Post the imposition of stricter measures on mobility across states in the wake of the second wave of COVID-19, India Ratings and Research (Ind-Ra) had opined in May 2021 that the overall microfinance sector’s collections could drop by a cumulative 10%-15% during the month compared to March 2021. However, the collection lag in the second half of May 2021 was more severe than the agency’s initial estimates, and hence, collections during the month were down by 60%-70% for many microfinance institutions (MFIs). Accordingly, Ind-Ra has revised the MFI sector’s credit cost estimate range for FY22 to 5%-10% from 3%-6%, depending on the geographies of operations/concentration.
However, Ind-Ra believes that most of the large MFIs rated by the agency would be able to absorb this through their income statement, with minimal impact on equity. Nevertheless, the difference in the performance of the companies operating in this sector will be based on the funding available to them. Ind-Ra believes that larger MFIs with a diverse customers base are better placed to raise funding at competitive costs, and hence, reiterates its Stable Outlook for large and group-owned MFIs and a Negative Outlook for the rest for FY22.
During June 2021, with lifting of restrictions in the first half of the month in the northern and western states of India, there was a modest improvement in the collection efficiencies of those regions. In the southern states, however, the restrictions began to ease very slowly only towards the second half of June 2021. In fact, the daily number of COVID-19 cases in Kerala are on an increasing trend again. Overall, for a diversified portfolio, the collections in June 2021 are likely to have been higher by 5%-10% compared to May 2021. The restrictions continue to be tighter in the states of Kerala and Tamil Nadu due to slow control over COVID-19 cases. Against this backdrop, Ind-Ra expects south India-based MFIs (including small finance banks) to witness larger shortfalls in collections in 1QFY22 compared to those operating in other regions.
Ind-Ra expects the collection efficiency trends to improve over July-August 2021 compared to June 2021, given that around 70% of the borrowers of most MFIs are in the essential goods and services segments, and also taking into consideration the trends witnessed during the first wave of COVID-19. That being said, the variations in the performance of MFIs could be wider, depending on their level of concentration in regions where the lifting of restrictions could be slow.
As far as fresh disbursements are concerned, MFIs significantly curtailed their disbursements during April-May 2021 and the initial two weeks of June 2021. However, Ind-Ra’s discussions with MFIs suggest that the operations are gradually picking up on the back of improved mobility, with the staff slowly regaining confidence to venture into the field. This by itself would aid the recovery efforts for MFIs.
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