Pressure on MFI industry’s asset quality to continue
The overall long-term growth outlook for domestic microfinance industry, including microfinance institutions (MFI)s and micro finance focused small finance banks (SFB)s, remains robust, even though the near-term outlook is clouded given the Covid-19 induced disruptions, says ICRA Ltd.
The onset of lockdown restriction and the moratorium on loan repayments extended to borrowers had led to the industry recording negligible collections in April 2020, but the situation improved gradually over the subsequent months with easing of restrictions and pick-up in economic activity.
As a result, the collection efficiency (total collections/scheduled demand) improved to ~102% in December 2020. The disbursements also started picking up from Q2 FY2021 onwards, which is expected to help the industry achieve growth of 9-11% in its assets under management (AUM) in FY2021. This provides some respite to the industry, which has been reeling under the stress induced by Covid-19.
Giving further insights, Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, says, “the improvement in collection efficiency and pickup in growth in AUM in H2 FY2021 has helped the industry witness marginal improvement in the overdue portfolio (0+ days past due (dpd)) to 16.7% as on 31 December 2020, which had earlier increased to 18.1% as on 30 September 2020 after the lifting of the moratorium.
“There has been further improvement in Q4 FY2021 as well, however, overdues remain significantly higher than pre-Covid levels and hence ICRA estimates the credit costs to rise significantly to 6-7% (spread over two years: FY2021-FY2022) from 1.5% in FY2020,” said Sachdeva.
Further, ICRA’s sample of 20 MFIs indicates that the liquidity flow to the sector has improved over the last few months and overall ~Rs.22,900 crore (~42% of their AUM) were raised in 9M FY2021. The industry also witnessed reduction in their overall cost of funds during this period, however, despite this; the industry is expected to witness reduction in net interest margins (NIMs).
This is owing to reduced interest income with portfolio growth happening only towards H2 FY2021 and negative carry because of excess on-book liquidity. In addition, increased recovery efforts are expected to negate the impact of the expense optimisation efforts to some extent and put pressure on the operating profitability.
Despite the reduction in cost of funds in 9M FY2021, the operating profitability is expected to decline in FY2021, which along with rise in credit costs would suppress the return indicators for FY2021. Nevertheless, the pick-up in AUM growth in FY2022, along with the increase in provision cover in FY2021, is expected to drive profitability upwards in FY2022, though the same is likely to remain below pre-Covid profitability level.
On equity infusion, the industry witnessed increased activity in H2 FY2021 after having witnessed limited equity infusion in H1 FY2021.
Going forward, ICRA estimates the equity capital infusion (including ~ Rs.2,500 crore equity raised in FY2021) of Rs.9,000-10,000 crore (33-36% of the closing net worth as on 31 March 2020) for the industry to grow at a rate of 15-20% p.a. over FY2021-FY2023 while maintaining prudent capitalisation levels.
Sachdeva says, “ICRA estimates asset quality pressures for the MFI industry to continue in the near term and the same may get accentuated with the recent increase in Covid-19 infections and localised restrictions/lockdowns. Nevertheless, improving collection efficiency, good on-balance sheet liquidity and capitalisation should help most entities to withstand the stress.” #banking #financing #investment #debt #economy /fiinews.com
