Microfinance institutions face Rs 2,600 crore shortfall
HYDERABAD: Microfinance Institutions (MFI) are staring at a cumulative cash shortfall of about Rs 2,600 crore as collections from borrowers thin down following the nationwide lockdown, according to credit rating agency ICRA.The shortfall is also due to the absence of external funding such as equity, additional debt or extension of moratorium.
It may be noted that the RBI has allowed a moratorium on term loans for the period from March 1 to May 31, 2020. “Following this, most of the MFIs have extended a moratorium to their borrowers till May 31, 2020. However, the MFIs are yet to formally receive moratorium from their lenders and the absence of the same could severely impact their ability to serve their debt-servicing obligations,” it noted.
It may take time for MFI collections to get back to normal as the income levels of most borrowers have been affected. Following the resumption of economic activity, borrowers may tend to prioritise cash for their daily needs and savings over repaying MFIs, it added.According to ICRA, credit costs for MFIs could at least double from the present 1-1.5 p per cent to 2.5-3 per cent for most players, which is likely to impact their Return on Equity (RoE) by 3-5 per cent in FY21.As per a sample of 29 MFIs, which constitute about 70 per cent of the MFI industry on portfolio basis, total repayment obligations and operational expenditure of around Rs 8,000 crore in Q1 (April-June) FY21 against which the on-balance sheet liquidity buffer stood at around Rs 5,400 crore.
“Based on our analysis of the sample, MFIs had unencumbered cash/liquid investments of around 10 per cent in relation to their assets under management as on March 31, 2020,” said Supreeta Nijjar, sector head and vice-president (Financial Sector Ratings), ICRA.
The strain on borrowers’ cash flows could lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local and political issues.
ICRA noted that the ability of these lenders to recover multiple instalments from delinquent borrowers would be tested over the next few quarters as a large proportion of the borrowers do not have material income buffers. It would also be important for the MFIs to minimise the operational risks and employee frauds during this period as collections for MFIs continue to be largely in cash.
The impact on credit costs could be even higher if there is a permanent loss of livelihood or significant decline in income for a proportion of the borrowers, thereby impacting their repayment capacity.
Meanwhile, entities currently in the process of raising capital may face some delays as investors may adopt a wait-and-watch strategy, which in turn may impact their solvency and liquidity positions in the near-term.