India Ratings and Research (Ind-Ra) has maintained an overall negative outlook on the microfinance sector for 2HFY22. While the agency has maintained a Stable Outlook for large and strong sponsor backed microfinance institutions (MFIs), small-mid non-bank MFIs (including those with over 50% of assets under management in microfinance) continue to be on a Negative Outlook.

Ind-Ra expects credit costs to be in the range of 5%-10% for MFIs in FY22, depending on their size and scale, access to liquidity (ability to continue to disburse) and geographic concentration. The Negative Outlook for small-mid non-bank MFIs is in view of their need to conserve liquidity and hence their disbursements could be constrained. This could be higher especially for MFIs that have a higher concentration in Kerala and West Bengal. On other hand, harmonisation guidelines, government guaranteed loans, mechanism of Assam debt waiver and equity raise by some MFIs in 2HFY22 could support the sentiments for all MFIs at least in the near term. 

Collections Improved along with Disbursements in July 2021: In line with Ind-Ra’s expectations and the impact of the first wave, collection efficiency improved over July-August 2021 from June 2021 levels, given that around 70% of the borrowers of most MFIs are in the essential goods and services segments. The current collection efficiency (collections only against current month non-cumulative demand) at end-June 21 lagged end-March 21 metrics by 15%-20%; the peak lag was highest in May 2021; April 21 was reasonably normal. Notably, as monthly disbursements have normalised to pre-second wave level since July 2021, this by itself would have also directly aided  the recovery efforts for MFIs. 

Note: SFBs: Small bank banks; NBFCs: Non-bank finance companies

Ind-Ra reiterates that most large MFIs rated by the agency (having pre-provision operating profit (PPOP) in the 6%-9% range) would be able to absorb this impact through their P&L with minimal impact on equity.


Funding Access would be Critical: Ind-Ra believes that the key differentiators in MFI sector performance would be their funding access. For most large MFIs (assets under management above INR50 billion or large sponsor backed), bank funding lines could continue and hence they may not face immediate liquidity stress. That being said, small and mid-size MFIs would need to conserve liquidity and hence their disbursements could be constrained, this could lead to lag in their performance. The lower rated (BBB and below category) entities have witnessed a rising trend in incremental cost of borrowing which is not the case with large entities. If they are able  to get a disproportionate share in government guarantee backed loans, it could help them in funding cost. 

Assam Debt Waiver – Encouraging Discipline, but still a Waiver:
The Assam debt waiver has been crafted to incentivise disciplined borrowers who have faced temporary cashflow problems but are not willing to default. For long-time defaulters, the plan envisages clearing of overdues and an incentive conditional to borrower behaviour becoming regular. While the MFIs operating in the region would probably see write-backs in their portfolio, this only partly addresses the larger problem of defaults post announcement/expectation of loan waivers especially in election times. In the rest of FY22, there could be elections in nine states/ union territories and hence MFIs operating in these regions might slow down disbursements.

Harmonisation Norms – Important but Need to Tread Carefully:
Ind-Ra opines the proposed harmonisation guidelines are the need of the hour to address the diverse interpretations of regulations by the multiple forms of entities (mostly regulated) involved in microfinance. Under the draft harmonisation guidelines, Microfinance Institutions Network is trying to evolve a common income evaluation guidelines for NBFC-MFIs and other players in the segment such as SFBs, banks and NBFCs. In addition, the removal of caps on lending rates could provide small NBFC-MFIs some breathing space and the opportunity to have reasonable operating buffers. The caveat here is that in case the microfinance qualifying borrower income cap is high, the purpose of microfinance could be diluted and the group structure may not be cut out to withstand defaults on high indebtedness.


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Analyst Names

  • Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001750

    Amit Rane

    Senior Analyst
    +91 22 40001700

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    Ankur Dahiya

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