to serve their debt-servicing obligations," rating agency Icra said in a report.

The industry is going to face a cash shortage for some time after the lockdown is eased as collections from borrowers will remain almost nil, it said.

"Moratorium is critical for NBFC-MFIs to sustain their business and tide over liquidity stress as they have announced moratorium to their borrowers," another rating agency Care Ratings Associate Director Ravi Kumar Dasari told reporters in a webinar Wednesday.

Rating firm Crisil in its report said most of its rated MFIs in the investment-grade or with strong parentage have sufficient liquidity to manage repayments and operational expenditure for the next two-three months but for other micro lenders, availing of the moratorium will be critical.

"In a scenario where MFIs do not receive moratorium on their bank loans, the liquidity levels they maintain will be an important determinant of their immediate term debt repayment ability," Crisil Ratings Senior Director Krishnan Sitaraman said in the report.

According to an ICRA study on 29 MFIs, constituting 70 per cent of the MFI industry on a portfolio basis, the total repayment obligations and operational expenditure of around Rs 8,000 crore in the first quarter of 2020-21 against which the on-balance sheet liquidity buffer stood at around Rs 5,400 crore.

"As per estimates, the shortfall for the sample stands at around Rs 2,600 crore in the absence of any external funding support by way of equity/additional debt or extension of moratorium," ICRA said in its report.

It will take time for MFI collections to get back to normal as the income levels of most borrowers have been affected, ICRA said.

The ability of these lenders to recover multiple instalments from delinquent borrowers would be tested over the next few quarters as a large proportion of the borrowers do not have material income buffers, it said.

"We expect the credit costs for MFIs to at least double from the present levels of 1-1.5 per cent to 2.5-3 per cent for most players, which is likely to impact the profitability (returns on equity) of the MFIs by 3-5 per cent in FY21," ICRA's Sector Head and Vice-President (Financial Sector Ratings) Supreeta Nijjar said.

Care Ratings said that with funding constraint, MFIs' loan book is not expected to grow, which will put strain on the margins.

"MFIs will see shrinkage in margins in 2020-21 with reduction in portfolio, fixed operating costs and increase in credit costs on account of COVID-19," Care Rating's Dasari said.

According to him, NBFC-MFIs, on an average, have maintained around 2.5 months of liquidity.

However their liquidity in the past has been majorly supported by their inflows from advances on account of the shorter tenure of advances as compared with the liabilities, he said.

"In the current situation of COVID-19 due to lockdown and moratorium provided to the borrowers, inflows from advances will be very low for MFIs," Dasari added.

ICRA said MFIs' ability to securitise portfolios to generate liquidity may also be limited.

Entities currently in the process of raising capital may face some delay as investors may adopt a wait-and-watch strategy and observe the collection efficiency trends post the lockdown and renegotiate valuations, which may impact their solvency and liquidity positions in the near term, the rating agency said.