India Ratings and Research (Ind-Ra) has maintained an overall negative outlook on the microfinance sector for FY22.

While the credit rating agency has maintained a ‘stable’ outlook on large non-bank microfinance institutions/MFIs (with assets under management/AUM of more that ₹5,000 crore), the outlook on small to mid-sized non-bank MFIs (including those with over 50 per cent of AUM in microfinance) continues to be ‘negative’ for FY22.

Ind-Ra reasoned that the negative outlook for small to mid non-bank MFIs is in view of the challenges being faced by them in raising funds and capital and managing credit costs that could emerge from urban regions post Covid-19 and Assam/West Bengal-focussed MFIs.

Political risk

Furthermore, nine States, including West Bengal and Assam, are expected to go into State elections in FY22, and the resultant political risk could be a large overhang on the sector.

While collections have picked-up, especially in rural areas, they continue to lag in urban regions, the agency said in a statement.

Large MFIs have been able to raise funding, especially since Q2 FY21, aided by easing liquidity and policy measures, while fund raising has been slow for mid-smaller ones (AUM less than ₹2,000 crore), said Jindal Haria, Director, Ind-Ra.

The agency assessed that the largest MFIs have a substantial rural exposure where the worst-case eventual credit cost expectations of 4 per cent to 8 per cent (on March 2020 portfolio) are lower than the expected pre-provision operating profit (PPOP) of 6 per cent to 9 per cent for FY21; for others, the range of credit costs could be higher.

Collections

While the outlook had already turned negative for MFIs in the beginning of April 2020 due to the lockdown, Ind-Ra also considered that 60 per cent to 70 per cent of the borrowers of most MFIs are in the essential goods and services segments and, hence, the initial recovery could be fairly quick.

Overall, Ind-Ra had estimated that at least 10 per cent to 15 per cent of the portfolio would be difficult to recover. As expected, the pace of collections has picked-up speedily since Q2 FY21 across the country.

The agency observed that for entities where there is significant exposure to urban regions and / or to West Bengal and Assam (where the easing of lockdowns has been slow), collections are lower at 80 per cent to 90 per cent of pre-Covid levels, while the rates have rebounded to 90 per cent to 95 per cent for others.

Two to six per cent of the clients are such that they are in overdue, but paying delayed equated monthly installments (EMIs) in partial or full and could have limited loss given defaults. Reported collection figures seem optically higher on account of the lower delinquencies in post Q1 FY21 disbursements and denominator effect, the agency said.

Ind-Ra said it is witnessing lower leverage ratios, higher capital levels, moderate growth than in the past (where large MFIs have grown over 50 per cent), emphasis on rural penetration, higher proportion of cash on-balance sheet and / liquid securities, and surplus asset and liabilities especially for large MFIs.

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