Challenging year stares at microfinance sector: Ind-Ra

India Ratings (Ind-Ra) said a sequential challenging year stares at the microfinance sector, with the impact of the credit costs on account of the second wave expected to be higher in the annual financials for FY22 than FY21.

The credit rating agency reiterated a Stable Outlook for large MFIs and a Negative Outlook for the rest for FY22.

With the second wave penetrating rural markets, Ind-Ra estimated collections for microfinance institutions (MFIs) and small finance banks (SFBs) to have declined 3-5 per cent in April 2021 and additional 5-7 per cent in May 2021 (first fortnight of the month), both on a month-on-month basis, as states implement stricter measures to manage the second Covid wave.

The agency expects the overall microfinance sector to witness a shortfall of 10-15 per cent 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,” said Amit Rane, Senior Analyst, in a note.

Ind-Ra, in its microfinance outlook had estimated credit costs for MFIs to be in the range of 3-8 per cent 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.

Portfolio deterioration

The agency observed that 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, it added.

Funding access critical

Ind-Ra believes smooth access to funding and liquidity would be critical for the microfinance sector.

It assessed that for most large MFIs (assets under management (AUM) above ₹5000 crore 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 ₹10,000 crore for SFBs and categorisation of lending by SFBs to MFIs under priority sector lending (for loans to MFIs of AUM ₹500 crore and less) is a step to ensure flow of liquidity to small MFIs, Ind-Ra said.

However, as per Ind-Ra’s analysis the portfolio of SFBs and their lending to MFIs with AUM of less than ₹500 crore billion is marginal.

Ind-Ra expects mid and small MFIs to continue to face challenges in fund raising and / or borrowing costs.

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