The Micro Finance Institutions (MFI) Bill, 2020 passed recently by the Assam Assembly has the potential to increase asset-quality challenges for microfinanciers. Additionally, any loan waivers announced would make matters worse due to their potential impact on repayment discipline.

Certain provisions in the Bill that pose operational hurdles could trigger collection challenges and end up dissuading lenders from seeking incremental business in the state.

Assam’s microfinance portfolio (including banks and non-banks) was estimated at Rs 12,400 crore as on September 2020, or ~5% of such loans in the country.

The legislation is the latest in a string of events affecting microfinance lenders in Assam: economic stress in the tea plantation industry in October 2019, agitation over Citizenship Amendment Bill that December, and the Covid-19 pandemic that hit the entire nation.

As a result, lenders – especially non-banking financial company - microfinance institutions (NBFC-MFIs) – had already begun steadily paring down their portfolio in the state. The share of NBFC-MFIs in Assam’s total microfinance portfolio was ~18% (~Rs 2,300 crore as on September 2020), registering an on-year de-growth of 15%. Banks (including small finance banks) have a dominant ~75% share.

Says Krishnan Sitaraman, Senior Director, CRISIL Ratings Ltd, “In the case of NBFC-MFIs, the 30+ portfolio at risk for Assam was already high at ~20% as on March 2020. In this milieu, the Bill, along with statements on the loan waiver, can create significant moral hazard. There was a similar case in December 2019 in a few districts of coastal Karnataka, which ended with MFIs taking a hit in terms of high provisioning/write-offs on loans in those districts. These instances reinforce the need for NBFCs-MFIs to maintain strong capital buffers and diversify geographical presence.”

For the sector, it’s déjà vu a decade after the Andhra Pradesh (AP) ordinance of 2010. Some of the Assam Bill’s provisions – such as sanctioning and disbursement of loans only at a central location, loan repayment to be done only at gram panchayat office or designated public place, different lending norms for tea-garden labourers and mandatory prior approval for fresh disbursement to borrowers with an already outstanding loan from a bank – are similar in principle to the AP ordinance.

The sector had significant exposure to AP at ~35% of the total portfolio when the ordinance was promulgated. Therefore, the impact was material with many MFIs shutting shop or significantly downscaling. On the other hand, while the developments in Assam could significantly impact microfinance operations in the state, at the sector level, the exposure is not substantial at ~5% of the total portfolio. Hence the impact would be way lesser compared with AP.

The exposure of CRISIL-rated NBFC-MFIs to Assam is just 0-4% of their total loan book. Some have already increased provisioning for stressed portfolios because of the ongoing issues. Additionally, the impacted entities are either backed by strong parents or have healthy capitalisation metrics.

While the applicability of the Bill to banks is subject to interpretation, spillover risks are high given that borrower segment is common. With repayment discipline among microfinance borrowers expected to be impacted in the state, collection efficiency will bear watching.

CRISIL Ratings is monitoring the progress on the implementation of the Bill and will take necessary action based on developments and its impact on collections, earnings profile and capitalisation metrics.