Microfinance institutions’ 30-plus delinquency may rise to 14-16% in June: Report

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With the collection efficiency impacted due to the COVID-19 related disruptions, microfinance institutions (MFIs) may feel asset quality pressures and their 30+ portfolio at risk (PAR) may rise to 14-16% in June, Crisil Ratings said in a report.

In the absence of a loan moratorium this year, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India’s (RBI) Resolution Framework 2.0 announced last month, and continue with higher provisioning, the report said.

A hit to collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted COVID-19 curbs will increase asset-quality pressures in the sector.

“Loans in arrears for over 30 days – or the 30+ portfolio at risk (PAR) – could rise to 14-16% of the portfolio this month from a recent low of 6-7% in March,” the agency said.

This number had surged to 11.7 in March 2017, in the aftermath of demonetisation, it added.

According to the agency’s Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman, the medical impact of the second wave of the pandemic has been much worse than the first wave, and afflictions have percolated to the rural areas too.

Ground-level infrastructural and operational challenges, as well as restrictions on the movement of people, have impinged on the MFI sector’s collection efficiency, he said.

“Though overall collection efficiency is expected at 75-80% in May, compared to 90-95% in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave,” Sitaraman said.

The report said that with 30+ PAR mounting, the sector is expected to resort to a restructuring of loans to a larger extent than the last fiscal, as this is perhaps the only practical option to support the borrowers and not let accounts slip into the non-performing bucket.

As a result, the demand under restructuring 2.0 could be in the high-single digits compared to 1-2% seen during restructuring 1.0 for the overall sector, it noted.

The agency’s Director Ajit Velonie said the NBFC-MFIs have created provisions (including a special COVID-19 provision in the fourth quarter last fiscal) estimated at 3-5% of the asset under management (AUM) as of March 2021.

“Considering the likely rise in delinquencies and restructuring, higher-than-normal provisioning is warranted even in the first half of this fiscal to absorb the shocks,” Sitaraman said, adding that NBFC-MFIs with adequate liquidity, lower leverage, or those backed by strong parentage will be better placed to withstand the current situation.

The agency said its large-rated MFIs are either backed by strong parentage with access to capital or have comfortable capitalisation with gearing at around 3-3.5 times, which should allow them to withstand the stress.

These MFIs also have the liquidity to cover over two months of debt repayments – even after assuming nil collections – because disbursements have been low too, which has helped conserve cash.

“Nevertheless, the trajectory of recovery, access to incremental funding, and capital position will bear watching, especially of the smaller MFIs,” it added.