A hit to collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted Covid-19 curbs will increase asset-quality pressures in the sector. Loans in arrears for over 30 days – or the 30+ portfolio at risk (PAR) – could rise to 14-16% of portfolio this month from a recent low of 6-7% in March.

The number had surged to 11.7% in March 2017, in the aftermath of demonetisation (see annexure).

But unlike last fiscal, when loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India (RBI)’s Resolution Framework 2.0 announced last month, and continue with higher provisioning.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “The medical impact of the second wave of the pandemic has been much worse than the first wave, and afflictions have percolated to the rural areas too. Ground-level infrastructural and operational challenges, as well as restrictions on movement of people, have impinged on the MFI sector’s collection efficiency. Though overall collection efficiency is expected at 75-80% in May, compared to 90-95% in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave.”

Considering the current ground-level challenges, encouraging collections through the digital mode is imperative for MFIs – the way they have transitioned to cashless disbursements.

With 30+ PAR mounting, the sector is expected to resort to restructuring of loans to a larger extent than last fiscal as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket. As a result, demand under restructuring 2.0 could be in high-single digits compared to 1-2% seen during restructuring 1.0 for the overall sector.

Yet, the risk of protracted delinquencies eventually leading to credit costs staying elevated, remains. For one, borrowers’ track record of repayment ability is yet to be established for already restructured portfolios. Two, lack of prudence is also a possibility.

CRISIL estimates that close to half of the total assets under management (AUM) of NBFC-MFIs of ~Rs 80,000 crore as on March 2021, were generated from December 2020 onwards. Given the relatively vulnerable credit profiles of borrowers and the fact that local economic activity is yet to normalise, sustainability of collections, especially for the recent disbursements, will be the key monitorable in the coming quarters.

Says Ajit Velonie, Director, CRISIL Ratings, “To be sure, NBFC-MFIs have created provisions (including a special Covid-19 provision in the fourth quarter last fiscal) estimated at 3-5% of the AUM as on March 2021. Considering the likely rise in delinquencies and restructuring, higher-than-normal provisioning is warranted even in the first half of this fiscal to absorb the shocks. NBFC-MFIs with adequate liquidity, lower leverage, or those backed by strong parentage, will be better placed to withstand the current situation.”

Large CRISIL-rated MFIs are either backed by strong parentage with access to capital, or have comfortable capitalisation with gearing at ~3-3.5 times, which should allow them to withstand the stress. They also have the liquidity to cover over two months of debt repayments – even after assuming nil collections – because disbursements have been low, too, which has helped conserve cash. Nevertheless, the trajectory of recovery, access to incremental funding and capital position will bear watching, especially of the smaller MFIs.