While the recoveries by MFIs improved in late November, things began to slip by the middle of December both on count of recoveries and credit disbursement, according to CARE Ratings.
For two weeks following the announcement of demonetisation on November 8, the collection rate for 11 MFIs declined to 80 per cent. Subsequently, it improved in the fourth week upon the Reserve Bank of India increasing the supply of new notes.
The rating agency said the uptick in performance could not hold for long. The collection began to dip again because of the slowdown in business activities for want of cash, and the wiggle-room given to lenders in recognising assets as bad loans.
The RBI gave an additional 60 days and later increased the duration to 90 days for financial institutions to treat an account as a non-performing loan.
However, influential individuals misled borrowers on this. That led to a decline in collection in states such as Uttar Pradesh, Maharashtra and Madhya Pradesh according to CARE Ratings.
Microfinance entities generally deal in cash and the collections on microfinance loans, of small denominations, have a periodic cycle (weekly/fortnightly/monthly).
The proportion of disbursements with respect to collections fell to around 30 per cent by the second week of December. The rate of disbursements fell because MFIs shifted focus to collections.
In the Indian microfinance industry, NBFC-MFIs have a significant share and are regulated by the RBI. There are 71 NBFC-MFIs registered with the RBI.
As of September 30, 2016, the gross loan portfolio of NBFC-MFIs stood at Rs 55,254 crore with Portfolio at Risk (PAR 30) being less than 1 per cent.
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