NEW DELHI: Microfinance institutions (MFIs), which operate at a further smaller level than non-banking financing companies, have been the most-severely affected as the renewed Covid-19 wave engulfed the rural areas to boot.
With localised lockdown casting shadow over microfinance collections, repayment delays of over 30 days is expected to rise to 14-16 per cent of the total portfolio in June, higher than 11.7 per cent seen in March 2017, a few months after demonetisation, rating agency Crisil said in a statement on Friday.
“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 per cent in May, compared to 90-95 per cent 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,” said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings.
According to P Satish, executive director, Sa-Dhan, an industry body comprising 225 microfinance institutions across India, the rural portfolio was impacted to a lesser extent than the urban portfolio during the first wave, and thus saw a faster recovery as disbursements also recovered especially in the second half of FY22.
“But this year, recovery is likely to take longer. Lenders are also facing liquidity constraints,” he added.
Unlike the 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’s Resolution Framework 2.0 announced last month, with over 30-day delinquencies mounting.
“This is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket. Demand under restructuring is expected to be in high-single digits compared to 1-2 per cent seen during restructuring 1.0 for the overall sector,” added Sitaraman.
Considering the likely rise in delinquencies and restructuring, he said, higher provisioning is also warranted to absorb the shocks.