While relaxation in asset classification norms for additional 60 days allowed by the RBI handed some short-term reprieve to the microfinance institutions, rating agency ICRA on Wednesday said MFIs could face pressures on liquidity and asset quality front over the next three to six months, unless currency availability and borrower cashflows improves. And this could translate into pressure on the microlenders’ credit ratings.
Releasing a study on the impact of the demonitisation process of high value notes on MFIs, the rating agency said, “The RBI has provided additional time of 60 days to NBFC-MFIs for classifying an account as NPA…ICRA believes that while this would provide some reprieve to NBFC-MFIs for asset classification, it expects MFIs to continue to pursue collections to avoid build-up of larger overdues going forward.”
Through its notification on November 21, the Reserve Bank of India stated that the relaxation is applicable for dues payable between November 1 and December 31.
ICRA said following the government’s announcement on demonetisation on November 8, MFIs have observed a considerable decline in collections, with collection rates dropping to 30-60% for most entities. The cash crisis has brought incremental disbursements by the microlenders virtually to a standstill. “While the collection rates are gradually improving with borrowers getting familiar with the currency exchange process, MFIs are also exploring alternative methods of collections such as cheques, demand drafts, and bank account transfers for the ongoing collections,” it said in the study.
The agency, however, warned that unless the ground-level situation on currency availability and borrower cashflows improves, MFIs could face pressures on liquidity and asset quality front over the next 3-6 months. “This could translate into pressure on their credit ratings, with entities with high leverage, weak ALM and concentrated geographical operations being at greater risk,” it added.