With the overall collection efficiency of microfinance lenders improving, the industry is likely to close the current financial year with asset growth of 12-15 per cent, up from nine per cent in 2020-21, according to a report.
The second wave of the pandemic impacted the business volume of microfinanciers during the first half due to poor collections and the resultant moderation in fresh lending. The industry closed the first six months of the current fiscal with asset growth of only five per cent, rating agency ICRA said in the report released on Wednesday.
It added that from the second half onwards, economic activities have returned to near-normal resulting in rising credit demand. “This should help the industry widen the asset base by 12-15 per cent, up from nine per cent in FY21.” However, the report does not expect profitability to improve in the year given the elevated credit cost that will eat into the bottomline (profit), whittling down the higher revenue impact arising from more loan sales.
Sachin Sachdeva, vice-president at the agency, said the asset quality metrics weakened sharply in the first half due to the localised lockdowns imposed by various states on account of the second wave impacting borrowers’ cash flows, and the resultant dip in collection efficiency of lenders.
However, with the gradual reopening of the economy, microfinance activities resumed from the second quarter and so did collections that bounced back to the March 2021 level, the report said without disclosing how much was the fall in H1FY22 or how it was in March 2021.
Nevertheless, despite better collections in the second quarter, overdues increased significantly with the 90+ days past due jumping to 6.2 per cent as of September 2021 from 5.3 per cent in March 2021, he said.
Delinquencies rose significantly in May-June 2021 when the second wave peaked and almost the entire country was under near-total lockdowns. On incremental restructuring and some recovery in collection efficiency, the reported delinquencies declined by September, though the same remain elevated compared to the March 2021 level.
In addition, the industry had around 10 per cent of its AUM (assets under management) restructured as of September 2021, though the performance of those loans remains monitorable.
Notwithstanding the expected improvement in business in the second half, persisting asset quality pressures will keep credit cost elevated and consequently, the profitability subdued in FY22 even though the industry is expected to see higher loan growth to the tune of 12-15 per cent for the full year, he added.