India Ratings and Research (Ind-Ra) estimates collections for microfinance institutions (MFIs) and small finance banks (SFBs) to have declined 3%-5% in April 2021 and additional 5%-7% in May 2021 (first fortnight of the month), both on a month-on-month basis. The agency expects the overall microfinance sector to witness a shortfall of 10%-15% in collections on a consolidated basis in May 2021. That being said, the variation among MFIs could be wider, depending on their level of concentration in regions where lifting of restrictions could be slow.

Second Wave Could Lead to an Encore: Ind-Ra opines MFIs could again see credit costs in the range of 3%-6% in FY22, if the early trends of the collection performance were to persist. With the second wave penetrating rural markets, the collections in April 2021 broadly lagged 3%-5% compared to March 2021. May 2021 could see a higher drop in collections (5%-7%) than even April 2021 (cumulative 10-15% drop in collections compared to March 21), as states implement stricter measures to manage the second covid wave. The collection behaviour in the first half of April 2021 was closer to March 2021 levels for quite a few MFIs as collections for the most part occur in the first half of the month. 

First Wave Impact on Microfinance Mostly Provided For:
 In the first covid wave, the rural portfolio was impacted to a lesser extent than urban portfolio and thus saw a faster recovery as disbursements also recovered especially in 2HFY21. Ind-Ra, in its microfinance outlook had estimated credit costs for MFIs to be in the range of 3%-8% in FY21 on account of the first covid first wave as collections picked up in the pre-covid portfolio and normalised for post September 2020 originations. 

Timing of Stress Events Play Role in Annual Financials:
The incidence of most of the relevant provision will also fall in FY22, given that the bulk of the second wave portfolio deterioration would happen at the beginning of FY22. As a consequence, the impact of the credit costs on account of the second wave would be higher in the annual financials for FY22 than FY21 and possibly even the demonetisation crisis; where credit costs were spread over three years as the event occurred at end-3QFY17 and the regulator provided forbearance for NPA recognition. 

Funding Access would be Critical:
Ind-Ra believes smooth access to funding and liquidity would be critical for the sector. For most large MFIs (assets under management (AUM) above INR50 billion or MFIs that are part of large groups), bank funding lines etc could continue and hence they may not face immediate liquidity stress. Recently, the regulatory announcement of special long-term repo operations of INR100 billion for SFBs and categorisation of lending by SFBs to MFIs under priority sector lending (for loans to MFIs of AUM INR5 billion and less) is a step to ensure flow of liquidity to small MFIs. However, Ind-Ra also analysed the portfolio of SFBs and their lending to MFIs with AUM of less than INR5 billion is marginal. Ind-Ra expects mid and small MFIs to continue to face challenges in fund raising and / or borrowing costs. The agency reiterates a Stable Outlook for large MFIs and a Negative Outlook for the rest for FY22. 

Harmonisation of Guidelines - a Positive for NBFC-MFIs:
Ind-Ra in its commentary ‘Harmonisation of Guidelines for Microfinance Sector Can improve NBFC-MFIs’ Competitiveness’, had opined that regulatory guidelines are prescriptive for non-banks; these are voluntary for non NBFCs-MFIs, including SFBs and mainstream banks that have microfinance loan portfolios. Hence, these are able to charge higher yields, higher fees than NBFC-MFIs and are somewhat liberal with limits on single borrower exposure as well as borrower indebtedness and income qualification of the borrower. With harmonisation, some of these asymmetries could be addressed.

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Analyst Names

  • Amit Rane

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001700

    Jindal Haria

    Director
    +91 22 40001750

    Aishwary Khandelwal

    Senior Analyst
    +91 22 40001700

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121