Credit and finance for MSMEs: The profitability of non-banking financial company-microfinance institutions (NBFC-MFIs) is expected to improve with higher margins and improved collection efficiency, however, with a substantial restructured book coming out of the moratorium, the profitability is likely to remain lower than the pre-Covid level in FY23, said credit rating company CareEdge in a report on Thursday for its sample set of NBFC-MFIs.
As on March 31, 2022, the NBFC-MFIs had witnessed improvement in profitability with a return on average assets of 1.01 per cent in comparison to 0.49 per cent in FY21, though below the pre-Covid level of a return on assets (RoA) of 2-3 per cent.
RoA is a widely used metric to track profitability as it tells how much profit the company is making for each rupee of assets it controls. For example, an RoA of 10 per cent indicates the company makes profit of Rs 10 for every Rs 100 of assets it owns.
According to a Crisil report in May this year, stressed assets of NBFC-MFIs comprising 30+ portfolio at risk (loans overdue by over 30 days), and loan book under restructuring were estimated to have declined a significant 800 basis points to around 14 per cent as of March 2022, after peaking to approximately 22 per cent in September 2021.
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“The microfinance sector had restructured around 10 per cent of its loan book under the Resolution Framework 2.0 announced by the Reserve Bank of India (RBI) in the wake of the second Covid-19 wave, compared with a mere 1-2 per cent in the first wave,” Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings had said.
Amid the Covid impact on the low-income groups and the consequent increase in delays in repayment of debt by borrowers, the asset quality stress for the NBFC-MFIs had spiked. The PAR 90+ (loan delinquent for more than 90 days) for CareEdge’s sample set increased to 4.82 per cent as on March 31, 2022, vis-a-vis 2.07 per cent as on March 31, 2020.
However, supported by a resurgence in economic activity post Q2 FY22, the collection efficiency for micro-loans improved substantially, with the average collection efficiency rising from 75 per cent during Q1 FY22 to 92 per cent during Q3 FY22 and further to 96 per cent during Q4 FY22, the rating agency noted.