The collection efficiency trends in the microfinance sector has improved from April to September, but challenges for the pandemic-hit segment are likely to continue in the near term, credit rating agency Icra said on Wednesday.
Providing some relief to the sector, overall collection efficiency of microfinance institutions (MFIs) gradually improved and stood at around 88% in September compared to around 2% in April. The improvement was driven by easing of the lockdown restrictions and resumption of economic activities, which led to gradual improvement in cash flows of several borrowers, an Icra note stated.
Supreeta Nijjar – vice-president and sector head, Financial Sector Ratings, Icra, said, “The collection efficiency was observed to be lower in Punjab and the eastern states such as West Bengal, Odisha, Assam and Bihar, on account of cyclones, floods and local lockdowns or unrest. Borrowers in rural areas involved in agricultural, dairy and allied services, have performed better than those involved in other activities.”
As on August 31, around 12% of borrowers in the Icra sample (21 entities with collective assets under management of around Rs 54,213 crore) availed a complete moratorium during April-August.
“Consequently, near-term delinquencies are expected to increase to double digits and remain at these levels for a few months as it will be difficult for such borrowers to clear their dues. However, the rise in credit costs could be lower at 6-7% (spread over two years FY2021-FY2022; 1.5% in FY2020). Entities with a higher share of such borrowers may face higher credit costs,” Nijjar pointed out.
“Icra estimates challenges for the MFI industry to continue in the near term. Nevertheless, good on-balance sheet liquidity and capitalisation should help most entities withstand the crisis though profitability indicators are expected to remain subdued over the next two years,” she added.
Sachin Sachdeva- vice-president, Financial Sector Ratings, Icra, said, “According to our estimates, the industry would require an external capital of Rs 8,500-10,000 crore (30-35% of the closing net worth as on March 31, 2020) for growing at a rate of 15-20% pa over the next three years and absorbing these levels of credit costs during this period and maintaining prudent capitalisation levels.”
Most entities put on hold their plans to raise equity in H1 FY2021 as investors became wary. In H2FY2021, too, equity infusion in the industry is expected to remain limited and is likely to flow to large and well-established entities.
In addition, the MFIs are expected to witness a compression in their net interest margins (NIMs) in FY2021 as the pressure on yields is expected to be more than the overall reduction in the cost of funds, the rating agency added.