The extended nationwide lockdown to contain the Covid-19 pandemic has affected the income-generation ability and savings of borrowers of microfinance institutions (MFIs), who typically have weaker credit profiles compared with borrowers of other types of lenders.
As for MFIs, normal operations – both loan origination and collections – would remain a challenge since their operations are field-intensive involving high personal touch such as home visits and physical collection of cash. Many have sought moratorium under the ‘Covid-19 - Regulatory Package’ announced by the Reserve Bank of India (RBI).
CRISIL understands that approval of moratorium by many lenders is still under process (barring a few instances), owing to uncertainty on whether non-banking financial companies1 are eligible for it (please refer to CRISIL’s credit alert titled, Moratorium non-availability for NBFCs - A double whammy).
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “In a scenario where MFIs do not receive moratorium on their bank loans, the liquidity levels they maintain will be an important determinant of their immediate term debt repayment ability. Most CRISIL-rated MFIs in the investment-grade or with strong parentage have sufficient liquidity to manage repayments and operational expenditure for the next 2-3 months. For other MFIs, availing of the moratorium will be critical.”
Many MFIs managed to shore up their liquidity by March-end since the main collection days were in the first two weeks, much before the lockdown was announced, and collection efficiency was largely intact at 98-99%. They also drew down bank loans for the purpose of on-lending in the last week of March, which is typically a period marked by high business. However, planned disbursements did not happen due to the lockdown.
A crucial challenge for MFIs is the potential impact on capitalisation metrics because of the risk of heightened credit losses in fiscal 2021. With the lockdown being extended up to May 3 and the likelihood of restrictions being lifted only in a phased manner, disruption of income-generating activities of borrowers may prolong. Therefore, how quickly borrowers return to normal repayment discipline once the lockdown is lifted will also be crucial.
To be sure, MFIs have navigated big events in the recent past, such as demonetisation in 2016, floods and local-level socio-political challenges. After demonetisation, most MFIs had reported 98-99% collection efficiency for incremental disbursements done since April 2017. Yet, their loan book of November 2016 saw credit losses ranging from 3% to 13% with strong correlation to geography and socio-political influence.
Says Poonam Upadhyay, Associate Director, CRISIL Ratings, “Overdues are expected to rise once billings recommence because borrowers may not clear them immediately. Collection efficiency is likely to take time to ramp up to pre-pandemic levels. Consequently, risk of larger credit losses and their impact on capitalisation metrics will be a key rating sensitivity factor in the road ahead.”
CRISIL’s rating analysis in this situation will be a scenario-based approach with a focus on two areas:
- Near-term evaluation of liquidity sufficiency to manage debt obligations and operating expenditure over the next 2-3 months; and,
- Medium-term impact on earnings profile and capitalisation on account of estimated losses that might arise from a potentially prolonged return to normal activity levels.
CRISIL is analysing the credit profiles of its rated MFIs and will take appropriate rating action where required.
1 Including housing finance companies and MFIs